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]
April 9, 1998
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Registration Statement on Form S-4 for Abraxas
Petroleum Corporation and Canadian Abraxas
Petroleum Limited
Ladies and Gentlemen:
On behalf of Abraxas Petroleum Corporation and Canadian Abraxas
Petroleum Limited, this letter accompanies the filing of the Registration
Statement on Form S-4 under the Securities Act of 1933, as amended, for the
registration of $275,000,000 Senior Notes due 2004 of Abraxas Petroleum
Corporation and Canadian Abraxas Petroleum Limited.
As required under the EDGAR rules, a paper copy of the Form S-4 is on
file with Abraxas' and Canadian Abraxas' office of the secretary.
The filing fee of $81,125 has been wire transferred to the SEC's account
at Mellon Bank.
Please direct any communication regarding this filing to the undersigned
at (210) 554-5255 or to Tobin E. Olson of this Firm at (210) 554-5298.
Yours very truly,
/s/ Steven R. Jacobs
Steven R. Jacobs
SRJ/lrk/0148371.02
<PAGE>
As filed with the Securities and Exchange Commission on April 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
CANADIAN ABRAXAS PETROLEUM LIMITED
(Exact name of registrant as specified in the charter)
Nevada 1331 74-2584033
Canada 1331 N/A
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Identification
Number) Number)
Robert L. G. Watson
500 North Loop 1604 East 500 North Loop 1604 East
Suite 100 Suite 100
San Antonio, Texas 78232 San Antonio, Texas 78232
(210) 490-4788 (210) 490-4788
(Address, including zip code, and (Address, including zip code, and
telephone number including area code, telephone number, including area
of registrant's principal executive code, of agent for service)
offices)
Copies to:
Cox & Smith Incorporated
112 E. Pecan Street, Suite 1800
San Antonio, Texas 78205
(210) 554-5500
Attention: Steven R. Jacobs
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.
CALCULATION OF REGISTRATION FEE
TITLE OF EACH PROPOSED PROPOSED
CLASS OF MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE
11 1/2 % Senior
Notes Due 2004, $275,000,000 100% $275,000,000 $81,125.00
Series D
Guarantees - - - -
<PAGE>
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
ii
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF PART I OF FORM S-4
REGISTRATION STATEMENT ITEM OF FORM S-4 CAPTION OR LOCATION
1. Forepart of Registration Statement and Outside Outside Front Cover
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front; Outside
Prospectus Back Cover Page;
AvailableInformation;
Enforceability of
Civil Liabilities
Against Foreign Persons
3. Risk Factors, Ratio of Earnings to Fixed Summary; Risk Factors;
Charges and Other Information Selected Consolidated
Financial Data
4. Terms of the Transaction Outside Front Cover
Page; Summary; The
Exchange Offer;
Description of the
Exchange Notes; Certain
United States and
Canadian Income Tax
Considerations
5. Pro Forma Financial Information Inapplicable
6. Material Contacts with the Company
Being Acquired Inapplicable
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 Registrants Inapplicable
11. Incorporation of Certain Information by Reference Inapplicable
12. Information with Respect to S-2 or S-3 Registrants Inapplicable
13. Incorporation of Certain Information by Reference Inapplicable
14. Information with Respect to Registrants Other Business; Consolidated
than S-3 or S-2 Registrants Financial Statements;
Selected Consolidated
Financial Data;
Management's Discussion
and Analysis of
Financial Condition and
Results of Operation;
Description of Existing
Indebtedness
15. Information with Respect to S-3 Companies Inapplicable
iii
<PAGE>
16. Information with Respect to S-2 or S-3 Companies Inapplicable
17. Information with Respect to Companies Other Inapplicable
than S-2 or S-3 Companies
18. Information if Proxies, Consents or Inapplicable
Authorizations are to be Solicited
19. Information if Proxies, Consents or Management; Securities
Authorizations are not to be Solicited Holdings of Principal
or in an Exchange Offer Stockholders, Directors
and Officers; Certain
Transactions
iv
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 9, 1998
PROSPECTUS
ABRAXAS PETROLEUM CORPORATION
CANADIAN ABRAXAS PETROLEUM LIMITED
OFFER TO EXCHANGE 11 1/2% SENIOR NOTES DUE 2004, SERIES D
FOR ANY AND ALL OUTSTANDING 11 1/2% SENIOR
NOTES DUE 2004, SERIES B AND SERIES C
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON ________________, 1998, UNLESS
EXTENDED.
Abraxas Petroleum Corporation, a Nevada corporation ("Abraxas"), and
Canadian Abraxas Petroleum Limited, an Alberta corporation ("Canadian Abraxas"
and, together with Abraxas, the "Issuers"), hereby offer (the "Exchange Offer"),
upon the terms and conditions set forth in this Prospectus (the "Prospectus")
and the accompanying Letter of Transmittal (the "Letter of Transmittal"), to
exchange $1,000 principal amount of their 11 1/2% Senior Notes due 2004, Series
D (the "Exchange Notes"), which have been registered under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to a Registration Statement
(the "Registration Statement") of which this Prospectus is a part, for each
$1,000 principal amount of their outstanding 11 1/2% Senior Notes due 2004,
Series B (the "Series B Notes"), of which $215,000,000 principal amount is
outstanding, and for each $1,000 principal amount of their outstanding 11 1/2%
Senior Notes due 2004, Series C (the "Series C Notes"), of which $60,000,000
principal amount is outstanding. The form and terms of the Exchange Notes,
except for the total outstanding principal amount thereof, are the same (in all
material respects) as the form and terms of the Series B Notes (which they
replace) except that the Exchange Notes will bear a Series D designation. The
form and terms of the Exchange Notes, except for the total outstanding principal
amount thereof, are the same as the form and terms of the Series C Notes (which
they replace) except that (i) the Exchange Notes will bear a Series D
designation, (ii) the Exchange Notes will have been registered under the
Securities Act and, therefore, will not bear legends restricting their transfer
and will not be subject to certain provisions relating to an increase in the
interest rate which were applicable to the Series C Notes in certain
circumstances relating to the timing of the Exchange Offer and (iii) holders of
the Exchange Notes will not be entitled to certain rights of holders of the
Series C Notes under the Registration Rights Agreement (as defined herein),
which rights will terminate upon consummation of the Exchange Offer. The
Exchange Notes will evidence the same debt as the Series B Notes and the Series
C Notes (each of which they replace) and will be issued under and be entitled to
the benefits of the Indenture dated January 27, 1998 (the "Indenture") among the
Issuers and IBJ Schroder Bank & Trust Company governing the Series C Notes and
the Exchange Notes. As used herein, the term "Notes" refers to the Series B
Notes, the Series C Notes and the Exchange Notes. See "The Exchange Offer" and
"Description of the Exchange Notes."
Interest on the Exchange Notes will be payable semi-annually in arrears
on May 1 and November 1 of each year, commencing on May 1, 1998, at the rate of
11 1/2% per annum. Interest will accrue from November 1, 1997 with respect to
the Series B Notes (the date of the most recent interest payment on the Series B
Notes) and January 27, 1998 (the "Issue Date") with respect to the Series C
Notes. The Exchange Notes will mature on November 1, 2004. The Exchange Notes
will be redeemable, in whole or in part, at the option of the Issuers, on or
after November 1, 2000, at the redemption prices set forth herein, plus accrued
and unpaid interest to the date of redemption. In addition, at any time on or
prior to November 1, 1999, the Issuers may, at their option, redeem up to 35% of
the aggregate principal amount of the Series C Notes and Exchange Notes with the
net cash proceeds of one or more Equity Offerings (as defined herein), at a
redemption price equal to 111.5% of the aggregate principal amount of the
Exchange Notes to be redeemed, plus accrued and unpaid interest to the date of
redemption; provided, however, that, after giving effect to any such redemption,
at least 65% of the aggregate principal amount of the Series C Notes and
Exchange Notes remains outstanding. Upon a Change of Control (as defined
herein), each holder of the Exchange Notes will have the right to require the
Issuers to repurchase all or a portion of such holder's Exchange Notes at a
redemption price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of repurchase. In addition, the Issuers will be
obligated to offer to repurchase the Exchange Notes at 100% of the principal
amount thereof plus accrued and unpaid interest to the date of repurchase in the
event of certain asset sales. See "Description of the Exchange Notes."
<PAGE>
The Exchange Notes will be general unsecured obligations of the Issuers
and will rank pari passu in right of payment to all existing and future senior
indebtedness of the Issuers and senior in right of payment to all future
subordinated indebtedness of the Issuers and on parity with any Series B Notes
and Series C Notes not exchanged. The Exchange Notes will, however, be
effectively subordinated to secured indebtedness of the Issuers to the extent of
the value of the assets securing such indebtedness. See "Description of the
Exchange Notes." Abraxas has an existing credit facility (the "Credit Facility")
with Bankers Trust Company ("BTCo") and ING (U.S.) Capital Corporation ("ING
Capital") which is secured by certain assets of Abraxas and guaranteed by
Canadian Abraxas and is to be secured by certain assets of Canadian Abraxas. The
Credit Facility has an availability of $40.0 million. At March 31, 1998, there
was $100,000 outstanding under the Credit Facility. The Indenture permits the
Issuers and their subsidiaries to incur additional indebtedness including
additional secured indebtedness, under certain conditions. See "Risk Factors --
Ranking of Indebtedness" and "Description of the Exchange Notes -- Certain
Covenants -- Limitation on Incurrence of Additional Indebtedness." The Exchange
Notes will be jointly and severally guaranteed by certain of the Issuers' future
subsidiaries (the "Subsidiary Guarantors"). The Guarantees (as defined herein)
will be general unsecured obligations of the Subsidiary Guarantors and will rank
pari passu in right of payment to all senior indebtedness of the Subsidiary
Guarantors and senior in right of payment to all subordinated indebtedness of
the Subsidiary Guarantors. The Guarantees will be effectively subordinated to
secured indebtedness of the Subsidiary Guarantors to the extent of the value of
the assets securing such indebtedness. See "Description of the Exchange Notes."
At March 31, 1998, the Issuers and the Subsidiary Guarantors had $100,000 of
secured indebtedness outstanding.
The Issuers will accept for exchange any and all Series B Notes and
Series C Notes validly tendered and not withdrawn prior to 5:00 p.m., New York
City time, on __________, 1998, unless extended by the Issuers in their sole
discretion (the "Expiration Date"). Tenders of the Series B Notes and Series C
Notes may be withdrawn at any time prior to 5:00 p.m. on the Expiration Date.
The Exchange Offer is subject to certain customary conditions. The Exchange
Notes are being offered hereunder in order to satisfy the obligations of the
Issuers under the Registration Rights Agreement entered into by the Issuers and
Jefferies & Company, Inc. (the "Initial Purchaser") in connection with the
offering of the Series C Notes (the "Offering"). See "The Exchange Offer."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Issuers believe that the Exchange Notes issued pursuant to the
Exchange Offer may be offered for resale, resold and otherwise transferred by
any holder thereof (other than any such holder that is an "affiliate" of either
of the Issuers within the meaning of Rule 405 under the Securities Act or a
broker-dealer who purchased the Series B Notes or Series C Notes directly from
the Issuers for resale pursuant to Rule 144A or another exemption from the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holder's business and such holder has no
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes. See "Purpose of the Exchange Offer" and " Resale of the
Exchange Notes." Each broker-dealer that receives the Exchange Notes for its own
account pursuant to the Exchange Offer (a "Participating Broker-Dealer") must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a participating Broker-Dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection with resales of the Exchange
Notes received in exchange for the Series B Notes and Series C Notes where such
Series B Notes and Series C Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
activities. The Issuers agreed that they will make this Prospectus available to
any Participating Broker-Dealer for use in connection with any such resale
during the period required by the Securities Act. See "Plan of Distribution."
There has not previously been any public market for the Series B Notes
or Series C Notes or the Exchange Notes. The Issuers do not intend to list the
Exchange Notes on any securities exchange or to seek approval for quotation
through any automated quotation system. There can be no assurance that an active
market for the Exchange Notes will develop. See "Risk Factors -- Lack of Public
Market." Moreover, to the extent that the Series B Notes and the Series C Notes
2
<PAGE>
are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Series B Notes and Series C Notes could
be adversely affected.
The Exchange Notes will be available initially only in book-entry form.
The Issuers expect that the Exchange Notes issued pursuant to the Exchange Offer
will be issued in the form of a Global Certificate (as defined herein), which
will be deposited with, or on behalf of, The Depository Trust Company (the
"Depositary" or "DTC") and registered in its name or in the name of Cede & Co.,
its nominee. Beneficial interests in the Global Certificate representing the
Exchange Notes will be shown on, and transfers thereof to qualified
institutional buyers will be affected through, records maintained by the
Depositary and its participants. After the initial issuance of the Global
Certificate, the Exchange Notes in certified form will be issued in exchange for
the Global Certificate only on the terms set forth in the Indenture. See
"Book-Entry; Delivery and Form."
Holders of the Series B Notes and Series C Notes not tendered and
accepted in the Exchange Offer will continue to hold such Series B Notes and
Series C Notes and will be entitled to all of the rights and benefits and will
be subject to the limitations applicable thereto under the Indenture and with
respect to transfer under the Securities Act. The Issuers will not receive any
proceeds from the Exchange Offer. Pursuant to the Registration Rights Agreement,
the Issuers will pay all the expenses incurred by them incident to the Exchange
Offer. See "The Exchange Offer."
SEE "RISK FACTORS" ON P. 11 FOR A DESCRIPTION OF CERTAIN RISKS TO BE
CONSIDERED BY HOLDERS WHO TENDER THEIR SERIES B NOTES NOTES AND SERIES C NOTES
IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is ______________, 1998.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
3
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This Prospectus includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this
Prospectus, including, without limitation, those regarding the Issuers'
financial position, business strategy, budgets, reserve estimates, development
and exploitation opportunities and projects, behind-pipe zones, classification
of reserves, projected costs, potential reserves, availability or sufficiency of
capital resources and plans and objectives of management for future operations,
are forward-looking statements. Although the Issuers believe that the
expectations reflected in such forward-looking statements are reasonable, they
can give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from the
Issuers' expectations ("Cautionary Statements") are disclosed under "Risk
Factors" and elsewhere in this Prospectus including, without limitation, in
conjunction with the forward-looking statements included in this Prospectus. All
subsequent written and oral forward-looking statements attributable to either of
the Issuers, or persons acting on behalf of either of them, are expressly
qualified in their entirety by the Cautionary Statements.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER THIS CHAPTER WITH THE STATE OF NEW HAMPSHIRE NOR
THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN
THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT
ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER
ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY
WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO,
ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
4
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. As used in this Prospectus, the term "Abraxas"
refers to Abraxas Petroleum Corporation, the term "Canadian Abraxas" refers to
Canadian Abraxas Petroleum Limited and the term "Company" refers to Abraxas and
all of its subsidiaries, including Canadian Abraxas, for the relevant time
periods. Except as otherwise noted, the reserve data for Abraxas and Canadian
Abraxas reported in this Prospectus are based on the reserve estimates of
Abraxas' and Canadian Abraxas' respective independent petroleum engineers. See
"Glossary of Terms" for definitions of certain terms used in this Prospectus.
The Company
The Company is an independent energy company engaged primarily in the
acquisition, exploration, development and production of crude oil and natural
gas. Since January 1, 1991, the Company's principal means of growth has been
through the acquisition and subsequent development and exploitation of producing
properties and related assets. The Company utilizes a disciplined acquisition
strategy, focusing its efforts on producing properties and related assets
possessing the following characteristics: a concentration of operations;
significant, quantifiable development potential; historically low operating
expenses; and the potential to reduce G&A expenses per BOE. The Company seeks to
complement its acquisition and development activities by selectively
participating in exploration projects with experienced industry partners. The
Company's principal areas of operation are Texas, western Canada and
southwestern Wyoming. The Company owns interests in 706,605 gross acres (445,955
net acres) and 763.0 gross wells (404.7 net wells), 341 of which are operated by
the Company, and varying interests in 20 natural gas processing plants or
compression facilities.
Since December 31, 1990, the Company has made 17 acquisitions of crude
oil and natural gas properties totaling an estimated 52,100 MBOE at an average
acquisition cost of $4.11 per BOE. From January 1, 1991 to December 31, 1997,
the Company's estimated total proved reserves increased from 889 MBOE to 54,700
MBOE; aggregate PV-10 increased from $11.0 million to $268.7 million; and
average net daily production increased from 0.141 MBOE per day to 14.9 MBOE per
day.
The Company was founded in 1977 by Robert L.G. Watson, the Company's
Chairman of the Board, President and Chief Executive Officer. Canadian Abraxas
was formed by the Company in 1996 to acquire CGGS Canadian Gas Gathering Systems
Inc. ("CGGS"). The Company's principal offices are located at 500 North Loop
1604 East, Suite 100, San Antonio, Texas 78232 and its telephone number is (210)
490-4788. Canadian Abraxas' principal offices are located at 300 - 5th Avenue,
12th Floor, Calgary, Alberta and its telephone number is (403) 262-1949.
Risk Factors
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Exchange Notes.
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<PAGE>
PURPOSE OF THE EXCHANGE OFFER
The Exchange Offer provides holders of the Series B Notes and Series C
Notes with the Exchange Notes which will generally be freely transferable by the
holders thereof without registration or any prospectus delivery requirement
under the Securities Act. The Issuers' purpose in engaging in the Exchange Offer
is to provide holders of the Series B Notes and the Series C Notes with freely
transferable securities and to comply with the provisions of the Registration
Rights Agreement which require, subject to certain conditions, that the Exchange
Offer be made. See "Purpose of the Exchange Offer".
THE EXCHANGE OFFER
Exchange Ratio Each Series B Note and Series C Note is
exchangeable for a like principal amount of
Exchange Notes.
Expiration Date 5:00 p.m., New York City time,
on __________, 1998 unless extended, in which
case the term "Expiration Date" means the latest
date and time to which the Exchange Offer shall
have been extended.
Principal Amount of Exchange Subject to the terms and conditions of the
Notes Exchange Offer, any and all Series B Notes and
Series C Notes will be accepted if duly tendered
and not withdrawn prior to acceptance thereof.
The Exchange Offer is not conditioned upon any
minimum principal amount of the Series B Notes
and Series C Notes being tendered. The Indenture
limits the aggregate amount of the Series C
Notes and the Exchange Notes which may be
outstanding to $275.0 million principal amount,
$215.0 million of which is currently in the form
of the Series B Notes and $60.0 million of which
is currently in the form of the Series C Notes.
Conditions of the Exchange The Issuers' obligation to consummate the
Offer Exchange Offer is subject to certain conditions.
See "The Exchange Offer -- Conditions." Tenders
of the Series B Notes and Series C Notes may be
withdrawn at any time prior to the Expiration
Date. See "The Exchange Offer - Withdrawal
Rights."
How to Tender Tendering holders of the Series B Notes and the
Series C Notes must either (i) complete and sign
a Letter of Transmittal, have their signatures
guaranteed if required, forward the Letter of
Transmittal and any other required documents to
the Exchange Agent at the address set forth
under the caption "Exchange Agent", and either
deliver the Series B Notes and Series C Notes to
the Exchange Agent or tender such Series B Notes
and Series C Notes pursuant to the procedures
for book-entry transfer or (ii) request a
broker, dealer, bank, trust company or other
nominee to effect the transaction for them.
Beneficial owners of the Series B Notes and the
Series C Notes registered in the name of a
broker, dealer, bank, trust company or other
nominee must contact such institution to tender
their Series B Notes and the Series C Notes. The
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<PAGE>
Series B Notes and Series C Notes may be
physically delivered, but physical delivery is
not required if a confirmation of a book-entry
transfer of such Series B Notes and Series C
Notes to the Exchange Agent's account at DTC is
delivered in a timely fashion. Certain
provisions have also been made for holders whose
Series B Notes and Series C Notes are not
readily available or who cannot comply with the
procedure for book-entry transfer on a timely
basis. Questions regarding how to tender and
requests for information should be directed to
the Exchange Agent. See "The Exchange Offer--
How to Tender."
Acceptance of Tenders Subject to the terms and conditions of the
Exchange Offer, including the reservation of
certain rights by the Issuers, the Series B
Notes and the Series C Notes validly tendered
prior to the Expiration Date will be accepted
for exchange. Subject to such terms and
conditions, the Exchange Notes to be issued in
exchange for validly tendered Series B Notes and
Series C Notes will be mailed by the Exchange
Agent promptly after acceptance of the tendered
Series B Notes and Series C Notes or credited to
the holder's account in accordance with
appropriate book-entry procedures. Although the
Issuers do not currently intend to do so, if
they modify the terms of the Exchange Offer
prior to the Expiration Date, such modified
terms will be available to all holders of the
Series B Notes and Series C Notes, whether or
not their Series B Notes and Series C Notes have
been tendered prior to such modification. Any
material modification will be disclosed in
accordance with the applicable rules of the
Commission and, if required, the Exchange Offer
will be extended to permit holders of the Series
B Notes and Series C Notes adequate time to
consider such modification. See "The Exchange
Offer -- Acceptance of Tenders."
Exchange Agent IBJ Schroder Bank & Trust Company, One State
Street, New York, New York 10004, Attention:
Reorganization Operations Department
Securities Offered $275,000,000 aggregate principal amount of 11
1/2% Senior Notes due 2004.
Issuers Abraxas Petroleum Corporation and Canadian
Abraxas Petroleum Limited, as joint and several
obligors.
Maturity Date November 1, 2004.
Interest Payment Dates Interest on the Exchange Notes will accrue from
November 1, 1997 with respect to the Exchange
Notes exchanged for the Series B Notes (the date
of the most recent interest payment on the
Series B Notes) and from the Issue Date with
respect to the Exchange Notes exchanged for the
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<PAGE>
Series C Notes and will be payable semi-annually
on each May 1 and November 1, commencing May 1,
1998.
Ranking The Exchange Notes will be general unsecured
obligations of the Issuers and will rank pari
passu to all existing and future senior
indebtedness of the Issuers and senior to all
future subordinated indebtedness of the Issuers
and on parity with any Series B Notes and Series
C Notes not exchanged. The Exchange Notes will
be effectively subordinated in right of payment
to all existing and future secured indebtedness
of the Issuers, including borrowings under the
Credit Facility, to the extent of the assets
securing such obligations. At March 31, 1998,
the Issuers had $100,000 of secured indebtedness
outstanding. The Indenture permits the Company
to incur additional indebtedness, including
additional secured indebtedness, subject to
certain conditions.
Guarantees The Exchange Notes will be jointly and severally
guaranteed (the "Guarantees") on a senior
unsecured basis by each of the Subsidiary
Guarantors. See "Description of the Exchange
Notes-Guarantees."
Change of Control Upon a Change of Control, each holder will have
the right to require the Issuers to repurchase
such holder's Exchange Notes at a redemption
price equal to 101% of the principal amount
thereof plus accrued and unpaid interest to the
date of repurchase. In addition, the Issuers
will be obligated to offer to repurchase the
Exchange Notes at 100% of the principal amount
thereof plus accrued and unpaid interest to the
date of redemption in the event of certain asset
sales.
Certain Covenants The Indenture governing the Exchange Notes (the
"Indenture") contains certain covenants that
limit the ability of the Issuers and their
Restricted Subsidiaries (as defined herein) to,
among other things, incur additional
indebtedness, pay dividends or make certain
other restricted payments, consummate certain
asset sales, enter into certain transactions
with affiliates, incur liens, and imposes
restrictions on the ability of a Restricted
Subsidiary to pay dividends or make certain
payments to the Issuers and their Restricted
Subsidiaries, merge or consolidate with any
other person or sell, assign, transfer, lease,
convey or otherwise dispose of all or
substantially all of the assets of either of the
Issuers.
For additional information regarding the Exchange Notes, see
"Description of the Exchange Notes."
8
<PAGE>
Summary Historical Financial Information
The following table presents summary historical consolidated financial
data of the Company for the five years ended December 31, 1997, which have been
derived from the Company's consolidated financial statements. The information in
this table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Selected
Consolidated Financial Data," and the Consolidated Financial Statements and the
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(dollars in thousands)
Consolidated Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Total operating revenue (1) $ 7,494 $ 11,349 $ 13,817 $ 26,653 $70,931
Operating expense (2) 2,964 3,826 4,458 6,289 16,429
DD&A expense 2,373 3,790 5,434 9,605 30,581
G&A expense 510 810 1,042 1,933 4,171
Interest expense 2,531 2,359 3,911 6,241 24,620
Amortization of deferred financing fee 649 400 214 280 1,260
Income (loss) from continuing operations
before extraordinary items (1,580) 113 (1,208) 1,940 (6,485)
Preferred stock dividends (186) (183) (366) (366) (183)
Net income (loss) applicable to
common stock (2,619) (2,577) (1,574) 1,147 (6,668)
Other Data:
Ratio (deficiency) of earnings to fixed
charges(3)(4) -- 1.04x -- 1.30x --
</TABLE>
December 31, 1997
-------------------
(dollars in
thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 2,836
Total assets 338,520
Total debt (5) 248,617
Stockholders' equity (6) 26,813
- --------------
(1) Consists of crude oil and natural gas production sales, revenue from rig
operations and processing facilities and other miscellaneous revenue.
(2)Consists of lease operating and production taxes, rig operating expenses and
processing expenses.
(3) Earnings consist of income (loss) from continuing operations before income
taxes plus fixed charges. Fixed charges consist of interest expense and
amortization of deferred financing fees.
(4) The Company's earnings were inadequate to cover fixed charges in 1993, 1995
and 1997 by $1,393,000, $1,208,000 and $10,376,000, respectively,.
(5) Consists of long-term debt, including capital lease obligations.
(6) Consists of 6,422,540 shares of the Company's Common Stock, par value $.01
per share, of which 53,023 are treasury shares.
9
<PAGE>
Summary Historical Reserves and Operating Data
The following table sets forth summary information with respect to the
Company's estimated proved crude oil, NGLs and natural gas reserves and certain
summary information with respect to the Company's operations for the periods
indicated. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's Consolidated Financial Statements and
the notes thereto included elsewhere in this Prospectus.
At December 31,
1997
-------------------
Estimated Proved Reserves (period-end):
Crude oil and NGLs (MBbls) 17,777
Natural gas (MMcf) 221,314
Crude oil equivalents (MBOE) 54,663
% Proved developed 82.9%
Estimated future net revenue before income taxes (in $ 464,444
thousands)
PV-10 (in thousands) $ 268,700
%Proved developed 90.5%
Year Ended December 31,
----------------------------------------
1995 1996 1997
---- ---- ----
Average Net Daily Production:
Crude oil and NGLs (Bbls) 1,493 1,985 5,285
Natural gas (Mcf) 9,733 17,397 57,671
Average Sales Price:
Crude oil (per Bbl) $ 17.16 $ 20.85 $ 18.63
NGLs (per Bbl) 10.83 14.55 10.75
Natural gas (per Mcf) 1.47 1.97 1.79
Natural Gas Processing Plants:
Net plant capacity (MMcfpd)
(period-end) 25 123 137
10
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors in
addition to the other information in this Prospectus before making an investment
in the Exchange Notes offered hereby.
High Degree of Leverage
The Company's total debt and stockholders' equity were approximately
$248.6 million and $26.8 million, respectively, as of December 31, 1997. See
"Capitalization." In addition, the Company has borrowing capacity of up to $40.0
million under the Credit Facility. At March 31, 1998, the Company had $39.9
million of borrowing availability 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 Series A/B
Indenture (as defined herein), the Indenture and the Credit Facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Description of Existing
Indebtedness" and "Description of the Exchange Notes."
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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources," "Description of Existing Indebtedness" and
"Description of the Exchange Notes -- Certain Covenants -- Limitation on
Incurrence of Additional Indebtedness."
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 the net proceeds from the
offering of the Series C Notes, 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," " Description of Existing
Indebtedness" and the Company's Consolidated Financial Statements and the notes
thereto included elsewhere in this Prospectus. 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 Series B Notes and
Series C Notes are, and the Exchange Notes will be, subject to certain
limitations on redemption. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations --Liquidity and Capital
Resources," "Description of Existing Indebtedness" and "Description of the
Exchange Notes -- Redemption."
Reliance on Estimates of Proved Reserves and Future Net Revenue
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond the control of the
Company. The reserve data included in this Prospectus represent only estimates.
In addition, the estimates of future net revenue from proved reserves and the
present value thereof are based upon certain assumptions about future production
levels, prices and costs that may not prove to be correct over time. In
particular, estimates of crude oil and natural gas reserves, future net revenue
from proved reserves and the PV-10 thereof for the crude oil and natural gas
11
<PAGE>
properties described in this Prospectus are based on the assumption that future
crude oil and natural gas prices remain the same as crude oil and natural gas
prices at December 31, 1997. The average sales prices as of such date used for
purposes of such estimates were $16.76 per Bbl of crude oil, $10.89 per Bbl of
NGLs and $2.08 per Mcf of natural gas. Also assumed is the Company's making
future capital expenditures of approximately $36.7 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 also
materially affect the estimated quantity and value of reserves set forth herein.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Reserves
Information."
Ranking of Indebtedness
The Exchange Notes will be general unsecured obligations of the Issuers
and will rank pari passu in right of payment to all existing and future senior
indebtedness of the Issuers and senior in right of payment to all future
subordinated indebtedness of the Issuers. In addition, the Exchange Notes will
be unconditionally guaranteed, jointly and severally, by each of the Subsidiary
Guarantors. The Guarantees will be general unsecured obligations of the
Subsidiary Guarantors and will rank pari passu in right of payment to all
existing and future senior indebtedness of the Subsidiary Guarantors and senior
in right of payment to all present and future subordinated indebtedness of the
Subsidiary Guarantors. However, the Exchange Notes will be effectively
subordinated to secured indebtedness of the Issuers and the Subsidiary
Guarantors to the extent of the value of the assets securing such indebtedness.
In the event of a liquidation or insolvency of the Company or, if any of its
secured indebtedness is accelerated, the secured assets of the Company will be
available to pay obligations on the Exchange Notes only after the Credit
Facility and any other secured indebtedness has been paid in full. As of March
31, 1998, the Issuers and the Subsidiary Guarantors had $275.1 million of
indebtedness outstanding, $100,000 of which was secured, and $39.9 million of
availability under the Credit Facility, which borrowings would be secured. See
"Capitalization," "Description of the Exchange Notes," "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Description of Existing Indebtedness."
Repurchase of Notes Upon a Change of Control
Upon the occurrence of a Change of Control, the Issuers must offer to
purchase all of the Notes then outstanding at a purchase price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, thereon
to the date of purchase (a "Change of Control Offer"). See "Description of the
Exchange Notes -- Change of Control." The events that require a Change of
Control Offer under the Indenture may also constitute events of default under
the Credit Facility. Such events may permit the lenders under such debt
instruments to accelerate the payment of the debt and, if the debt is not paid,
to proceed against any collateral securing such debt and/or commence litigation
which could ultimately result in a sale of substantially all of the assets of
the Company to satisfy the debt, thereby limiting the Company's ability to raise
cash to repurchase the Notes and reducing the practical benefit of the offer to
purchase provisions to the holders of the Notes. These provisions may be deemed
to have anti-takeover effects and may delay, defer or prevent a merger, tender
offer or other takeover attempt. Notwithstanding these provisions, the Company
could enter into certain transactions, including certain recapitalizations, that
would not constitute a Change of Control but would increase the amount of debt
outstanding at such time.
Prior to commencing such an offer to purchase, the Issuers may be
required to (i) repay in full all indebtedness of the Issuers that would
prohibit the repurchase of the Notes, including that under the Credit Facility,
or (ii) obtain any requisite consent to permit the repurchase. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Description of Existing Indebtedness." If
the Issuers were unable to repay all of such indebtedness or were unable to
obtain the necessary consents, then the Issuers would be unable to offer to
repurchase the Notes and such failure would constitute an Event of Default under
the Indenture. There can be no assurance that the Issuers will have sufficient
funds available at the time of any Change of Control to repurchase the Notes.
12
<PAGE>
Net Losses
The Company has experienced recurring losses. For the years ended
December 31, 1993, 1994, 1995 and 1997, the Company recorded net losses of $2.4
million, $2.4 million, $1.2 million and $6.5 million, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and the notes
thereto included elsewhere in this Prospectus.
Industry Conditions; Impact on Company's Profitability
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for crude oil and natural gas.
Crude oil and natural gas prices can be extremely volatile and in recent years
have been depressed by excess total domestic and imported supplies. Prices are
also affected by actions of state and local agencies, the United States and
foreign governments and international cartels. While prices for crude oil and
natural gas increased during the fourth quarter of 1995 and remained at these
levels during 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, such as the decline of crude oil which has
occurred since December 31, 1997, would have a material adverse effect on the
Company's financial condition and results of operations, including reduced cash
flow and borrowing capacity. All of these factors are beyond the control of the
Company. Sales of crude oil and natural gas are seasonal in nature, leading to
substantial differences in cash flow at various times throughout the year.
Federal and state regulation of crude oil and natural gas production and
transportation, general economic conditions, changes in supply and changes in
demand all could adversely affect the Company's ability to produce and market
its crude oil and natural gas. If market factors were to change dramatically,
the financial impact on the Company could be substantial. The availability of
markets and the volatility of product prices are beyond the control of the
Company and thus represent a significant risk.
The Company periodically reviews the carrying value of its crude oil and
natural gas properties under the full cost accounting rules of the SEC. Under
these rules, capitalized costs of proved oil and natural gas properties may not
exceed the present value of estimated future net revenues from proved reserves,
discounted at 10%. Application of the ceiling test generally requires pricing
future revenue at the unescalated prices in effect as of the end of each fiscal
quarter and requires a write-down for accounting purposes if the ceiling is
exceeded, even if prices were depressed for only a short period of time. The
Company was required to write-down the carrying value of its Canadian crude oil
and natural gas properties at December 31, 1997 by $4.6 million and may be
required to write-down the carrying value of its crude oil and natural gas
properties in the future when oil and natural gas prices are depressed or
unusually volatile. When a write-down is required, it results in a charge to
earnings, but does not impact cash flow from operating activities. The Company
sustained a charge to earnings of $4.6 million at December 31, 1997 as a result
of the write-down. Once incurred, a write-down of crude oil and natural gas
properties is not reversible at a later date. If such a write-down were large
enough, it could result in the occurrence of an event of default under the
Credit Facility that could require the sale of some of the Company's producing
properties under unfavorable market conditions or require the Company to seek
additional equity capital. In addition, the Indenture governing the Series B
Notes (the "Series A/B Indenture"), the Indenture and the Credit Facility
contain certain restrictions on certain sales of assets by the Company. See
"Description of the Exchange Notes," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of Existing Indebtedness."
In order to manage its exposure to price risks in the marketing of its
crude oil and natural gas, the Company from time to time has entered into fixed
price delivery contracts, financial swaps and crude oil and natural gas futures
contracts as hedging devices. To ensure a fixed price for future production, the
Company may sell a futures contract and thereafter either (i) make physical
delivery of crude oil or natural gas to comply with such contract or (ii) buy a
matching futures contract to unwind its futures position and sell its production
to a customer. Such contracts may expose the Company to the risk of financial
loss in certain circumstances, including instances where production is less than
expected, the Company's customers fail to purchase or deliver the contracted
quantities of crude oil or natural gas, or a sudden, unexpected event materially
impacts crude oil or natural gas prices. Such contracts may also restrict the
ability of the Company to benefit from unexpected increases in crude oil and
natural gas prices. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
13
<PAGE>
Restrictions Imposed by Terms of the Company's Indebtedness
The Series A/B Indenture, 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. The Credit Facility also requires the Company to maintain
specified financial ratios and satisfy certain financial tests. The Company's
ability to meet such financial ratios and tests may be affected by events beyond
its control, and there can be no assurance that the Company will meet such
ratios and tests. See "Description of the Exchange Notes -- Certain Covenants,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Existing
Indebtedness." A breach of any of these covenants could result in a default
under the Series A/B Indenture, 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 assets, including,
without limitation, working capital and interests in producing properties and
related assets owned by the Company, and the proceeds thereof are or may in the
future be pledged as security under the Credit Facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Description of Existing Indebtedness."
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 debt and equity securities. The Company
believes that it will have sufficient capital to finance planned capital
expenditures. If revenue or the Company's borrowing base under the Credit
Facility decrease as a result of lower crude oil and natural gas prices,
operating difficulties or declines in reserves, the Company may have limited
ability to finance planned capital expenditures in the future. There can be no
assurance that additional debt or equity financing or cash generated by
operations will be available to meet these requirements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- --Liquidity and Capital Resources" and "Description of Existing Indebtedness."
Foreign Operations
The Company's operations are 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 an adverse effect on the Company's financial position,
results of operations and cash flows. The Company's stockholders' equity was
negatively impacted by approximately $2.5 million during 1997 due to
fluctuations in the foreign currency translation rate. The Company may from time
to time engage in hedging programs intended to reduce the Company's exposure to
currency fluctuations.
Future Availability of Natural Gas Supply
To obtain volumes of committed natural gas reserves to supply the
Canadian Abraxas Plants (as defined herein), 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.
14
<PAGE>
Long-term contracts will not protect Canadian Abraxas from shut-ins or supply
curtailments by natural gas suppliers. Although CGGS was historically successful
in contracting for new natural gas supplies and in renewing natural gas supply
contracts as they expired, there is no assurance that Canadian Abraxas will be
able to do so on a similar basis in the future.
Operating Hazards; Uninsured Risks
The nature of the crude oil and natural gas business involves certain
operating hazards such as crude oil and natural gas blowouts, explosions,
encountering formations with abnormal pressures, cratering and crude oil spills
and fires, any of which could result in damage to or destruction of crude oil
and natural gas wells, destruction of producing facilities, damage to life or
property, suspension of operations, environmental damage and possible liability
to the Company. In accordance with customary industry practices, the Company
maintains insurance against some, but not all, of such risks and some, but not
all, of such losses. The occurrence of such an event not fully covered by
insurance could have a material adverse effect on the financial condition and
results of operations of the Company.
Competition
The Company encounters strong competition from major oil companies and
independent operators in acquiring properties and leases for the exploration
for, and production of, crude oil and natural gas. Competition is particularly
intense with respect to the acquisition of desirable undeveloped crude oil and
natural gas properties. The principal competitive factors in the acquisition of
such undeveloped crude oil and natural gas properties include the staff and data
necessary to identify, investigate and purchase such properties, and the
financial resources necessary to acquire and develop such properties. Many of
the Company's competitors have financial resources, staff and facilities
substantially greater than those of the Company. In addition, the producing,
processing and marketing of crude oil and natural gas is affected by a number of
factors which are beyond the control of the Company, the effect of which cannot
be accurately predicted.
The principal resources necessary for the exploration and production of
crude oil and natural gas are leasehold prospects under which crude oil and
natural gas reserves may be discovered, drilling rigs and related equipment to
explore for such reserves and knowledgeable personnel to conduct all phases of
crude oil and natural gas operations. The Company must compete for such
resources with both major crude oil and natural gas companies and independent
operators. Although the Company believes its current operating and financial
resources are adequate to preclude any significant disruption of its operations
in the immediate future, the continued availability of such materials and
resources to the Company cannot be assured.
The Company faces 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 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 competes 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.
Certain Business Risks
The Company intends to continue acquiring producing crude oil and
natural gas properties or companies that own such properties. Although the
Company performs a review of the acquired properties that it believes is
15
<PAGE>
consistent with industry practices, such reviews are inherently incomplete. It
generally is not feasible to review in depth every individual property involved
in each acquisition. Ordinarily, the Company will focus its review efforts on
the higher-valued properties and will sample the remainder. However, even an
in-depth review of all properties and records may not necessarily reveal
existing or potential problems nor will it permit the Company to become
sufficiently familiar with the properties to assess fully their deficiencies and
capabilities. Inspections may not always be performed on every well, and
environmental problems, such as ground water contamination, are not necessarily
observable even when an inspection is undertaken. Furthermore, the Company must
rely on information, including financial, operating and geological information,
provided by the seller of the properties without being able to verify fully all
such information and without the benefit of knowing the history of operations of
all such properties.
In addition, a high degree of risk of loss of invested capital exists in
almost all exploration and development activities which the Company undertakes.
No assurance can be given that crude oil or natural gas will be discovered to
replace reserves currently being developed, produced and sold, or that if crude
oil or natural gas reserves are found, they will be of a sufficient quantity to
enable the Company to recover the substantial sums of money incurred in their
acquisition, discovery and development. Drilling activities are subject to
numerous risks, including the risk that no commercially productive crude oil or
natural gas reservoirs will be encountered. The cost of drilling, completing and
operating wells is often uncertain. The Company's operations may be curtailed,
delayed or cancelled as a result of numerous factors including title problems,
weather conditions, compliance with governmental requirements and shortages or
delays in the delivery of equipment. The availability of a ready market for the
Company's natural gas production depends on a number of factors, including,
without limitation, the demand for and supply of natural gas, the proximity of
natural gas reserves to pipelines, the capacity of such pipelines and government
regulations.
Depletion of Reserves
The rate of production from crude oil and natural gas properties
declines as reserves are depleted. Except to the extent the Company acquires
additional properties containing proved reserves, conducts successful
exploration and development activities or, through engineering studies,
identifies additional behind-pipe zones or secondary recovery reserves, the
proved reserves of the Company will decline as reserves are produced. Future
crude oil and natural gas production is therefore highly dependent upon the
Company's level of success in acquiring or finding additional reserves. See "--
Certain Business Risks."
The Company's ability to continue to acquire producing properties or
companies that own such properties assumes that major integrated oil companies
and independent oil companies will continue to divest many of their crude oil
and natural gas properties. There can be no assurance, however, that such
divestitures will continue or that the Company will be able to acquire such
properties at acceptable prices or develop additional reserves in the future. In
addition, under the terms of the Indenture and the Credit Facility, the
Company's ability to obtain additional financing in the future for acquisitions
and capital expenditures may be limited.
Government Regulation
The Company's business is subject to certain federal, state, provincial
and local laws and regulations relating to the exploration for and development,
production and marketing of crude oil and natural gas, as well as environmental
and safety matters. Such laws and regulations have generally become more
stringent in recent years, often imposing greater liability on a larger number
of potentially responsible parties. Because the requirements imposed by such
laws and regulations are frequently changed, the Company is unable to predict
the ultimate cost of compliance with such requirements. There is no assurance
that laws and regulations enacted in the future will not adversely affect the
Company's financial condition and results of operations. See "Business --
Regulatory Matters."
Fraudulent Transfer Considerations
Under applicable provisions of the United States Bankruptcy Code or
comparable provisions of state fraudulent transfer or conveyance law, if the
Subsidiary Guarantors, at the time they incurred the Guarantees, (a) incurred
such indebtedness with the intent to hinder, delay or defraud creditors, or
16
<PAGE>
(b)(i) received less then reasonably equivalent value or fair consideration and
(ii) (A) was insolvent at the time of such incurrence, (B) was rendered
insolvent by reason of such incurrence (and the application of the proceeds
thereof), (C) was engaged or was about to engage in a business or transaction
for which the assets remaining with the Company constituted unreasonably small
capital to carry on its business, or (D) intended to incur, or believed that it
would incur, debts beyond its ability to pay such debts as they mature, then in
each such case, a court of competent jurisdiction could void, in whole or in
part, the Guarantees or, in the alternative, subordinate the Guarantees to
existing and future indebtedness of the Subsidiary Guarantors. Among other
things, a legal challenge of the Guarantees issued by any Subsidiary Guarantor
on fraudulent conveyance grounds may focus on the benefits, if any, realized by
such Subsidiary Guarantor as a result of the issuance by the Issuers of the
Notes. To the extent the Guarantee was voided as a fraudulent conveyance or held
unenforceable for any other reason, the holders of the Notes would cease to have
any claim against such Subsidiary Guarantor and would be creditors solely of the
Issuers and any Subsidiary Guarantor whose Guaranty was not voided or held
unenforceable. In such event, the claims of the holders of the Notes against the
issuer of an invalid Guarantee would be subject to the prior payment of all
liabilities of such Subsidiary Guarantor. There can be no assurance that, after
providing for all prior claims, there would be sufficient assets to satisfy the
claims of the holders of the Notes relating to any avoided portions of any of
the Guarantees.
The measure of insolvency for purposes of the foregoing would likely
vary depending upon the law applied to such case. Generally, however, a
Subsidiary Guarantor would be considered insolvent if the sum of its debts,
including contingent liabilities, was greater than all of its assets at a fair
valuation, or if the present fair salable value of its assets was less than the
amount that would be required to pay the probable liabilities on its existing
debts, including contingent liabilities, as such debts become absolute and
matured. The Issuers believe that, for purposes of the United States Bankruptcy
Code and state fraudulent transfer or conveyance laws, the Guarantees will be
issued without the intent to hinder, delay or defraud creditors and for proper
purposes and in good faith, and that the Subsidiary Guarantors will receive
reasonably equivalent value or fair consideration therefor, and that after the
issuance of the Guarantees and the application of the net proceeds therefrom,
the Subsidiary Guarantors will be solvent, have sufficient capital for carrying
on their businesses and will be able to pay their debts as they mature. However,
there can be no assurance that a court passing on such issues would agree with
the determination of the Issuers.
Dependence on Key Personnel
The Company depends to a large extent on Robert L. G. Watson, its
Chairman of the Board, President and Chief Executive Officer, for its management
and business and financial contacts. See "Management." The unavailability of Mr.
Watson would have a materially adverse effect on the Company's business. The
Company's success is also dependent upon its ability to employ and retain
skilled technical personnel. While the Company has not to date experienced
difficulties in employing or retaining such personnel, its failure to do so in
the future could adversely affect its business.
Limitations on the Availability of the Company's Net Operating Loss
Carryforwards
At December 31, 1997, the Company had, subject to the limitations
discussed below, $25.1 million of net operating loss carryforwards for U.S. tax
purposes, of which approximately $22.4 million are available for utilization
without limitation. These loss carryforwards will expire from 2002 through 2010
if not utilized. As a result of the acquisition of certain partnership interests
and crude oil and natural gas properties in 1990 and 1991, an ownership change
under Section 382 ("Section 382") of the Internal Revenue Code of 1986, as
amended (the "Code"), occurred 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. During 1992, the Company acquired 100% of the
outstanding capital stock of an unrelated corporation. The use of the net
operating loss carry-forwards of $1.1 million of the unrelated corporation are
limited to approximately $115,000 per year. As a result of the issuance of
additional shares of Common Stock for acquisitions and 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
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and $7.2 million in the aggregate. Further 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 $5.7 million and
$5.9 million for deferred tax assets at December 31, 1996 and 1997,
respectively.
Lack of Public Market
The Notes are a new issue of securities for which there currently is no
public market. The Issuers do not intend to list the Notes on any securities
exchange. Although the Initial Purchaser has informed the Issuers that it
intends to make a market in the Notes, the Initial Purchaser is not obligated to
make a market in the Notes and any market making may be discontinued at any time
at the sole discretion of the Initial Purchaser. In addition, such market-making
activity is subject to the limits imposed by the Securities Act and the Exchange
Act and may be limited during the Exchange Offer and the pendancy of any shelf
registration statement. If a market develops for the Notes, there can be no
assurance as to the liquidity of such market, the ability of the holders to sell
their Notes or the prices at which holders would be able to sell the Notes. If a
market for the Notes does develop, the Notes may trade at a discount to their
principal amount, depending on prevailing interest rates, the market for similar
securities, the performance of the Company, and other factors. See "Plan of
Distribution."
Exchange Notes; Dilution of Interest
It is likely that all Series B Notes and Series C Notes will be tendered
for exchange in the Exchange Offer; however, there is no assurance that a
significant amount of Series B Notes and Series C Notes will be so tendered. If
all Series B Notes and Series C Notes are exchanged for Exchange Notes,
$275,000,000 aggregate principal amount of Exchange Notes will be outstanding
following consummation of the Exchange Offer, and the Exchange Notes will be
deemed to be a single series of notes outstanding under the Indenture. In such
case, any actions requiring the consent of each Holder or the Holders of a
majority in outstanding principal amount of Notes under the Indenture will
therefore require the consent of each Holder of Exchange Notes or the Holders of
a majority in aggregate principal amount of such outstanding Exchange Notes, as
applicable, and the individual voting interest of each Holder will accordingly
be diluted.
Blue Sky Restrictions on Resale of Exchange Notes
In order to comply with the securities laws of certain jurisdictions,
the Exchange Notes may not be offered or resold by any holder unless they have
been registered or qualified for sale in such jurisdictions or an exemption from
registration or qualification is available and the requirements of such
exemption have been satisfied. The Issuers do not currently intend to register
or qualify the resale of the Exchange Notes in any such jurisdictions. However,
an exemption is generally available for sales to registered broker-dealers and
certain institutional buyers. Other exemptions under applicable state securities
laws may also be available.
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PURPOSE OF THE EXCHANGE OFFER
In connection with the initial sale of the Series C Notes, the Issuers
agreed, subject to certain conditions, to use their best efforts to conduct the
Exchange Offer pursuant to the terms of the Registration Rights Agreement by and
among the Issuers and the Initial Purchaser (the "Registration Rights
Agreement"). Pursuant to the Registration Rights Agreement, the Issuers agreed
to (i) cause to be filed with the Commission, no later than 75 days after the
Issue Date, a registration statement under the Securities Act relating to the
Exchange Notes and the Exchange Offer, (ii) use their best efforts (a) to cause
such registration statement to be declared effective by the Commission in no
event later than 135 days after the Issue Date, (b) unless the Exchange Offer
would not be permitted by applicable law or Commission policy, to commence the
Exchange Offer and to consummate the Exchange Offer, on or prior to 165 days
after the Issue Date and (c) to cause the Exchange Offer to remain open for a
period of not less than 30 days. The Issuers' purpose in making the Exchange
Offer is to comply with such agreement and to avoid the increase in interest
rate on the Series C Notes which would occur if the Exchange Offer were not duly
and timely consummated. The objectives of the Exchange Offer are (i) to create a
single series of debt securities having a total outstanding principal amount
which is larger than either the Series B Notes or Series C Notes as a separate
series and (ii) to enable the holders of the Series C Notes, which are subject
to trading limitations, to receive securities which do not contain restrictions
on trading.
The Exchange Offer provides holders of the Series B Notes and Series C
Notes with the Exchange Notes that will generally be freely transferable by
holders thereof (other than any holder who is an "affiliate" or "promoter" of
the Issuers within the meaning of Rule 405 under the Securities Act), who may
offer for resale, resell or otherwise transfer such Exchange Notes without
complying with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of each such holder's business and such holders have no arrangement or
understanding with any person to participate in a distribution of the Exchange
Notes. Each holder who participates in the Exchange Offer will be required to
represent that any Exchange Notes received by it will be acquired in the
ordinary course of its business, that at the time of consummation of the
Exchange Offer such holder will have no arrangement or understanding with any
person to participate in the distribution of the Exchange Notes in violation of
the provisions of the Securities Act, and that such holder is not an affiliate
of the Issuers within the meaning of the Securities Act.
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RESALE OF THE EXCHANGE NOTES
With respect to resales of the Exchange Notes, based on interpretations
by the staff of the Commission set forth in no-action letters issued to third
parties, the Issuers believe that a holder or other person who receives Exchange
Notes, whether or not such person is the holder (other than a person that is an
"affiliate" of the Issuers within the meaning of Rule 405 under the Securities
Act) who receives Exchange Notes in exchange for Series B Notes or Series C
Notes in the ordinary course of business and who is not participating, does not
intend to participate, and has no arrangement or understanding with any person
to participate, in the distribution of the Exchange Notes, will be allowed to
resell the Exchange Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the Exchange Notes a
prospectus that satisfies the requirements of Section 10 of the Securities Act.
However, if any holder acquires Exchange Notes in the Exchange Offer for the
purpose of distributing or participating in a distribution of the Exchange
Notes, such holder cannot rely on the position of the staff of the Commission
enunciated in such no-action letters or any similar interpretive letters, and
must comply with the registration and prospectus delivery requirements of the
Securities Act (with such prospectus containing the selling securityholder
information required by Item 507 of Regulation S-K under the Securities Act) in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each Participating Broker-Dealer that receives
Exchange Notes for its own account in exchange for Series B Notes or Series C
Notes, where such Series B Notes or Series C Notes were acquired by such
Participating Broker-Dealer as a result of market-making activities or other
trading activities, may be a statutory underwriter and must acknowledge that it
will deliver a prospectus meeting the requirements of the Securities Act (which
may be this Prospectus, as it may be amended or supplemented from time to time)
in connection with any resale of such Exchange Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Issuers in the Letter of Transmittal that (i) the Exchange Notes are to be
acquired by the holder or the person receiving such Exchange Notes, whether or
not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Issuers within the meaning of Rule 405 under the
Securities Act, and (v) the holder or any such other person acknowledges that if
such holder or other person participates in the Exchange Offer for the purpose
of distributing the Exchange Notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the Exchange Notes and cannot rely on such no-action letters. As
indicated above, each Participating Broker-Dealer that receives an Exchange Note
for its own account in exchange for the Series B Notes or Series C Notes must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. For a description of the procedures for such resales by
Participating Broker-Dealers, see "Plan of Distribution."
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its
own account pursuant to the Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of Exchange Notes
received in exchange for the Series B Notes or Series C Notes where such Series
B Notes or Series C Notes were acquired as a result of market-making activities
or other trading activities. The Issuers have agreed that they will make this
Prospectus, as amended or supplemented, available to any Participating
Broker-Dealer for use in connection with any such resale during the period
required by the Securities Act.
The Issuers will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker-Dealers. The Exchange Notes received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the
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over-the-counter market, in negotiated transactions, through the writing of
options on the Exchange Notes or a combination of such methods of resale, at
market prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may be made
directly to the purchaser or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
Participating Broker-Dealer and/or the purchasers of any such Exchange Notes.
Any Participating Broker-Dealer that resells the Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such Exchange Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of Exchange Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. The Issuers have agreed to pay all expenses incident to the
Exchange Offer other than commissions or concessions of any brokers or dealers
and will indemnify an Eligible Holder (including any certain profits) against
certain liabilities, including liabilities under the Securities Act.
The Issuers will promptly send additional copies of this Prospectus and
any amendment or supplement to this Prospectus to any Participating
Broker-Dealer that requests such documents in the Letter of Transmittal.
THE EXCHANGE OFFER
Terms of the Offer
The Issuers hereby offer, upon the terms and conditions set forth herein
and in the related Letter of Transmittal, to exchange the Exchange Notes for a
like principal amount of the outstanding Series B Notes and Series C Notes. An
aggregate of $275.0 million principal amount of Series B Notes and Series C
Notes are outstanding. The Exchange Offer is not conditioned upon any minimum
amount of the Series B Notes and the Series C Notes being tendered.
The Exchange Offer will expire at 5:00 p.m., New York City time, on
___________, 1998, unless extended. The term "Expiration Date" means 5:00 p.m.,
New York City time, on __________ , 1998, unless the Issuers, in their sole
discretion, notify the Exchange Agent that the period of the Exchange Offer has
been extended, in which case the term "Expiration Date" means the latest time
and date on which the Exchange Offer as so extended will expire.
See "-- Expiration and Extension."
Holders of the Series B Notes and the Series C Notes who wish to
exchange the Series B Notes and the Series C Notes for the Exchange Notes and
who validly tender the Series B Notes and the Series C Notes to the Exchange
Agent or validly tender the Series B Notes and the Series C Notes by complying
with the book-entry transfer procedures described below and, in each case, who
furnish the Letter of Transmittal and any other required documents to the
Exchange Agent, will either have the Exchange Notes mailed to them by the
Exchange Agent or have the Exchange Notes credited to their account in
accordance with the book-entry transfer procedures described below, promptly
after such tender is accepted by the Issuers. Subject to the terms and
conditions of the Exchange Offer, the Series B Notes and the Series C Notes
which have been validly tendered prior to the Expiration Date will be accepted
on or promptly after the Expiration Date. Subject to the applicable rules of the
Commission, the Issuers, however, reserve the right, prior to the first
acceptance of tendered Series B Notes and Series C Notes, to delay acceptance of
tendered Series B Notes and Series C Notes, or to terminate the Exchange Offer,
subject to the provisions of Rule 14e-1(c) under the Exchange Act, which
requires that a tender offeror pay the consideration offered or return the
tendered securities promptly after the termination or withdrawal of a tender
offer.
In addition, the Issuers reserve the right to waive any condition or
otherwise amend the Exchange Offer in any respect consistent with the Indenture
and the Registration Rights Agreement prior to the acceptance of tendered Series
B Notes and Series C Notes. If any amendment by the Issuers of the Exchange
Offer or waiver by the Issuers of any condition thereto constitutes a material
change in the information previously disclosed to the holders of Series B Notes
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and Series C Notes, the Issuers will, in accordance with the applicable rules of
the Commission, disseminate promptly disclosure of such change in a manner
reasonably calculated to inform such holders of such change. If it is necessary
to permit an adequate dissemination of information regarding such material
change, the Issuers will extend the Exchange Offer to permit an adequate time
for holders of the Series B Notes and the Series C Notes to consider the
additional information.
Certain Effects of the Exchange Offer
Because the Exchange Offer is for any and all Series B Notes and Series
C Notes, the number of Series B Notes and Series C Notes tendered and exchanged
in the Exchange Offer will reduce the principal amount of Series B Notes and
Series C Notes outstanding. As a result, the liquidity of any remaining Series B
Notes and Series C Notes may be substantially reduced. Because the Issuers
anticipate that most holders of Series B Notes and Series C Notes will elect to
exchange such Series B Notes and Series C Notes for the Exchange Notes due to
the absence of restrictions on the resale of the Exchange Notes under the
Securities Act, the Issuers anticipate that the liquidity of the market for any
Series B Notes and Series C Notes remaining after the consummation of the
Exchange Offer may be substantially limited.
Expiration and Extension
The Exchange Offer will expire at 5:00 p.m., New York City time, on
__________ , 1998, unless extended by the Issuers. The Exchange Offer may be
extended by oral or written notice from the Issuers to the Exchange Agent at any
time or from time to time, on or prior to the date then fixed for the expiration
of the Exchange Offer. Public announcement of any extension of the Exchange
Offer will be timely made by the Issuers, but, unless otherwise required by law
or regulation, the Issuers will not have any obligation to communicate such
public announcement other than by making a release to the Dow Jones News
Service.
The Issuers reserve the right, in their sole discretion, (i) to delay
accepting any Series B Notes or Series C Notes, (ii) to extend the Exchange
Offer or (iii) if any conditions set forth below under "-- Conditions" shall not
have been satisfied, to terminate the Exchange Offer by giving oral or written
notice of such delay, extension or termination to the Exchange Agent. Any such
delay in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice thereof to the registered
holders. If the Exchange Offer is amended in a manner determined by the Issuers
to constitute a material change, the Issuers will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
registered holders of the Series B Notes and the Series C Notes, and the Issuers
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner of disclosure to
the registered holders, if the Exchange Offer would otherwise expire during such
five to ten business day period.
Conditions
The Exchange Offer is subject to the following conditions: (i) the
Exchange Offer does not violate applicable law or any applicable interpretation
of the staff of the Commission, (ii) no action or proceeding is instituted or
threatened in any court or by any governmental agency which might materially
impair the ability of the Issuers to proceed with the Exchange Offer and no
material adverse development has occurred in any existing action or proceeding
with respect to the Issuers and (iii) all governmental approvals have been
obtained, which approvals the Issuers deem necessary for the consummation of the
Exchange Offer.
Registration Rights
Pursuant to the Registration Rights Agreement, the Issuers agreed to
file the Registration Statement with the Commission on the appropriate form
under the Securities Act with respect to the Exchange Notes. Upon the
effectiveness of the Registration Statement, the Issuers will offer to the
holders of the Series B Notes and Series C Notes pursuant to the Exchange Offer
who are able to make certain representations the opportunity to exchange their
Series B Notes or Series C Notes for Exchange Notes. If (a) the Issuers are not
required to file the Registration Statement or permitted to consummate the
Exchange Offer because the Exchange Offer is not permitted by applicable law or
Commission policy or (b) any holder of Transfer Restricted Securities (as
defined herein) notifies the Issuers prior to the 20th day following
consummation of the Exchange Offer that (i) it is prohibited by law or
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Commission policy from participating in the Exchange Offer or (ii) that it may
not resell the Exchange Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus and the prospectus contained in the Registration
Statement is not available for such resales, the Issuers will file with the
Commission a shelf registration statement (the "Shelf Registration Statement")
to cover resales of the Series C Notes by the holders thereof who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement. The Issuers will use their reasonable best
efforts to cause the applicable registration statement to be declared effective
as promptly as possible by the Commission. For purposes of the foregoing,
"Transfer Restricted Securities" means each Series C Note until (A) the date on
which such Series C Note has been exchanged by a person other than a
broker-dealer for an Exchange Note in the Exchange Offer, (B) following the
exchange by a broker-dealer in the Exchange Offer of a Series C Note for an
Exchange Note, the date on which such Exchange Note is sold to a purchaser who
receives from such broker-dealer on or prior to the date of such a copy of the
prospectus contained in the Exchange Offer Registration Statement, (C) the date
on which such Series C Note has been effectively registered under the Securities
Act and disposed of in accordance with the Shelf Registration Statement or (D)
the date on which such Series C Note is distributed to the public pursuant to
Rule 144 under the Securities Act or may be distributed to the public pursuant
to Rule 144(k) under the Securities Act.
The Registration Rights Agreement provides that (a) the Issuers will
file the Registration Statement with the Commission on or prior to 75 days after
the Issue Date, (b) the Issuers will use their reasonable best efforts to have
the Registration Statement declared effective by the Commission on or prior to
135 days after the Issue Date, (c) unless the Exchange Offer would not be
permitted by applicable law or Commission policy, the Issuers will commence the
Exchange Offer and use their reasonable best efforts to issue, on or prior to
165 days after the Issue Date, and (d) if obligated to file the Shelf
Registration Statement, the Issuers will use their reasonable best efforts to
file the Shelf Registration Statement with the Commission on or prior to 60 days
after such filing obligation arises and to cause the Shelf Registration
Statement to be declared effective by the Commission on or prior to 120 days
after such obligation arises.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available without charge by writing to the Company
at 500 North Loop 1604 East, Suite 100, San Antonio, Texas 78232, Attention:
Secretary.
How to Tender
A holder of the Series B Notes or Series C Notes may tender the Series B
Notes or Series C Notes by (a) properly completing and signing the Letter of
Transmittal or a facsimile thereof (all references in this Prospectus to the
Letter of Transmittal shall be deemed to include a facsimile thereof) and
delivering the same, together with the Series B Notes or Series C Notes being
tendered (or a confirmation of an appropriate book-entry transfer) to the
Exchange Agent on or prior to the Expiration Date or (b) requesting a broker,
dealer, bank, trust company or other nominee to effect the transaction for such
holder prior to the Expiration Date.
If Exchange Notes are to be delivered to an address other than that of
the registered holder appearing on the note register (the "Note Register")
maintained by the registrar of the Notes, the signature on the Letter of
Transmittal must be guaranteed by a commercial bank or trust company having an
office or correspondent in the United States, or by a member firm of a national
securities exchange or the National Association of Securities Dealers, Inc. (any
of the foregoing is hereinafter referred to as an "Eligible Institution").
Exchange Notes will not be issued in the name of a person other than that of the
registered holder of the Series B Notes or Series C Notes appearing on the Note
Register.
The Exchange Agent will establish an account with respect to the Series
B Notes and the Series C Notes at DTC within two business days after the date of
this Prospectus, and any financial institution which is a participant in DTC may
make book-entry delivery of the Series B Notes and the Series C Notes by causing
DTC to transfer such Series B Notes and Series C Notes into the Exchange Agent's
account in accordance with DTC's procedure for such transfer. Although delivery
of the Series B Notes and the Series C Notes may be effected through book-entry
transfer into the Exchange Agent's account at DTC, the Letter of Transmittal,
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with any required signature guarantees and any other required documents, must in
any case be transmitted to and received by the Exchange Agent on or prior to the
Expiration Date at one of its addresses set forth below under "Exchange Agent",
or in compliance with the guaranteed delivery procedure described below.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
All references in this Prospectus to deposit or delivery of Series B Notes and
Series C Notes shall be deemed to include DTC's book-entry delivery method.
Notwithstanding the foregoing, any financial institution that is a
participant in the Depository's Book-Entry Transfer Facility system may make
book-entry delivery of the Series B Notes and the Series C Notes by causing the
Depositary to transfer such Series B Notes and Series C Notes into the Exchange
Agent's account in accordance with the Depository's Automated Tender Offer
Program ("ATOP") procedures for such book-entry transfers. However, the exchange
for the Series B Notes and the Series C Notes so tendered will only be made
after timely confirmation (a "Book-Entry Confirmation") of such Book-Entry
Transfer of Existing Notes into the Exchange Agent's account, and timely receipt
by the Exchange Agent of an Agent's Message (as such term is defined in the next
sentence) and any other documents required by the Letter of Transmittal. The
term "Agent's Message" means a message, transmitted by the Book-Entry Transfer
Facility and received by the Exchange Agent and forming a part of a Book-Entry
Confirmation, which states that the Book-Entry Transfer Facility has received an
express acknowledgment from a participant tendering the Series B Notes or Series
C Notes that is the subject of such Book-Entry Confirmation that such
participant has received and agrees to be bound by the terms of the Letter of
Transmittal, and that the Issuers may enforce such agreement against such
participant.
THE METHOD OF DELIVERY OF THE SERIES B NOTES AND SERIES C NOTES AND ALL
OTHER DOCUMENTS, INCLUDING DELIVERY THROUGH DTC, IS AT THE ELECTION AND RISK OF
THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, RETURN
RECEIPT REQUESTED, BE USED, AND PROPER INSURANCE BE OBTAINED.
If a holder desires to tender Series B Notes or Series C Notes pursuant
to the Exchange Offer and such holder's Series B Notes or Series C Notes are not
immediately available or time will not permit all of the above documents to
reach the Exchange Agent prior to the Expiration Date, or such holder cannot
complete the procedure of book-entry transfer on a timely basis, such tender may
be effected if the following conditions are satisfied:
(a) such tenders are made by or through an Eligible Institution;
(b) a properly completed and duly executed Notice of Guaranteed
Delivery, in substantially the form provided by the Issuers, is received by the
Exchange Agent as provided below on or prior to the Expiration Date; and
(c) the Series B Notes or Series C Notes, in proper form for transfer
(or confirmation of book-entry transfer of such Series B Notes or Series C Notes
into the Exchange Agent's account at DTC as described above), together with a
properly completed and duly executed Letter of Transmittal and all other
documents required by the Letter of Transmittal, are received by the Exchange
Agent within three New York Stock Exchange, Inc. trading days after the date of
execution of such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand or
transmitted by facsimile transmission or mailed to the Exchange Agent and must
include a guarantee by an Eligible Institution in the form set forth in such
Notice of Guaranteed Delivery.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed Letter of Transmittal accompanied by Series B
Notes or Series C Notes (or a timely confirmation received of a book-entry
transfer of Series B Notes or Series CNotes into the Exchange Agent's account at
DTC) or a Notice of Guaranteed Delivery from an Eligible Institution is received
by the Exchange Agent. Issuances of Exchange Notes in exchange for Series B
Notes or Series C Notes tendered pursuant to a Notice of Guaranteed Delivery by
an Eligible Institution will be made only against delivery of the Letter of
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Transmittal (and any other required documents) and the tendered Series B Notes
or Series C Notes (or a timely confirmation received of a book-entry transfer of
Series B Notes or Series C Notes into the Exchange Agent's account at DTC) with
the Exchange Agent.
Partial tenders of Series B Notes or Series C Notes may be made only if
(i) the principal amount tendered is equal to $1,000 or an integral multiple
thereof; and (ii) the remaining untendered portion of such Series B Notes or C
Note is in a principal amount of $250,000, or any integral multiple of $1,000 in
excess of such amount. Holders tendering less than the entire principal amount
of any Series B Note or Series C Note they hold in accordance with the foregoing
restrictions must appropriately indicate such fact on the Letter of Transmittal
accompanying the tendered Series B Note or Series C Note.
With respect to tenders of Series B Notes or Series C Notes, the Issuers
reserve full discretion to determine whether the documentation is complete and
generally to determine all questions as to tenders, including the date of
receipt of a tender, the propriety of execution of any document, and other
questions as to the validity, form, eligibility or acceptability of any tender.
The Issuers reserve the right to reject any tender not in proper form or
otherwise not valid or the acceptance for exchange of which may, in the opinion
of the Issuers' counsel, be unlawful or to waive any irregularities or
conditions, and the Issuers' interpretation of the terms and conditions of the
Exchange Offer (including the instructions on the Letter of Transmittal) will be
final and binding. The Issuers and the Exchange Agent shall not be obligated to
give notice of any defects or irregularities in tenders and shall not incur any
liability for failure to give any such notice. The Exchange Agent may, but shall
not be obligated to, give notice of any irregularities or defects in tenders,
and shall not incur any liability for any failure to give any such notice. The
Series B Notes or Series C Notes shall not be deemed to have been duly or
validly tendered unless and until all defects and irregularities have been cured
or waived. All improperly tendered Series B Notes or Series C Notes, as well as
Series B Notes or Series C Notes in excess of the principal amount tendered for
exchange, will be returned (unless irregularities and defects are timely cured
or waived), without cost to the tendering holder (or, in the case of Series B
Notes or Series C Notes delivered by book-entry transfer within DTC, will be
credited to the account maintained within DTC by the participant in DTC which
delivered such shares), promptly after the Expiration Date.
Terms and Conditions of the Letter of Transmittal
The Letter of Transmittal contains, among other things, certain terms
and conditions which are summarized below and are part of the Exchange Offer.
Each holder who participates in the Exchange Offer will be required to
represent that any Exchange Notes received by it will be acquired in the
ordinary course of its business, unless it is a Participating Broker-Dealer, it
is not engaging and does not intend to engage in the distribution of the
Exchange Notes, that at the time of consummation of the Exchange Offer such
holder will have no arrangement or understanding with any person to participate
in the distribution of the Exchange Notes in violation of the provision of the
Securities Act, that such holder is not an "affiliate" of the Issuers within the
meaning of the Securities Act and that if it participates in the Exchange Offer
for the purpose of distributing the Exchange Notes it must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the Exchange Notes.
The Series B Notes and Series C Notes tendered in exchange for the
Exchange Notes (or a timely confirmation of a book-entry transfer of such Series
B Notes and Series C Notes into the Exchange Agent's account at DTC) must be
received by the Exchange Agent, with the Letter of Transmittal and any other
required documents, by 5:00 p.m., New York City time, on or prior to
___________, 1998, unless extended, or within the time periods set forth above
in "-- How to Tender" pursuant to a Notice of Guaranteed Delivery from an
Eligible Institution. The party tendering the Series B Notes or Series C Notes
for exchange (the "Holder") will sell, assign and transfer the Series B Notes or
Series C Notes to the Exchange Agent, as agent of the Issuers, and irrevocably
constitute and appoint the Exchange Agent as the Holder's agent and
attorney-in-fact to cause the Series B Notes or Series C Notes to be transferred
and exchanged. The Holder will warrant that it has full power and authority to
tender, exchange, sell, assign and transfer the Series B Notes or Series C Notes
and to acquire the Exchange Notes issuable upon the exchange of such tendered
Series B Notes or Series C Notes, the Exchange Agent, as agent of the Issuers,
will acquire good and unencumbered title to the tendered Series B Notes or
Series C Notes, free and clear of all liens, restrictions, charges and
25
<PAGE>
encumbrances, and that the Series B Notes or Series C Notes tendered for
exchange are not subject to any adverse claims or encumbrance when accepted by
the Exchange Agent, as agent of the Issuers. The Holder will also covenant and
agree that it will, upon request, execute and deliver any additional documents
deemed by the Issuers or the Exchange Agent to be necessary or desirable to
complete the exchange, sale, assignment and transfer of the Series B Notes or
Series C Notes. All authority conferred or agreed to be conferred in the Letter
of Transmittal by the Holder will survive the death or incapacity of the Holder
and any obligation of the Holder shall be binding upon the heirs, personal
representatives, successors and assigns of such Holder.
Signature(s) on the Letter of Transmittal will be required to be
guaranteed as set forth above in "-- How to Tender." All questions as to the
validity, form, eligibility (including time of receipt) and acceptability of any
tender will be determined by the Issuers, in their sole discretion, and such
determination will be final and binding. Unless waived by the Issuers,
irregularities and defects must be cured by the Expiration Date. The Issuers
will pay all security transfer taxes, if any, applicable to the transfer and
exchange of the Series B Notes and the Series C Notes tendered.
Withdrawal Rights
All tenders of the Series B Notes and Series C Notes may be withdrawn at
any time prior to acceptance thereof on the Expiration Date. To be effective, a
notice of withdrawal must be timely received by the Exchange Agent at the
address set forth below under "--Exchange Agent." Any notice of withdrawal must
specify the person named in the Letter of Transmittal as having tendered the
Series B Notes or Series C Notes to be withdrawn. If the Series B Notes or
Series C Notes have been physically delivered to the Exchange Agent, the
tendering holder must also submit the serial number shown on the particular
Series B Notes or Series C Notes to be withdrawn. If the Series B Notes or
Series C Notes have been delivered pursuant to the book-entry procedures set
forth above under "--How to Tender," any notice of withdrawal must specify the
name and number of the participant's account at DTC to be credited with the
withdrawn Series B Notes or Series C Notes. The Exchange Agent will return the
properly withdrawn Series B Notes or Series C Notes as soon as practicable
following receipt of notice of withdrawal. All questions as to the validity,
including time of receipt, of notices of withdrawals will be determined by the
Issuers, and such determinations will be final and binding on all parties.
Acceptance of Tenders
Subject to the terms and conditions of the Exchange Offer, including the
reservation of certain rights by the Issuers, the Series B Notes and the Series
C Notes tendered (either physically or through book-entry delivery as described
in "-- How to Tender") with a properly executed Letter of Transmittal and all
other required documentation, and not withdrawn, will be accepted promptly after
the Expiration Date. Subject to such terms and conditions, Exchange Notes to be
issued in exchange for properly tendered Series B Notes and Series C Notes will
either be mailed by the Exchange Agent or credited to the holder's account in
accordance with the appropriate book-entry procedures promptly after the
acceptance of the properly tendered Series B Notes and Series C Notes.
Acceptance of Series B Notes and Series C Notes will be effected by the delivery
of a notice to that effect by the Issuers to the Exchange Agent. Subject to the
applicable rules of the Commission, the Issuers, however, reserve the right,
prior to the acceptance of tendered Series B Notes and Series C Notes, to delay
acceptance of tendered Series B Notes and Series C Notes upon the occurrence of
any of the conditions set forth above under the caption "-- Conditions." The
Issuers confirm that their reservation of the right to delay acceptance of
tendered Series B Notes and Series C Notes is subject to the provisions of Rule
14e-1(c) under the 1934 Act which requires that a tender offeror pay the
consideration offered or return the tendered securities promptly after the
termination or withdrawal of a tender offer.
Although the Issuers do not currently intend to do so, if they modify
the terms of the Exchange Offer, such modified terms will be available to all
holders of Series B Notes and Series C Notes, whether or not their Series B
Notes and Series C Notes have been tendered prior to such modification. Any
material modification will be disclosed in accordance with the applicable rules
of the Commission and, if required, the Exchange Offer will be extended to
permit holders of Series B Notes and Series C Notes adequate time to consider
such modification.
26
<PAGE>
The tender of Series B Notes and Series C Notes pursuant to any one of
the procedures set forth in "-- How to Tender" will constitute an agreement
between the tendering holder and the Issuers upon the terms and subject to the
conditions of the Exchange Offer.
27
<PAGE>
EXCHANGE AGENT
IBJ Schroder Bank & Trust Company has been appointed as Exchange Agent
for the Exchange Offer. Letters of Transmittal must be addressed to the Exchange
Agent as follows:
If Delivery By Mail: If Delivered By Courier or By Hand:
IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company
One State Street One State Street
New York, New York, 10004 New York, New York 10004
Attention: Reorganization Attention:Processing Window,
Operations Department Securities Subcellar One (SC-1)
Delivery to other than the above addresses will not constitute valid
delivery.
Solicitation of Tenders; Expenses
Except as described above under "Exchange Agent," the Issuers have not
retained any agent in connection with the Exchange Offer and will not make any
payments to brokers, dealers or other persons for soliciting or recommending
acceptances of the Exchange Offer. The Issuers will, however pay the exchange
agent reasonable and customary fees for its services and will, reimburse the
Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Issuers will also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this Prospectus and related documents to the beneficial
owners of the Series B Notes and the Series C Notes and in handling or
forwarding tenders for their customers.
28
<PAGE>
USE OF PROCEEDS
The Issuers will not receive any proceeds as a result of the Exchange
Offer.
The net proceeds to the Issuers from the Offering were approximately
$62.7 million after deducting discounts and estimated offering expenses payable
by the Issuers. The Issuers utilized the net proceeds primarily to repay all
indebtedness outstanding under the Credit Facility (except for $100,000 which
remained outstanding) and for general corporate purposes, including future
acquisitions and the development of producing properties. Indebtedness under the
Credit Facility was incurred in connection with certain acquisitions and for
general corporate purposes, has an initial revolving term expiring in November
1998 and a reducing period of three years from November 1998 and bears interest
based on a facility usage grid and upon either an adjusted rate of LIBOR (as
defined herein) or the prime rate of BTCo.
CAPITALIZATION
The following table sets forth the total consolidated capitalization of
the Issuers at December 31, 1997, on an historical basis and as-adjusted to give
effect to the Offering. This table should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes thereto and the
other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
December 31, 1997
Actual As Adjusted
-----------------------------------
(dollars in thousands)
<S> <C> <C>
Cash and cash equivalents $ 2,836 $ 32,186
============== =============
Total debt, including current maturities:
Other long-term obligation 2,117 2,117
Credit Facility 31,500 100
111/2% Senior Notes due 2004, Series B 215,000 215,000
111/2% Senior Notes due 2004, Series C -- 60,000
Premium on Series C Notes $ -- $ 4,050
-------------- -------------
Total debt 248,617 281,267
Stockholders' equity:
Common stock, $.01 par value; 50,000,000
shares authorized; 6,422,540 shares issued 63 63
Additional paid-in capital 51,118 51,118
Accumulated deficit (19,185) (19,185)
Treasury stock, 53,023 shares (281) (281)
Accumulated other comprehensive income (loss) (4,902) (4,902)
-------------- -------------
Total stockholders' equity 26,813 26,813
-------------- -------------
Total capitalization $ 275,430 $ 308,080
============== =============
</TABLE>
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following historical selected consolidated financial data are
derived from, and qualified by reference to, the Company's Consolidated
Financial Statements and the notes thereto. The historical consolidated
financial data should be read in conjunction with the Consolidated Financial
Statements of the Company and the notes thereto included elsewhere in this
Prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Consolidated Statements of Operations (dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Operating revenue:
Oil and gas production sales $7,275 $11,114 $13,660 $25,749 $65,826
Gas processing revenue -- -- -- 600 3,568
Other revenue 219 235 157 304 1,537
------ ------ ------ ------ ------
Total operating revenue 7,494 11,349 13,817 26,653 70,931
------ ------ ------ ------ ------
Operating costs and expenses:
Lease operating and production taxes 2,896 3,693 4,333 5,858 14,881
Gas processing costs -- -- -- 262 1,252
Depreciation, depletion and
amortization 2,373 3,790 5,434 9,605 30,581
General and administrative expenses 510 810 1,042 1,933 4,171
Other 103 133 125 169 296
Proved property impairment -- -- -- -- 4,600
------ ------ ------ ------ ------
Total operating expenses 5,882 8,426 10,934 17,827 55,781
------ ------ ------ ------ ------
Operating income (loss) 1,612 2,923 2,883 8,826 15,150
Net interest expense 2,492 2,343 3,877 5,987 24,300
Amortization of deferred financing
fees (1) 649 400 214 280 1,260
Other (income) expense (136) 67 -- 443 (34)
------ ------ ------ ------ ------
Income (loss) from continuing
operations before tax and
extraordinary items (1,393) 113 (1,208) 2,116 (10,376)
Deferred income tax (expense) benefit (187) -- -- (176) 3,891
Loss from discontinued operations (2) (280) (1,335) -- -- --
------ ------ ------ ------ ------
Income (loss) before extraordinary
items (1,860) (1,222) (1,208) 1,940 (6,485)
Extraordinary items (3) (573) (1,172) -- (427) --
------ ------ ------ ------ ------
Net income (loss) (2,433) (2,394) (1,208) 1,513 (6,485)
Preferred dividends requirement (186) (183) (366) (366) (183)
------ ------ ------ ------ ------
Net income (loss) applicable to
common stockholders $(2,619) $(2,577) $(1,574) $1,147 $(6,668)
======= ======= ======= ====== =======
Earnings (loss) per common share:
Income (loss) from continuing
operations $ (0.91) $ (0.02) $ (0.34) $ 0.27 $ (1.11)
Discontinued operations (0.14) (0.31) -- -- --
Extraordinary items (0.29) (0.27) -- (0.07) --
------- -------- ------- ------- -------
Net income (loss) per common share $ (1.34) $ (0.60) $ (0.34) $ 0.20 $ (1.11)
======= ======= ======= ======= =======
Weighted average shares outstanding 1,947 4,310 4,635 5,757 6,025
======= ======= ======= ======= =======
Earnings (loss) per common share -
assuming dilution:
Income (loss) from continuing
operations $ (0.91) $ (0.02) $ (0.34) $ 0.23 $ (1.11)
Discontinued operations (0.14) (0.31) -- -- --
Extraordinary items (0.29) (0.27) -- (0.06) --
------- ------- ------- -------- ------
Net income (loss) per common
share assuming dilution $ (1.34) $ (0.60) $ (0.34) $ 0.17 $ (1.11)
======= ======= ======= ======== =======
Weighted average shares outstanding 1,947 4,310 4,635 6,794 6,025
======= ======= ======= ======== =======
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------
1993 1994 1995 1996 1997
(dollars in thousands)
Consolidated Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working capital (deficit) (4) $(1,368) $(1,605) $ 2,633 $ 6,433 $(9,144)
Total assets 43,396 75,361 85,067 304,842 338,528
Long-term debt (5) 12,484 41,235 41,557 215,000 248,596
Stockholders' equity 25,143 28,502 37,063 35,656 26,813
- ---------------
</TABLE>
(1) Consists of financing fees incurred in connection with the issuance of the
Notes and the Credit Facility.
(2) Discontinued operations consist primarily of coal operations which were
terminated in January 1995. The Company anticipates no additional costs
associated with coal operations in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations."
(3) Consists of loss incurred in connection with extinguishment of debt.
(4) Includes current maturities of long-term debt and capital lease obligations.
(5) Excludes current maturities of long-term debt and capital lease obligations.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the Company's financial condition,
results of operations, liquidity and capital resources. This discussion should
be read in conjunction with the Consolidated Financial Statements of the Company
and the notes thereto included elsewhere in this Prospectus.
Results of Operations
The factors which most significantly affect the Company's results of
operations are (1) the sales prices of crude oil, natural gas liquids and
natural gas, (2) the level of total sales volumes of crude oil, natural gas
liquids and natural gas, (3) the level of and interest rates on borrowings and
(4) the level and success of exploration and development activity.
Selected Operating Data. The following table sets forth certain
operating data of the Company for the periods presented:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
(dollars in thousands, except per unit data)
1995 1996 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
Operating revenue:
Crude oil sales $ 5,218 $ 8,864 $ 17,453
NGLs sales 1,553 4,359 10,668
Natural gas sales 6,889 12,526 37,705
Gas Processing revenue - 600 3,568
Other 157 304 1,537
================ =============== ===============
Total operating revenue $ 13,817 $ 26,653 $ 70,931
================ =============== ===============
Operating income $ 2,883 $ 8,826 $ 15,150
Crude oil production (MBbls) 401.4 425.2 936.7
NGLs production (MBbls) 143.4 299.5 992.3
Natural gas production (MMcf) 3,552.7 6,350.0 21,050.0
Average crude oil sales prices (per Bbl) $ 17.16 $ 20.85 $ 18.63
Average NGLs sales price (per Bbl) $ 10.83 $ 14.55 $ 10.75
Average natural gas sales price (per Mcf) $ 1.47 $ 1.97 $ 1.79
</TABLE>
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
Operating Revenue. During the year ended December 31, 1997, operating
revenue from crude oil, natural gas and natural gas liquids sales, and natural
gas processing revenues increased by $43.1 million from $26.3 million in 1996 to
$69.4 million in 1997. This increase was primarily attributable to increased
volumes which were partially offset by a decline in commodity prices. Volume
increased from 1,783 MBOE to 5,437 MBOE for the year ended December 1997. Crude
oil and natural gas liquids sales volumes increased by 166% to 1,929 MBOE during
1997 compared to 725 MBOE in 1996, natural gas sales volumes increased by 231%
to 21.1 Bcf in 1997 compared to 6.3 Bcf in 1996. The increases in volumes were
attributable to a full year of production from property acquisitions completed
during the fourth quarter of 1996 as well as increased production attributable
to the Company's ongoing development program on existing and acquired
properties. Acquisitions and the subsequent development of the acquired
properties contributed 1,182 MBbls of oil and natural gas liquids and 15.9 Bcf
of natural gas. Development of existing properties contributed 747 MBbls of oil
32
<PAGE>
and natural gas liquids and 5.2 Bcf of natural gas during 1997. Average sales
prices in 1997 were $18.63 per Bbl of crude oil, $10.75 per Bbl of natural gas
liquid and $1.79 per Mcf of natural gas compared to $20.85 per Bbl of crude oil,
$14.55 per Bbl of natural gas liquids and $1.97 per Mcf of natural gas in 1996.
The Company also had gas processing revenue of $3.6 million in 1997 as a result
of the acquisition of CGGS in November 1996. Prior to the acquisition, the
Company was not engaged in third party gas processing.
Lease Operating Expenses. Lease operating expenses ("LOE") and natural
gas processing costs, increased by $10.0 million from $6.1 million for the year
ended December 31, 1996 to $16.1 million for the same period of 1997. LOE
increased by $9.0 million to $14.9 million primarily due to the greater number
of wells owned by the Company for the year ended December 31, 1997 compared to
the year ended December 31, 1996. The Company's LOE on a per BOE basis for 1997
was $2.74 per BOE as compared to $3.28 per BOE in 1996. Natural gas processing
cost increased to $1.3 million in 1997 as compared to $262,000 in 1996. The
increase in gas processing expense was due to the acquisition of CGGS in
November 1996. Prior to the acquisition, the Company was not engaged in third
party gas processing
G & A Expenses. General and administrative ("G & A") expenses increased
from $1.9 million for the year ended December 31, 1996 to $4.2 million for the
year ended December 31, 1997, as a result of the Company's hiring additional
staff, including an increase in personnel to manage and develop properties
acquired in the fourth quarter of 1996. The Company's G & A expense on a per BOE
basis was $0.77 per BOE in 1997 compared to $1.08 per BOE for 1996.
DD & A Expenses. Due to the increase in sales volumes of crude oil and
natural gas, depreciation, depletion and amortization ("DD & A") expense
increased by $21.0 million from $9.6 million for the year ended December 31,
1996 to $30.6 million for the year ended December 31, 1997. The Company's DD&A
expense on a per BOE basis for 1997 was $5.62 per BOE as compared to $5.38 per
BOE in 1996.
Interest Expenses and Preferred Dividends. Interest expense and
preferred dividends increased by $18.1 million from $6.4 million to $24.5
million for the year end December 31, 1997, compared to 1996. This increase was
attributable to increased borrowings by the Company to finance the acquisitions
consummated during 1996. In November 1996,the Company issued $215 million in
principal amount of the Series B Notes. During 1997, the Company made additional
borrowings under the Credit Facility. Long-term debt increased from $215.0
million at December 31, 1996 to $248.6 million at December 31, 1997. During
1997, the Company paid $183,000 in preferred dividends as compared to $366,000
in 1996. Preferred dividends were eliminated on July 1, 1997 as the result of
the conversion of all outstanding preferred stock into Abraxas Common Stock.
Ceiling Limitation Writedown. The Company records the carrying value of
its crude oil and natural gas properties using the full cost method of
accounting for oil and gas properties. Under this method, the Company
capitalizes the cost to acquire, explore for and develop oil and gas properties.
Under the full cost accounting rules, the net capitalized cost of crude oil and
natural gas properties less related deferred taxes, are limited by country, to
the lower of the unamortized cost or the cost ceiling, defined as the sum of the
present value of estimated unescalated future net revenues from proved reserves,
discounted at 10%, plus the cost of properties not being amortized if any, plus
the lower of cost or estimated fair value of unproved properties included in the
costs being amortized, if any, less related income taxes. If the net capitalized
cost of crude oil and natural gas properties exceeds the ceiling limit, the
Company is subject to a ceiling limitation writedown to the extent of such
excess. A ceiling limitation writedown is a charge to earnings which does not
impact cash flow from operating activities. However, such writedowns do impact
the amount of the Company's stockholders' equity. The risk that the Company will
be required to writedown the carrying value of its oil and gas assets increases
when oil and gas prices are depressed or volatile. In addition, writedowns may
occur if the Company has substantial downward revisions in its estimated proved
reserves or if purchasers or governmental action cause an abrogation of, or if
the Company voluntarily cancels, long-term contracts for its natural gas. For
the year ended December 31, 1997, the Company recorded a writedown of $4.6
million, $3.0 million after tax, related to its Canadian properties. No
assurance can be given that the Company will not experience additional
writedowns in the future. Should commodity prices continue to decline, a further
writedown of the carrying value of the Company's crude oil and natural gas
properties may be required. See Note 16 of Notes to Consolidated Financial
Statements.
33
<PAGE>
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 $26.3
million. 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 the Portilla and Happy fields during the portion of the year
that the Company did not own the properties. The Company sold these properties
in March 1996 and reacquired these properties in November 1996. During 1995, the
Portilla and Happy Fields 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 Portilla and Happy in 1996 as
compared to 1995 and the acquisitions of the Wyoming Properties, the capital
stock of 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 and natural gas processing costs 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 expenses increased 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 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.
General
The Company has incurred operating losses and net losses for a number of
years. The Company's revenues, profitability and future rate of growth are
substantially dependent upon prevailing prices for crude oil and natural gas and
the volumes of crude oil, natural gas and natural gas liquids produced by the
34
<PAGE>
Company. Natural gas prices increased substantially during 1996; however, gas
prices and crude oil weakened somewhat during 1997. Crude oil prices have
continued to be depressed during 1998. The average natural gas prices realized
by the Company were $1.79 per Mcf in 1997 compared with $1.97 per Mcf at
December 31, 1996 and $1.47 per Mcf at December 31, 1995. During 1997, crude oil
prices averaged $18.63 per Bbl compared to $20.85 during 1996 and $17.16 per Bbl
during 1995. Although the Company had operating and net income during 1996,
losses were incurred in 1995 and 1997 and there can be no assurance that
operating income and net earnings will be achieved in future periods. In
addition, because the Company's proved reserves will decline as crude oil,
natural gas and natural gas liquids are produced, unless the Company is
successful in acquiring properties containing proved reserves or conducts
successful exploration and development activities, the Company's reserves and
production will decrease. If crude oil prices remain at depressed levels or if
natural gas prices return to depressed levels, or if the Company's production
levels decrease, the Company's revenues, cash flow from operations and
profitability will be materially adversely affected.
Liquidity and Capital Resources
General. Capital expenditures in 1995, 1996 and 1997 were $12.3 million,
$173.2 million and $87.8 million, respectively. The table below sets forth the
components of these capital expenditures on a historical basis for the three
years ended December 31, 1995, 1996 and 1997.
Year Ended December 31
-----------------------------------
(dollars in thousands)
1995 1996 1997
---- ---- ----
Expenditure category:
Property acquisitions (1) $ 719 $ 154,484 $ 24,210
Development 11,472 18,465 61,414
Facilities and other 139 206 2,140
---------- ---------- ----------
Total $ 12,330 $ 173,155 $ 87,764
- ------------------------
(1) Acquisition cost includes 7,585,000 common shares and 4,000,000
special warrants of Cascade Oil & Gas, Ltd. valued at approximately $3.7 million
in 1997 related to the acquisition of certain crude oil and natural gas
properties.
Acquisitions of crude oil and natural gas producing properties during
1996 accounted for the majority of the capital expenditures made by the Company
during 1996. During 1995 and 1997, expenditures were primarily for the
development of existing properties. These expenditures were funded through
internally generated cash flow and borrowings under the Credit Facility.
At December 31, 1997, the Company had current assets of $18.3 million
and current liabilities of $27.5 million resulting in a working capital deficit
of $9.2 million. This compares to working capital of $6.4 million at December
31, 1996. The material components of the Company's current liabilities at
December 31, 1997 include trade accounts payable of $17.1 million, revenues due
third parties of $2.8 million and accrued interest of $4.6 million.
Stockholders' equity decreased from $35.7 million at December 31, 1996 to $26.8
million at December 31, 1997 primarily due to a net loss incurred in 1997,
including the impact of the impairment of the full cost pool. See "Ceiling
Limitation Writedown"
The Company's current budget for capital expenditures for 1998 other
than acquisition expenditures is $68.4 million. 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 and is consequently able to adjust the level of
its expenditures as circumstances dictate. Additionally, the level of capital
35
<PAGE>
expenditures will vary during future periods depending on market conditions and
other related economic factors. Should the price of crude oil continue to
decline, the Company's cash flows will decrease which may result in a reduction
of the capital expenditures budget.
The Company will have three principal sources of liquidity during the next
12 months: (i) cash on hand, including the net proceeds of the offering of the
Series C Notes, (ii) borrowing capacity under the Credit Facility and (iii) cash
generated by operations. While the availability of capital resources cannot be
predicted with certainty and is dependent upon a number of factors including
factors outside of management's control, management believes that the net
proceeds of the offering of the Series C Notes, the Company's cash flow from
operations plus availability under the Credit Facility will be adequate to fund
operations and planned capital expenditures. The Company may also sell
additional equity or debt securities in order to fund operations and planned
capital expenditures as well as to finance future acquisitions.
The Credit Facility has an availability of $40.0 million. As of December
31, 1997, there was $31.5 million outstanding under the Credit Facility. A
portion of the proceeds of the offering of the Series C Notes were used to
re-pay the outstanding balance of the Credit Facility (except for $100,000 which
remains outstanding).
Operating activities for the year ended December 31, 1997 provided $36.6
million of cash to the Company. Investing activities required $74.5 million
during 1997 primarily for the acquisition and development of producing
properties. Financing provided $33.3 million during 1997.
Operating activities for the year ended December 31, 1996, provided $13.5
million of cash. Investing activities required $172.6 million primarily for the
acquisition of the Wyoming Properties, CGGS and Portilla and Happy. Financing
provided $163.0 million during 1996.
During 1995, operating activities provided $4.5 million of cash. Investing
activities during 1995 utilized $10.1 million of cash primarily for the
development of existing properties. Total cash provided from financing
activities for 1995 was $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.
The Company is heavily dependent on crude oil and natural gas prices which
have historically been volatile. Although the Company has hedged a portion of
its natural gas production and intends to continue this practice, future crude
oil and natural gas price declines would have a material adverse effect on the
Company's overall results, and therefore, its liquidity. Furthermore, low crude
oil and natural gas prices could affect the Company's ability to raise capital
on terms favorable to the Company.
Hedging Activities. 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 . Under the
agreement, the Company pays a fixed rate of 6.15% while the Banks will pay a
floating rate equal to the USD-LIBOR-BBA rate for one month maturities, quoted
on the eighteenth day of each month, to the Company. Settlements are due
monthly. The agreement terminates in August 1998. At December 31, 1997, the fair
value of this swap, as determined by BTCo., was approximately $64,000.
In connection with the re-acquisition of the Portilla and Happy Fields,
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
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
36
<PAGE>
five year period averages $1.84 per MMBTU. At December 31, 1997, the estimated
fair market value of the Hedge Agreement is a loss of approximately $700,000.
Net Operating Loss Carryforwards. At December 31, 1997, the Company had,
subject to the limitations discussed below, $25.1 million of net operating loss
carryforwards for U.S. tax purposes, of which approximately $22.4 million are
available for utilization without limitation. These loss carryforwards will
expire from 2002 through 2010 if not utilized. At December 31, 1997, the Company
had approximately $2.9 million of net operating loss carryforwards for Canadian
tax purposes which expire in 2003 and 2004. As a result of the acquisition of
certain partnership interests and crude oil and natural gas properties in 1990
and 1991, an ownership change under Section 382, occurred in December 1991.
Accordingly, it is expected that the use of net operating loss 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 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 $5.9 million for deferred tax assets at December
31, 1996 and 1997, respectively.
DESCRIPTION OF EXISTING INDEBTEDNESS
Series B Notes and Series C Notes
On November 14, 1996, Abraxas and Canadian Abraxas consummated the
offering of $215 million of their 11 1/2 % Senior Notes due 2004, Series A (the
"Series A Notes"), which were subsequently exchanged for the registered Series B
Notes. On January 27, 1998, the Issuers completed the sale of $60 million of the
Series C Notes. The Series C Notes were sold at a premium of $4,050,000 which
will be amortized over the life of the Series C Notes resulting in an effective
interest rate of 10.5%. The terms of the Series C Notes are, and the terms of
the Exchange Notes will be, substantially similar to the terms of the Series B
Notes. The Series A Notes and the Series B Notes were issued pursuant to the
Series A/B Indenture. The Series A/B Indenture is substantially similar to the
Indenture. See "Description of the Exchange Notes."
Credit Facility
Concurrently with the consummation of the offering of the Series A
Notes, the Company entered into the Credit Facility with BTCo and other lenders.
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. At March 31, 1998, there was $100,000 outstanding under the
Credit Facility.
Commitments available under the Credit Facility are subject to borrowing
base redeterminations to be performed semi-annually and, at the option of each
of the Company and the lenders 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 BTCo'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 the Company's 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
37
<PAGE>
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 Londer Inter-Bank Offered
Rate ("LIBOR") plus 1.25% or (b) the prime rate of BTCo (which is based on
BTCo'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 BTCo 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 BTCo 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. As of
December 31, 1997, the Company was not in compliance with the minimum working
capital and capital expenditure requirements under the Credit Facility. The
Company received a waiver of these requirements through March 31, 1998. At March
31, 1998, the Company was in compliance with these requirements. Should crude
oil prices continue to decline, a further write-down of the Company's oil and
gas properties may be required. If such a write-down were large enough, it could
result in a default in the net worth and other requirements under the Credit
Facility.
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 Series A/B Indenture and the Indenture
also contain 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 Series B Notes and the Series C Notes, violation of covenants,
cross default on other indebtedness, bankruptcy and material judgments.
38
<PAGE>
BUSINESS
General
The Company is an independent energy company engaged primarily in
the acquisition, exploration, development and production of crude oil and
natural gas. Since January 1, 1991, the Company's principal means of growth has
been through the acquisition and subsequent development and exploitation of
producing properties and related assets. The Company utilizes a disciplined
acquisition strategy, focusing its efforts on producing properties and related
assets possessing the following characteristics: a concentration of operations;
significant, quantifiable development potential; historically low operating
expenses; and the potential to reduce G&A expenses per BOE. The Company seeks to
complement its acquisition and development activities by selectively
participating in exploration projects with experienced industry partners. The
Company's principal areas of operation are Texas, western Canada and
southwestern Wyoming. The Company owns interests in 706,605 gross acres (445,955
net acres) and 763.0 gross wells (404.7 net wells), 341 of which are operated by
the Company, and varying interests in 20 natural gas processing plants or
compression facilities.
Since December 31, 1990, the Company has made 17 acquisitions of crude
oil and natural gas properties totaling an estimated 52,100 MBOE at an average
acquisition cost of $4.11 per BOE. From January 1, 1991 to December 31, 1997,
the Company's estimated total proved reserves increased from 889 MBOE to 54,700
MBOE; aggregate PV-10 increased from $11.0 million to $268.7 million; and
average net daily production increased from 0.141 MBOE per day to 14.9 MBOE per
day.
The Company was founded in 1977 by Robert L.G. Watson, the Company's
Chairman of the Board, President and Chief Executive Officer. Canadian Abraxas
was formed by the Company in 1996 to acquire CGGS. The Company's principal
offices are located at 500 North Loop 1604 East, Suite 100, San Antonio, Texas
78232 and its telephone number is (210) 490-4788. Canadian Abraxas' principal
offices are located at 300 - 5th Avenue, 12th Floor, Calgary, Alberta and its
telephone number is (403) 262-1949.
Primary Operating Areas
Texas
Abraxas Cherry Canyon Field, Ward County, Texas. In connection with the
acquisition of certain producing properties located in West Texas in July 1994
(the "West Texas Properties"), the Company acquired an interest in approximately
7,360 gross acres (4,500 net acres) in this field and currently operates 20 of
the wells in its acreage. The Company drilled its first shallow pool exploratory
test well in this field in March 1995. Since that time, this field has become
the principal focus of the Company's development activity. To date, 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. For the year ended December 31, 1997, this field produced an average of
approximately 1,166 net Bbls of crude oil and NGLs and approximately 4,499 net
Mcf of natural gas per day from 27.25 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. For
the year ended December 31, 1997, these fields produced an average of
approximately 154 net Bbls of crude oil and NGLs and 4,158 net Mcf of natural
gas per day from 15.7 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
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<PAGE>
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. For the year ended December 31,
1997, the field produced an average of approximately 586 net Bbls of crude oil
and NGLs and approximately 1,213 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 (the "Portilla Plant") which had aggregate capacity of
approximately 20.0 MMcf of natural gas per day at December 31, 1997. During the
year ended December 31, 1997, the Portilla Plant processed an average of
approximately 13.5 MMcf of natural gas per day and extracted an average of
approximately 200 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 March 1996, the Company sold its interest in this field to the
Partnership. In November 1996, the Company reacquire its interest in this field
and 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.
For the year ended December 31, 1997, this field produced an average of
approximately 331 net Bbls of crude oil and NGLs and 2,933 net Mcf of natural
gas per day from 8.2 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 8.2 MMcf of natural gas per day and extracted approximately 477
Bbls of NGLs per day for the year ended December 31, 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. For the year ended December 31, 1997, this field produced
an average of approximately 203 net Bbls of crude oil and NGLs and 3,072 net Mcf
of natural gas per day from 5 net wells.
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. For the year ended December 31, 1997, the field produced an
average of approximately 117 net Bbls of crude oil and NGLs and approximately
275 net Mcf natural gas per day from 31 net wells.
Southwestern Wyoming
The Company acquired 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. For the year ended December 31, 1997, the
Wyoming Properties produced an average of approximately 1,740 net Bbls of crude
oil and NGLs and 15,810 net Mcf of natural gas per day from 42 net wells.
Western Canada
In January 1996, the Company invested $3.0 million in Grey Wolf
Exploration Ltd. ("Grey Wolf"), a privately held Canadian corporation, which, in
turn, invested these proceeds in newly-issued shares of Cascade, 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 a 10% interest in the Canadian Abraxas Properties (as
defined herein) and the Canadian Abraxas Plants and an 8% interest in the
Pacalta Properties (as defined herein) and manages the operations of Canadian
Abraxas pursuant to a management agreement between Canadian Abraxas and Cascade.
Under the management agreement, Canadian Abraxas reimburses Cascade for
reasonable costs or expenses attributable to Canadian Abraxas and for
administrative expenses based upon the percentage that Canadian Abraxas' gross
revenue bear to the total gross revenue of Canadian Abraxas and Cascade.
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In November 1996, Canadian Abraxas acquired Canadian Gas Gathering
Systems, Inc. ("CGGS"). For the year ended December 31, 1997, the producing
properties acquired by Canadian Abraxas from CGGS (the "Canadian Abraxas
Properties") produced an average of approximately 530 net Bbls of crude oil and
NGLs and 23,403 net Mcf of natural gas per day from 110 net wells.
In October 1997, Canadian Abraxas and Cascade completed the acquisition
of the Canadian assets of Pacalta Resources Ltd. (the "Pacalta Properties") for
Cdn $20.0 million in cash and four million Cascade Special Warrants. Canadian
Abraxas acquired a 92% interest in the Pacalta Properties and Cascade acquired
an 8% interest. Cascade has the opportunity to acquire Canadian Abraxas'
ownership upon arranging satisfactory financing in 1998. At closing, the Pacalta
Properties were producing 115 net Bbls of oil per day and 8,000 net Mcf of gas
per day.
The following table sets forth a summary of certain information, by
field, of the Canadian Abraxas, Pacalta, Pennant and Cascade Properties:
Average Daily Production
for Year Ended December
31, 1997
--------------------------
Crude Oil
& NGLs Natural Gas
Name of Field Working Net Wells (Bbls) (Mcf)
Interest
Quirk Creek (1) 4.4 213 4,420
Sundre (2) 10.2 214 4,551
Bellis (3) 26.4 -- 4,510
Chinchaga (4) 3.4 10 2,129
Pouce Coupe (5) 2.0 -- 2,161
Valhalla (6) 6.5 3 1,007
Other (8)(9) (7) 56.8 283 9,072
---- --- -----
Total 109.7 725 27,850
- ------------
(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 1% to 100% in 213 wells.
(8) Consist of Big Bend, Kbnopcik, Eaglesham, Giroux Lake and minor properties.
(9)Includes acquisition of Pennant properties effective September 1, 1997,
(working interests ranging from 1% to 100% in 41 wells) and Pacalta
properties effective June 1, 1997 (working interests ranging from 1% to 100%
in 78 wells).
Natural Gas Processing. In connection with the acquisition of CGGS,
Canadian Abraxas acquired interests in 11 natural gas processing plants (the
"Canadian Abraxas Plants") and 197 miles of natural gas gathering facilities.
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
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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 following table sets forth certain information with respect to the
Canadian Abraxas Plants for the year ended December 31, 1997.
Gross Net
Plant Plant
Working Capacity Capacity
Plant Location Interest (MMcfpd) (MMcfpd)
- -------------- -------- -------- --------
Quirk Creek 26% 80 20.8
Knopcik (1) 10% 56 5.6
Valhalla 100% 30 30.0
Sundre 40% 20 8.0
Bellis (2) 49% 44 21.7
Big Bend 77% 8 6.2
Pouce Coupe 100% 8 8.0
Eaglesham 25% 5 1.3
-- -----
Total 251 101.6
=== =====
- ------------
(1) Consists of three plants.
(2) Consists of eight plants.
Developmental and Exploratory Acreage
The following table indicates the Company's interest in developed and
undeveloped acreage as of December 31, 1997:
Developed and Undeveloped Acreage
As of December 31, 1997
Developed Acreage Undeveloped Acreage
---------------------------- -----------------------------
Gross Acres Net Acres Gross Acres Net Acres
------------- ------------ ------------- --------------
Canada 227,794 111,888 402,246 286,041
Texas 41,393 24,143 12,369 9,591
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 277,970 140,847 428,635 305,108
- ---------------
Productive Wells
The following table sets forth the total gross and net productive wells
of the Company, expressed separately for crude oil and natural gas, as of
December 31, 1997:
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Productive Wells
As of December 31, 1997
Crude Oil Natural Gas
-------------------------- ----------------------------
State/Country Gross Net Gross Net
------------------ ------------ ------------ ------------ -------------
Canada 57.0 12.7 212.0 97.2
Texas 332.0 194.8 105.0 67.2
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 1.0 -- 1.0 --
Kansas 3.0 0.7 -- --
============ ============ ============ =============
Total 401.0 210.2 362.0 194.5
============ ============ ============ =============
Substantially all of the Company's existing crude oil and natural gas
properties are pledged to secure the Company's indebtedness under the Credit
Facility. See "Description of Existing Indebtedness."
Reserves Information
The crude oil and natural gas reserves of Abraxas have been estimated as
of January 1, 1998, January 1, 1997 and January 1, 1996 and of Canadian Abraxas
as of January 1, 1997, by DeGolyer & MacNaughton, of Dallas, Texas. The reserves
of Canadian Abraxas and Cascade as of January 1, 1998 have been estimated by
McDaniel & Associates Consultants Ltd. of Calgary, Alberta. Crude oil and
natural gas reserves, and the estimates of the present value of future net
revenues therefrom, were determined based on then current prices and costs.
Reserve calculations involve the estimate of future net recoverable reserves of
crude oil and natural gas and the timing and amount of future net revenues to be
received therefrom. Such estimates are not precise and are based on assumptions
regarding a variety of factors, many of which are variable and uncertain.
The following table sets forth certain information regarding estimates
of the Company's crude oil, natural gas liquids and natural gas reserves as of
January 1, 1998 January 1, 1997 and January 1, 1996:
Estimated Proved Reserves
----------------------------------------
Proved Proved Total
Developed Undeveloped Proved
----------- ------------ ----------
As of January 1, 1996
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 January 1, 1997
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
As of January 1,1998
Crude oil (MBbls) 7,075 1,873 8,948 (1)
NGLs (MBbls) 7,178 1,651 8,829 (2)
Natural gas (MMcf) 186,490 34,824 221,314 (3)
- ------------------
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(1) Includes 120,000 and 128,900 barrels of crude oil reserves owned by
Cascade of which 57,600 and 69,541 barrels are applicable to the minority
interests share of these reserves as of December 31, 1996 and 1997,
respectively.
(2) Includes 131,300 barrels of natural gas liquids reserves owned by
Cascade of which 70,889 barrels are applicable to the minority interests share
of these reserves as of December 31, 1997.
(3) Includes 7,446 Mmcf of natural gas reserves owned by Cascade of which
4,020 Mmcf are applicable to the minority interests share of these reserves as
of December 31, 1997.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond the control of the
Company. The reserve data included in this Prospectus represent only estimates.
Reserve engineering is a subjective process of estimating underground
accumulations of crude oil and natural gas that cannot be measured in an exact
manner. The accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment. As
a result, estimates of different engineers often vary . 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 natural gas reserves, future net revenue from proved
reserves and the PV-10 thereof for the Company's crude oil and natural gas
properties included in this Prospectus are subject to revisions by the results
of drilling, testing and production subsequent to the date of such estimates.
Accordingly, reserve estimates are often different from the quantities of crude
oil and natural gas that are ultimately recovered. The meaningfulness of such
estimates is highly dependent upon the accuracy of the assumptions upon which
they are based.
In general, the volume of production from crude oil and natural gas
properties declines as reserves are depleted. Except to the extent the Company
acquires properties containing proved reserves or conducts successful
exploration and development activities, or both, the proved reserves of the
Company will decline as reserves are produced. The Company's future crude oil
and natural gas production is therefore highly dependent upon its level of
success in acquiring or finding additional reserves.
The Company files reports of its estimated crude oil and natural gas
reserves with the Department of Energy and the Bureau of the Census. The
reserves reported to these agencies are required to be reported on a gross
operated basis and therefore are not comparable to the reserve data reported
herein.
Crude Oil, NGLs and Natural Gas Production and Sales Prices
The following table presents the net crude oil, net NGLs and net natural
gas production for the Company, the average sales price per Bbl of crude oil and
NGLs and per Mcf of natural gas produced and the average LOE per BOE of
production sold, for each of the three years ended December 31, 1997:
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<PAGE>
1995 1996 1997
---- ---- ----
Crude oil production (Bbls) 401,445 425,188 936,716
Natural gas production (Mcf) 3,552,671 6,350,069 21,050,045
Natural gas liquids
production (Bbls) 143,380 299,509 992,266
Average sales price per
Bbl of crude oil ($) $ 17.16 $ 20.85 $ 18.63
Average sales price per
MCF of natural gas ($) $ 1.47 $ 1.97 $ 1.79
Average sales price per
Bbl of natural gas
liquids ($) $ 10.83 $ 14.55 $ 10.75
Average cost of
production ($) per
BOE produced (1) $ 3.81 $ 3.28 $ 2.74
--------------------
(1) Oil and gas were combined by converting gas to a barrel oil equivalent
("BOE") on the basis of 6 Mcf gas =1 Bbl of oil. Production costs include direct
operating costs, ad valorem taxes and gross production taxes.
45
<PAGE>
Drilling Activities
The following table sets forth the Company's gross and net working
interests in exploratory, development, and service wells drilled during the year
ended December 31, 1997:
1995 1996 1997
----------------- ----------------- ----------------
Gross Net Gross Net Gross Net
------- ------- ------- ------- ------- -------
Exploratory
Productive
Crude oil 1.0 .72 2.0 1.2 - -
Natural gas - - 2.0 1.2 10.0 7.9
Dry holes 1.0 1 4.0 1.4 2.0 1.8
------- ------- ------- ------- ------- -------
Total 2.0 1.72 8.0 3.8 12.0 9.7
======= ======= ======= ======= ======= =======
Development
Productive
Crude oil 12.0 9.1 20.0 15.8 25.0 22.3
Natural gas 2.0 .6 10.0 3.7 20.0 14.9
Service - - 1.0 1.0 - -
Dry holes 1.0 .3 - - 3.0 2.0
------- ------- ------- ------- ------- -------
Total 15.0 10.0 31.0 20.5 48.0 39.2
======= ======= ======= ======= ======= =======
As of March 31, 1998, the Company had five wells in the process of
drilling.
Markets and Customers
The revenues 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 and the
Canadian economies (particularly the manufacturing sector), foreign imports,
political conditions in other oil-producing and natural gas-producing countries,
the actions of the Organization of Petroleum Exporting Countries and domestic
regulation, legislation and policies. Decreases in the prices of crude oil and
natural gas have had, and could have in the future, an adverse effect on the
carrying value of the Company's proved reserves and the Company's revenues,
profitability and cash flow.
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
46
<PAGE>
price delivery contracts, financial swaps and crude oil and natural gas futures
contracts as hedging devices. To ensure a fixed price for future production, the
Company may sell a futures contract and thereafter either (i) make physical
delivery of crude oil or natural gas to comply with such contract or (ii) buy a
matching futures contract to unwind its futures position and sell its production
to a customer. Such contracts may expose the Company to the risk of financial
loss in certain circumstances, including instances where production is less than
expected, the Company's customers fail to purchase or deliver the contracted
quantities of crude oil or natural gas, or a sudden, unexpected event materially
impacts crude oil or natural gas prices. Such contracts may also restrict the
ability of the Company to benefit from unexpected increases in crude oil and
natural gas prices. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources.
Substantially all of the Company's crude oil and natural gas is sold at
current market prices under short term contracts, as is customary in the
industry. During the year ended December 31, 1997, three purchasers accounted
for approximately 42% of the Company's crude oil and natural gas sales and two
customers accounted for approximately 51% of natural gas processing revenues.
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.
Competition
The Company encounters strong competition from major oil companies and
independent operators in acquiring properties and leases for the exploration
for, and production of, crude oil and natural gas. Competition is particularly
intense with respect to the acquisition of desirable undeveloped crude oil and
natural gas leases. The principal competitive factors in the acquisition of such
undeveloped crude oil and natural gas leases include the staff and data
necessary to identify, investigate and purchase such leases, and the financial
resources necessary to acquire and develop such leases. Many of the Company's
competitors have financial resources, staff and facilities substantially greater
than those of the Company. In addition, the producing, processing and marketing
of crude oil and natural gas is affected by a number of factors which are beyond
the control of the Company, the effect of which cannot be accurately predicted.
The principal resources necessary for the exploration and production of
crude oil and natural gas are leasehold prospects under which crude oil and
natural gas reserves may be discovered, drilling rigs and related equipment to
explore for such reserves and knowledgeable personnel to conduct all phases of
crude oil and natural gas operations. The Company must compete for such
resources with both major crude oil companies and independent operators.
Although the Company believes its current operating and financial resources are
adequate to preclude any significant disruption of its operations in the
immediate future, the continued availability of such materials and resources to
the Company cannot be assured.
The Company will face significant competition for obtaining additional
natural gas supplies for gathering and processing operations, for marketing
NGLs, residue gas, helium, condensate and sulfur, and for transporting natural
gas and liquids. The Company's principal competitors will include major
integrated oil companies and their marketing affiliates and national and local
gas gatherers, brokers, marketers and distributors of varying sizes, financial
resources and experience. Certain competitors, such as major crude oil and
natural gas companies, have capital resources and control supplies of natural
gas substantially greater than the Company. Smaller local distributors may enjoy
a marketing advantage in their immediate service areas. The Company competes
against other companies in its natural gas processing business both for supplies
of natural gas and for customers to which it sells 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
47
<PAGE>
are, or in the past have been, affected by price controls, taxes, conservation,
safety, environmental, and other laws relating to the petroleum industry, by
changes in such laws and by constantly changing administrative regulations.
Price Regulations. In the recent past, maximum selling prices for
certain categories of crude oil, natural gas, condensate and NGLs were subject
to federal regulation. In 1981, all federal price controls over sales of crude
oil, condensate and NGLs were lifted. Effective January 1, 1993, the Natural Gas
Wellhead Decontrol Act (the "Decontrol Act") deregulated natural gas prices for
all "first sales" of natural gas, which includes all sales by the Company of its
own production. As a result, all sales of the Company's domestically produced
crude oil, natural gas, condensate and NGLs may be sold at market prices, unless
otherwise committed by contract.
Natural gas exported from Canada is subject to regulation by the
National Energy Board ("NEB") and the government of Canada. Exporters are free
to negotiate prices and other terms with purchasers, provided that export
contracts in excess of two years must continue to meet certain criteria
prescribed by the NEB and the government of Canada. As is the case with crude
oil, natural gas exports for a term of less than two years must be made pursuant
to an NEB order, or, in the case of exports for a longer duration, pursuant to
an NEB license and Governor in Council approval.
The government of Alberta also regulates the volume of natural gas that
may be removed from Alberta for consumption elsewhere based on such factors as
reserve availability, transportation arrangements and marketing considerations.
The North American Free Trade Agreement. On January 1, 1994, the North
American Free Trade Agreement ("NAFTA") among the governments of the United
States, Canada and Mexico became effective. In the context of energy resources,
Canada remains free to determine whether exports to the U.S. or Mexico will be
allowed provided that any export restrictions do not: (i) reduce the proportion
of energy resources exported relative to the total supply of the energy resource
(based upon the proportion prevailing in the most recent 36 month period); (ii)
impose an export price higher than the domestic price; or (iii) disrupt normal
channels of supply. All three countries are prohibited from imposing minimum
export or import price requirements.
NAFTA contemplates the reduction of Mexican restrictive trade practices
in the energy sector and prohibits discriminatory border restrictions and export
taxes. The agreement also contemplates clearer disciplines on regulators to
ensure fair implementation of any regulatory changes and to minimize disruption
of contractual arrangements, which is important for Canadian natural gas
exports.
Natural Gas Regulation. Historically, interstate pipeline companies
generally acted as wholesale merchants by purchasing natural gas from producers
and reselling the gas to local distribution companies and large end users.
Commencing in late 1985, the Federal Energy Regulatory Commission (the "FERC")
issued a series of orders that have had a major impact on interstate natural gas
pipeline operations, services, and rates, and thus have significantly altered
the marketing and price of natural gas. The FERC's key rule making action, order
No. 636 ("Order 636"), issued in April 1992, required each interstate pipeline
to, among other things, "unbundle" its traditional bundled sales services and
create and make available on an open and nondiscriminatory basis numerous
constituent services (such as gathering services, storage services, firm and
interruptible transportation services, and standby sales and gas balancing
services), and to adopt a new ratemaking methodology to determine appropriate
rates for those services. To the extent the pipeline company or its sales
affiliate makes natural gas sales as a merchant, it does so pursuant to private
contracts in direct competition with all of the sellers, such as the Company;
however, pipeline companies and their affiliates were not required to remain
"merchants" of natural gas, and most of the interstate pipeline companies have
become "transporters only." In subsequent orders, the FERC largely affirmed the
major features of Order 636 and denied a stay of the implementation of the new
rules pending judicial review. By the end of 1994, the FERC had concluded the
Order 636 restructuring proceedings, and, in general, accepted rate filings
implementing Order 636 on every major interstate pipeline. The federal appellate
courts have largely affirmed the features of Order No. 636 and numerous related
orders pertaining to the individual pipelines. Nevertheless, because further
review of certain of these orders is still possible, various appeals remain
pending, and the FERC continues to review and modify its open access
regulations, the outcome of such proceedings and their ultimate impact on the
Company's business is uncertain.
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<PAGE>
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,
(vi) a policy statement regarding market based rates and other non-cost-based
rates for interstate pipeline transmission and storage capacity and (vii) a
proposed rule to further standardize pipeline transportation tariffs that, if
implemented as proposed, may adversely affect the reliability of scheduled
interruptible transportation. In addition, the FERC has recently requested
comments on the financial outlook of the natural gas pipeline industry
including, among other matters, whether the FERC's current rate making policies
are suitable in the current industry environment. 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 spin downs have been approved by the FERC and implemented. The
FERC held that it retains jurisdiction over gathering provided by interstate
pipelines, but that it generally does not have jurisdiction over pipeline
gathering affiliates, except in the event of affiliate abuse (such as actions by
the affiliate undermining open and nondiscriminatory access to the interstate
pipeline). These orders require nondiscriminatory access for all sources of
supply and prohibit the tying of pipeline transportation service to any service
provided by the pipeline's gathering affiliate. On November 30, 1994, the FERC
issued a series of rehearing orders largely affirming the May 27, 1994 orders.
The FERC now requires interstate pipelines to not only seek authority under
Section 7(b) of the Natural Gas Act of 1938 (the "NGA") to abandon certificated
facilities, but also to seek authority under Section 4 of the NGA to terminate
service from both certificated and uncertificated facilities. The U.S. Court of
Appeals for the D.C. Circuit has now largely upheld the FERC. The Company cannot
predict what the ultimate effect of the FERC's orders pertaining to gathering
will have on its production and marketing.
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
49
<PAGE>
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.
In the event the Company conducts operations on federal or Indian oil
and gas leases, such operations must comply with numerous regulatory
restrictions, including various non-discrimination statutes, and certain of such
operations must be conducted pursuant to certain on-site security regulations
and other permits issued by various federal agencies. In addition, the Minerals
Management Service ("MMS") has recently issued a final rule to clarify the types
of costs that are deductible transportation costs for purposes of royalty
valuation of production sold off the lease. In particular, MMS will not allow
deduction of costs associated with marketer fees, cash out and other pipeline
imbalance penalties, or long-term storage fees. The Company cannot predict what,
if any, effect the new rule will have on its operations.
50
<PAGE>
Title to Properties
As is customary in the crude oil and natural gas industry, the Company
makes only a cursory review of title to undeveloped crude oil and natural gas
leases at the time they are acquired by the Company. However, before drilling
commences, the Company requires a thorough title search to be conducted, and any
material defects in title are remedied prior to the time actual drilling of a
well on the lease begins. To the extent title opinions or other investigations
reflect title defects, the Company, rather than the seller of the undeveloped
property, is typically obligated to cure any title defect at its expense. If the
Company were unable to remedy or cure any title defect of a nature such that it
would not be prudent to commence drilling operations on the property, the
Company could suffer a loss of its entire investment in the property. The
Company believes that it has good title to its crude oil and natural gas
properties, some of which are subject to immaterial encumbrances, easements and
restrictions. The crude oil and natural gas properties owned by the Company are
also typically subject to royalty and other similar non-cost bearing interests
customary in the industry. The Company does not believe that any of these
encumbrances or burdens will materially affect the Company's ownership or use of
its properties. All of the Company's U.S. properties are subject to the liens of
the Banks.
Employees
As of March 31, 1998, the Company had 74 full-time employees, including
two executive officers, six non-executive officers, five petroleum engineers,
two landmen, two geologists, thirty secretarial, accounting and clerical
personnel and 27 field personnel. Additionally, Abraxas retains contract pumpers
on a month-to-month basis. The Company retains independent geologic and
engineering consultants from time to time on a limited basis and expects to
continue to do so in the future.
Office Facilities
The Company's executive and administrative offices are located at 500
North Loop 1604 East, Suite 100, San Antonio, Texas 78232. The Company owns a
16% limited partnership interest in the partnership which owns this office
building. The Company also has an office in Midland, Texas. These offices,
consisting of approximately 12,650 square feet in San Antonio and 960 square
feet in Midland, are leased until March 2006 at an aggregate rate of $18,000 per
month. Cascade leaves 8,683 square feet of office space in Calgary, Alberta
pursuant to a lease which expires December 31, 2001 at a rate of CDN $15,000 per
month.
Other Properties
The Company owns 10 acres of land, an office building, workshop,
warehouse and house in Sinton, Texas, 160 acres of land in Coke County, Texas
and a 50% interest in approximately 2.0 acres of land in Bexar County, Texas.
All three properties are used for the storage of tubulars and production
equipment. The Company also owns 19 vehicles which are used in the field by
employees.
Litigation
Hornburg Litigation. In 1995, John H. Hornburg and certain other
individuals filed a law suit against the Company alleging negligence and gross
negligence, tortious interference with contract, conversion and waste. In March
1998, a jury found against the Company in the amount of $1,332,825.00 plus
attorneys fees and pre-judgment interest. At March 31, 1998, no judgment had
been entered. The Company intends to file various post-judgment motions
including a motion for judgment notwithstanding the verdict and a motion for new
trial, as well as an appeal, if necessary. The Company has not established a
reserve to account for the damages awarded to the plaintiffs by the jury.
Other 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. As of March 31, 1998, the Company was not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on the Company.
51
<PAGE>
MANAGEMENT
Directors and Executive Officers
Set forth below are the names, ages, years of service and positions of
the executive officers and directors of Abraxas , as well as certain executive
officers of Cascade and Canadian Abraxas. The term of the Class I directors of
Abraxas expires in 1999, the Class II directors expires in 2000 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 49 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
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>
Robert L. G. Watson has served as Chairman of the Board, President,
Chief Executive Officer and a director of Abraxas since 1977. Since May 1996,
Mr. Watson has also served as Chairman of the Board, Chief Executive Officer and
director of Grey Wolf and Chairman of the Board and a director of Cascade. In
November 1996, Mr. Watson was elected Chairman of the Board, President and as a
director of Canadian Abraxas. Prior to joining Abraxas, Mr. Watson was employed
in various petroleum engineering positions with Tesoro Petroleum Corporation, a
crude oil and natural gas exploration and production company, from 1972 through
1977, and DeGolyer & McNaughton, an independent petroleum engineering firm, from
1970 to 1972. Mr. Watson received a Bachelor of Science degree in Mechanical
Engineering from Southern Methodist University in 1972 and a Master of Business
Administration degree from the University of Texas at San Antonio in 1974.
Chris E. Williford was elected Vice President, Treasurer and Chief
Financial Officer of Abraxas in January 1993, and as Executive Vice President
and a director of Abraxas in May 1993. In November 1996, Mr. Williford was
elected Vice President, Assistant Secretary and as a director of Canadian
Abraxas. Prior to joining Abraxas, Mr. Williford was Chief Financial Officer of
American Natural Energy Corporation, a crude oil and natural gas exploration and
production company, from July 1989 to December 1992 and President of Clark
Resources Corp., a crude oil and natural gas exploration and production company,
from January 1987 to May 1989. Mr. Williford received a Bachelor of Science
degree in Business Administration from Pittsburgh State University in 1973.
Robert Patterson has served as Vice President/Operations of Abraxas
since December 1995. From 1986 to 1995, Mr. Patterson was employed by Parker and
Parsley Petroleum USA most recently as a Gulf Coast Division Manager. Prior to
that, Mr. Patterson was District Manager for HCW Exploration from 1983 to 1986
and Drilling Engineer with Hilliard Oil and Gas from 1980 to 1983. Prior to
that, he was a Drilling Engineer with Texas Pacific Oil Company from 1979 to
52
<PAGE>
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, has served as a director of the Abraxas since May
1996. Mr. Carter has more than 30 years experience in the oil and gas industry
and has been an independent consultant since 1990. Prior to consulting, Mr.
Carter served as Executive Vice President of Pacific Enterprises Oil Company
(USA). Before that, Mr. Carter was associated for 20 years with Sabine
Corporation, ultimately serving as President and Chief Operating Officer from
1986 and 1989. Mr. Carter consults for Endowment Advisors, Inc. with respect to
its EEP Partnerships and Associated Energy Managers, Inc. with respect to its
Energy Income Fund, L.P. and is a director of Brigham Exploration Company. Mr.
Carter has a B.B.A. in Petroleum Land Management from the University of Texas
and has completed the Program for Management Development at the Harvard
University Business School.
Robert D. Gershen, a director of Abraxas since May 1995, has served as
President of Associated Energy Managers, Inc., an investment manager
specializing in structuring and managing private investments in the energy
industry, since July 1989. Mr. Gershen has served as an investment advisor to
Endowment Energy Partners, L.P. and Endowment Energy Partners II, Limited
Partnership, limited partnerships formed to make loans to companies in the crude
oil and natural gas business, since October 1989 and January 1993, respectively.
Richard M. Kleberg, III, a director of Abraxas since December 1983, has
held the position of 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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<PAGE>
Paul A. Powell, Jr., a director of Abraxas since 1987, is currently
Trustee of the Paul A. Powell Trust and has served as Vice President and
Director of Mechanical Development Co., Inc., a tool and die and production
machine company, since 1984. He also serves as trustee of sixteen investment
trusts. Mr. Powell is a director and officer of Frameco, Inc., a tool and die
and production machine company, Somerset Investments, Ltd., an investment
company, and Powell Lake Properties, a real estate investment and management
company. He attended Emory and Henry College and graduated from National
Business College with a degree in Accounting.
Richard M. Riggs, a director of Abraxas since 1985, is a self-employed
geological consultant. He served as Vice President of Petro Consultants Energy
Corporation, a crude oil and natural gas exploration and production company,
from June 1978 to December 1984. Mr. Riggs has served as a director of Cascade
since May 1996. He has previously been employed by Tesoro Petroleum Corporation,
a crude oil and natural gas exploration and production company, as Exploration
Vice President for North America, and prior to that time was Manager of Domestic
Exploration for Ashland Oil, Inc., a crude oil and natural gas exploration and
production company. Mr. Riggs graduated with a Bachelors degree in Geology from
Dartmouth College and a Masters degree in Geology from Columbia University.
Roger L. Bruton is currently Executive Vice President and a director of
Cascade. From January 1996 to October 1996, he served as President of Cascade.
In November 1996, Mr. Bruton was elected Vice President of Canadian Abraxas and
in December 1996 was elected as a director of Canadian Abraxas. Prior to joining
Cascade, Mr. Bruton served as a geologist with Panhandle Eastern Pipeline
Company from 1958 to 1963. From 1976 to 1977 he served as Regional Exploration
Manager for Anadarko Production Company. He also served as Exploration Manager
for the western United States and Canada for General Crude Oil Company from 1977
to 1979. From 1984 to 1990, Mr. Bruton served as President of Western Oil
Corporation and Plains Petroleum Corporation, both of which are subsidiaries of
KN Energy. Mr. Bruton was Regional General Manager of Anadarko Petroleum of
Canada Ltd. from 1972 to 1976. Mr. Bruton received a Bachelors of Science degree
in Geology and a Masters of Science degree in Geology from Kansas State
University.
Donald A. Engle, is currently President and a director of Cascade. From
January 1996 to October 1996, he served as Vice President of Cascade. In
November 1996, Mr. Engle was elected Secretary and as a director of Canadian
Abraxas. From 1985 to 1995, he was President of Sapphire Resources, Ltd. Prior
to that, Mr. Engle served as President of Neomar Resources Limited from 1980 to
1985 and as General Manager of Anadarko Petroleum of Canada Limited from 1976 to
1979. Mr. Engle received a Bachelor of Commerce degree from the University of
Saskatchewan.
Executive Compensation
Compensation Summary
The following table sets forth a summary of compensation for the fiscal
years ended December 31, 1995, 1996 and 1997 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, 1997. Abraxas did
not have any executive officers other than Messrs. Watson and Williford whose
total annual salary and bonus exceeded $100,000 for the years ended December 31,
1995, and Messrs. Watson, Williford, Patterson and Wendel for the years ended
December 31, 1996 and 1997.
54
<PAGE>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
-------------
Annual Compensation Awards
---------------------------------- -------------
Options
Name and Principal /SARs
Position Year Salary ($) Bonus ($) (#)
----------------------- ------ -------------- ------------ -------------
Robert L. G. Watson, 1995 $108,281 (1) -- 60,000
Chairman of the Board 1996 $133,187 (2) $135,550 (3) 140,000
and President 1997 $211,154 $ 39,373 (4) 100,000
Chris E. Williford, 1995 $115,795 (5) -- 20,000
Executive Vice 1996 $121,315 $ 72,000 (4) 40,000
President, 1997 $148,269 $ 26,250 (4) 40,000
Chief Financial
Officer
and Treasurer
Robert E. Patterson, 1996 $124,615 $ 35,000 (4) 60,000
Vice President of 1997 $148,269 $ 9,375 (4) 50,000
Operations
Stephen T. Wendel, 1995 $ 63,210 -- 20,000
Vice President - Land 1996 $ 76,577 $ 40,000 (4) 18,660
and Marketing 1997 $106,731 $ 13,750 (4) 25,000
----------------------- ------ -------------- ------------ -------------
- --------
(1) Mr. Watson received a repayment of loans to Abraxas of $354,677 during 1995.
(2) Includes $1,093 of stock awards and $107,188 of salary.
(3) Includes $95,000 in cash and $40,550 of stock awards.
(4) One-half paid in cash and one-half in stock awards.
(5) Includes $8,607 of stock awards and $107,188 of salary.
Grants of Stock Options and Stock Appreciation Rights During the Fiscal Year
Ended December 31, 1997
Pursuant to the Abraxas Petroleum Corporation 1984 Incentive Stock
Option Plan (the "ISO Plan"), the Abraxas Petroleum Corporation 1993 Key
Contributor Stock Option Plan (the "1993 Plan") and the Abraxas Petroleum
Corporation 1994 Long Term Incentive Plan (the "LTIP"), the Company grants to
employees and officers of the Company (including directors of the Company who
are also employees) incentive stock options and non-qualified stock options. The
ISO Plan, the 1993 Plan and the LTIP are administered by the Compensation
Committee which, based upon the recommendation of the Chief Executive Officer,
determines the number of shares subject to each option.
The table below contains certain information concerning stock options
granted to Messrs. Watson, Williford, Patterson and Wendel during 1997:
55
<PAGE>
OPTION GRANTS IN FISCAL YEAR
- -------------------------------------------------------------------------------
% of Potential Realizable
Total Exercise Value at Assumed
Options Options Price Per Expiration Annual Rates of Stock
Name Granted Granted Share Date Price Appreciation
to for Option Term
Employees
========== ========= ========== =========== =========== =========== ===========
5% 10%
Robert 100,000 35.1 7.44 3/26/07 $1,211,898 $1,929,744
L. G.
Watson
Chris E. 40,000 14.0 7.44 3/26/07 484,579 771,898
Williford
Robert E. 50,000 17.5 7.44 3/26/07 605,949 964,872
Patterson
Stephen T. 25,000 8.8 7.44 3/26/07 302,974 482,436
Wendel
- --------------
(1) One-fourth of the options become exercisable on each of the first four
anniversaries of the date of grant.
The table below contains certain information concerning exercises of
stock options during the fiscal year ended December 31, 1997 by Messrs. Watson,
Williford, Patterson and Wendel and the fiscal year end value of unexercised
options held by Messrs. Watson, Williford, Patterson and Wendel.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Fiscal 1997
and Fiscal Year End Option Values
Value of
Number of Unexercised
Unexercised in-the-Money
Options on Options on
December 31,1997 December 31,
(#) 1997 ($)
Shares Acquired Exercisable/ Exercisable/
Name By Exercise (#) Value Realized Unexercisable Unexercisable
($)
<S> <C> <C> <C> <C>
Robert L. G. Watson -0- -0- 65,000/235,000 518,750/1,476,250
Chris E. Williford -0- -0- 40,000/80,000 325,000/495,000
Robert E. Patterson -0- -0- 14,998/95,002 122,484/567,516
Stephen T. Wendel -0- -0- 29,005/48,995 238,954/301,451
</TABLE>
Long Term Incentive Plan Awards During the Fiscal Year Ended December 31, 1997
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, 1997.
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<PAGE>
Employment Agreements
The Company has entered into Employment Agreements (the "Employment
Agreements") with each of Messrs. Watson, Williford, Patterson and Wendel as
well as with Jack M. Roney, Abraxas' Vice President-Corporate Development, and
Lowell Lischer, Abraxas' and Vice President of Exploration, pursuant to which
each of Messrs. Watson, Williford, Patterson, Wendel, Roney and Lischer will
receive compensation as determined from time to time 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, Wendel, Roney or Lischer, 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, Wendel's,
Roney's and Lischer'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 five 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 four years following the effective date of
such change in control and the expiration date of each of Mr. Patterson's, Mr.
Wendel's, Mr. Roney's and Mr. Lischer's Employment Agreement is automatically
extended to a date no earlier than three years following the effective date of
such change in control. If, following a change in control, Messrs. Watson's,
Williford's, Patterson's, Wendel's, Roney's or Lischer'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, Wendel's, Roney's or
Lischer's death or retirement or by Messrs. Watson, Williford, Patterson,
Wendel, Roney or Lischer, as the case may be, other than for Good Reason (as
defined in each of the Employment Agreements), then Mr. Watson will be entitled
to receive a lump sum payment equal to five times his annual base salary, Mr.
Williford will be entitled to receive a lump sum payment equal to four times his
annual base salary and Messrs. Patterson, Wendel, Roney and Lischer will each be
entitled to receive a lump sum payment equal to three times his annual base
salary. If any such lump sum payment would individually or together with any
other amounts paid or payable constitute an "excess parachute payment" within
the meaning of Section 280G of the Internal Revenue Code of 1986, as amended
("Section 280G"), and applicable regulations thereunder (the "Code"), the
amounts to be paid will be increased so that Messrs. Watson, Williford,
Patterson, Wendel, Roney or Lischer, as the case may be, will be entitled to
receive the amount of compensation provided in his contract after payment of the
tax imposed by Section 280G.
Compensation of Directors
Non-Qualified Stock Option Plan. Messrs. Burke, Kleberg, Phelps, Powell
and Riggs have previously been granted options to purchase 8,900 shares of
Common Stock under the Company's 1984 Non-Qualified Stock Option Plan (the
"Non-Qualified Plan"). There are currently outstanding options to purchase 8,900
shares of Common Stock under the Non-Qualified Plan at an exercise price of
$6.75 per share.
Restricted Share Plan for Directors. Pursuant to the Abraxas Petroleum
Corporation Restricted Share Plan for Directors (the "Director Plan"), each
director of the Company, other than Messrs. Watson and Williford, is entitled to
receive compensation for attendance at regular and special meetings of the Board
of Directors. Initially each eligible director of the Company was issued 400
shares of Common Stock during 1994 as an initial grant under the Director Plan
and thereafter received a number of shares of Common Stock equal to the product
of 1,000 times the Capitalization Factor (as defined in the Director Plan)
divided by the Average Stock Price (as defined in the Director Plan) as of the
date of a meeting of the Board. In 1997, the Director Plan was amended to
provide that one-half of the compensation under the Director Plan shall be paid
in cash and one-half in shares of Abraxas Common Stock. For 1997, each of the
directors, received the number of shares of Common Stock and cash
compensationset forth opposite his name under the Director Plan:
57
<PAGE>
Name Number of Cash Compensation
Shares
---------------- --------------------
Franklin M. Burke 846 $2,000
Harold D. Carter 825 2,000
Robert D. Gershen 1,115 2,000
Richard M. Kleberg 318 2,500
James C. Phelps 318 2,500
Paul A. Powell 1,098 2,000
Richard M. Riggs 318 2,500
Director Stock Option Plan. Pursuant to the Abraxas Petroleum
Corporation Director Stock Option Plan, each non-employee member of the Board of
Directors of the Company on June 1, 1996 was granted an option to purchase 8,000
shares of Common Stock at a price of $6.75 per share. Each person who becomes a
director after that date will also be granted an option to purchase 8,000 shares
of Common Stock at the then prevailing price of the Common Stock as quoted on
the Nasdaq National Market. In addition, in March 1998, the Plan was amended to
provide that each non-employee member of the Board of Directors as of the date
of the first meeting of the Board of Directors in each year will receive options
to purchase 2,000 shares of common stock at the closing price of the Company's
Common Stock on such date. On March 25, 1998, each non-employee Director
received options to purchase 2,000 shares of Common Stock.
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.
58
<PAGE>
CERTAIN TRANSACTIONS
Messrs. Watson, Phelps and Riggs were founders of Grey Wolf and
in April 1995 purchased 900,000 shares of the capital stock of Grey Wolf
(initially representing 39% of the outstanding shares) for an aggregate of
CDN$90,000 (or CDN$0.10 per share) in cash. In January 1996, the Company
purchased 20,325,096 shares of the capital stock of Grey Wolf (representing 78%
of the outstanding shares) for an aggregate of approximately CDN$4.1 million (or
CDN$.20 per share) in cash. Messrs. Phelps, Riggs and Watson currently own 5.1%
of the issued and outstanding capital stock of Casecade.
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 CDN$.20 per
share, and Mr. Watson owns options to purchase up to 800,000 shares of Cascade's
capital stock at an exercise price of CDN$.20 per share. Cascade currently has
76,981,000 shares of capital stock outstanding.
Wind River Resources Corporation ("Wind River"), all of the capital
stock of which is owned by Mr. Watson, owns a twin-engine airplane. The airplane
is available for business use by employees of the Company from time to time at
Wind River's cost. The Company paid Wind River a total of $330,000 for use of
the plane during 1997.
Cascade owns a 10% interest in the Canadian Abraxas Properties and
Canadian Abraxas Plants and an 8% interest in the Pacalta Properties and manages
the operations of Canadian Abraxas pursuant to a management agreement between
Canadian Abraxas and Cascade. Under the management agreement, Canadian Abraxas
reimburses Cascade for reasonable costs or expenses attributable to Canadian
Abraxas and for administrative expenses based upon the percentage that Canadian
Abraxas' gross revenue bears to the total gross revenue of Canadian Abraxas and
Cascade. In 1997, Canadian Abraxas paid Cdn $1,239,998 to Cascade pursuant to
the management agreement.
Abraxas has adopted a policy that transactions, including loans, between
Abraxas and its officers, directors, principal stockholders, or affiliates of
any of them, will be on terms no less favorable to Abraxas than can be obtained
on an arm's length basis in transactions with third parties and must be approved
by the vote of at least a majority of the disinterested directors.
59
<PAGE>
SECURITIES HOLDINGS OF PRINCIPAL STOCKHOLDERS,
DIRECTORS AND OFFICERS
Based upon information received from the persons concerned, each person
known to the Company to be the beneficial owner of more than five percent of the
outstanding shares of Common Stock of Abraxas, each director and officer and all
directors and officers of Abraxas as a group, owned beneficially as of March 31,
1998 the number and percentage of outstanding shares of Common Stock of Abraxas
indicated in the following table:
Name and Address of
Beneficial Owner Number of Shares Percentage
(1)
Robert L. G. Watson 324,505 (2) 4.91
Endowment Advisors, Inc. 863,790 (3) 13.54
450 Post Road East
Westport, CT 06881
Wellington Management Company 505,000 (4) 7.92
75 State Street
19th Floor
Boston, MA 02109
State Street Research &
Management Company 375,000(5) 5.92
One Financial Center,
30th Floor
Boston, MA 02111
Dimensional Fund Advisors,
Inc. 344,900 (6) 5.41
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Franklin A. Burke 117,468 (7) 1.78
Paul A. Powell, Jr. 35,389 (8) *
James C. Phelps 36,125 (9) *
Richard M. Kleberg, III 34,032 (10) *
Robert D. Gershen 26,804 (11) *
Chris E. Williford 49,345 (12) *
Richard M. Riggs 16,331 (13) *
Harold D. Carter 10,318 (14) *
Robert E. Patterson 27,223 (15) *
Stephen T. Wendel 35,995 (16) *
All Officers and Directors 713,535 (2)(7)(8) 11.00
as a Group (11 persons) (9)(10)
(11)(12)
(13)(14)
(15)(16)
- ---------
* Less than 1%
(1) Unless otherwise indicated, all shares are held directly with sole
voting and investment power.
(2) Includes 20,316 shares owned by Wind River Resources Corporation, a
corporation owned by Mr. Watson, as to which Mr. Watson has sole voting
and investment power, 21,907 shares issuable upon exercise of options
granted pursuant to Abraxas Petroleum Corporation 1993 Key Contributor
Stock Option Plan and 58,093 shares issuable upon exercise of options
60
<PAGE>
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) State Street Research & Management Company 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.
(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,
61
<PAGE>
18,214 shares issuable upon exercise of options granted pursuant to the
Abraxas Petroleum Corporation 1993 Key Contributor Stock Option Plan and
25,000 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 25,000 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,
10,000 shares issuable upon exercise of options granted pursuant to the
Abraxas Petroleum Corporation Key 1993 Contributor Stock Option Plan and
19,665 shares issuable upon exercise of options granted pursuant to the
Abraxas Petroleum Corporation 1994 Long
Term Incentive Plan.
62
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
The Series C Notes have been and the Exchange Notes will be issued under
an indenture (the "Indenture") by and among the Issuers, the Subsidiary
Guarantors and IBJ Schroder Bank & Trust Company, as Trustee (the "Trustee"),
the terms of which are substantially similar to those of the Series A/B
Indenture. The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Trust Indenture Act of 1939, as amended (the "TIA"), and to
all of the provisions of the Indenture, including the definitions of certain
terms therein and those terms made a part of the Indenture by reference to the
TIA as in effect on the date of the Indenture. A copy of the form of Indenture
may be obtained from the Issuers. The definitions of certain capitalized terms
used in the following summary are set forth below under "-- Certain
Definitions."
The Series B Notes and the Series C Notes are, and the Exchange Notes
will be, general unsecured obligations of the Issuers and will rank pari passu
in right of payment to all existing and future senior indebtedness of the
Issuers and senior in right of payment to any subordinated indebtedness incurred
by the Issuers in the future. The Series B Notesand Series C Notes are, and the
Exchange Notes will be, however, effectively subordinated in right of payment to
all existing and future secured indebtedness of the Issuers to the extent of the
value of the assets securing such indebtedness. At March 31, 1998, the Issuers
had $275.1 million in outstanding Indebtedness, $100,000 of which was secured.
The Indenture permits the Company to incur additional indebtedness, including
additional secured indebtedness, under certain circumstances. See "Risk Factors
- -- High Degree of Leverage," "Capitalization," and "-- Certain Covenants --
Limitation on Incurrence of Additional Indebtedness."
The Exchange Notes will be issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof. Initially,
the Trustee will act as paying agent and registrar for the Exchange Exchange
Notes. The Exchange Notes may be presented for registration of transfer and
exchange at the offices of the registrar, which initially will be the Trustee's
corporate trust office. The Issuers may change any paying agent and registrar
without notice to holders of the Exchange Notes (together with the holders of
the Series C Notes, the "Holders"). The Issuers will pay principal (and premium,
if any) on the Exchange Notes at the Trustee's corporate office in New York, New
York. At the Issuers' option, interest may be paid at the Trustee's corporate
trust office or by check mailed to the registered addresses of the Holders. Any
Series C Notes that remain outstanding after the completion of the Exchange
Offer, together with the Exchange Notes issued in connection with the Exchange
Offer, will be treated as a single class of securities under the Indenture. See
"-- Registration Rights; Liquidated Damages."
Principal, Maturity and Interest
The Exchange Notes will be limited in aggregate principal amount to
$275,000,000 provided that $215,000,000 of Exchange Notes reserved for issuance
under the Indenture will be available only in connection with the exchange of
Series B Notes for the Exchange Notes pursuant to the Exchange Offer. Each
Exchange Note will mature on November 1, 2004. Interest on the Exchange Notes
will accrue at the rate of 11 1/2% per annum and will be payable semi-annually
in cash on each May 1 and November 1, commencing on May 1, 1998, to the Persons
who are registered Holders of Exchange Notes at the close of business on April
15 and October 15, respectively, immediately preceding the applicable interest
payment date. Interest on the Exchange Notes will accrue from and including the
most recent date to which interest has been paid or, if no interest has been
paid, from and including the date of issuance.
The Exchange Notes will not be entitled to the benefit of any mandatory
sinking fund.
Guarantees
The Issuer's payment obligations under the Exchange Notes will be
jointly and severally guaranteed (the "Guarantees") by certain of the Company's
subsidiaries (the "Subsidiary Guarantors"). Each Subsidiary Guarantor will
unconditionally guarantee, on a senior basis, jointly and severally, to each
63
<PAGE>
Holder of Exchange Notes and the Trustee, the full and prompt performance of the
Issuers' obligations under the Indenture and the Exchange Notes, including the
payment of principal of and interest on the Exchange Notes. The obligations of
each Subsidiary Guarantor under its Guarantee will be a general unsecured
obligation of such Subsidiary Guarantor, ranking pari passu in right of payment
with all other current or future senior borrowings of such Subsidiary Guarantor,
including borrowings under the Credit Facility, and senior in rights of payment
to any subordinated indebtedness incurred by such Subsidiary Guarantor in the
future. The Guarantees will be effectively subordinated, however, to all current
and future secured obligations of the Subsidiary Guarantors, including
borrowings under the Credit Facility, to the extent of the value of the assets
securing such indebtedness. The obligations of each Subsidiary Guarantor will be
limited to the maximum amount which, after giving effect to all other contingent
and fixed liabilities of such Subsidiary Guarantor and after giving effect to
any collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
its Guarantee or pursuant to its contribution obligations under the Indenture,
will result in the obligations of such Subsidiary Guarantor under its Guarantee
not constituting a fraudulent conveyance or fraudulent transfer under Federal or
state law. Each Subsidiary Guarantor that makes a payment or distribution under
its Guarantee shall be entitled to a contribution from each other Subsidiary
Guarantor in an amount pro rata, based on the net assets of each Subsidiary
Guarantor, determined in accordance with GAAP.
Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Company or another Subsidiary Guarantor that is a Wholly Owned
Restricted Subsidiary without limitation, or with or to other Persons upon the
terms and conditions set forth in the Indenture. See "-- Certain Covenants --
Merger, Consolidation and Sale of Assets." In the event all of the Capital Stock
of a Subsidiary Guarantor is sold by the Company and/or one or more of its
Restricted Subsidiaries and the sale complies with the provisions set forth in
"-- Certain Covenants -- Limitation on Asset Sales," such Subsidiary Guarantor's
Guarantee will be released.
Redemption
Optional Redemption
The Series B Notes and Series C Notes are, and the Exchange Notes will
be, redeemable, at the Issuers' option, in whole at any time or in part from
time to time, on and after November 1, 2000, upon not less than 30 nor more than
60 days' notice, at the following redemption prices (expressed as percentages of
the principal amount thereof) if redeemed during the twelve-month period
commencing on November 1 of the years set forth below, plus, in each case,
accrued and unpaid interest, if any, thereon to the date of redemption:
Year Percentage
- ---- ----------
2000.................................................... 105.750%
2001.................................................... 102.875%
2002 and thereafter..................................... 100.000%
Optional Redemption upon Equity Offerings
At any time, or from time to time, on or prior to November 1, 1999, the
Issuers may, at their option, use all or a portion of the net cash proceeds of
one or more Equity Offerings (as defined below) to redeem up to 35% of the
aggregate original principal amount of the Exchange Notes at a redemption price
equal to 111.5% of the aggregate principal amount of the Exchange Notes to be
redeemed, plus accrued and unpaid interest and liquidated damages, if any,
thereon to the date of redemption; provided, however, that at least 65% of the
aggregate original principal amount of the Series C Notes and Exchange Notes
remains outstanding immediately after giving effect to any such redemption (it
being expressly agreed that for purposes of determining whether this condition
is satisfied, Exchange Notes owned by either Issuer or any of their Affiliates
shall be deemed not to be outstanding). In order to effect the foregoing
redemption with the proceeds of any Equity Offering, the Issuers shall make such
redemption not more than 60 days after the consummation of any such Equity
Offering.
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Selection and Notice of Redemption
In the event that less than all of the Exchange Notes are to be redeemed
at any time, selection of such Exchange Notes, or portions thereof, for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Exchange Notes
are listed or, if the Exchange Notes are not then listed on a national
securities exchange, on a pro rata basis, by lot or by such other method as the
Trustee shall deem fair and appropriate; provided, however, that no Exchange
Notes of a principal amount of $1,000 or less shall be redeemed in part; and
provided, further, that if a partial redemption is made with the proceeds of an
Equity Offering, selection of the Exchange Notes or portions thereof for
redemption shall be made by the Trustee only on a pro rata basis or on as nearly
a pro rata basis as is practicable (subject to the procedures of DTC), unless
such method is otherwise prohibited. Notice of redemption shall be mailed by
first-class mail at least 30 but not more than 60 days before the redemption
date to each Holder of Exchange Notes to be redeemed at its registered address.
If any Exchange Note is to be redeemed in part only, the notice of redemption
that relates to such Exchange Note shall state the portion of the principal
amount thereof to be redeemed. A new Exchange Note in a principal amount equal
to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Exchange Note. On and after the
applicable redemption date, interest will cease to accrue on Exchange Notes or
portions thereof called for redemption as long as the Issuers have deposited
with the paying agent for the Exchange Notes funds in satisfaction of the
applicable redemption price pursuant to the Indenture.
Change of Control
The Indenture provides that upon the occurrence of a Change of Control,
each Holder of Exchange Notes will have the right to require that the Issuers
purchase all or a portion of such Holder's Exchange Notes pursuant to the offer
described below (the "Change of Control Offer"), at a purchase price equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
thereon to the date of purchase.
Within 30 days following the date upon which the Change of Control
occurred, the Issuers must send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). A Change of Control Offer shall remain open for a period of 20
Business Days or such longer period as may be required by law. Holders of
Exchange Notes electing to have an Exchange Note purchased pursuant to a Change
of Control Offer will be required to surrender the Exchange Note, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the Exchange
Note completed, to the paying agent for the Exchange Notes at the address
specified in the notice prior to the close of business on the third Business Day
prior to the Change of Control Payment Date.
The Issuers shall not be required to make a Change of Control Offer upon
a Change of Control if a third party makes the Change of Control Offer at the
Change of Control Purchase Price, at the same times and otherwise in compliance
with the requirements applicable to a Change of Control Offer made by the
Issuers and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
If a Change of Control Offer is made, there can be no assurance that the
Issuers will have available funds sufficient to pay the Change of Control
purchase price for all the Exchange Notes that might be delivered by Holders
seeking to accept the Change of Control Offer. In the event the Issuers are
required to purchase outstanding Exchange Notes pursuant to a Change of Control
Offer, the Issuers expect that they would seek third party financing to the
extent they do not have available funds to meet their purchase obligations.
However, there can be no assurance that the Issuers would be able to obtain such
financing.
Neither the Board of Directors of either of the Issuers nor the Trustee
may waive the covenant relating to the Issuers' obligation to make a Change of
Control Offer. Restrictions in the Indenture described herein on the ability of
the Company and its Restricted Subsidiaries to incur additional Indebtedness, to
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grant liens on their property, to make Restricted Payments and to make Asset
Sales may also make more difficult or discourage a takeover of the Company,
whether favored or opposed by the management of the Company. Consummation of any
such transaction in certain circumstances may require repurchase of the Notes,
and there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such repurchase. Such restrictions and
the restrictions on transactions with Affiliates may, in certain circumstances,
make more difficult or discourage any leveraged buyout of the Company by the
management of the Issuers. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the Indenture may not afford the Holders of Exchange Notes
protection in all circumstances from the adverse aspects of a highly leveraged
transaction, reorganization, restructuring, merger or similar transaction.
The Issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Issuers shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached their obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
Certain Covenants
The Indenture contain, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. Other than
Permitted Indebtedness, the Company may not, and may not cause or permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume,
guarantee, acquire, become liable, contingently or otherwise, with respect to,
or otherwise become responsible for payment of (collectively, "incur") any
Indebtedness; provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company and the Restricted Subsidiaries
or any of them may incur Indebtedness (including, without limitation, Acquired
Indebtedness), in each case, if on the date of the incurrence of such
Indebtedness, after giving pro forma effect to the incurrence thereof and the
receipt and application of the proceeds therefrom, (i) both (a) the Company's
Consolidated EBITDA Coverage Ratio would have been at least equal to 2.5 to 1.0
and (b) the Company's Adjusted Consolidated Net Tangible Assets are equal to or
greater than 150% of the aggregate consolidated Indebtedness of the Company and
its Restricted Subsidiaries or (ii) the Company's Adjusted Consolidated Net
Tangible Assets are equal to or greater than 200% of the aggregate consolidated
Indebtedness of the Company and its Restricted Subsidiaries.
For purposes of determining any particular amount of Indebtedness under
this covenant, guarantees of Indebtedness otherwise included in the
determination of such amount shall not also be included.
Indebtedness of a Person existing at the time such Person becomes a
Restricted Subsidiary (whether by merger, consolidation, acquisition of Capital
Stock or otherwise) or is merged with or into the Company or any Restricted
Subsidiary or which is secured by a Lien on an asset acquired by the Company or
a Restricted Subsidiary (whether or not such Indebtedness is assumed by the
acquiring Person) shall be deemed incurred at the time the Person becomes a
Restricted Subsidiary or at the time of the asset acquisition, as the case may
be.
The Company will not, and will not permit any Subsidiary Guarantor to
incur any Indebtedness which by its terms (or by the terms of any agreement
governing such Indebtedness) is subordinated in right of payment to any other
Indebtedness of the Company or such Subsidiary Guarantor unless such
Indebtedness is also by its terms (or by the terms of any agreement governing
such Indebtedness) made expressly subordinate in right of payment to the Notes
or the Guarantee of such Subsidiary Guarantor, as the case may be, pursuant to
subordination provisions that are substantively identical to the subordination
provisions of such Indebtedness (or such agreement) that are most favorable to
the holders of any other Indebtedness of the Company or such Subsidiary
Guarantor, as the case may be.
Limitation on Restricted Payments. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
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(a) declare or pay any dividend or make any distribution (other than dividends
or distributions payable solely in Qualified Capital Stock of the Company) on or
in respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock other than through the exchange
therefor solely of Qualified Capital Stock of the Company or warrants, rights or
options to purchase or acquire shares of Qualified Capital Stock of the Company,
(c) make any principal payment on, purchase, defease, redeem, prepay, decrease
or otherwise acquire or retire for value, prior to any scheduled final maturity,
scheduled repayment or scheduled sinking fund payment, any Indebtedness of the
Company or a Subsidiary Guarantor that is subordinate or junior in right of
payment to the Notes or such Subsidiary Guarantor's Guarantee, as the case may
be, or (d) make any Investment (other than a Permitted Investment) (each of the
foregoing actions set forth in clauses (a), (b), (c) and (d) being referred to
as a "Restricted Payment"), if at the time of such Restricted Payment or
immediately after giving effect thereto, (i) a Default or an Event of Default
shall have occurred and be continuing or (ii) the Company is not able to incur
at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with "-- Limitation on Incurrence of Additional Indebtedness" above;
provided, however, that notwithstanding the provisions of clause (i)(a) of "--
Limitation on Incurrence of Additional Indebtedness" above, for purposes of
determining whether the Company could incur such additional Indebtedness
pursuant to this clause (ii), the Consolidated EBITDA Coverage Ratio which shall
be required shall be at least 2.5 to 1.0, or (iii) the aggregate amount of
Restricted Payments (including such proposed Restricted Payment) made subsequent
to the Series A/B Issue Date (the amount expended for such purposes, if other
than in cash, being the fair market value of such property as determined
reasonably and in good faith by the Board of Directors of the Company) shall
exceed the sum of: (A) 50% of the cumulative Consolidated Net Income (or if
cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of
the Company earned subsequent to the Series A/B Issue Date and on or prior to
the last date of the Company's fiscal quarter immediately preceding such
Restricted Payment (the "Reference Date") (treating such period as a single
accounting period); plus (B) 100% of the aggregate net cash proceeds received by
the Company from any Person (other than a Restricted Subsidiary of the Company)
from the issuance and sale subsequent to the Series A/B Issue Date and on or
prior to the Reference Date of Qualified Capital Stock of the Company; plus (C)
without duplication of any amounts included in clause (iii)(B) above, 100% of
the aggregate net cash proceeds of any equity contribution received by the
Company from a holder of the Company's Capital Stock (excluding, in the case of
clauses (iii)(B) and (C), any net cash proceeds from an Equity Offering to the
extent used to redeem the Notes); plus (D) an amount equal to the net reduction
in Investments in Unrestricted Subsidiaries resulting from dividends, interest
payments, repayments of loans or advances, or other transfers of cash, in each
case to the Company or to any Restricted Subsidiary of the Company from
Unrestricted Subsidiaries (but without duplication of any such amount included
in calculating cumulative Consolidated Net Income of the Company), or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (in each
case valued as provided in "-- Limitation on Designation of Unrestricted
Subsidiaries" below), not to exceed, in the case of any Unrestricted Subsidiary,
the amount of Investments previously made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary and which was treated as a Restricted
Payment under the Indenture; plus (E) without duplication of the immediately
preceding subclause (D), an amount equal to the lesser of the cost or net cash
proceeds received upon the sale or other disposition of any Investment made
after the Series A/B Issue Date which had been treated as a Restricted Payment
(but without duplication of any such amount included in calculating cumulative
Consolidated Net Income of the Company); plus (F) $5,000,000.
Notwithstanding the foregoing, the provisions set forth in the
immediately preceding paragraph shall not prohibit: (1) the payment of any
dividend or redemption payment within 60 days after the date of declaration of
such dividend or the applicable redemption if the dividend or redemption
payment, as the case may be, would have been permitted on the date of
declaration; (2) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any shares of Capital Stock of the Company,
either (A) solely in exchange for shares of Qualified Capital Stock of the
Company or (B) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Restricted Subsidiary of the Company)
of shares of Qualified Capital Stock of the Company; (3) if no Default or Event
of Default shall have occurred and be continuing, the acquisition of any
Indebtedness of the Company or Subsidiary Guarantor that is subordinate or
junior in right of payment to the Notes or such Subsidiary Guarantor's
Guarantee, as the case may be, either (A) solely in exchange for shares of
Qualified Capital Stock of the Company, or (B) through the application of net
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proceeds of a substantially concurrent sale for cash (other than to a Restricted
Subsidiary of the Company) of (I) shares of Qualified Capital Stock of the
Company or (II) Refinancing Indebtedness; and (4) the initial designation of
Cascade and Western Associated Energy Corporation as Unrestricted Subsidiaries
under the Indenture. In determining the aggregate amount of Restricted Payments
made subsequent to the Series A/B Issue Date in accordance with clause (iii) of
the immediately preceding paragraph, amounts expended pursuant to clauses (1)
and (2)(B) shall be included in such calculation.
Limitation on Asset Sales. The Company may not, and may not cause or
permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless
(a) the Company or the applicable Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the fair
market value of the assets sold or otherwise disposed of (as determined in good
faith by the Company's Board of Directors or senior management of the Company);
(b) (i) at least 70% of the consideration received by the Company or such
Restricted Subsidiary, as the case may be, from such Asset Sale shall be in the
form of cash or Cash Equivalents and is received at the time of such disposition
and (ii) at least 15% of such consideration received if in a form other than
cash or Cash Equivalents is converted into or exchanged for cash or Cash
Equivalents within 120 days of such disposition; and (c) upon the consummation
of an Asset Sale, the Company shall apply, or cause such Restricted Subsidiary
to apply, the Net Cash Proceeds relating to such Asset Sale within 365 days of
receipt thereof either (i) to repay or prepay Indebtedness outstanding under the
Credit Facility, including, without limitation, a permanent reduction in the
related commitment, (ii) to repay or prepay any Indebtedness of the Company that
is secured by a Lien permitted to be incurred pursuant to "-- Limitation on
Liens" below, (iii) to make an investment in properties or assets that replace
the properties or assets that were the subject of such Asset Sale or in
properties or assets that will be used in the business of the Company and its
Restricted Subsidiaries as existing on the Series A/B Issue Date or in
businesses reasonably related thereto ("Replacement Assets"), (iv) to an
investment in Crude Oil and Natural Gas Related Assets or (v) a combination of
prepayment and investment permitted by the foregoing clauses (c)(i) through
(c)(iv). On the 366th day after an Asset Sale or such earlier date, if any, as
the Board of Directors of the Company determines not to apply the Net Cash
Proceeds relating to such Asset Sale as set forth in clauses (c)(i) through
(c)(iv) of the next preceding sentence (each a "Net Proceeds Offer Trigger
Date"), such aggregate amount of Net Cash Proceeds which have been received by
the Company or such Restricted Subsidiary, but which have not been applied on or
before such Net Proceeds Offer Trigger Date as permitted in clauses (c)(i)
through (c)(iv) of the next preceding sentence (each an "Unadjusted Net Proceeds
Offer Amount"), multiplied by the ratio (the "Net Proceeds Offer Adjustment
Ratio") of the then outstanding principal amount of the Notes to the sum of the
then outstanding principal amount of the Series B Notes plus the then
outstanding principal amount of the Notes (each a "Net Proceeds Offer Amount")
shall be applied by the Company or such Restricted Subsidiary, as the case may
be, to make an offer to purchase (a "Net Proceeds Offer") on a date (the "Net
Proceeds Offer Payment Date") not less than 30 nor more than 45 days following
the applicable Net Proceeds Offer Trigger Date, from all Holders on a pro rata
basis, that principal amount of Notes purchasable with the Net Proceeds Offer
Amount at a price equal to 100% of the principal amount of the Notes to be
purchased, plus accrued and unpaid interest, if any, thereon to the date of
purchase; provided, however, that if at any time any non-cash consideration
received by the Company or any Restricted Subsidiary, as the case may be, in
connection with any Asset Sale is converted into or sold or otherwise disposed
of for cash (other than interest received with respect to any such non-cash
consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant. The Company may defer the Net Proceeds
Offer until the sum of the Unadjusted Net Proceeds Offer Amounts that correlate
to the unutilized Net Proceeds Offer Amounts resulting from one or more Asset
Sales is equal to or in excess of $5,000,000 (at which time, the entire
unutilized Net Proceeds Offer Amounts (recalculated using the then current Net
Proceeds Offer Adjustment Ratio), and not just the Net Proceeds Offer Amounts
correlating to the Unadjusted Net Proceeds Offer Amounts in excess of
$5,000,000, shall be applied as required pursuant to this paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "-- Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and its Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
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Notwithstanding the two immediately preceding paragraphs, the Company
and its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (a) the consideration for
such Asset Sale constitutes Replacement Assets and/or Crude Oil and Natural Gas
Related Assets and (b) such Asset Sale is for fair market value; provided,
however, that any consideration not constituting Replacement Assets and Crude
Oil and Natural Gas Related Assets received by the Company or any of its
Restricted Subsidiaries in connection with any Asset Sale permitted to be
consummated under this paragraph shall constitute Net Cash Proceeds subject to
the provisions of the two immediately preceding paragraphs.
Notice of each Net Proceeds Offer will be mailed to the record Holders
as shown on the register of Holders within 30 days following the Net Proceeds
Offer Trigger Date, with a copy to the Trustee, and shall comply with the
procedures set forth in the Indenture. Upon receiving notice of the Net Proceeds
Offer, Holders of Exchange Notes may elect to tender their Exchange Notes in
whole or in part in integral multiples of $1,000 in exchange for cash. To the
extent Holders properly tender Notes with an aggregate principal amount
exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be
purchased on a pro rata basis (based on principal amounts tendered). A Net
Proceeds Offer shall remain open for a period of 20 Business Days or such longer
period as may be required by law.
The Company's ability to repurchase Exchange Notes in a Net Proceeds
Offer is restricted by the terms of the Credit Facility and may be prohibited or
otherwise limited by the terms of any then existing borrowing arrangements and
by the Company's financial resources.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Exchange Notes pursuant to a Net Proceeds Offer. To the extent
that the provisions of any securities laws or regulations conflict with the
"Asset Sale" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries. The Company may not, and may not cause or permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or permit to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock; (b) make loans or advances,
or to pay any Indebtedness or other obligation owed, to the Company or any other
Restricted Subsidiary; (c) guarantee any Indebtedness or any other obligation of
the Company or any Restricted Subsidiary; or (d) transfer any of its property or
assets to the Company or any other Restricted Subsidiary (each such encumbrance
or restriction, a "Payment Restriction"), except for such encumbrances or
restrictions existing under or by reason of: (i) applicable law; (ii) the
Indenture and the Series A/B Indenture; (iii) the Credit Facility; (iv)
customary non-assignment provisions of any contract or any lease governing a
leasehold interest of any Restricted Subsidiary; (v) any instrument governing
Acquired Indebtedness, which encumbrance or restriction is not applicable to
such Restricted Subsidiary, or the properties or assets of such Restricted
Subsidiary, other than the Person or the properties or assets of the Person so
acquired; (vi) agreements existing on the Series A/B Issue Date to the extent
and in the manner such agreements were in effect on the Series A/B Issue Date;
(vii) customary restrictions with respect to a Restricted Subsidiary of the
Company pursuant to an agreement that has been entered into for the sale or
disposition of Capital Stock or assets of such Restricted Subsidiary to be
consummated in accordance with the terms of the Indenture solely in respect of
the assets or Capital Stock to be sold or disposed of; (viii) any instrument
governing a Permitted Lien, to the extent and only to the extent such instrument
restricts the transfer or other disposition of assets subject to such Permitted
Lien; or (ix) an agreement governing Refinancing Indebtedness incurred to
Refinance the Indebtedness issued, assumed or incurred pursuant to an agreement
referred to in clause (ii), (iii), (v) or (vi) above; provided, however, that
the provisions relating to such encumbrance or restriction contained in any such
Refinancing Indebtedness are no less favorable to the Holders in any material
respect as determined by the Board of Directors of the Company in their
reasonable and good faith judgment than the provisions relating to such
encumbrance or restriction contained in the applicable agreement referred to in
such clause (ii), (iii), (v) or (vi).
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Limitation on Preferred Stock of Restricted Subsidiaries. The Company
will not cause or permit any of its Restricted Subsidiaries to issue any
Preferred Stock (other than to the Company or to a Wholly Owned Restricted
Subsidiary) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary) to own any Preferred Stock of any Restricted Subsidiary.
Limitation on Liens. Other than Permitted Liens, the Company may not,
and may not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume or permit or suffer to exist any Liens of any
kind against or upon any property or assets of the Company or any of its
Restricted Subsidiaries (whether owned on the Issue Date or acquired after the
Issue Date) or any proceeds therefrom, or assign or otherwise convey any right
to receive income or profits therefrom unless (a) in the case of Liens securing
Indebtedness that is expressly subordinate or junior in right of payment to the
Exchange Notes or any Guarantee, the Exchange Notes or such Guarantee, as the
case may be, are secured by a Lien on such property, assets or proceeds that is
senior in priority to such Liens at least to the same extent as the Exchange
Notes are senior in priority to such Indebtedness and (b) in all other cases,
the Exchange Notes and the Guarantees are equally and ratably secured.
Merger, Consolidation and Sale of Assets. The Company may not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Restricted Subsidiary to sell, assign,
transfer, lease, convey or otherwise dispose of) all or substantially all of the
Company's assets (determined on a consolidated basis for the Company and its
Restricted Subsidiaries), whether as an entirety or substantially as an entirety
to any Person unless: (a) either (i) the Company or such Restricted Subsidiary,
as the case may be, shall be the surviving or continuing corporation or (ii) the
Person (if other than the Company) formed by such consolidation or into which
the Company is merged or the Person which acquires by sale, assignment,
transfer, lease, conveyance or other disposition the properties and assets of
the Company and its Restricted Subsidiaries substantially as an entirety (the
"Surviving Entity") (x) shall be a corporation organized and validly existing
under the laws of the United States or any state thereof or the District of
Columbia and (y) shall expressly assume, by supplemental indenture (in form and
substance satisfactory to the Trustee), executed and delivered to the Trustee,
the due and punctual payment of the principal of, premium, if any, and interest
on all of the Exchange Notes and the performance of every covenant of the
Exchange Notes, the Indenture and the Registration Rights Agreement on the part
of the Company to be performed or observed; (b) immediately after giving effect
to such transaction and the assumption contemplated by clause (a)(ii)(y) above
(including giving effect to any Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction), the Company or
such Surviving Entity, as the case may be, (i) shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction and (ii) shall be able to incur at least
$1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to
"-- Limitation on Incurrence of Additional Indebtedness" above; (c) immediately
before and immediately after giving effect to such transaction and the
assumption contemplated by clause (a)(ii)(y) above (including, without
limitation, giving effect to any Indebtedness incurred or anticipated to be
incurred and any Lien granted in connection with or in respect of the
transaction), no Default or Event of Default shall have occurred or be
continuing; and (d) the Company or the Surviving Entity, as the case may be,
shall have delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that such consolidation, merger, sale, assignment,
transfer, lease, conveyance or other disposition and, if a supplemental
indenture is required in connection with such transaction, such supplemental
indenture comply with the applicable provisions of the Indenture and that all
conditions precedent in the Indenture relating to such transaction have been
satisfied; provided, however, that such counsel may rely, as to matters of fact,
on a certificate or certificates of officers of the Company.
For purposes of the foregoing, the transfer (by lease, assignment, sale
or otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
Upon any consolidation, combination or merger or any transfer of all or
substantially all of the assets of the Company in accordance with the foregoing,
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in which the Company is not the continuing corporation, the successor Person
formed by such consolidation or into which the Company is merged or to which
such conveyance, lease or transfer is made shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under the Indenture
and the Exchange Notes with the same effect as if such surviving entity had been
named as such.
Each Subsidiary Guarantor (other than any Subsidiary Guarantor whose
Guarantee is to be released in accordance with the terms of the Guarantee and
the Indenture in connection with any transaction complying with the provisions
of the Indenture described under "Merger, Consolidation and Sale of Assets") may
not, and the Company may not cause or permit any Subsidiary Guarantor to,
consolidate with or merge with or into any Person other than the Company or
another Subsidiary Guarantor that is a Wholly Owned Restricted Subsidiary
unless: (a) the entity formed by or surviving any such consolidation or merger
(if other than the Subsidiary Guarantor) or to which such sale, lease,
conveyance or other disposition shall have been made is a corporation organized
and existing under the laws of the United States or any state thereof or the
District of Columbia; (b) such entity assumes by execution of a supplemental
indenture all of the obligations of the Subsidiary Guarantor under its
Guarantee; (c) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; and (d) immediately
after giving effect to such transaction and the use of any net proceeds
therefrom on a pro forma basis, the Company could satisfy the provisions of
clause (b) of the first paragraph of this covenant. Any merger or consolidation
of a Subsidiary Guarantor with and into the Company (with the Company being the
surviving entity) or another Subsidiary Guarantor that is a Wholly Owned
Restricted Subsidiary need only comply with clause (d) of the first paragraph of
this covenant.
Limitations on Transactions with Affiliates. (a) The Company will not,
and will not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, enter into, amend or permit or suffer to exist any transaction or
series of related transactions (including, without limitation, the purchase,
sale, lease or exchange of any property, the guaranteeing of any Indebtedness or
the rendering of any service) with, or for the benefit of, any of their
respective Affiliates (each an "Affiliate Transaction"), other than (i)
Affiliate Transactions permitted under paragraph (b) of this covenant and (ii)
Affiliate Transactions that are on terms that are fair and reasonable to the
Company or the applicable Restricted Subsidiary and are no less favorable to the
Company or the applicable Restricted Subsidiary than those that might reasonably
have been obtained in a comparable transaction at such time on an arm's-length
basis from a Person that is not an Affiliate of the Company or such Restricted
Subsidiary. All Affiliate Transactions (and each series of related Affiliate
Transactions which are similar or part of a common plan) involving aggregate
payments or other property with a fair market value in excess of $1,000,000
shall be approved by the Board of Directors of the Company, such approval to be
evidenced by a Board Resolution stating that such Board of Directors has
determined that such transaction complies with the foregoing provisions. If the
Company or any Restricted Subsidiary enters into an Affiliate Transaction (or a
series of related Affiliate Transactions related to a common plan) that involves
an aggregate fair market value of more than $10,000,000, the Company shall,
prior to the consummation thereof, obtain a favorable opinion as to the fairness
of such transaction or series of related transactions to the Company or the
relevant Restricted Subsidiary, as the case may be, from a financial point of
view, from an Independent Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary as determined in good faith by the Board of Directors or senior
management of the Company or such Restricted Subsidiary, as the case may be;
(ii) transactions exclusively between or among the Company and any of its
Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries; provided, however, that such transactions are not otherwise
prohibited by the Indenture; and (iii) Restricted Payments permitted by the
Indenture.
Limitation on Restricted and Unrestricted Subsidiaries. The Indenture
provides that the Board of Directors may, if no Default or Event of Default
shall have occurred and be continuing or would arise therefrom, designate an
Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that
(i) any such redesignation shall be deemed to be an incurrence as of the date of
such redesignation by the Company and its Restricted Subsidiaries of the
Indebtedness (if any) of such redesignated Subsidiary for purposes of
"--Limitation on Incurrence of Additional Indebtedness" above, (ii) unless such
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redesignated Subsidiary shall not have any Indebtedness outstanding, other than
Indebtedness which would be Permitted Indebtedness, no such designation shall be
permitted if immediately after giving effect to such redesignation and the
incurrence of any such additional Indebtedness the Company could not incur $1.00
of additional Indebtedness (other than Permitted Indebtedness) pursuant to "--
Limitation on Incurrence of Additional Indebtedness" above and (iii) such
Subsidiary assumes by execution of a supplemental indenture all of the
obligations of a Subsidiary Guarantor under a Guarantee.
The Board of Directors of the Company also may, if no Default or Event
of Default shall have occurred and be continuing or would arise therefrom,
designate any Restricted Subsidiary to be an Unrestricted Subsidiary if (i) such
designation is at that time permitted under "-- Limitation on Restricted
Payments" above and (ii) immediately after giving effect to such designation,
the Company could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to "-- Limitation on Incurrence of Additional
Indebtedness" above. Any such designation by the Board of Directors shall be
evidenced to the Trustee by the filing with the Trustee of a certified copy of
the resolution of the Board of Directors giving effect to such designation or
redesignation and an Officers' Certificate certifying that such designation or
redesignation complied with the foregoing conditions and setting forth in
reasonable detail the underlying calculations. In the event that any Restricted
Subsidiary is designated an Unrestricted Subsidiary in accordance with this
covenant, such Restricted Subsidiary's Guarantee will be released.
The Indenture provides that for purposes of the covenant described under
"--Limitation on Restricted Payments" above, (i) an "Investment" shall be deemed
to have been made at the time any Restricted Subsidiary is designated as an
Unrestricted Subsidiary in an amount (proportionate to the Company's equity
interest in such Subsidiary) equal to the net worth of such Restricted
Subsidiary at the time that such Restricted Subsidiary is designated as an
Unrestricted Subsidiary; (ii) at any date the aggregate amount of all Restricted
Payments made as Investments since the Series A/B Issue Date shall exclude and
be reduced by an amount (proportionate to the Company's equity interest in such
Subsidiary) equal to the net worth of any Unrestricted Subsidiary at the time
that such Unrestricted Subsidiary is designated a Restricted Subsidiary, not to
exceed, in the case of any such redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary, the amount of Investments previously made by the Company
and its Restricted Subsidiaries in such Unrestricted Subsidiary (in each case
(i) and (ii) "net worth" to be calculated based upon the fair market value of
the assets of such Subsidiary as of any such date of designation); and (iii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer.
The Indenture provides that notwithstanding the foregoing, the Board of
Directors may not designate any Subsidiary of the Company to be an Unrestricted
Subsidiary if, after such designation, (a) the Company or any Restricted
Subsidiary (i) provides credit support for, or a guarantee of, any Indebtedness
of such Subsidiary (including any undertaking, agreement or instrument
evidencing such Indebtedness) or (ii) is directly or indirectly liable for any
Indebtedness of such Subsidiary or (b) such Subsidiary owns any Capital Stock
of, or owns or holds any Lien on any property of, any Restricted Subsidiary
which is not a Subsidiary of the Subsidiary to be so designated.
The Indenture provides that Subsidiaries of the Company that are not
designated by the Board of Directors as Restricted or Unrestricted Subsidiaries
will be deemed to be Restricted Subsidiaries. Notwithstanding any provisions of
this covenant, all Subsidiaries of an Unrestricted Subsidiary will be
Unrestricted Subsidiaries.
Additional Subsidiary Guarantees. If the Company or any of its
Restricted Subsidiaries transfers or causes to be transferred, in one
transaction or a series of related transactions, any property to any Restricted
Subsidiary that is not a Subsidiary Guarantor, or if the Company or any of its
Restricted Subsidiaries shall organize, acquire or otherwise invest in or hold
an Investment in another Restricted Subsidiary having total consolidated assets
with a book value in excess of $500,000 that is not a Subsidiary Guarantor, then
such transferee or acquired or other Restricted Subsidiary shall (a) execute and
deliver to the Trustee a supplemental indenture in form reasonably satisfactory
to the Trustee pursuant to which such Restricted Subsidiary shall
unconditionally guarantee all of the Company's obligations under the Notes and
the Indenture on the terms set forth in the Indenture and (b) deliver to the
Trustee an opinion of counsel that such supplemental indenture has been duly
authorized, executed and delivered by such Restricted Subsidiary and constitutes
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a legal, valid, binding and enforceable obligation of such Restricted
Subsidiary. Thereafter, such Restricted Subsidiary shall be a Subsidiary
Guarantor for all purposes of the Indenture.
Limitation on Conduct of Business. The Company may not, and may not
permit any of its Restricted Subsidiaries to, engage in the conduct of any
business other than the Crude Oil and Natural Gas Business.
Reports to Holders. The Company will deliver to the Trustee within 15
days after the filing of the same with the Commission, copies of the quarterly
and annual reports and of the information, documents and other reports, if any,
which the Company is required to file with the Commission pursuant to Section 13
or 15(d) of the Exchange Act. Notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the Commission, to the extent permitted, and
provide the Trustee and Holders with such annual reports and such information,
documents and other reports specified in Sections 13 and 15(d) of the Exchange
Act. The Company will also comply with the other provisions of Section 314(a) of
the TIA.
Events of Default
The following events are defined in the Indenture as "Events of
Default":
(a) the failure to pay interest (including any Additional Interest) on
any Notes when the same becomes due and payable and the default continues for a
period of 30 days;
(b) the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise (including
the failure to make a payment to purchase Notes tendered pursuant to a Change of
Control Offer or a Net Proceeds Offer);
(c) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period of 30
days after either Issuer receives written notice specifying the default (and
demanding that such default be remedied) from the Trustee or the Holders of at
least 25% of the outstanding principal amount of the Notes (except in the case
of a default with respect to observance or performance of any of the terms or
provisions of "-- Change of Control" or "Certain Covenants -- Merger,
Consolidation and Sale of Assets" or "-- Limitation on Asset Sales" which will
constitute an Event of Default with such notice requirement but without such
passage of time requirement);
(d) a default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company or of any Restricted Subsidiary (or the payment of
which is guaranteed by the Issuers or any Restricted Subsidiary), whether such
Indebtedness now exists or is created after the Issue Date, which default (i) is
caused by a failure to pay principal of or premium, if any, or interest on such
Indebtedness after any applicable grace period provided in such Indebtedness (a
"payment default") or (ii) results in the acceleration of such Indebtedness
prior to its express maturity and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a payment default or the maturity of
which has been so accelerated, aggregates at least $5,000,000;
(e) one or more judgments in an aggregate amount in excess of $5,000,000
(unless covered by insurance by a reputable insurer as to which the insurer has
acknowledged coverage) shall have been rendered against the Company or any of
its Restricted Subsidiaries and such judgments remain undischarged, unvacated,
unpaid or unstayed for a period of 60 days after such judgment or judgments
become final and non-appealable;
(f) certain events of bankruptcy affecting the Company or any of its
Subsidiaries; or
(g) any of the Guarantees cease to be in full force and effect or any of
the Guarantees are declared to be null and void or invalid and unenforceable or
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any of the Subsidiary Guarantors denies or disaffirms its liability under its
Guarantees (other than by reason of release of a Subsidiary Guarantor in
accordance with the terms of the Indenture).
The Indenture provides that, if an Event of Default (other than an Event
of Default specified in clause (f) above) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding Notes
may declare the principal of, premium, if any, and accrued and unpaid interest
on all the Notes to be due and payable by notice in writing to the Issuers and
the Trustee specifying the Event of Default and that it is a "notice of
acceleration", and the same shall become immediately due and payable. If an
Event of Default specified in clause (f) above occurs and is continuing, then
all unpaid principal of, and premium, if any, and accrued and unpaid interest on
all of the outstanding Notes shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (a) if the rescission would not
conflict with any judgment or decree, (b) if all existing Events of Default have
been cured or waived except nonpayment of principal or interest that has become
due solely because of such acceleration, (c) to the extent the payment of such
interest is lawful, interest on overdue installments of interest and overdue
principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (d) if the Issuers have paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (e) in the event of the cure or waiver of an
Event of Default of the type described in clause (f) of the description of
Events of Default above, the Trustee shall have received an officers'
certificate and an opinion of counsel that such Event of Default has been cured
or waived; provided, however, that such counsel may rely, as to matters of fact,
on a certificate or certificates of officers of the Company. No such rescission
shall affect any subsequent Default or impair any right consequent thereto.
The Indenture provides that, at any time prior to the declaration of
acceleration of the Notes, the Holders of a majority in principal amount of the
Notes may waive any existing Default or Event of Default under the Indenture,
and its consequences, except a default in the payment of the principal of or
interest on any Notes.
The Indenture provides that Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture and under the TIA.
During the existence of an Event of Default, the Trustee is required to exercise
such rights and powers vested in it under the Indenture and use the same degree
of care and skill in its exercise thereof as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs. Subject to the
provisions of the Indenture relating to the duties of the Trustee, whether or
not an Event of Default shall occur and be continuing, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Issuers are required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
Legal Defeasance and Covenant Defeasance
The Issuers may, at their option and at any time, elect to have their
obligations and the corresponding obligations of the Subsidiary Guarantors
discharged with respect to the outstanding Notes ("Legal Defeasance"). Such
Legal Defeasance means that the Issuers shall be deemed to have paid and
discharged the entire indebtedness represented by the outstanding Notes, and
satisfied all of their obligations with respect to the Notes, except for (a) the
rights of Holders to receive payments in respect of the principal of, premium,
if any, and interest on the Notes when such payments are due, (b) the Issuers'
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obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payments, (c) the rights, powers, trust,
duties and immunities of the Trustee and the Issuers' obligations in connection
therewith and (d) the Legal Defeasance provisions of the Indenture. In addition,
the Issuers may, at their option and at any time, elect to have the obligations
of the Issuers released with respect to certain covenants that are described in
the Indenture ("Covenant Defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the Notes. In the event Covenant Defeasance occurs, certain events (other
than non-payment, bankruptcy, receivership, reorganization and insolvency
events) described under "-- Events of Default" will no longer constitute an
Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (a)
the Issuers must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in United States dollars, non-callable United States
government obligations, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the Notes
on the stated date for payment thereof or on the applicable redemption date, as
the case may be; (b) in the case of Legal Defeasance, the Issuers shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (i) the Issuers have received from, or
there has been published by, the Internal Revenue Service a ruling or (ii) since
the Series A/B Issue Date, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred, (c) in the case of Covenant Defeasance, the Issuers
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (d) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit or insofar as
Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (e) such
Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under the Indenture or any other agreement
or instrument to which the Company or any of its Restricted Subsidiaries is a
party or by which the Company or any of its Restricted Subsidiaries is bound;
(f) the Issuers shall have delivered to the Trustee an officers' certificate
stating that the deposit was not made by the Issuers with the intent of
preferring the Holders over any other creditors of either Issuer or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
the Issuers or others; (g) the Issuers shall have delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance or the
Covenant Defeasance, as the case may be, have been complied with; provided,
however, that such counsel may rely, as to matters of fact, on a certificate or
certificates of officers of the Company; (h) the Issuers shall have delivered to
the Trustee an opinion of counsel to the effect that after the 91st day
following the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; provided, however, that such counsel may rely, as
to matters of fact, on a certificate or certificates of officers of the Issuers;
and (i) certain other customary conditions precedent are satisfied.
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Satisfaction and Discharge
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (a) either (i) all the Notes, theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Issuers and thereafter repaid to the Issuers
or discharged from such trust) have been delivered to the Trustee for
cancellation or (ii) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Issuers have irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Issuers directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (b)
the Issuers have paid all other sums payable under the Indenture by the Issuers;
and (c) the Issuers have delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with; provided, however, that such counsel may rely, as to matters of fact, on a
certificate or certificates of officers of the Issuers.
Modification of the Indenture
From time to time, the Issuers, the Subsidiary Guarantors and the
Trustee, without the consent of the Holders, may amend the Indenture for certain
specified purposes, including curing ambiguities, defects or inconsistencies, to
comply with any requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the TIA or to make any change that
would provide any additional benefit or rights to the Holders or that does not
adversely affect the rights of any Holder. In formulating its opinion on such
matters, the Trustee will be entitled to rely on such evidence as it deems
appropriate, including, without limitation, solely on an opinion of counsel;
provided, however, that in delivering such opinion of counsel, such counsel may
rely, as to matters of fact, on a certificate or certificates of officers of the
Company. Other modifications and amendments of the Indenture may be made with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes issued under the Indenture, except that, without the consent
of each Holder affected thereby, no amendment may: (a) reduce the amount of
Notes whose Holders must consent to an amendment; (b) reduce the rate of or
change or have the effect of changing the time for payment of interest,
including defaulted interest, on any Notes; (c) reduce the principal of or
change or have the effect of changing the fixed maturity of any Notes, or change
the date on which any Notes may be subject to redemption or repurchase, or
reduce the redemption or repurchase price therefor; (d) make any Notes payable
in money other than that stated in the Notes; (e) make any change in provisions
of the Indenture protecting the right of each Holder to receive payment of
principal of and interest on such Note on or after the due date thereof or to
bring suit to enforce such payment, or permitting Holders of a majority in
principal amount of Notes to waive Defaults or Events of Default; (f) amend,
change or modify in any material respect the obligation of the Issuers to make
and consummate a Change of Control Offer in the event of a Change of Control or
make and consummate a Net Proceeds Offer with respect to any Asset Sale that has
been consummated or modify any of the provisions or definitions with respect
thereto; (g) modify or change any provision of the Indenture or the related
definitions affecting ranking of the Notes or any Guarantee in a manner which
adversely affects the Holders; or (h) release any Subsidiary Guarantor from any
of its obligations under its Guarantee or the Indenture otherwise than in
accordance with the terms of the Indenture.
Governing Law
The Indenture provides that the Indenture, the Notes and the Guarantees
will be governed by, and construed in accordance with, the laws of the State of
New York but without giving effect to applicable principles of conflicts of law
to the extent that the application of the law of another jurisdiction would be
required thereby.
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The Trustee
The Indenture provides that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations
on the rights of the Trustee, should it become a creditor of the Issuers or a
Subsidiary Guarantor, to obtain payments of claims in certain cases or to
realize on certain property received in respect of any such claim as security or
otherwise. Subject to the TIA, the Trustee will be permitted to engage in other
transactions; provided, however, that if the Trustee acquires any conflicting
interest as described in the TIA, it must eliminate such conflict or resign.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries (i) existing at the time such Person becomes a Restricted
Subsidiary or at the time it merges or consolidates with the Company or any of
its Restricted Subsidiaries or (ii) which becomes Indebtedness of the Company or
a Restricted Subsidiary in connection with the acquisition of assets from such
Person, in each case not incurred in connection with, or in anticipation or
contemplation of, such Person becoming a Restricted Subsidiary or such
acquisition, merger or consolidation.
"Adjusted Consolidated Net Tangible Assets" means (without duplication),
as of the date of determination, (a) the sum of (i) discounted future net
revenues from proved oil and gas reserves of the Company and its consolidated
Subsidiaries, calculated in accordance with Commission guidelines (before any
state or federal income tax), as estimated by a nationally recognized firm of
independent petroleum engineers as of a date no earlier than the date of the
Company's latest annual consolidated financial statements, as increased by, as
of the date of determination, the estimated discounted future net revenues from
(A) estimated proved oil and gas reserves acquired since the date of such
year-end reserve report, and (B) estimated oil and gas reserves attributable to
upward revisions of estimates of proved oil and gas reserves since the date of
such year-end reserve report due to exploration, development or exploitation
activities, in each case calculated in accordance with Commission guidelines
(utilizing the prices utilized in such year-end reserve report), and decreased
by, as of the date of determination, the estimated discounted future net
revenues from (C) estimated proved oil and gas reserves produced or disposed of
since the date of such year-end reserve report and (D) estimated oil and gas
reserves attributable to downward revisions of estimates of proved oil and gas
reserves since the date of such year-end reserve report due to changes in
geological conditions or other factors which would, in accordance with standard
industry practice, cause such revisions, in each case calculated in accordance
with Commission guidelines (utilizing the prices utilized in such year-end
reserve report); provided, however, that, in the case of each of the
determinations made pursuant to clauses (A) through (D), such increases and
decreases shall be as estimated by the Company's petroleum engineers, unless in
the event that there is a Material Change as a result of such acquisitions,
dispositions or revisions, then the discounted future net revenues utilized for
purposes of this clause (a)(i) shall be confirmed in writing, by a nationally
recognized firm of independent petroleum engineers (which may be the Company's
independent petroleum engineers who prepare the Company's annual reserve report)
plus (ii) the capitalized costs that are attributable to oil and gas properties
of the Company and its Subsidiaries to which no proved oil and gas reserves are
attributable, based on the Company's books and records as of a date no earlier
than the date of the Company's latest annual or quarterly financial statements,
plus (iii) the Net Working Capital on a date no earlier than the date of the
Company's latest consolidated annual or quarterly financial statements plus (iv)
with respect to each other tangible asset of the Company or its consolidated
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Restricted Subsidiaries specifically including, but not to the exclusion of any
other qualifying tangible assets, the Company's or its consolidated Restricted
Subsidiaries' gas producing facilities and unproved oil and gas properties (less
any remaining deferred income taxes which have been allocated to such gas
processing facilities in connection with the acquisition thereof), land,
equipment, leasehold improvements, investments carried on the equity method,
restricted cash and the carrying value of marketable securities, the greater of
(A) the net book value of such other tangible asset on a date no earlier than
the date of the Company's latest consolidated annual or quarterly financial
statements or (B) the appraised value, as estimated by a qualified Independent
Advisor, of such other tangible assets of the Company and its Restricted
Subsidiaries, as of a date no earlier than the date of the Company's latest
audited financial statements minus (b) minority interests and, to the extent not
otherwise taken into account in determining Adjusted Consolidated Net Tangible
Assets, any gas balancing liabilities of the Company and its consolidated
Restricted Subsidiaries reflected in the Company's latest audited financial
statements. In addition to, but without duplication of, the foregoing, for
purposes of this definition, "Adjusted Consolidated Net Tangible Assets" shall
be calculated after giving effect, on a pro forma basis, to (1) any Investment
not prohibited by the Indenture, to and including the date of the transaction
giving rise to the need to calculate Adjusted Consolidated Net Tangible Assets
(the "Assets Transaction Date"), in any other Person that, as a result of such
Investment, becomes a Restricted Subsidiary of the Company, (2) the acquisition,
to and including the Assets Transaction Date (by merger, consolidation or
purchase of stock or assets), of any business or assets, including, without
limitation, Permitted Industry Investments, and (3) any sales or other
dispositions of assets permitted by the Indenture (other than sales of
Hydrocarbons or other mineral products in the ordinary course of business)
occurring on or prior to the Assets Transaction Date.
"Affiliate" means, with respect to any specified Person, (a) any other
Person who directly or indirectly through one or more intermediaries controls,
or is controlled by, or under common control with, such specified Person and (b)
any Related Person of such Person. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative of the foregoing.
"Affiliate Transaction" has the meaning set forth under "Certain
Covenants -- Limitation on Transactions with Affiliates."
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person shall
become a Restricted Subsidiary, or shall be merged with or into the Company or
any Restricted Subsidiary, or (b) the acquisition by the Company or any
Restricted Subsidiary of the assets of any Person (other than a Restricted
Subsidiary) which constitute all or substantially all of the assets of such
Person or comprises any division or line of business of such Person or any other
properties or assets of such Person other than in the ordinary course of
business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, exchange, lease (other than operating leases entered into in the
ordinary course of business), assignment or other transfer for value by the
Company or any of its Restricted Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than the Company or a Restricted Subsidiary of
(a) any Capital Stock of any Restricted Subsidiary; or (b) any other property or
assets (including any interests therein) of the Company or any Restricted
Subsidiary, including any disposition by means of a merger, consolidation or
similar transaction; provided, however, that Asset Sales shall not include (i)
the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company in a transaction which is made in
compliance with the provisions of "--Certain Covenants -- Merger, Consolidation
and Sale of Assets", (ii) any Investment in an Unrestricted Subsidiary which is
made in compliance with the provisions of "-- Certain Covenants -- Limitation on
Restricted Payments" above, (iii) disposals or replacements of obsolete
equipment in the ordinary course of business, (iv) the sale, lease, conveyance,
disposition or other transfer (each, a "Transfer") by the Company or any
Restricted Subsidiary of assets or property to the Company or one or more
Restricted Subsidiaries, (v) any disposition of Hydrocarbons or other mineral
products for value in the ordinary course of business and (vi) the Transfer by
the Company or any Restricted Subsidiary of assets or property in the ordinary
course of business; provided, however, that the aggregate amount (valued at the
fair market value of such assets or property at the time of such Transfer) of
all such assets and property Transferred since the Series A/B Issue Date
pursuant to this clause (vi) shall not exceed $1,000,000 in any one year.
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"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Business Day" means any day other than a Saturday, Sunday or any other
day on which banking institutions in the City of New York are required or
authorized by law or other governmental action to be closed.
"Capitalized Lease Obligation" means, as to any Person, the discounted
present value of the rental obligations of such Person under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed) that is required to be classified and accounted for as a capital lease
obligation at such date, determined in accordance with GAAP.
"Capital Stock" means (a) with respect to any Person that is a
corporation, any and all shares, interests, participations or other equivalents
(however designated and whether or not voting) of corporate stock, including
each class of Common Stock and Preferred Stock of such Person and including any
warrants, options or rights to acquire any of the foregoing and instruments
convertible into any of the foregoing and (b) with respect to any Person that is
not a corporation, any and all partnership or other equity interests of such
Person.
"Cash Equivalents" means (a) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (b)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (c) commercial paper maturing no more than
one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (d)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any United States branch of a foreign bank having at the date of acquisition
thereof combined capital and surplus of not less than $250,000,000; (e)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clause (a) above entered into with any bank
meeting the qualifications specified in clause (d) above and (f) money market
mutual or similar funds having assets in excess of $100,000,000.
"Change of Control" means the occurrence of one or more of the following
events: (a) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group") (whether or not otherwise in compliance with the
provisions of the Indenture); (b) the approval by the holders of Capital Stock
of the Company of any plan or proposal for the liquidation or dissolution of the
Company (whether or not otherwise in compliance with the provisions of the
Indenture); (c) any Person or Group shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 35% of
the aggregate ordinary voting power represented by the issued and outstanding
Capital Stock of the Company; or (d) the replacement of a majority of the Board
of Directors of the Company over a two-year period from the directors who
constituted the Board of Directors of the Company at the beginning of such
period with directors whose replacement shall not have been approved (by
recommendation, nomination or election, as the case may be) by a vote of at
least a majority of the Board of Directors of the Company then still in office
who either were members of such Board of Directors at the beginning of such
period or whose election as a member of such Board of Directors was previously
so approved.
"Change of Control Offer" has the meaning set forth under "-- Change of
Control."
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"Change of Control Payment Date" has the meaning set forth under "--
Change of Control."
"Common Stock" of any Person means any and all shares, interests or
other participations in, and other equivalents (however designated and whether
voting or non-voting) of such Person's common stock, whether outstanding on the
Issue Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Commission" means the Securities and Exchange Commission.
"Company" means Abraxas Petroleum Corporation, a Nevada corporation.
"Company Properties" means all Properties, and equity, partnership or
other ownership interests therein, that are related or incidental to, or used or
useful in connection with, the conduct or operation of any business activities
of the Company or the Subsidiaries, which business activities are not prohibited
by the terms of the Indenture.
"Consolidated EBITDA" means, for any period, the sum (without
duplication) of (a) Consolidated Net Income and (b) to the extent Consolidated
Net Income has been reduced thereby, (i) all income taxes of the Company and its
Restricted Subsidiaries paid or accrued in accordance with GAAP for such period
(other than income taxes attributable to extraordinary, unusual or nonrecurring
gains or losses or taxes attributable to sales or dispositions outside the
ordinary course of business), (ii) Consolidated Interest Expense, (iii) the
amount of any Preferred Stock dividends paid by the Company and its Restricted
Subsidiaries and (iv) Consolidated Non-cash Charges, less any non-cash items
increasing Consolidated Net Income for such period, all as determined on a
consolidated basis for the Company and its Restricted Subsidiaries in accordance
with GAAP.
"Consolidated EBITDA Coverage Ratio" means, with respect to the Company,
the ratio of (a) Consolidated EBITDA of the Company during the four full fiscal
quarters for which financial information in respect thereof is available (the
"Four Quarter Period") ending on or prior to the date of the transaction giving
rise to the need to calculate the Consolidated EBITDA Coverage Ratio (the
"Transaction Date") to (b) Consolidated Fixed Charges of the Company for the
Four Quarter Period. In addition to and without limitation of the foregoing, for
purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed
Charges" shall be calculated after giving effect (without duplication) on a pro
forma basis for the period of such calculation to (a) the incurrence or
repayment of any Indebtedness of the Company or any of its Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (b) any Asset
Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of the
Company or one of its Restricted Subsidiaries (including any Person who becomes
a Restricted Subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness, and also
including, without limitation, any Consolidated EBITDA attributable to the
assets which are the subject of the Asset Acquisition or Asset Sale during the
Four Quarter Period) occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such Asset Sale or Asset Acquisition (including the
incurrence, assumption or liability for any such Acquired Indebtedness) occurred
on the first day of the Four Quarter Period. If the Company or any of its
Restricted Subsidiaries directly or indirectly guarantees Indebtedness of a
third Person, the preceding sentence shall give effect to the incurrence of such
guaranteed Indebtedness as if the Company or the Restricted Subsidiary, as the
case may be, had directly incurred or otherwise assumed such guaranteed
Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for
purposes of determining the denominator (but not the numerator) of this
"Consolidated EBITDA Coverage Ratio," (i) interest on outstanding Indebtedness
determined on a fluctuating basis as of the Transaction Date and which will
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continue to be so determined thereafter shall be deemed to have accrued at a
fixed rate per annum equal to the rate of interest on such Indebtedness in
effect on the Transaction Date; (ii) if interest on any Indebtedness actually
incurred on the Transaction Date may optionally be determined at an interest
rate based upon a factor of a prime or similar rate, a eurocurrency interbank
offered rate, or other rates, then the interest rate in effect on the
Transaction Date will be deemed to have been in effect during the Four Quarter
Period; (iii) notwithstanding clauses (i) and (ii) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"Consolidated Fixed Charges" means, with respect to the Company for any
period, the sum, without duplication, of (a) Consolidated Interest Expense
(including any premium or penalty paid in connection with redeeming or retiring
Indebtedness of the Company and its Restricted Subsidiaries prior to the stated
maturity thereof pursuant to the agreements governing such Indebtedness), plus
(b) the product of (i) the amount of all dividend payments on any series of
Preferred Stock of the Company (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(ii) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local
income tax rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to the Company for
any period, the sum of, without duplication: (a) the aggregate of the interest
expense of the Company and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (i) any amortization of original issue discount, (ii) the net costs
under Interest Swap Obligations, (iii) all capitalized interest and (iv) the
interest portion of any deferred payment obligation; and (b) the interest
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by the Company and its Restricted Subsidiaries during such
period, as determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to the Company for any
period, the aggregate net income (or loss) of the Company and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided, however, that there shall be excluded therefrom (a)
after-tax gains from Asset Sales or abandonments or reserves relating thereto,
(b) after-tax items classified as extraordinary or nonrecurring gains, (c) the
net income of any Person acquired in a "pooling of interests" transaction
accrued prior to the date it becomes a Restricted Subsidiary or is merged or
consolidated with the Company or any Restricted Subsidiary, (d) the net income
(but not loss) of any Restricted Subsidiary to the extent that the declaration
of dividends or similar distributions by that Restricted Subsidiary of that
income is restricted by charter, contract, operation of law or otherwise, (e)
the net income of any Person in which the Company has an interest, other than a
Restricted Subsidiary, except to the extent of cash dividends or distributions
actually paid to the Company or to a Restricted Subsidiary by such Person, (f)
income or loss attributable to discontinued operations (including, without
limitation, operations disposed of during such period whether or not such
operations were classified as discontinued) and (g) in the case of a successor
to the Company by consolidation or merger or as a transferee of the Company's
assets, any net income (or loss) of the successor corporation prior to such
consolidation, merger or transfer of assets.
"Consolidated Net Worth" of any Person as of any date means the
consolidated stockholders' equity of such Person, determined on a consolidated
basis in accordance with GAAP, less (without duplication) amounts attributable
to Disqualified Capital Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to the Company, for
any period, the aggregate depreciation, depletion, amortization and other
non-cash expenses of the Company and its Restricted Subsidiaries reducing
Consolidated Net Income of the Company for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"consolidation" means, with respect to any Person, the consolidation of
the accounts of the Restricted Subsidiaries of such Person with those of such
Person, all in accordance with GAAP; provided, however, that "consolidation"
will not include consolidation of the accounts of any Unrestricted Subsidiary of
such Person with the accounts of such Person. The term "consolidated" has a
correlative meaning to the foregoing.
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"Covenant Defeasance" has the meaning set forth under "-- Legal
Defeasance and Covenant Defeasance."
"Credit Facility" means the Amended and Restated Credit Agreement dated
as of November 14, 1996, by and among the Company, BTCo and ING Capital, as
Co-Agents, and each of the Lenders named therein, or any successor or
replacement agreement and whether by the same or any other agent, lender or
group of lenders, together with the related documents thereto (including,
without limitation, any guarantee agreements and security documents), in each
case as such agreements have been or may be amended (including any amendment and
restatement thereof), supplemented or otherwise modified from time to time,
including any agreements extending the maturity of, refinancing, replacing,
increasing or otherwise restructuring all or any portion of the Indebtedness
under such agreements.
"Crude Oil and Natural Gas Business" means (i) the acquisition,
exploration, development, operation and disposition of interests in oil, gas and
other hydrocarbon properties located in North America, and (ii) the gathering,
marketing, treating, processing, storage, selling and transporting of any
production from such interests or properties of the Company or of others.
"Crude Oil and Natural Gas Hedge Agreements" means, with respect to any
Person, any oil and gas agreements and other agreements or arrangements or any
combination thereof entered into by such Person in the ordinary course of
business and that is designed to provide protection against oil and natural gas
price fluctuations.
"Crude Oil and Natural Gas Properties" means all Properties, including
equity or other ownership interests therein, owned by any Person which have been
assigned "proved oil and gas reserves" as defined in Rule 4-10 of Regulation S-X
of the Securities Act as in effect on the Issue Date.
"Crude Oil and Natural Gas Related Assets" means any Investment or
capital expenditure (but not including additions to working capital or
repayments of any revolving credit or working capital borrowings) by the Company
or any Subsidiary of the Company which is related to the business of the Company
and its Subsidiaries as it is conducted on the date of the Asset Sale giving
rise to the Net Cash Proceeds to be reinvested.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"Default" means an event or condition the occurrence of which is, or
with the lapse of time or the giving of notice or both would be, an Event of
Default.
"Disqualified Capital Stock" means that portion of any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is mandatorily redeemable at the sole option of the
holder thereof, in whole or in part, in either case, on or prior to the final
maturity of the Notes.
"Equity Offering" means an offering of Qualified Capital Stock of the
Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the
price which could be negotiated in an arm's-length, free market transaction, for
cash, between an informed and willing seller and an informed and willing buyer,
neither of whom is under undue pressure or compulsion to complete the
transaction. Fair market value shall be determined by the Board of Directors of
the Company acting reasonably and in good faith and shall be evidenced by a
Board Resolution of the Company delivered to the Trustee; provided, however,
that (A) if the aggregate non-cash consideration to be received by the Company
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or any Restricted Subsidiary from any Asset Sale shall reasonably be expected to
exceed $5,000,000 or (B) if the net worth of any Restricted Subsidiary to be
designated as an Unrestricted Subsidiary shall reasonably be expected to exceed
$10,000,000, then fair market value shall be determined by an Independent
Advisor.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board as of any date of determination.
"Holder" means any Person holding a Note.
"Hydrocarbons" means oil, gas, casinghead gas, drip gasoline, natural
gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and
all constituents, elements or compounds thereof and products processed
therefrom.
"Incur" has the meaning set forth under "-- Certain Covenants --
Limitation on Incurrence of Additional Indebtedness."
"Indebtedness" means with respect to any Person, without duplication,
(a) all Obligations of such Person for borrowed money, (b) all Obligations of
such Person evidenced by bonds, debentures, notes or other similar instruments,
(c) all Capitalized Lease Obligations of such Person, (d) all Obligations of
such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable), (e) all Obligations for the
reimbursement of any obligor on a letter of credit, banker's acceptance or
similar credit transaction, (f) guarantees and other contingent obligations in
respect of Indebtedness referred to in clauses (a) through (e) above and clause
(h) below, (g) all Obligations of any other Person of the type referred to in
clauses (a) through (f) above which are secured by any Lien on any property or
asset of such Person, the amount of such Obligation being deemed to be the
lesser of the fair market value of such property or asset or the amount of the
Obligation so secured, (h) all Obligations under Currency Agreements and
Interest Swap Obligations and (i) all Disqualified Capital Stock issued by such
Person with the amount of Indebtedness represented by such Disqualified Capital
Stock being equal to the greater of its voluntary or involuntary liquidation
preference and its maximum fixed redemption price or repurchase price. For
purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined reasonably and in good
faith by the Board of Directors of the Company. The "amount" or "principal
amount" of Indebtedness at any time of determination as used herein represented
by (a) any Indebtedness issued at a price that is less than the principal amount
at maturity thereof shall be the face amount of the liability in respect
thereof, (b) any Capitalized Lease Obligation shall be the amount determined in
accordance with the definition thereof, (c) any Interest Swap Obligations
included in the definition of Permitted Indebtedness shall be zero, (d) all
other unconditional obligations shall be the amount of the liability thereof
determined in accordance with GAAP and (e) all other contingent obligations
shall be the maximum liability at such date of such Person.
"Independent Advisor" means a reputable accounting, appraisal or
nationally recognized investment banking, engineering or consulting firm (a)
which does not, and whose directors, officers and employees or Affiliates do
not, have a direct or indirect material financial interest in the Company and
(b) which, in the judgment of the Board of Directors of the Company, is
otherwise disinterested, independent and qualified to perform the task for which
it is to be engaged.
"Initial Purchaser" means Jefferies & Company, Inc.
"Interest Swap Obligation" means the obligations of any Person pursuant
to any arrangement with any other Person, whereby, directly or indirectly, such
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Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect
(i) loan, advance or other extension of credit (including, without limitation, a
guarantee) or capital contribution to (by means of any transfer of cash or other
property (valued at the fair market value thereof as of the date of transfer)
others or any payment for property or services for the account or use of
others), (ii) purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person (whether by merger, consolidation, amalgamation or otherwise and
whether or not purchased directly from the issuer of such securities or
evidences of Indebtedness), (iii) guarantee or assumption of the Indebtedness of
any other Person (other than the guarantee or assumption of Indebtedness of such
Person or a Restricted Subsidiary of such Person which guarantee or assumption
is made in compliance with the provisions of "--Certain Covenants -- Limitation
on Incurrence of Additional Indebtedness" above), and (iv) other items that
would be classified as investments on a balance sheet of such Person prepared in
accordance with GAAP. Notwithstanding the foregoing, "Investment" shall exclude
extensions of trade credit by the Company and its Restricted Subsidiaries on
commercially reasonable terms in accordance with normal trade practices of the
Company or such Restricted Subsidiary, as the case may be. The amount of any
Investment shall not be adjusted for increases or decreases in value, or
write-ups, write-downs or write-offs with respect to such Investment. If the
Company or any Restricted Subsidiary sells or otherwise disposes of any Capital
Stock of any Restricted Subsidiary such that, after giving effect to any such
sale or disposition, it ceases to be a Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Capital Stock of such
Restricted Subsidiary not sold or disposed of.
"Issue Date" means the date of original issuance of the Series C Notes.
"Legal Defeasance" has the meaning set forth under "-- Legal Defeasance
and Covenant Defeasance."
"Lien" means any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind (including any conditional sale or
other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).
"Material Change" means an increase or decrease of more than 10% during
a fiscal quarter in the discounted future net cash flows (excluding changes that
result solely from changes in prices) from proved oil and gas reserves of the
Company and consolidated Subsidiaries (before any state or federal income tax);
provided, however, that the following will be excluded from the Material Change
calculation: (i) any acquisitions during the quarter of oil and gas reserves
that have been estimated by independent petroleum engineers and on which a
report or reports exist, (ii) any disposition of properties existing at the
beginning of such quarter that have been disposed of as provided in "Limitation
on Asset Sales" and (iii) any reserves added during the quarter attributable to
the drilling or recompletion of wells not included in previous reserve
estimates, but which will be included in future quarters.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash
Equivalents received by the Company or any of its Restricted Subsidiaries from
such Asset Sale net of (a) reasonable out-of-pocket expenses and fees relating
to such Asset Sale (including, without limitation, legal, accounting and
investment banking fees and sales commissions), (b) taxes paid or payable after
taking into account any reduction in consolidated tax liability due to available
tax credits or deductions and any tax sharing arrangements, (c) repayment of
Indebtedness that is required to be repaid in connection with such Asset Sale
and (d) appropriate amounts (determined by the Chief Financial Officer of the
Company) to be provided by the Company or any Restricted Subsidiary, as the case
may be, as a reserve, in accordance with GAAP, against any post closing
adjustments or liabilities associated with such Asset Sale and retained by the
Company or any Restricted Subsidiary, as the case may be, after such Asset Sale,
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including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale (but excluding
any payments which, by the terms of the indemnities will not, be made during the
term of the Notes).
"Net Proceeds Offer" has the meaning set forth under "-- Certain
Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Adjustment Ratio" has the meaning set forth under
"-- Certain Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Amount" has the meaning set forth under "-- Certain
Covenants --Limitation on Asset Sales."
"Net Proceeds Offer Payment Date" has the meaning set forth under "--
Certain Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Trigger Date" has the meaning set forth under "--
Certain Covenants -- Limitation on Asset Sales."
"Net Working Capital" means (i) all current assets of the Company and
its consolidated Subsidiaries, minus (ii) all current liabilities of the Company
and its consolidated Subsidiaries, except current liabilities included in
Indebtedness, in each case as set forth in financial statements of the Company
prepared in accordance with GAAP.
"Non-Recourse Indebtedness" with respect to any Person means
Indebtedness of such Person for which (i) the sole legal recourse for collection
of principal and interest on such Indebtedness is against the specific property
identified in the instruments evidencing or securing such Indebtedness and such
property was acquired with the proceeds of such Indebtedness or such
Indebtedness was incurred within 90 days after the acquisition of such property
and (ii) no other assets of such Person may be realized upon in collection of
principal or interest on such Indebtedness; provided, however, that any such
Indebtedness shall not cease to be "Non-Recourse Indebtedness" solely as a
result of the instrument governing such Indebtedness containing terms pursuant
to which such Indebtedness becomes recourse upon (a) fraud or misrepresentation
by the Person in connection with such Indebtedness, (b) such Person failing to
pay taxes or other charges that result in the creation of liens on any portion
of the specific property securing such Indebtedness or failing to maintain any
insurance on such property required under the instruments securing such
Indebtedness, (c) the conversion of any of the collateral for such Indebtedness,
(d) such Person failing to maintain any of the collateral for such Indebtedness
in the condition required under the instruments securing the Indebtedness, (e)
any income generated by the specific property securing such Indebtedness being
applied in a manner not otherwise allowed in the instruments securing such
Indebtedness, (f) the violation of any applicable law or ordinance governing
hazardous materials or substances or otherwise affecting the environmental
condition of the specific property securing the Indebtedness or (g) the rights
of the holder of such Indebtedness to the specific property becoming impaired,
suspended or reduced by any act, omission or misrepresentation of such Person;
provided, further, however, that upon the occurrence of any of the foregoing
clauses (a) through (g) above, any such Indebtedness which shall have ceased to
be "Non-Recourse Indebtedness" shall be deemed to have been Indebtedness
incurred by such Person at such time.
"Notes" means the Series C Notes and the Exchange Notes.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Payment Restriction" has the meaning set forth under "-- Certain
Covenants -- Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries."
"Permitted Indebtedness" means, without duplication, each of the
following:
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(a) Indebtedness under the Notes, the Exchange Notes, the Private
Exchange Notes, if any, the Indenture, the Guarantees, the Series A/B Notes, the
Series A/B Indenture and any guarantees relating to the Series A/B Notes;
(b) Indebtedness incurred pursuant to the Credit Facility in an
aggregate principal amount at any time outstanding not to exceed $50,000,000,
reduced by any required permanent repayments (which are accompanied by a
corresponding permanent commitment reduction) thereunder;
(c) Interest Swap Obligations of the Company or a Restricted Subsidiary
covering Indebtedness of the Company or any of its Restricted Subsidiaries;
provided, however, that such Interest Swap Obligations are entered into to
protect the Company and its Restricted Subsidiaries from fluctuations in
interest rates on Indebtedness incurred in accordance with the Indenture to the
extent the notional principal amount of such Interest Swap Obligations does not
exceed the principal amount of the Indebtedness to which such Interest Swap
Obligation relates;
(d) Indebtedness of a Restricted Subsidiary to the Company or to a
Wholly Owned Restricted Subsidiary for so long as such Indebtedness is held by
the Company or a Wholly Owned Restricted Subsidiary, in each case subject to no
Lien held by a Person other than the Company or a Wholly Owned Restricted
Subsidiary; provided, however, that if as of any date any Person other than the
Company or a Wholly Owned Restricted Subsidiary owns or holds any such
Indebtedness or holds a Lien in respect of such Indebtedness, such date shall be
deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by
the issuer of such Indebtedness;
(e) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary
for so long as such Indebtedness is held by a Wholly Owned Restricted
Subsidiary, in each case subject to no Lien; provided, however, that (i) any
Indebtedness of the Company to any Wholly Owned Restricted Subsidiary that is
not a Subsidiary Guarantor is unsecured and subordinated, pursuant to a written
agreement, to the Company's obligations under the Indenture and the Notes and
(ii) if as of any date any Person other than a Wholly Owned Restricted
Subsidiary owns or holds any such Indebtedness or holds a Lien in respect of
such Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the Company;
(f) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in the
case of daylight overdrafts) drawn against insufficient funds in the ordinary
course of business; provided, however, that such Indebtedness is extinguished
within two Business Days of incurrence;
(g) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with
self-insurance or similar requirements in the ordinary course of business;
(h) Refinancing Indebtedness;
(i) Capitalized Lease Obligations of the Company outstanding on the
Series A/B Issue Date;
(j) Capitalized Lease Obligations and Purchase Money Indebtedness of the
Company or any of its Restricted Subsidiaries not to exceed $5,000,000 at any
one time outstanding;
(k) Permitted Operating Obligations;
(l) Obligations arising in connection with Crude Oil and Natural Gas
Hedge Agreements of the Company or a Restricted Subsidiary;
(m) Non-Recourse Indebtedness;
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(n) Indebtedness under Currency Agreements; provided, however, that in
the case of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and its Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(o) additional Indebtedness of the Company or any of its Restricted
Subsidiaries in an aggregate principal amount at any time outstanding not to
exceed the greater of (i) $10.0 million or (ii) 5.0% of Adjusted Consolidated
Net Tangible Assets of the Company; and
(p) Indebtedness outstanding on the Series A/B Issue Date.
"Permitted Industry Investments" means (i) capital expenditures,
including, without limitation, acquisitions of Company Properties and interests
therein; (ii) (a) entry into operating agreements, joint ventures, working
interests, royalty interests, mineral leases, unitization agreements, pooling
arrangements or other similar or customary agreements, transactions, properties,
interests or arrangements, and Investments and expenditures in connection
therewith or pursuant thereto, in each case made or entered into in the ordinary
course of the oil and gas business, and (b) exchanges of Company Properties for
other Company Properties of at least equivalent value as determined in good
faith by the Board of Directors of the Company; (iii) Investments of operating
funds on behalf of co-owners of Crude Oil and Natural Gas Properties of the
Company or the Subsidiaries pursuant to joint operating agreements.
"Permitted Investments" means (a) Investments by the Company or any
Restricted Subsidiary in any Person that is or will become immediately after
such Investment a Restricted Subsidiary or that will merge or consolidate into
the Company or a Restricted Subsidiary that is not subject to any Payment
Restriction, (b) Investments in the Company by any Restricted Subsidiary;
provided, however, that any Indebtedness evidencing any such Investment held by
a Restricted Subsidiary that is not a Subsidiary Guarantor is unsecured and
subordinated, pursuant to a written agreement, to the Company's obligations
under the Notes and the Indenture; (c) investments in cash and Cash Equivalents;
(d) Investments made by the Company or its Restricted Subsidiaries as a result
of consideration received in connection with an Asset Sale made in compliance
with "-- Certain Covenants -- Limitation on Asset Sales" above; and (e)
Permitted Industry Investments.
"Permitted Liens" means each of the following types of Liens:
(a) Liens existing as of the Series A/B Issue Date to the extent and in
the manner such Liens were in effect on the Series A/B Issue Date (and any
extensions, replacements or renewals thereof covering property or assets secured
by such Liens on the Series A/B Issue Date);
(b) Liens securing Indebtedness outstanding under the Credit Facility
and Liens arising under the Indenture or the Series A/B Indenture;
(c) Liens securing the Notes and the Guarantees;
(d) Liens of the Company or a Restricted Subsidiary on assets of any
Restricted Subsidiary;
(e) Liens securing Refinancing Indebtedness which is incurred to
Refinance any Indebtedness which has been secured by a Lien permitted under the
Indenture and which has been incurred in accordance with the provisions of the
Indenture; provided, however, that such Liens (x) are no less favorable to the
Holders and are not more favorable to the lienholders with respect to such Liens
than the Liens in respect of the Indebtedness being Refinanced and (y) do not
extend to or cover any property or assets of the Company or any of its
Restricted Subsidiaries not securing the Indebtedness so Refinanced;
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(f) Liens for taxes, assessments or governmental charges or claims
either (i) not delinquent or (ii) contested in good faith by appropriate
proceedings and as to which the Company or a Restricted Subsidiary, as the case
may be, shall have set aside on its books such reserves as may be required
pursuant to GAAP;
(g) statutory and contractual Liens of landlords to secure rent arising
in the ordinary course of business to the extent such Liens relate only to the
tangible property of the lessee which is located on such property and Liens of
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other
Liens imposed by law incurred in the ordinary course of business for sums not
yet delinquent or being contested in good faith, if such reserve or other
appropriate provision, if any, as shall be required by GAAP shall have been made
in respect thereof;
(h) Liens incurred or deposits made in the ordinary course of business
(i) in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit issued
in the ordinary course of business consistent with past practice in connection
therewith, or (ii) to secure the performance of tenders, statutory obligations,
surety and appeal bonds, bids, leases, government contracts, performance and
return-of-money bonds and other similar obligations (exclusive of obligations
for the payment of borrowed money);
(i) judgment and attachment Liens not giving rise to an Event of
Default;
(j) easements, rights-of-way, zoning restrictions, restrictive
covenants, minor imperfections in title and other similar charges or
encumbrances in respect of real property not interfering in any material respect
with the ordinary conduct of the business of the Company or any of its
Restricted Subsidiaries;
(k) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or assets
which is not leased property subject to such Capitalized Lease Obligation;
(l) Liens securing Purchase Money Indebtedness of the Company or any
Restricted Subsidiary; provided, however, that (i) the Purchase Money
Indebtedness shall not be secured by any property or assets of the Company or
any Restricted Subsidiary other than the property and assets so acquired or
constructed and (ii) the Lien securing such Indebtedness shall be created within
90 days of such acquisition or construction;
(m) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to such
letters of credit and products and proceeds thereof;
(n) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company or
any of its Restricted Subsidiaries, including rights of offset and set-off;
(o) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture and Liens securing Crude Oil and Natural Gas Hedge Agreements;
(p) Liens securing Acquired Indebtedness incurred in accordance with "--
Certain Covenants -- Limitation on Incurrence of Additional Indebtedness" above;
provided, however, that (i) such Liens secured such Acquired Indebtedness at the
time of and prior to the incurrence of such Acquired Indebtedness by the Company
or a Restricted Subsidiary and were not granted in connection with, or in
anticipation of, the incurrence of such Acquired Indebtedness by the Company or
a Restricted Subsidiary and (ii) such Liens do not extend to or cover any
property or assets of the Company or of any of its Restricted Subsidiaries other
than the property or assets that secured the Acquired Indebtedness prior to the
time such Indebtedness became Acquired Indebtedness of the Company or a
Restricted Subsidiary and are no more favorable to the lienholders than those
securing the Acquired Indebtedness prior to the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary;
(q) Liens on, or related to, properties and assets of the Company and
its Subsidiaries to secure all or a part of the costs incurred in the ordinary
course of business of exploration, drilling, development, production,
processing, transportation, marketing or storage, or operation thereof;
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(r) Liens on pipeline or pipeline facilities, Hydrocarbons or properties
and assets of the Company and its Subsidiaries which arise out of operation of
law;
(s) royalties, overriding royalties, revenue interests, net revenue
interests, net profit interests, revisionary interests, production payments,
production sales contracts, operating agreements and other similar interests,
properties, arrangements and agreements, all as ordinarily exist with respect to
Properties and assets of the Company and its Subsidiaries or otherwise as are
customary in the oil and gas business;
(t) with respect to any Properties and assets of the Company and its
Subsidiaries, Liens arising under, or in connection with, or related to,
farm-out, farm-in, joint operation, area of mutual interest agreements and/or
other similar or customary arrangements, agreements or interests that the
Company or any Subsidiary determines in good faith to be necessary for the
economic development of such Property;
(u) any (a) interest or title of a lessor or sublessor under any lease,
(b) restriction or encumbrance that the interest or title of such lessor or
sublessor may be subject to (including, without limitation, ground leases or
other prior leases of the demised premises, mortgages, mechanics' liens, tax
liens, and easements), or (c) subordination of the interest of the lessee or
sublessee under such lease to any restrictions or encumbrance referred to in the
preceding clause (b);
(v) Liens in favor of collecting or payor banks having a right of
setoff, revocation, refund or chargeback with respect to money or instruments of
the Company or any Restricted Subsidiary on deposit with or in possession of
such bank; and
(w) Liens securing Non-recourse Indebtedness.
"Permitted Operating Obligations" means Indebtedness of the Company or
any Restricted Subsidiary in respect of one or more standby letters of credit,
bid, performance or surety bonds, or other reimbursement obligations, issued for
the account of, or entered into by, the Company or any Restricted Subsidiary in
the ordinary course of business (excluding obligations related to the purchase
by the Company or any Restricted Subsidiary of Hydrocarbons for which the
Company or such Restricted Subsidiary has contracts to sell), or in lieu of any
thereof or in addition to any thereto, guarantees and letters of credit
supporting any such obligations and Indebtedness (in each case, other than for
an obligation for borrowed money, other than borrowed money represented by any
such letter of credit, bid, performance or surety bond, or reimbursement
obligation itself, or any guarantee and letter of credit related thereto).
"Person" means an individual, partnership, corporation, unincorporated
organization, limited liability company, trust, estate, or joint venture, or a
governmental agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person
that has preferential rights to any other Capital Stock of such Person with
respect to dividends or redemptions or upon liquidation.
"Property" means, with respect to any Person, any interests of such
Person in any kind of property or asset, whether real, personal or mixed, or
tangible or intangible, including, without limitation, Capital Stock,
partnership interests and other equity or ownership interests in any other
Person.
"Purchase Money Indebtedness" means Indebtedness the net proceeds of
which are used to finance the cost (including the cost of construction) of
property or assets acquired in the normal course of business by the Person
incurring such Indebtedness.
"Qualified Capital Stock" means any Capital Stock that is not
Disqualified Capital Stock.
"Reference Date" has the meaning set forth under "-- Certain Covenants
- -- Limitation on Restricted Payments."
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"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
"-- Certain Covenants --Limitation on Incurrence of Additional Indebtedness"
above (other than pursuant to clause (b), (c), (d), (e), (f), (g), (j), (k),
(l), (n) or (o) of the definition of Permitted Indebtedness), in each case that
does not (i) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing (plus
the amount of any premium required to be paid under the terms of the instrument
governing such Indebtedness and plus the amount of reasonable expenses incurred
by the Company and its Restricted Subsidiaries in connection with such
Refinancing) or (ii) create Indebtedness with (x) a Weighted Average Life to
Maturity that is less than the Weighted Average Life to Maturity of the
Indebtedness being Refinanced or (y) a final maturity earlier than the final
maturity of the Indebtedness being Refinanced; provided, however, that (1) if
such Indebtedness being Refinanced is Indebtedness of the Company or a
Subsidiary Guarantor, then such Refinancing Indebtedness shall be Indebtedness
solely of the Company and/or such Subsidiary Guarantor and (2) if such
Indebtedness being Refinanced is subordinate or junior to the Notes or a
Guarantee, then such Refinancing Indebtedness shall be subordinate to the Notes
or such Guarantee, as the case may be, at least to the same extent and in the
same manner as the Indebtedness being Refinanced.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the Issue Date among the Issuers and the Initial Purchaser.
"Related Person" of any Person means any other Person directly or
indirectly owning 10% or more of the outstanding voting Common Stock of such
Person (or, in the case of a Person that is not a corporation, 10% or more of
the equity interest in such Person).
"Replacement Assets" has the meaning set forth under "-- Certain
Covenants -- Limitation on Asset Sales."
"Restricted Payment" has the meaning set forth under "-- Certain
Covenants -- Limitation on Restricted Payments."
"Restricted Subsidiary" means any Subsidiary of the Company (including,
without limitation, Canadian Abraxas) that has not been designated by the Board
of Directors of the Company, by a Board Resolution delivered to the Trustee, as
an Unrestricted Subsidiary pursuant to and in compliance with "-- Certain
Covenants -- Limitation on Restricted and Unrestricted Subsidiaries" above. Any
such designation may be revoked by a Board Resolution of the Company delivered
to the Trustee, subject to the provisions of such covenant.
"Sale and Leaseback Transaction" means any direct or indirect
arrangement with any Person or to which any such Person is a party, providing
for the leasing to the Company or a Restricted Subsidiary of any property,
whether owned by the Company or any Restricted Subsidiary at the Series A/B
Issue Date or later acquired which has been or is to be sold or transferred by
the Company or such Restricted Subsidiary to such Person or to any other Person
from whom funds have been or are to be advanced by such Person on the security
of such property.
"Series A/B Indenture" means the Indenture dated as of November 14,
1996, among the Issuers and IBJ Schroder Bank & Trust Company, as Trustee,
providing for the issuance of the Series A/B Notes in the aggregate principal
amount of $215,000,000, as such may be amended and supplemented from time to
time.
"Series A/B Issue Date" means the date on which the Series A/B Notes
were originally issued under the Series A/B Indenture.
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"Series A/B Notes" means the Issuers' 11 1/2% Senior Notes due 2004
issued pursuant to the Series A/B Indenture, as such may be amended or
supplemented from time to time.
"Subsidiary", with respect to any Person, means (a) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (b) any
other Person of which at least a majority of the voting interests under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Subsidiary Guarantor" means each of the Company's Restricted
Subsidiaries that in the future executes a supplemental indenture in which such
Restricted Subsidiary agrees to be bound by the terms of the Indenture as a
Subsidiary Guarantor; provided, however, that any Person constituting a
Subsidiary Guarantor as described above shall cease to constitute a Subsidiary
Guarantor when its Guarantee is released in accordance with the terms of the
Indenture.
Surviving Entity has the meaning set forth under "-- Certain Covenants
- -- Merger, Consolidation and Sale of Assets."
"Unadjusted Net Proceeds Offer Amount" has the meaning set forth under
"-- Certain Covenants -- Limitation on Asset Sales."
"Unrestricted Subsidiary" means any Subsidiary of the Company designated
as such pursuant to and in compliance with "-- Certain Covenants -- Limitation
on Restricted and Unrestricted Subsidiaries" above; provided, however, that
Unrestricted Subsidiaries shall initially include Cascade Oil & Gas Ltd., an
Alberta, Canada corporation, and Western Associated Energy Corporation, a Texas
corporation. Any such designation may be revoked by a Board Resolution of the
Company delivered to the Trustee, subject to the provisions of such covenant.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the then
outstanding aggregate principal amount of such Indebtedness into (b) the sum of
the total of the products obtained by multiplying (i) the amount of each then
remaining installment, sinking fund, serial maturity or other required payment
of principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which all the outstanding voting securities normally entitled to vote in the
election of directors are owned by the Company or another Wholly Owned
Restricted Subsidiary.
CERTAIN UNITED STATES AND CANADIAN INCOME TAX CONSIDERATIONS
The discussion below is intended to be a general description of the
material United States and Canadian tax consequences of the Exchange Offer to
holders of the Notes. In addition, the discussion describes, in general, the
material United States and Canadian tax consequences associated with the
acquisition, ownership and disposition of the Notes. It does not take into
account the individual circumstances of any particular investor and does not
purport to discuss all of the possible tax consequences of the Exchange Offer or
the ownership or disposition of the Notes and is not intended as tax advice. The
summary below is general in nature and does not discuss all aspects of United
States and Canadian income taxation that may be relevant to a particular
investor in the light of the investor's particular circumstances.
Certain U.S. Federal Income Tax Considerations
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The following is a summary of certain United States federal income tax
consequences related to the Exchange Offer and the associated with the
acquisition, ownership, and disposition of the Notes. The following summary does
not discuss all of the aspects of federal income taxation that may be relevant
to a prospective holder of the Notes in light of his or her particular
circumstances, or to certain types of holders which are subject to special
treatment under the federal income tax laws (including persons who hold the
Notes as part of a conversion, straddle or hedge, dealers in securities,
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers and S corporations). Further, this summary pertains only to
holders that are citizens or residents of the United States, corporations,
partnerships or other entities created in or under the laws of the United States
or any political subdivision thereof, or estates or trusts the income of which
is subject to United States federal income taxation regardless of its source. In
addition, this summary does not describe any tax consequences under state,
local, or foreign tax laws.
This summary is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury Regulations (the "Regulations"), rulings and
pronouncements issued by the Internal Revenue Service ("IRS") and judicial
decisions now in effect, all of which are subject to change at any time by
legislative, judicial or administrative action. Any such changes may be applied
retroactively in a manner that could adversely affect the holders of the Notes.
The Issuers have not sought and will not seek any rulings from the IRS or
opinions from counsel with respect to the matters discussed below. There can be
no assurance that the IRS will not take positions concerning the tax
consequences of the Exchange Offer or the valuation, purchase, ownership or
disposition of the Notes which are different from those discussed herein.
Tax Consequences of the Exchange Offer
An exchange of the Series B Notes and the Series C Notes for the
Exchange Notes pursuant to the Exchange Offer should not be treated as a
significant modification of the Series B Notes or Series C Notes; accordingly,
an Exchange Note should be treated as a continuation of the corresponding Series
B Note or Series C Note and an exchanging holder should not recognize any gain
or loss as a result of participating in the Exchange Offer. In addition, an
exchanging Holder's basis in an Exchange Note should be equal to the basis of
the corresponding Series B Note or Series C Note and the holding period for an
Exchange Note would include such holder's holding period for the corresponding
Series B Note or Series C Note.
The Exchange Offer will not have any federal income tax consequences to
a non-exchanging holder.
Each exchanging holder should consult with his or her individual tax
advisor concerning any foreign, state or local tax consequences of the Exchange
Offer as well as to the effect of his or her particular facts and circumstances
on the matters discussed herein.
Taxation of Accrued Stated Interest on Notes
Accrued stated interest paid on a Note will generally be taxable to a
holder as ordinary interest income at the time it accrues or is received, in
accordance with the holder's regular method of accounting for federal income tax
purposes.
The Company will annually furnish to certain record holders of the Notes
and the IRS information with respect to any stated interest accruing during the
calendar year as may be required under applicable Regulations.
Market Discount
If a holder purchases a Note, other than in connection with the original
offering of the Series C Notes or the Exchange Offer, for less than the stated
redemption price of the Note at maturity, the difference is considered "market
discount," unless such difference is "de minimis," i.e., less than one-fourth of
one percent of the stated redemption price of the Note at maturity multiplied by
the number of complete years to maturity (after the holder acquires the Note).
Under market discount rules, any gain realized by the holder on a taxable
disposition of a Note having "market discount," as well as any partial principal
payment made with respect to such a Note, will be treated as ordinary income to
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the extent of the then "accrued market discount" of the Note. The rules
concerning the calculation of "accrued market discount" are set forth in the
paragraph immediately below. In addition, a holder of such a Note may be
required to defer the deduction of all or a portion of the interest expense on
any indebtedness incurred to purchase or carry a Note having "market discount."
Any market discount will accrue ratably from the date of acquisition to
the maturity date of the Note, unless the holder elects, irrevocably, to accrue
market discount on a constant interest rate method. The constant interest rate
method generally accrues interest at times and in amounts equivalent to the
result which would have occurred had the market discount been original issue
discount computed from the date of the holder's acquisition of the Note through
the maturity date. The election to accrue market discount on a constant interest
rate method is irrevocable but may be made separately as to each Note held by
the holder.
Accrual of market discount will not cause the accrued amounts to be
included currently in a holder's taxable income, in the absence of a disposition
of, or principal payment on, the Note. Nevertheless, a holder may elect to
currently include market discount in income as it accrues on either a ratable or
constant interest rate method. In such event, interest expense relating to the
acquisition of a Note which would otherwise be deferred would be currently
deductible to the extent otherwise permitted by the Code. The election to
include market discount in income currently, once made, applies to all market
discount obligations acquired by such holder on or after the first day of the
first taxable year to which the election applies and all subsequent years unless
revoked with the consent of the IRS. Accrued market discount which is included
in a holder's gross income will increase the adjusted tax basis of the Note in
the hands of the holder.
Acquisition Premium
If a subsequent holder acquires a Note for an amount which is greater
than the stated redemption price of the Note at maturity, such holder will be
considered to have purchased such Note with "amortizable bond premium" equal to
the amount of such excess. The holder may elect to amortize the premium using a
constant yield method employing six month compounding over the period from the
acquisition date to the maturity date of the Note. Amortized amounts may be
offset only against interest paid with respect to the Note and will reduce the
holder's adjusted tax basis in the Note to the extent so used. Once made, an
election to amortize and offset interest on the Note may be revoked only with
the consent of the IRS and will apply to all Notes held by the holder on the
first day of the taxable year to which the election relates and to subsequent
taxable years and to all Notes subsequently acquired by the holder.
Sale, Exchange or Other Taxable Disposition of the Notes
The sale, redemption or other taxable disposition of a Note will result
in the recognition of gain or loss to the holder in an amount equal to the
difference between (i) the amount of cash and fair market value of property
received (except to the extent attributable to the payment of accrued stated
interest) in exchange therefore and (ii) the holder's adjusted tax basis in such
Note. A holder's initial tax basis in a Note purchased by such holder will be
equal to the issue price of the Note.
Any gain or loss on the sale, redemption or other taxable disposition of
a Note will be capital gain or loss, except to the extent of any "accrued market
discount," assuming a purchaser of the Note holds such security as a "capital
asset" (generally property held for investment) within the meaning of Section
1221 of the Code. Any capital gain or loss will be long-term capital gain or
loss if the Note is held for more than one year and otherwise will be short-term
capital gain or loss. Payments on such disposition for accrued stated interest
not previously included in income will be treated as ordinary interest income.
Purchase or Redemption of Notes
Effect of Change of Control and Asset Sale. Upon a Change of Control,
the Issuers are required to offer to redeem all outstanding Notes for a price
equal to 101% of the principal amount thereof plus accrued and unpaid stated
interest. See "Description of the Exchange Notes -- Redemption -- Optional
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<PAGE>
Redemption." Under the Regulations, such a Change of Control redemption
requirement will not affect the yield or maturity date of the Notes unless,
based on all the facts and circumstances as of the issue date, it is more likely
than not that a Change of Control giving rise to the redemption will occur. Upon
certain asset sales, the Issuers will be obligated to offer to repurchase the
Notes at one hundred percent (100%) of the principal amount thereof plus accrued
and unpaid interest to the date of redemption. The Issuers will not treat the
Change of Control or the asset sale redemption provisions of the Notes as
affecting the calculation of the yield to maturity of any Note.
Optional Redemption. The Issuers, at their option, may redeem part or
all of the Notes at any time on or after November 1, 2000, at the redemption
prices set forth herein. In addition, if the Issuers consummate an Equity
Offering on or before November 1, 1999, the Issuers may, at their option, use
all or a portion of the proceeds from such Equity Offering to redeem up to
thirty-five percent (35%) of the aggregate principal amount of the Notes
originally issued in the Offering at a redemption price equal to 111.5%,
together with accrued and unpaid interest to the date of redemption; provided,
however, that, after giving effect to any such redemption, at least 65% of the
aggregate principal amount of the Series C Notes and Exchange Notes remains
outstanding. See "Description of the Exchange Notes --Redemption -- Optional
Redemption." For purposes of determining whether the Series C Notes and Exchange
Notes are issued with any "original issue discount," the Regulations generally
provide that an issuer will be treated as exercising any such option if its
exercise would lower the yield of the debt instrument. A redemption of Notes at
the optional redemption prices, however, would increase rather than decrease the
effective yield of the debt instrument as calculated from the issue date.
The Issuers do not currently intend to exercise any of the options
described above with respect to the Notes. Should the Issuers exercise an option
and redeem a Note, the holder of the Note would be required to treat any amount
paid by the Issuers which exceeds the Note's then principal balance and all
accrued and unpaid interest thereon as an amount received in exchange for the
Note.
Backup Withholding
The backup withholding rules require a payor to deduct and withhold a
tax if (i) the payee fails to properly furnish a taxpayer identification number
("TIN") to the payor, (ii) the IRS notifies the payor that the TIN furnished by
the payee is incorrect, (iii) the payee has failed to report properly the
receipt of "reportable payments" and the IRS has notified the payor that
withholding is required, or (iv) there has been a failure of the payee to
certify under a penalty of perjury that a payee is not subject to withholding
under Section 3406 of the Code. As a result, if any one of the events discussed
above occurs with respect to a holder of Notes, the Company, its paying agent or
other withholding agent will be required to withhold a tax equal to 31% of any
"reportable payment" made in connection with the Notes to such holder. A
"reportable payment" includes, among other things, amounts paid in respect of
interest or original issue discount and amounts paid through brokers in
retirement of securities. Any amounts withheld from a payment to a holder under
the backup withholding rules will be allowed as a refund or credit against such
holder's federal income tax, provided, that the required information is
furnished to the IRS. Certain holders (including, among others, corporations and
certain tax-exempt organizations) are not subject to the backup withholding
rules.
Certain Canadian Federal Income Tax Considerations
The following is, as of the date hereof, a summary of the principal
Canadian federal income tax consequences of the Exchange Offer, and the
ownership and disposition of the Exchange Notes, to a holder of Series B Notes
or Series C Notes who, for purposes of the Income Tax Act (Canada) (the "ITA")
and any relevant bilateral tax treaty and at all relevant times, deals at arm's
length with Canadian Abraxas, holds the Notes as capital property, is not and is
not deemed to be a resident in Canada, does not use or hold and is not deemed to
use or hold the Notes in carrying on business in Canada and is not an insurer
carrying on an insurance business in Canada and elsewhere (a "Non-Resident
Holder"). For the purposes of the ITA, related persons (as therein defined) are
deemed not to deal at arm's length. This summary is based on the current
provisions of the ITA and the regulations thereunder, the current published
administrative practices of Revenue Canada, and all specific proposals to amend
the ITA and the regulations announced by or on behalf of the Canadian Minister
of Finance prior to the date hereof. This summary does not otherwise take into
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<PAGE>
account or anticipate changes in the law, whether by judicial, governmental or
legislative decision or action, nor does it take into account tax legislation or
considerations of any province or territory of Canada or any jurisdiction other
than Canada. The provisions of provincial income tax legislation vary from
province to province in Canada and in some cases differ from federal income tax
legislation. This summary is of a general nature only and is not intended to be,
and should not be interpreted as, legal or tax advice to any particular holder
of Notes.
No taxes will be payable under the ITA in respect of the exchange of
Series B Notes or Series C Notes for Exchange Notes by a Non-Resident Holder
pursuant to the Exchange Offer.
The payment by Canadian Abraxas of interest, principal or premium, if
any, on the Exchange Notes to a Non-Resident Holder will be exempt from Canadian
withholding tax.
No other taxes on income (including taxable capital gains) will be
payable under the ITA in respect of the holding, redemption or disposition of
the Exchange Notes by a Non-Resident Holder.
95
<PAGE>
BOOK-ENTRY; DELIVERY AND FORM
The Certificates representing the Exchange Notes will be issued in fully
registered form, without coupons and will be deposited with, or on behalf of,
the Depositary, and registered in the name of Cede & Co., as the Depository's
nominee, in the form of a global Exchange Note certificate (the "Global
Certificate") or will remain in the custody of the Trustee.
Except as set forth below, the Global Certificate may be transferred, in
whole and not in part, only by the Depositary to its nominee to such Depositary
or another nominee of the Depositary or by the Depositary or its nominee to a
successor of the Depositary or a nominee of such successor.
The Issuers understand that the Depositary is a limited-purpose trust
company which was created to hold securities for its participating organizations
(the "Participants") and to facilitate the clearance and settlement of
transactions in such securities between Participants through electronic
book-entry changes in accounts of its Participants. Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to the
Depository's book-entry system is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("indirect
participants"). Persons who are not participants may beneficially own securities
held by the Depositary through Participants or indirect participants.
Pursuant to procedures established by the Depositary (i) upon deposit of
the Global Certificate, the Depositary will credit the accounts of Participants
with portions of the principal amount of the Global Certificate and (ii)
ownership of the Exchange Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depositary
(with respect to the interest on the Depository's participants), the
Depository's Participants and the Depository's indirect participants.
The laws of some jurisdictions require that certain persons take
physical delivery in definitive form of securities that they own. Consequently,
the ability to transfer interests in the Global Certificate will be limited to
such extent.
So long as the nominee of the Depositary is the registered owner of the
Global Certificate, such nominee will be considered the sole owner or holder of
the Exchange Notes for all purposes under the Indenture. Except as provided
below, the owners of interests in the Global Certificate will not be entitled to
have Exchange Notes registered in their names, will not receive or be entitled
to receive physical delivery of Exchange Notes in definitive form and will not
be considered the owners or holders thereof under the Indenture. As a result,
the ability of a person having a beneficial interest in Exchange Notes
represented by the Global Certificate to pledge such interest to persons or
entities that do not participate in the Depository's system or to otherwise take
actions in respect to such interest may be affected by the lack of a physical
certificate evidencing such interest.
Neither the Issuers, the Trustee nor any paying agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of interests in the Global Certificate or for
maintaining, supervising or reviewing any records relating to such interests.
Principal and interest payments on the Global Certificate registered in
the name of the Depository's nominee will be made by the Issuers or through a
paying agent to the Depository's nominee as the registered owner of the Global
Certificate. Under the terms of the Indenture, the Issuers and the Trustee will
treat the persons in whose names the Exchange Notes are registered as the owners
of such Exchange Notes for the purpose of receiving payments of principal and
interest on such Exchange Notes and for all other purposes whatsoever.
Therefore, neither the Issuers, the Trustee nor any paying agent has any direct
responsibility or liability for the payment of principal or interest on the
Exchange Notes to owners of interests in the Global Certificate. The Depositary
has advised the Issuers and the Trustee that its present practice is, upon
receipt of any payment of principal or interest, to credit immediately the
account of the Participants with payments in amounts proportionate to their
respective holdings in principal amount of interests in the Global Certificate
as shown on the records of the Depositary. Payments by Participants and indirect
participants to owners of interests in the Global Certificate will be governed
96
<PAGE>
by standing instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in
"street name," and will be the responsibility of such participants or indirect
participants.
If the Depositary is at any time unwilling or unable to continue as
depositary and a successor depositary is not appointed by the Issuers within 90
calendar days, the Issuers will issue Exchange Notes in certificated form in
exchange for the Global Certificate. In addition, the Issuers may at any time
determine not to have the Exchange Notes represented by a Global Certificate,
and, in such event, will issue Exchange Notes in certificated form in exchange
for the Global Certificate. In either instance, an owner of an interest in the
Global Certificate would be entitled to physical delivery of such Exchange Notes
in certificated form. Exchange Notes so issued in certificated form will be
issued in denominations of $1,000 and integral multiples thereof and will be
issued in registered form only.
Neither the Issuers nor the Trustee shall be liable for any delay by the
Depositary or its nominee in identifying the beneficial owners or the related
Exchange Notes, and each such person may conclusively rely on, and shall be
protected in relying on, instructions from the Depositary or its nominee for all
purposes (including with respect to the registration and delivery, and the
respective principal amounts, of the Exchange Notes to be issued).
97
<PAGE>
AVAILABLE INFORMATION
The Issuers have filed with the Commission a Registration Statement on
Form S-4 (the "Exchange Offer Registration Statement", which term shall
encompass all amendments, exhibits, annexes and schedules thereto) pursuant to
the Securities Act and the rules and regulations promulgated thereunder,
covering the Exchange Notes being offered hereby. This Prospectus does not
contain all the information set forth in the Exchange Offer Registration
Statement. For further information with respect to the Issuers and the Exchange
Offer, reference is made to the Exchange Offer Registration Statement.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the Exchange
Offer Registration Statement, reference is made to the exhibit for a more
complete description of the document or matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. The Exchange Offer
Registration Statement, including the exhibits thereto, can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional
Offices of the Commission at 7 World Trade Center, New York, New York 10048 and
at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Such material may also be accessed electronically by
means of the Commission's home page on the Internet at http://www.sec.gov.
The Company is subject to the informational reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements and other
information with the Commission. Such material filed by the Company with the
Commission may be inspected by anyone without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material may also be obtained at the Public Reference Section of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of prescribed fees. . Such material may
also be accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov. The Common Stock of the Company is quoted on The
Nasdaq National Market under the symbol "AXAS" and such reports, proxy and
information statements and other information concerning the Company are
available at the offices of The Nasdaq National Market located at 1735 K Street,
N.W., Washington, D.C. 20006.
In the event that the Company ceases to be subject to the informational
reporting requirements of the Exchange Act, the Issuers have agreed that, so
long as the Series B Notes, the Series C Notes or the Exchange Notes remain
outstanding, they will file with the Commission and distribute to holders of the
Series B Notes, Series C Notes or Exchange Notes, as applicable, copies of the
financial information that would have been contained in annual reports and
quarterly reports, including management's discussion and analysis of financial
condition and results of operations, that the Company would have been required
to file with the Commission pursuant to the Exchange Act. Such financial
information shall include annual reports containing consolidated financial
statements and notes thereto, together with an opinion thereon expressed by an
independent public accounting firm, as well as quarterly reports containing
unaudited condensed consolidated financial statements for the first three
quarters of each fiscal year. The Company will also make such reports available
to prospective purchasers of the Series B Notes, Series C Notes or Exchange
Notes, as applicable, securities analysts and broker-dealers upon their request.
In addition, the Issuers have agreed that for so long as any of the Series B
Notes, Series C Notes or Exchange Notes remain outstanding they will make
available to any prospective purchaser of the Series B Notes, Series C Notes or
Exchange Notes or beneficial owner of the Series B Notes, Series C Notes or
Exchange Notes in connection with any sale thereof the information required by
Rule 144A(d)(4) under the Securities Act, until such time as the Issuers have
either exchanged the Series B Notes, Series C Notes or Exchange Notes for
securities identical in all material respects which have been registered under
the Securities Act or until such time as the holders thereof have disposed of
such Series B Notes, Series C Notes or Exchange Notes pursuant to an effective
registration statement filed by the Issuers.
98
<PAGE>
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
Canadian Abraxas is an Alberta corporation, certain of its officers and
directors may be residents of various jurisdictions outside the United States
and its Canadian counsel, Osler, Hoskin & Harcourtt, are residents of Canada.
All or a substantial portion of the assets of Canadian Abraxas and of such
persons may be located outside the United States. As a result, it may be
difficult for investors to effect service of process within the United States
upon such persons or to enforce judgments obtained against such persons in
United States courts and predicated upon the civil liability provisions of the
Securities Act. Notwithstanding the foregoing, Canadian Abraxas has irrevocably
agreed that it may be served with process with respect to actions based on
offers and sales of securities made hereby in the United States by serving Chris
E. Williford, c/o Abraxas Petroleum Corporation, 500 North Loop 1604 East, Suite
100, San Antonio, Texas 78232, Canadian Abraxas' United States agent appointed
for that purpose. Canadian Abraxas has been advised by its Canadian counsel,
Osler, Hoskin & Harcourt, that there is doubt as to the enforceability in Canada
against Canadian Abraxas or against any of its directors, controlling persons,
officers or experts who are not residents of the United States, in original
actions for enforcement of judgments of United States courts, of liabilities
predicated solely upon United States federal securities laws.
LEGAL MATTERS
Certain legal matters related to the Notes offered hereby are being
passed upon for the Company by Cox & Smith Incorporated, San Antonio, Texas and
for Canadian Abraxas by Osler, Hoskin & Harcourt, Barristers and Solicitors,
Calgary, Alberta.
EXPERTS
The consolidated financial statements of Abraxas Petroleum Corporation
as of December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997 included in this Prospectus and the Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of CGGS Canadian Gas Gathering Systems Inc. for
the years ended October 31, 1996 and 1995 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 historical reserve information prepared by DeGolyer and MacNaughton
and McDaniel & Associates Consultants Ltd. included in this Prospectus and the
Registration Statement has been included herein in reliance upon the authority
of such firms as experts with respect to matters contained in such reserve
reports.
99
<PAGE>
GLOSSARY OF TERMS
Unless otherwise indicated in this Prospectus, natural gas volumes are
stated at the legal pressure base of the State or area in which the reserves are
located at 60 degrees Fahrenheit. Natural gas equivalents are determined using
the ratio of six Mcf of natural gas to one barrel of crude oil, condensate or
NGLs.
The following definitions shall apply to the technical terms used in
this Prospectus.
"Bbl" means barrel or barrels.
"Bblpd" means barrels per day.
"Bcf" means billion cubic feet.
"BOE" means barrel of crude oil equivalent.
"DD&A" means depletion, depreciation and amortization.
"Developed acreage" means acreage which consists of acres spaced or
assignable to productive wells.
"Development well" means a well drilled within the proved area of a
crude oil or natural gas reservoir to the depth of stratigraphic horizon (rock
layer or formation) known to be productive for the purpose of extraction of
proved crude oil or natural gas reserves.
"Dry hole" means an exploratory or development well found to be
incapable of producing either crude oil or gas in sufficient quantities to
justify completion as a crude oil or natural gas well.
"Exploratory well" means a well drilled to find and produce crude oil or
natural gas in an unproved area, to find a new reservoir in a field previously
found to be producing crude oil or natural gas in another reservoir, or to
extend a known reservoir.
"Finding cost", expressed in dollars per BOE, is calculated by dividing
the amount of total exploration and development capital expenditures (excluding
any amortization with respect to deferred financing fees) by the amount of
proved reserves added during the same period (including the effect on proved
reserves of reserve revisions).
"G&A" means general and administrative.
"Gross" natural gas and crude oil wells or "gross" wells or acres is the
number of wells or acres in which the Company has an interest.
"LOE" means lease operating expenses and production taxes.
"MBbl" means thousand barrels.
"MBOE" means thousand barrels of crude oil equivalent.
"Mcf" means thousand cubic feet.
"Mcfpd" means thousand cubic feet per day.
"MMBbls" means million barrels of crude oil.
"MMBOE" means million barrels of crude oil equivalent.
100
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"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.
101
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Abraxas Petroleum Corporation and Subsidiaries
Report of Independent Auditors F-2
Consolidated Balance Sheets at December 31,1996 and 1997 F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996, and 1997 F-5
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995, 1996, and 1997 F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 F-10
Notes to Consolidated Financial Statements F-12
Supplemental Information Relating to Oil and Gas
Producing Companies F-35
CGGS Canadian Gas Gathering Systems Inc.
Auditors' Report to the Directors F-42
Statements of Earnings (Loss) for the years ended
October 31, 1995 and 1996 F-43
Statements of Changes in Financial Position for the years
ended October 31, 1995 and 1996 F-44
Notes to Financial Statements F-45
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Abraxas Petroleum Corporation
We have audited the accompanying consolidated balance sheets of Abraxas
Petroleum Corporation and Subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Antonio, Texas
March 17, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
--------------------------
1996 1997
--------------------------
(In thousands)
<S> <C> <C>
Current assets:
Cash ................................. $ 8,290 $ 2,836
Accounts receivable, less allowance
for doubtful accounts:
Joint owners ...................... 1,601 2,149
Oil and gas production sales ...... 11,400 11,194
Affiliates, officers, and
stockholders ..................... 94 42
Other ............................. 1,289 1,217
------------- -----------
14,384 14,602
Equipment inventory .................. 451 367
Other current assets ................. 187 508
------------- -----------
Total current assets ................ 23,312 18,313
Property and equipment.................. 310,043 385,442
Less accumulated depreciation, 38,653 74,597
depletion, and amortization ..........
------------- -----------
Net property and equipment based on
the full cost method of accounting
for oil and gas properties of which
$37,268 and $11,519 at December 31,
1996 and 1997, respectively, were
excluded from amortization ......... 271,390 310,845
Deferred financing fees, net of
accumulated amortization of $280 and
$1,540 at December 31, 1996 and 1997,
respectively ......................... 9,335 8,072
Restricted cash ........................ 90 40
Other assets ........................... 715 1,258
============= ==========
Total assets ......................... $ 304,842 $ 338,528
============= ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31
--------------------------
1996 1997
--------------------------
(In thousands)
<S> <C> <C>
Current liabilities:
Accounts payable ....................... $ 9,960 $ 17,120
Oil and gas production payable ......... 2,378 2,819
Accrued interest ....................... 3,206 4,622
Income taxes payable ................... 145 164
Other accrued expenses ................. 1,132 2,732
Payable to affiliates .................. 58 -
------------- -----------
Total current liabilities ............. 16,879 27,457
Long-term debt:
Senior notes ........................... 215,000 215,000
Credit facility ........................ - 31,500
Other................................... 32 2,117
------------- -----------
215,032 248,617
Other long-term obligations .............. 87 -
Deferred income taxes .................... 32,928 27,751
Minority interest in foreign subsidiary .. 2,157 4,813
Future site restoration ................. 2,103 3,077
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock 8%,
authorized 1,000,000 shares; issued and
outstanding 45,741 and -0- shares at
December 31, 1996 and 1997, respectively - -
Common stock, par value $.01 per
share - authorized 50,000,000
shares; issued 5,806,812 and
6,422,540 shares at December 31,
1996 and 1997, respectively ......... 58 63
Additional paid-in capital ............. 50,926 51,118
Accumulated deficit .................... (12,517) (19,185)
Treasury stock, at cost, 74,711 and
53,023 shares at December 31, 1996 and
1997, respectively .................... (405) (281)
Accumulated other comprehensive income
(loss) ................................ (2,406) (4,902)
------------- -----------
Total stockholders' equity ............... 35,656 26,813
------------- -----------
Total liabilities and stockholders'
equity .............................. $ 304,842 $ 338,528
============= ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
----------------------------------------
1995 1996 1997
------------- --------------------------
(In thousands except per share data)
<S> <C> <C> <C>
Revenue:
Oil and gas production
revenues ................. $ 13,660 $ 25,749 $ 65,826
Gas processing revenues ... - 600 3,568
Rig revenues .............. 108 139 334
Other .................... 49 165 1,203
----------- ----------- -----------
13,817 26,653 70,931
Operating costs and expenses:
Lease operating and
production taxes ......... 4,333 5,858 14,881
Gas processing costs ...... - 262 1,252
Depreciation, depletion, and
amortization ............. 5,434 9,605 30,581
Rig operations ............ 125 169 296
Proved property impairment - - 4,600
General and administrative 1,042 1,933 4,171
----------- ----------- -----------
10,934 17,827 55,781
----------- ----------- -----------
Operating income............. 2,883 8,826 15,150
Other (income) expense:
Interest income ........... (34) (254) (320)
Amortization of deferred
financing fee ............ 214 280 1,260
Interest expense .......... 3,911 6,241 24,620
Other expense (income)..... - 373 (369)
----------- ----------- -----------
4,091 6,640 25,191
----------- ----------- -----------
Income (loss) before taxes and
extraordinary item ........ (1,208) 2,186 (10,041)
Income tax expense (benefit):
Current ................... - 176 244
Deferred .................. - - (4,135)
Minority interest in income of
consolidated foreign
subsidiary ................ - 70 335
----------- ----------- -----------
Income (loss) before
extraordinary item ........ (1,208) 1,940 (6,485)
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Year Ended December 31
----------------------------------------
1995 1996 1997
------------- --------------------------
(In thousands except per share data)
<S> <C> <C> <C>
Extraordinary item:
Debt extinguishment costs $ - $ (427) $ -
----------- ----------- -----------
Net income (loss) ......... (1,208) 1,513 (6,485)
Less dividend requirement
on cumulative preferred
stock ................... (366) (366) (183)
----------- ----------- -----------
Net income (loss)
applicable to common
stock ................... $ (1,574) $ 1,147 $ (6,668)
=========== =========== ===========
Earnings (loss) per common share:
Income (loss) before
extraordinary item .... $ (.34) $ .27 $ (1.11)
Extraordinary item ...... - (.07) -
----------- ----------- -----------
Net income (loss) per
common share ............. $ (.34) $ .20 $ (1.11)
=========== =========== ===========
Earnings (loss) per common
share - assuming dilution:
Income (loss) before
extraordinary item .... $ (.34) $ .23 $ (1.11)
Extraordinary item ...... - (.06) -
----------- ----------- -----------
Net income (loss) per
common share - assuming
dilution ................. $ (.34) $ .17 $ (1.11)
=========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands except share amounts)
Accumulated
Convertible Other
Preferred Stock Common Stock Treasury Stock Additional Comprehensive
---------------- ---------------- ---------------- Paid-In Accumulated Income
Shares Amount Shares Amount Shares Amount Capital Deficit (Loss) Total
----------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1994 45,741 $ 4,573 4,461,890 $ 45 - $ - $36,217 $(12,090) $ (244) $28,501
Comprehensive
income (loss):
Net loss ....... - - - - - - - (1,208) - (1,208)
----------
Comprehensive
income (loss) (1,208)
Issuance of
common stock
for
compensation .. - - 7,872 - - - 74 - - 74
Issuance of
common stock .. - - 1,330,000 13 - - 10,050 - - 10,063
Treasury stock
purchased, net - - - - 2,571 (1) - - - (1)
Changes in
preferred
stock par
value ......... - (4,573) - - - - 4,573 - - -
Dividend on
preferred
stock ......... - - - - - - - (366) - (366)
----------------------------------------------------------- -----------------------------------
Balance at
December 31, 1995 45,741 - 5,799,762 58 2,571 (1) 50,914 (13,664) $ (244) 37,063
Comprehensive
income (loss):
Net income ..... - - - - - - - 1,513 - 1,513
Other
comprehensive
income:
Change in
unrealized
holding loss
on
securities .. - - - - - - - - 244 244
Foreign
currency
translation
adjustment .. - - - - - - - - (2,406) (2,406)
----------
Comprehensive (649)
income (loss)
Issuance of
common stock
for
compensation .. - - 5,050 - (2,500) 1 41 - - 42
Expenses paid
related to
private
placement
offering ...... - - - - - - (42) - - (42)
Options
exercised ..... - - 2,000 - - - 13 - - 13
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
(In thousands except share amounts)
Accumulated
Convertible Other
Preferred Stock Common Stock Treasury Stock Additional Comprehensive
---------------- ---------------- ---------------- Paid-In Accumulated Income
Shares Amount Shares Amount Shares Amount Capital Deficit (Loss) Total
----------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Treasury stock
purchased ..... - - - - 74,640 (405) - - - (405)
purchased .....
Dividend on
preferred
stock ......... - - - - - - - (366) - (366)
-----------------------------------------------------------------------------------------------
Balance at
December 31, 1996 45,741 - 5,806,812 58 74,711 (405) 50,926 (12,517) (2,406) 35,656
Comprehensive
income (loss):
Net loss ....... - - - - - - - (6,485) - (6,485)
Other
comprehensive
income:
Foreign
currency
translation
adjustment .. - - - - - - - - (2,496) (2,496)
----------
Comprehensive
income (loss).. (8,981)
Issuance of
common stock
for
compensation .. - $ - 7,735 $ - (21,688) $ 124 $ 186 $ $ - $ 310
Conversion of
preferred
stock into
common stock .. (45,741) - 508,183 5 - - (5) - - -
Options
exercised ..... - - 2,000 - - - 11 - - 11
Dividend on
preferred
stock ......... - - - - - - - (183) - (183)
Warrants
exercised ..... - - 97,810 - - - - - - -
exercised .....
------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 - $ - 6,422,540 $ 63 53,023 $ (281) 51,118 $(19,185) $(4,902) $26,813
================================================================================================
</TABLE>
See accompanying notes.
F-8
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
-----------------------------------------
1995 1996 1997
------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Operating Activities
Net income (loss) ............................. $ (1,208) $ 1,513 $ (6,485)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Minority interest in
income of foreign
subsidiary ............................... -- 70 335
Depreciation, depletion,
and amortization ......................... 5,434 9,605 30,581
Proved property impairment ................. -- -- 4,600
Deferred income tax benefit ................ -- -- (4,135)
Amortization of deferred
financing fees ........................... 214 280 1,260
Issuance of common stock
for compensation ......................... 74 42 310
Loss on marketable
securities ............................... -- 235 --
Net loss from debt
restructurings ........................... -- 427 --
Changes in operating assets and liabilities:
Accounts receivable ..................... (807) (6,013) (444)
Equipment inventory ..................... (29) (82) 76
Other assets ............................ 2 (133) (325)
Accounts payable and
accrued expenses ...................... (79) 7,009 10,402
Oil and gas production
payable ............................... 919 591 466
--------- --------- ---------
Net cash provided by .......................... 4,520 13,544 36,641
operating activities
Investing Activities
Capital expenditures,
including purchases
and development of
properties .................................. (12,330) (87,793) (84,111)
Payment for purchase of CGGS,
net of cash acquired ........................ -- (85,362) --
Proceeds from sale of oil
and gas properties and equipment
inventory ................................... 2,556 242 9,606
Purchase of interest in real
estate partnership .......................... (311) -- --
Proceeds from sale of
marketable securities ....................... -- 335 --
--------- --------- ---------
Net cash used in investing
activities .................................. (10,085) (172,578) (74,505)
</TABLE>
F-9
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year Ended December 31
----------------------------------------
1995 1996 1997
----------------------------------------
(In thousands)
<S> <C> <C> <C>
Financing Activities
Preferred stock dividends ........................ $ (366) $ (366) $ (183)
Issuance of common stock, net
of expenses .................................... 10,063 (29) 11
Purchase of treasury stock, net .................. (1) (405) --
Proceeds from long-term borrowings ............... 5,950 305,400 33,620
Payments on long-term borrowing .................. (5,646) (131,969) --
Deferred financing fees .......................... (186) (9,688) (123)
Other ............................................ -- 87 --
---------- ----------- -----------
Net cash provided by
financing activities ........................... 9,814 163,030 33,325
Effect of exchange rate
changes on cash ................................ -- -- (965)
---------- ----------- -----------
Increase (decrease) in cash ...................... 4,249 3,996 (5,504)
Cash at beginning of year ........................ 135 4,384 8,380
---------- ----------- -----------
Cash at end of year,
including restricted cash ...................... $ 4,384 $ 8,380 $ 2,876
========== =========== ===========
Supplemental Disclosures
Supplemental disclosures of cash flow information:
Interest paid ................................. $ 3,884 $ 3,863 $ 24,170
========== =========== ===========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
During 1996, the Company purchased all of the capital stock of CGGS Canadian
Gas Gathering Systems, Inc. for $85,362,000, net of cash acquired. In
conjunction with the acquisition, liabilities assumed were as follows (in
thousands):
Fair value of assets acquired ....................... $ 123,970
Cash paid for the capital stock ..................... (85,362)
-------------
Liabilities assumed ................................. $ 38,608
=============
During 1997, the Company's subsidiary, Cascade Oil & Gas Ltd. acquired
certain crude oil and gas producing properties through the issuance of its
common shares and special warrants valued at approximately$3,700,000.
See accompanying notes.
F-10
<PAGE>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996, and 1997
1. Organization and Significant Accounting Policies
Nature of Operations
Abraxas Petroleum Corporation (the Company or Abraxas) is an independent
energy company engaged in the exploration for and the acquisition, development,
and production of crude oil and natural gas primarily along the Texas Gulf
Coast, in the Permian Basin of western Texas, and in Canada and Wyoming, and the
processing of natural gas primarily in Canada. The consolidated financial
statements include the accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Management
believes that it is reasonably possible that estimates of proved crude oil and
natural gas revenues could significantly change in the future.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to credit risk
consist principally of trade receivables, interest rate and crude oil and
natural gas price swap agreements. Accounts receivable are generally from
companies with significant oil and gas marketing activities. The Company
performs ongoing credit evaluations and, generally, requires no collateral from
its customers. For further information regarding the Company's swap
arrangements, see Notes 4 and 15.
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, excluding
unevaluated, unproved properties, are based on the unit-of-production method
based on proved reserves. Net capitalized costs of crude oil and natural gas
properties, less related deferred taxes, are limited, by country, to the lower
of unamortized cost or the cost ceiling, defined as the sum of the present value
of estimated 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. Excess costs are
charged to proved property impairment expense. No gain or loss is recognized
upon sale or disposition of crude oil and natural gas properties, except in
unusual circumstances.
F-11
<PAGE>
Unevaluated properties not currently being amortized included in oil and
gas properties were approximately $37,268,000 and $11,519,000 at December 31,
1996 and 1997, 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, 1997 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 processing facilities and other property and equipment is
provided over the estimated useful lives using the straight-line method. Major
renewals and betterments are recorded as additions to the property and equipment
accounts. Repairs that do not improve or extend the useful lives of assets are
expensed.
Hedging
The Company periodically enters into derivative contracts to hedge the
risk of future crude oil and natural gas fluctuations. Such contracts may either
fix or support crude oil and natural gas prices or limit the impact of price
fluctuations with respect to the Company's sales of crude oil and natural gas.
Gains and losses on such hedging activities are recognized in oil and gas
production revenues when hedged production is sold.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," 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 6).
Foreign Currency Translation
The functional currency for the Company's Canadian operations is the
Canadian dollar. The Company translates the functional currency into U.S.
dollars based on the current exchange rate at the end of the period for the
balance sheet and a weighted average rate for the period on the statement of
operations. Translation adjustments are reflected as Accumulated Other
Comprehensive Income in Stockholders' Equity.
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.
F-12
<PAGE>
Restoration, Removal and Environmental Liabilities
The estimated costs of restoration and removal of major processing
facilities are accrued on a straight-line basis over the life of the property.
The estimated future costs for known environmental remediation requirements are
accrued when it is probable that a liability has been incurred and the amount of
remediation costs can be reasonably estimated. These amounts are the
undiscounted, future estimated costs under existing regulatory requirements and
using existing technology.
Revenue Recognition
The Company recognizes crude oil and natural gas revenue from its interest
in producing wells as crude oil and natural gas is sold from those wells net of
royalties. Revenue from the processing of natural gas is recognized in the
period the service is performed.
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.
Earnings per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Earnings per share amounts
for all periods have been restated to conform to the requirements of Statement
128.
Comprehensive Income
During 1997, the Company adopted Statement No. 130, Reporting
Comprehensive Income. Statement No. 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or stockholders'
equity. Statement No. 130 requires unrealized gains or losses on the Company's
available-for-sale securities and the foreign currency translation adjustments,
which prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of Statement No. 130.
Impact of Statement of Financial Accounting Standards No. 131
Also in June 1997, the Financial Accounting Standards Board issued
Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information. Statement No. 131 establishes standards for the reporting of
financial information from operating segments in annual and interim financial
statements. This Statement requires that financial information be reported on
the basis that it is reported internally for evaluating segment performance and
deciding how to allocate resources to segments. Statement No. 131 will become
effective in 1998.
F-13
<PAGE>
Reclassifications
Certain balances for 1995 and 1996 have been reclassified for comparative
purposes.
2. Acquisitions and Divestitures
Pacalta Properties Acquisition
In October 1997, Canadian Abraxas Petroleum Limited (Canadian Abraxas), a
wholly owned subsidiary of the Company, and Cascade Oil and Gas Ltd. (Cascade)
completed the acquisition of the Canadian assets of Pacalta Resources Ltd.
(Pacalta Properties) for approximately $14,000,000 (CDN$20,000,000) in cash and
four million Cascade special warrants valued at approximately $1,375,000.
Canadian Abraxas acquired an approximate 92% interest in the Pacalta Properties,
and Cascade acquired an approximate 8% interest. Cascade has the opportunity to
acquire the Canadian Abraxas' ownership upon arranging satisfactory financing in
the future. The Cascade special warrants are exchangeable into an equal number
of Cascade common shares.
The acquisition was accounted for as a purchase, and the purchase price
was allocated to the crude oil and natural gas properties based on the fair
values of the properties acquired. The transaction was financed through an
advance from the Company with funds which were obtained through borrowings under
the Company's Credit Facility. Revenues and expenses from the Pacalta Properties
have been included in the consolidated financial statements since October 1997.
Pennant Acquisition
In September 1997, Cascade acquired all the common shares if Pennant
Petroleum Ltd. in exchange for the issuance of 7,585,000 common shares of
Cascade valued at approximately $2,278,000. The acquisition was accounted for as
a purchase and the purchase price was allocated to the crude oil and natural gas
properties based on the fair values of the properties acquired. Revenues and
expenses from Pennant have been included in the consolidated financial
statements since October 1997.
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 4. 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 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 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 4.
Revenues and expenses from Canadian Abraxas have been included in the
consolidated financial statements since November 14, 1996.
F-14
<PAGE>
Grey Wolf Acquisition
In January 1996, the Company made a $3,000,000 investment in Grey Wolf
Exploration Ltd. (Grey Wolf), a privately-held Canadian corporation, which, in
turn, invested these proceeds in newly-issued shares of Cascade, an Alberta,
Canada corporation whose common shares are traded on The Alberta Stock Exchange.
The acquisition was accounted for as a purchase and the purchase price was
allocated to the assets and liabilities based on the fair values. Revenues and
expenses have been included in the consolidated financial statements since
January 1996. During 1997, Cascade acquired 100% of the common stock of Grey
Wolf in exchange for the issuance of additional Cascade common shares to the
Grey Wolf shareholders and the cancellation of the common shares of Cascade held
by Grey Wolf. This transaction resulted in the share ownership of Cascade
previously held by Grey Wolf being passed to the Grey Wolf shareholders, and
Grey Wolf was merged into Cascade.
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.
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 15).
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 4. 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
F-15
<PAGE>
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 4. 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. Revenues and expenses have been included in the
consolidated financial statement 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.
The condensed pro forma financial information for the periods presented
below summarize on an unaudited pro forma basis approximate results of the
Company's consolidated operations for the years ended December 31, 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. The pro forma information does not
necessarily represent what the actual consolidated results would have been for
these periods and is not intended to be indicative of future results.
December 31
-------------------------
1995 1996
------------------------
(In thousands except
per share data)
(Unaudited)
Revenues ............................... $ 46,132 $60,077
========= =========
Income (loss) before extraordinary item $(16,430) $(6,665)
========= =========
Net income (loss) ...................... $(16,430) $(7,092)
========= =========
Income (loss) per common share:
Before extraordinary item ............ $ (3.54) $ (.98)
Net income (loss) .................... $ (3.54) $ (1.04)
Divestiture
In July 1995, the Company sold its C.S. Dean Unit for approximately
$2,550,000. In January 1997, the Company sold its interest in its crude oil and
natural gas processing properties in the Hoole area in Alberta, Canada for net
proceeds of approximately $8,700,000 which was credited to the Canadian full
cost pool.
F-16
<PAGE>
3. Property and Equipment
The major components of property and equipment, at cost, are as follows:
Estimated
Useful 1996 1997
Life
----------- ----------- -----------
Years (In thousands)
Land, buildings, and improvements 15 $ 269 $ 291
Crude oil and natural gas
properties .................... - 268,358 344,199
Natural gas processing plants ... 18 40,100 39,113
Equipment and other ............. 7 1,316 1,839
---------- -----------
$310,043 $385,442
========== ===========
4. Long-Term Debt
Long-term debt consists of the following:
December 31
1996 1997
----------- -----------
(In thousands)
11.5% Senior Notes due 2004, Series B (see
below). ............................... $215,000 $215,000
Credit facility due to Bankers Trust
Company, ING
Capital and Union Bank of California (see
below). ............................... - 31,500
Credit facility due to a Canadian bank,
providing for borrowings to
approximately $2,800,000 at the
bank's prime rate plus .25%, 5.5% at
December 31, 1997..................... - 2,096
Other ................................... 32 21
----------- -----------
215,032 248,617
Less current maturities ................. - -
----------- -----------
$215,032 $248,617
=========== ===========
On November 14, 1996, the Company and Canadian Abraxas completed the sale
of $215,000,000 aggregate principal amount of Senior Notes due November 1, 2004
(Notes). In January 1997, the Notes were exchanged for Series B Notes, which
have been registered under the Securities Act of 1933 (Series B Notes). The form
and terms of the Series B Notes are the same as the Notes issued on November 14,
1996. Interest at 11.5% is payable semi-annually in arrears on May 1 and
November 1 of each year, commencing on May 1, 1997. The Series B Notes are
general unsecured obligations of the Company and Canadian Abraxas and rank pari
passu in right of payment to all future subordinated indebtedness of the Company
and Canadian Abraxas. The Series B Notes are, however, effectively subordinated
in right of payment to all existing and future secured indebtedness to the
extent of the value of the assets securing such indebtedness. The Company and
Canadian Abraxas are joint and several obligors on the Series B Notes. The
Series B Notes are redeemable, in whole or in part, at the option of the Company
and Canadian Abraxas on or after November 1, 2000, at the redemption price of
105.75% through October 31, 2001, 102.87% through October 31, 2002 and 100.00%
thereafter plus accrued interest. In addition, any time on or prior to November
1, 1999, the Company and Canadian Abraxas may redeem up to 35% of the aggregate
principal amount of the Series B Notes originally issued with the cash proceeds
of one or more equity offerings at a redemption price of 111.5% of the aggregate
principal amount of the Series B Notes to be redeemed plus accrued interest,
provided, however, that after giving effect to such redemption, at least
$139,750,000 aggregate principal amount of Series B Notes remains outstanding.
The Series B Notes were issued under the terms of an Indenture dated November
14, 1996 that contains, among others, certain covenants which generally limit
the ability of the Company to incur additional indebtedness other than specific
F-17
<PAGE>
indebtedness permitted under the Indenture, including the Credit Facility
discussed below, provided however, if no event of default is continuing, the
Company may incur indebtedness if after giving pro forma effect to the
incurrence of such debt both the Company's consolidated earnings before
interest, taxes, depletion and amortization (EBITDA) coverage ratio would be
greater than 2.25 to 1.0 if prior to November 1, 1997, and at least equal to 2.5
to 1.0 thereafter, and the Company's adjusted consolidated net tangible assets,
as defined, are greater than 150% of the aggregate consolidated indebtedness of
the Company or the Company's adjusted consolidated net tangible assets are
greater than 200% of the aggregate consolidated indebtedness of the Company. The
Indenture also contains other covenants affecting the Company's ability to pay
dividends on its common stock, sell assets and incur liens.
On September 30, 1996, the Company entered into a credit facility with
Bankers Trust Company (BTCo) and ING Capital (together the Lenders), providing a
bridge facility in the total amount of $90,000,000 and borrowed $85,000,000
which was used to repay all amounts due under its previous credit agreement and
to finance the purchase of the Wyoming Properties.
On November 14, 1996, the Company repaid all amounts outstanding under the
bridge facility with proceeds from the offering of $215,000,000 of Notes
described above and entered into an amended and restated credit agreement
(Credit Facility) with the Lenders and Union Bank of California. On October 14,
1997, the Company amended the Credit Facility to provide for a revolving line of
credit with an availability of $40,000,000, subject to a borrowing base
condition. At December 31, 1996 and 1997, $-0- and $31,500,000 were outstanding
under the Credit Facility.
Commitments available under the Credit Facility are subject to borrowing
base redeterminations to be performed semi-annually and, at the option of each
of the Company and the Lenders, one additional time per year. Amounts due under
the Credit Facility will be secured by the Company's oil and gas properties and
plants. Any outstanding principal balance in excess of the borrowing base will
be due and payable in three equal monthly payments after a borrowing base
redetermination. The borrowing base will be determined in the agent's sole
discretion, subject to the approval of the Lenders, based on the value of the
Company's reserves as set forth in the reserve report of the Company's
independent petroleum engineers, with consideration given to other assets and
liabilities.
The Credit Facility has an initial revolving term of two years and a
reducing period of three years from the end of the initial two-year period. The
commitment under the Credit Facility will be reduced during such reducing period
by eleven equal quarterly reductions. Quarterly reductions will equal 8.2% per
quarter with the remainder due at the end of the three-year reducing period.
The applicable interest rate charged on the outstanding balance of the
Credit Facility is based on a facility usage grid. If the borrowings under the
Credit Facility represent an amount less than or equal to 33.3% of the available
borrowing base, then the applicable interest rate charged on the outstanding
balance will be either (a) an adjusted rate of the London Inter-Bank Offered
Rate ("LIBOR") plus 1.25% or (b) the prime rate of the agent (which is based on
the agent's published prime rate) plus 0.50%. If the borrowings under the Credit
Facility represent an amount greater than or equal to 33.3% but less than 66.7%
of the available borrowing base, then the applicable interest rate on the
outstanding principal will be either (a) LIBOR plus 1.75% or (b) the prime rate
of the agent plus 0.50%. If the borrowings under the Credit Facility represent
an amount greater than or equal to 66.7% of the available borrowing base, then
the applicable interest rate on the outstanding principal will be either (a)
LIBOR plus 2.00% or (b) the prime rate of the agent plus 0.50%. LIBOR elections
can be made for periods of one, three or six months. The interest rate at
December 31, 1997 was 7.80%.
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
F-18
<PAGE>
Facility the Company is required to comply with specified financial ratios and
tests, including minimum debt service coverage ratios, maximum funded debt to
EBITDA tests, minimum net worth tests and minimum working capital tests. The
Company is obligated to pay the Lenders on a quarterly basis a commitment fee of
0.50% per annum on the average unused portion of the commitment in effect from
time to time. The Credit Facility contains customary events of default,
including nonpayment of principal, interest or fees, violation of covenants,
inaccuracy of representations or warranties in any material respect, cross
default and cross acceleration to certain other indebtedness, bankruptcy,
material judgments and liabilities and change of control. As of December 31,
1997, the Company was not in compliance with the working capital and capital
expenditures requirements under the Credit Facility. The Company has received a
waiver of these requirements through March 31, 1998. Under the provisions of the
Credit Facility, the Company is required to maintain working capital (as defined
in the agreement) of at least 1.00 to 1.00. At December 31, 1997 the Company's
working capital was less than the required amount, however, subsequent to
December 31, 1997 the Company repaid all outstanding amounts under the Credit
Facility except $100,000, which management believes will restore its working
capital ratio to the required amount. Accordingly, amounts payable under the
Credit Facility are classified as long-term in the accompanying balance sheet.
Should crude oil prices continue to decline, a further write-down of the
Company's oil and gas properties may be required (see Note 16). If such a
write-down were large enough, it could result in a default in the net worth
requirement under the Credit Facility.
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, 1997, the fair value of this Swap, as determined by
BTCo was approximately $64,000 and has been recorded as interest expense at
December 31, 1997. 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 January 1998, the Company and Canadian Abraxas completed the sale of
$60,000,000 aggregate principal amount of 11.5% Senior Notes due 2004, Series C
(Series C Notes). The Series C Notes are general unsecured obligations of the
Company and Canadian Abraxas and rank pari passu in right to all existing and
future indebtedness of the Company and Canadian Abraxas and on parity with the
Series B Notes and senior in right of payment to all future subordinated
indebtedness of the Company and Canadian Abraxas. The Series C Senior Notes
carry similar redemption provisions to the Series B Notes and are subject to the
terms of the Indenture dated January 27, 1998 which is substantially similar to
the Indenture governing the Series B Notes. The Company and Canadian Abraxas
sold the Series C Notes at a premium of $4,050,000 which will be amortized over
the life of the Series C Notes resulting in an effective rate of interest of
10.5%. The net proceeds, after deducting estimated offering costs, were
$62,750,000, $33,400,000 of which was used to repay outstanding indebtedness
under the Credit Facility, except for $100,000 which remained outstanding with
the remainder used for general corporate purposes.
The Company's principal source of funds to meet debt service and capital
requirements is net cash flow provided by operating activities, which is
sensitive to the prices the Company receives for its crude oil and natural gas.
The Company periodically enters into hedge agreements to reduce its exposure to
price risk in the spot market for natural gas. However, a substantial portion of
the Company's production will remain subject to such price risk. Additionally,
significant capital expenditures are required for drilling and development, and
other equipment additions. The Company believes that cash provided by operating
activities and other financing sources, including, if necessary, the sale of
certain assets and additional long-term debt, will provide adequate liquidity
for the Company's operations, including its capital expenditure program, for the
next twelve months. No assurance, however, can be given that the Company's cash
flow from operating activities will be sufficient to meet planned capital
expenditures and debt service in the future. Should the Company be unable to
generate sufficient cash flow from operating activities to meet its obligations
and make planned capital expenditures, the Company could be forced to reduce
such expenditures, sell assets or be required to refinance all or a portion of
its existing debt or to obtain additional financing. There can be no assurance
that such refinancing would be possible or that any additional financing could
be obtained.
F-19
<PAGE>
During 1996 and 1997, the Company capitalized $465,000 and $966,000 of
interest expense, respectively.
The fair value of the Notes was approximately $236,500,000 as of December
31, 1997. The fair values of the credit facilities approximate their carrying
values as of December 31, 1997. The Company has approximately $1,800,000 of
standby letters of credit and a $30,000 performance bond open at December 31,
1997. Approximately $40,000 of cash is restricted and in escrow related to
certain of the letters of credit and bond.
5. Stockholders' 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 Stockholders' Rights Plan and
declared a dividend of one Common Stock Purchase Right (Rights) for each share
of common stock. The Rights are not initially exercisable. Subject to the Board
of Directors' option to extend the period, the Rights will become exercisable
and will detach from the common stock ten days after any person has become a
beneficial owner of 20% or more of the common stock of the Company or has made a
tender offer or exchange offer (other than certain qualifying offers) for 20% or
more of the common stock of the Company.
Once the Rights become exercisable, each Right entitles the holder, other
than the acquiring person, to purchase for $20 one-half of one share of common
stock of the Company having a value of four times the purchase price. The
Company may redeem the Rights at any time for $.01 per Right prior to a
specified period of time after a tender or exchange offer. The Rights will
expire in November 2004, unless earlier exchanged or redeemed.
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.
Contingent Value Rights
The CVRs were issued under the CVR Agreement between the Company, the
purchasers, and a rights agent. 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.
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.
F-20
<PAGE>
On June 20, 1997, the CVRs expired with no issuance of additional shares
under the CVR Agreement.
Convertible Preferred Stock
In June 1994, in connection with an acquisition, 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 each of
1995 and 1996 amounted to $366,000 and, during 1997, amounted to $183,000.
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. 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. 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 stockholders.
Treasury Stock
In March 1996, the Board of Directors authorized the purchase in the open
market of up to 500,000 shares of the Company's outstanding common stock, the
aggregate purchase price not to exceed $3,500,000.
During the year ended December 31, 1996, the Company purchased 74,640
shares of its common stock at a cost of $405,000, which were recorded as
treasury stock. No shares were purchased during 1997.
6. 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 1,395,000
shares of the Company's common stock. All options granted have ten year terms
and vest and become fully exercisable over four years of continued service at
25% on each anniversary date. At December 31, 1997, approximately 467,000
options remain available for grant.
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, 1996, and 1997, respectively: risk-free interest rates of
6.25%, dividend yields of -0-%; volatility factors of the expected market price
of the Company's common stock of .383, .383 and .529, respectively; and a
weighted-average expected life of the option of six years.
F-21
<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 1997
--------------------------------
(In thousands)
Pro forma net income (loss) ......... $(1,286) $ 1,250 $(7,325)
Pro forma net income (loss) per
common share ...................... $ (.36) $ .15 $ (1.25)
Pro forma net income (loss) per
common share - assuming dilution .. $ (.36) $ .13 $ (1.25)
A summary of the Company's stock option activity, and related information
for the years ended December 31, follows:
1995 1996 1997
--------------------- -------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(000s) Price (000s) Price(1) (000s) Price
------- ------------- -------------------- -------------------
Outstanding-beginning
of year ........ 103 $ 7.93 219 $ 6.71 (1) 551 $ 6.63
Granted .......... 158 9.50 358 6.58 285 11.26
Exercised ........ - - (2) 6.75 (2) 5.50
Forfeited ........ (42) 9.86 (24) 9.21 - -
------- ------- -------
Outstanding-end
of year ........ 219 $ 8.69 551 $ 6.63 834 $ 8.27
======= ======= =======
Exercisable at
end of year .... 53 $ 8.06 93 $ 6.65 222 $ 6.66
======= ======= =======
Weighted-average
fair value of
options granted
during the year $ 2.85 $ 3.46 $ 8.00
Exercise prices for options outstanding as of December 31, 1997 ranged
from $5.00 to $13.62. The weighted-average remaining contractual life of those
options is 8.4 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.
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, 1996, and 1997,
the Company made direct awards of common stock of 4,800 shares, 1,000 shares and
14,748 shares, respectively, at weighted average fair values of $9.40, $5.00 and
$10.75 per share, respectively.
F-22
<PAGE>
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, 1996, and 1997, the Company made direct awards of common stock of 3,072
shares, 4,050 shares and 7,235 shares, respectively, at weighted average fair
values of $9.40, $6.25 and $9.87 per share, respectively.
During 1996, the Company's stockholders approved the Abraxas Petroleum
Corporation Director Stock Option Plan (Plan), which authorizes the grant of
nonstatutory options to acquire an aggregate of 104,000 common shares to those
persons who are directors and not officers of the Company. During 1996, each of
the seven eligible directors was granted an option to purchase 8,000 common
shares at $6.75. These options are included in the above table. No options were
granted during 1997.
Stock Warrants
In connection with an amendment to one of the Company's previous credit
agreements, the Company granted stock warrants to the lender covering 424,000
shares of its common stock at an average price of $9.79 a share. The warrants
are exercisable in whole or in part through December 1999 and are
nontransferable without the consent of the Company. During 1997, the lender
exercised 212,000 of its warrants on a cashless basis and was issued 97,810
shares of the Company's common stock.
Additionally, warrants to purchase 13,500 shares of the Company's common
stock at $7.00 per share remain outstanding from previous grants.
At December 31, 1997, the Company has approximately 4,700,000 shares
reserved for future issuance for conversion of its stock options, warrants,
Rights, and incentive plans for the Company's directors and employees.
7. 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
--------------------
1996 1997
--------------------
(In thousands)
Deferred tax liabilities:
Full cost pool, including intangible
drilling costs ................................. $34,298 $31,128
State taxes ..................................... 187 67
Other ........................................... 61 103
--------------------
Total deferred tax liabilities .................... 34,546 31,298
Deferred tax assets:
Depletion ....................................... 431 930
Net operating losses ............................ 6,831 8,520
Other ........................................... 12 12
--------------------
Total deferred tax assets ......................... 7,274 9,462
Valuation allowance for deferred tax assets ....... (5,656) (5,915)
--------------------
Net deferred tax assets ........................... 1,618 3,547
--------------------
Net deferred tax liabilities ...................... $32,928 $27,751
====================
F-23
<PAGE>
Significant components of the provision (benefit) for income taxes are as
follows:
1996 1997
-------------------
Current:
Federal ...................................... $ - $ -
State ........................................ - -
Foreign ...................................... 176 244
-------------------
$176 $ 244
===================
Deferred:
Federal ...................................... $ - $ -
State ........................................ - -
Foreign ...................................... - (4,135)
-------------------
$ - $(4,135)
===================
At December 31, 1997, the Company had, subject to the limitations
discussed below, $25,059,000 of net operating loss carryforwards for U.S. tax
purposes, of which it is estimated a maximum of $22,353,000 may be utilized
before it expires. These loss carryforwards will expire from 2002 through 2010
if not utilized. At December 31, 1997, the Company had approximately $2,943,000
of net operating loss carryforwards for Canadian tax purposes of which $830,000
will expire in 2003 and $2,113,000 will expire in 2004.
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.
As a result of the issuance of additional shares of common stock for
acquisitions and sales of common stock, an additional ownership change under
Section 382 occurred in October 1993. Accordingly, it is expected that the use
of all U.S. net operating loss carryforwards generated through October 1993
(including those subject to the 1991 and 1992 ownership changes discussed above)
of $8,224,000 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 $5,915,000 for deferred tax assets at
December 31, 1996 and 1997, respectively.
F-24
<PAGE>
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:
December 31
--------------------------------------------
1995 1996 1997
-------------- -------------- --------------
(In thousands)
Tax (expense) benefit
at U.S. statutory
rates (34%) .......... $ 411 $ (743) $ 3,414
(Increase) decrease in
deferred tax asset
valuation allowance .. (174) (1) (259)
Higher effective rate
of foreign operations - (49) (244)
Percentage depletion ... - 189 499
Other .................. (237) 428 481
-------------- -------------- --------------
$ - $ (176) $ 3,891
============== ============== ==============
8. Related Party Transactions
Accounts receivable from affiliates, officers, and stockholders represent
amounts receivable relating to joint interest billings on properties which the
Company operates and advances made to officers.
In connection with a note payable to the Company's President, principal
and interest payments amounted to $355,000 in the year ended December 31, 1995.
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, $101,000
and $330,000 for use of the plane during 1995, 1996 and 1997, 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.
In January 1996, Grey Wolf purchased newly issued shares of Cascade
representing 66 2/3% of Cascade's capital stock. As described in Note 2, in 1997
Grey Wolf merged with Cascade. At December 31, 1997, the Company owns
approximately 46% of Cascade. The Company's President as well as certain
directors directly own approximately 5% of Cascade. Additionally the Company's
President owns options to purchase up to 800,000 shares of Cascade capital stock
at an exercise price of CDN$.20 per share, and certain of the Company's
directors own options to purchase in the aggregate up to 1,000,000 shares of
Cascade capital stock at an exercise price of CDN$.20 per share. Cascade
currently has 76,981,000 shares, including special warrants, of capital stock
outstanding.
Cascade owns a 10% interest in the Canadian Abraxas oil and gas properties
and the Canadian Abraxas gas processing plants and an 8% interest in the Pacalta
Properties and manages the operations of Canadian Abraxas, pursuant to a
management agreement between Canadian Abraxas and Cascade. Under the management
agreement, Canadian Abraxas reimburses Cascade for reasonable costs or expenses
attributable to Canadian Abraxas and for administrative expenses based upon the
percentage that Canadian Abraxas' gross revenue bears to the total gross revenue
of Canadian Abraxas and Cascade.
F-25
<PAGE>
9. Commitments and Contingencies
Operating Leases
During the years ended December 31, 1995, 1996, and 1997, the Company
incurred rent expense of approximately $103,000, $179,000 and $228,000,
respectively. Future minimum rental payments are as follows at December 31,
1997:
1998 .................................................... $289,000
1999 ..................................................... 290,000
2000 ..................................................... 306,000
2001 ..................................................... 354,000
2002 ..................................................... 247,000
Thereafter ............................................... 854,000
Contingencies
In May 1995, certain plaintiffs filed a lawsuit against the Company
alleging negligence and gross negligence, tortious interference with contract,
conversion and waste. In March 1998, a jury found against the Company in the
amount of $1,332,000 plus attorneys' fees and pre-judgment interest.
As of March 1998, no judgment had been entered. The Company intends to
file various post-judgment motions including a motion for judgment
notwithstanding the verdict and a motion for new trial, as well as an appeal.
Management believes, based on the advice of legal counsel, that the plaintiffs'
claims are without merit and that damages should not be recoverable under this
action; however, the ultimate effect on the Company's financial position and
results of operations cannot be determined at this time. The Company has not
established a reserve for this matter at December 31, 1997.
Additionally, from time to time, the Company is involved in litigation
relating to claims arising out of its operations in the normal course of
business. At December 31, 1997, the Company was not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on the Company.
F-26
<PAGE>
10. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
1995 1996 1997
----------- ----------- -----------
Numerator:
Net income (loss) $(1,208,000) $1,513,000 $(6,485,000)
Preferred stock dividends 366,000 366,000 183,000
----------- ----------- -----------
Numerator for basic earnings per
share - income (loss) available
to common stockholders (1,574,000) 1,147,000 (6,668,000)
Effect of dilutive securities:
Preferred stock dividends - - -
----------- ----------- -----------
Numerator for diluted earnings per
share - income available to
common stockholders after assumed
conversions (1,574,000) 1,147,000 (6,668,000)
Denominator:
Denominator for basic earnings per
share - weighted-average shares 4,635,412 5,757,105 6,025,294
Effect of dilutive securities:
Stock options and warrants - 24,277 -
Convertible preferred stock - - -
Assumed issuance under the CVR - 1,013,060 -
Agreement
----------- ----------- -----------
- 1,037,337 -
----------- ----------- -----------
Dilutive potential common shares
Denominator for diluted earnings
per share - adjusted
weighted-average shares and
assumed conversions 4,635,412 6,794,442 6,025,294
Basic earnings (loss) per share:
Income (loss) before
extraordinary item $ (.34) $ .27 $ (1.11)
Extraordinary item - (.07) -
=========== =========== ===========
$ (.34) $ .20 $ (1.11)
=========== =========== ===========
Diluted earnings (loss) per share:
Income (loss) before
extraordinary item $ (.34) $ .23 $ (1.11)
Extraordinary item - (.06) -
=========== =========== ===========
$ (.34) $ .17 $ (1.11)
=========== =========== ===========
For additional disclosures regarding the preferred stock, CVRs, employee
stock options, and warrants, see Notes 5 and 6.
For the years ended December 31, 1995 and 1997, none of the shares
issuable in connection with stock options, warrants, conversion of preferred
stock or the CVR Agreement are included in diluted shares. Inclusion of these
shares would be antidilutive due to losses incurred in those years. In addition,
for the year ended December 31, 1996 shares issuable in connection with the
conversion of the preferred stock were not included in diluted shares because
the effect was antidilutive.
F-27
<PAGE>
Stock options and warrants to purchase approximately 875,000 shares of
common stock at a weighted average per share price of $8.36 were outstanding
during 1996 but were not included in the computations of diluted earnings per
share because the options' and warrants' exercise price was greater than the
average market price of the common shares and, therefore, the effect would be
antidilutive.
11. Quarterly Results of Operations (Unaudited)
Selected results of operations for each of the fiscal quarters during the
years ended December 31, 1996 and 1997 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, 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:
Income (loss) before
extraordinary item ............................ .09 (.04) (.04) .30
Net income (loss)
per common share .............................. .09 (.04) (.10) .29
Earnings (loss) per common share assuming dilution:
Income (loss) before
extraordinary item ............................ .08 (.04) (.04) .25
Net income (loss)
per common share - ............................ .08 (.04) (.10) .24
assuming dilution .............................
Year Ended December 31, 1997
Net revenue ....................................... $ 19,216 $ 15,772 $ 15,703 $ 20,240
Operating income (loss)............................ 7,791 4,090 3,902 (633)
Net income (loss) ................................. 1,454 (2,010) (2,042) (3,887)
Earnings (loss) per
common share ..................................... .24 (.37) (.33) (.61)
Earnings (loss) per
common share - assuming dilution ................. .22 (.37) (.33) (.61)
</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.
During the fourth quarter of 1997, the Company recorded a write-down of
its Canadian proved crude oil and natural gas properties of approximately
$4,600,000, $3,000,000, net of taxes, under the ceiling limitation.
Certain previously reported financial information has been reclassified to
conform with the current presentation.
F-28
<PAGE>
12. 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 1995.
During 1996 and 1997, the Company contributed 2,500 and 7,440 shares,
respectively, of its common stock held in the treasury to the Plan and recorded
the fair value of $12,500 and $41,850, respectively, as compensation expense.
The employee contribution limitations are determined by formulas which limit the
upper one-third of the plan members from contributing amounts that would cause
the plan to be top-heavy. The 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, 1996, and 1997, the Company incurred no bonus expense.
13. Summary Financial Information of Canadian Abraxas Petroleum Ltd.
The following is summary financial information of Canadian Abraxas, a
wholly owned subsidiary of the Company. Canadian Abraxas is jointly and
severally liable for the entire balance of the Series B Notes ($215,000,000), of
which $84,612,000 was utilized by Canadian Abraxas in connection with the
acquisition of CGGS. The Company has not presented separate financial statements
and other disclosures concerning Canadian Abraxas because management has
determined that such information is not material to the holders of the Notes.
December 31,
1996 1997
----------- -----------
(In thousands)
BALANCE SHEET
Assets
Total current assets ............................ $ 6,174 $ 4,738
Oil and gas and processing properties ........... 115,671 109,968
Other assets .................................... 3,302 3,761
=========== ===========
$125,147 $118,467
=========== ===========
Liabilities and Stockholder's Equity
Total current liabilities ....................... $ 3,624 $ 3,625
11.5% Senior Notes due 2004 ..................... 84,612 74,682
Notes payable to Abraxas Petroleum Corporation .. - 18,844
Other liabilities ............................... 34,797 30,295
Stockholder's equity (deficit) .................. 2,114 (8,979)
----------- -----------
$125,147 $118,467
=========== ===========
F-29
<PAGE>
November 14,
1996, Date of
Acquisition, Year Ended
to December 31,
December 31, 1997
1996
--------------- --------------
(In thousands)
STATEMENTS OF OPERATIONS
Revenues ............................... $ 3,972 $19,264
Operating costs and expenses ........... (2,292) (16,617)
Proved property impairment ............. - (4,600)
Interest expense ....................... (1,331) (9,952)
Other income ........................... 23 202
Income tax (expense) benefit ........... (175) 3,815
--------------- --------------
Net income (loss) .................... $ 197 $(7,888)
=============== ==============
14. 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 western
Texas, Canada and Wyoming. The Processing segment engages in the processing of
natural gas. 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 1997 three customers accounted for approximately 42% of oil and natural
gas production revenues and two customers accounted for approximately 51% of gas
processing revenues. In 1996 four customers accounted for approximately 63% of
oil and natural gas production revenues and three customers accounted for
approximately 54% of gas processing revenues. In 1995 one customer accounted for
approximately 20% of oil and natural gas production.
F-30
<PAGE>
Business segment information about the Company's 1996 operations is as
follows:
E&P Processing Total
----------- ----------- -----------
(In thousands)
Revenues ....................... $26,053 $ 600 $10,681
=========== =========== ===========
Operating profit ............... $10,660 $ 21 $10,681
=========== ===========
General corporate .............. (2,044)
Interest expense and
amortization of deferred
financing fees ............... (6,521)
-----------
Income from before income
taxes ....................... $ 2,116
===========
Identifiable assets ............ $253,707 $40,700 $294,407
=========== ===========
Corporate assets ............... 10,435
-----------
Total assets ................. $304,842
===========
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.
Business segment information about the Company's 1997 operations is as
follows:
E&P Processing Total
----------- ----------- -----------
(In thousands)
Revenues ....................... $67,363 $ 3,568 $70,931
=========== =========== ===========
Operating profit ............... $18,039 $ (226) $17,813
=========== ===========
General corporate .............. (2,309)
Interest expense and
amortization of deferred
financing fees ............... (25,880)
-----------
Loss before income taxes ..... $(10,376)
===========
Identifiable assets ............ $292,087 $37,159 $329,246
=========== ===========
Corporate assets ............... 9,282
-----------
Total assets ................. $338,528
===========
Depreciation and depletion for E&P and Processing was approximately
$27,813,000 and $2,310,000, respectively. Capital expenditures for E&P and
Processing were approximately $84,300,000 and $1,500,000, respectively.
During 1995 the Company's operations were entirely in the E&P segment.
F-31
<PAGE>
Business segment information about the Company's 1996 operations in
different geographic areas is as follows:
U.S. Canada Total
------------- ------------- -------------
(In thousands)
Revenues ..................... $ 21,999 $ 4,654 $ 26,653
============= ============= =============
Operating profit ............. $ 8,987 $ 1,694 $ 10,681
============= =============
General corporate ............ (2,044)
Interest expense and
amortization of deferred
financing fees ............. (6,521)
=============
Income before income taxes . $ 2,116
=============
Identifiable assets at
December 31, 1997 .......... $ 168,141 $ 126,266 $ 294,407
============= =============
Corporate assets ............. 10,435
-------------
Total assets ............... $ 304,842
=============
Business segment information about the Company's 1997 operations in
different geographic areas is as follows:
U.S. Canada Total
------------- ------------- -------------
(In thousands)
Revenues ..................... $ 50,172 $ 20,759 $ 70,931
============= ============= =============
Operating profit (loss)....... $ 19,938 $ (2,125) $ 17,813
============= =============
General corporate ............ (2,309)
Interest expense and
amortization of deferred
financing fees ............. (25,880)
=============
Loss before income taxes ... $ (10,376)
=============
Identifiable assets at
December 31, 1997 .......... $ 198,277 $ 130,969 $ 329,246
============= =============
Corporate assets ............. 9,282
-------------
Total assets ............... $ 338,528
=============
During 1995 the Company's operations were entirely in the United States.
15. Commodity Swap Agreements
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.
Pursuant to certain hedge agreements, either the Company or the
counterparty thereto is required to make payment to the other at the end of each
F-32
<PAGE>
month. During the period from March 1996 through November 1996, payments were
exchanged equal to the product of 5,000 MMBtu 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 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:
Crude Oil Natural Gas
------------------------------------------------------
Notional Notional
Quantity Fixed Quantity Fixed
per Month Price per Month Price
(barrels) (barrel) (MMBtu) (MMBtu)
------------- -------------------------- -------------
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
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
and a loss of $952,000 in 1997) 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 1998 is equal to
approximately 15% and 1.5%, respectively, of the Company's expected monthly
production for 1998 based on the Company's January 1, 1998 reserve reports. At
December 31, 1997, the estimated fair market value of the hedge agreements is a
loss of approximately $700,000.
16. Proved Property Impairment
In 1997 the Company recorded a write-down of its proved crude oil and
natural gas properties of approximately $4,600,000, $3,000,000 after taxes,
under the ceiling limitation prescribed for companies following the full cost
method of accounting for its oil and gas properties. The write-down was related
to the Company's Canadian cost center and was due primarily to a decrease in
spot market prices for its crude oil and natural gas. Under full cost accounting
rules, the net capitalized costs of oil and gas properties, less related
deferred taxes, are limited by country, to the lower of unamortized cost or the
cost ceiling as discussed in Note 1. The risk that the Company will be required
to write-down the carrying value of its crude oil and natural gas properties
increases when crude oil and natural gas prices are depressed or volatile.
Should prices continue to decline, a further write-down of the Company's crude
oil and natural gas properties may be required. If such a write-down were large
enough, it could result in the occurrence of an event of default under the
Credit Facility that could require the sale of some of the Company's producing
properties under unfavorable market conditions or require the Company to seek
additional equity capital.
17. Subsequent Event
In November 1997, the Company entered into an agreement and plan of merger
(agreement) to purchase all of the outstanding capital stock of Vessels Energy,
F-33
<PAGE>
Inc. (Vessels) in exchange for common stock of the Company, which agreement was
subject to stockholder approval of both companies. In February 1998 the
agreement was not approved by the Vessels stockholders and was terminated. In
accordance with the termination provisions of the agreement, Vessels paid the
Company a fee of $1,500,000. The Company incurred approximately $519,000
($274,000 through December 31, 1997 which is included in other accounts
receivable) of expenses in connection with the negotiation of the agreement.
Such cost will be offset against the fee received from Vessels, which will
result in a gain of approximately $981,000 in 1998. Additionally, through
December 31, 1997, the Company incurred approximately $133,000, which is
included in other accounts receivable, in drilling costs in connection with
farm-out agreements with Vessels which is to be reimbursed to the Company
subsequent to December 31, 1997.
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
-----------------------------
1996 1997
-------------- --------------
(In thousands)
Proved crude oil and natural gas $231,090 $332,680
properties .........................
Unproved properties .................. 37,268 11,519
-------------- --------------
Total ............................... 268,358 344,199
Accumulated depreciation, depletion,
and amortization, and impairment ... (38,368) (70,717)
-------------- --------------
Net capitalized costs ............. $229,990 $273,482
============== ==============
F-34
<PAGE>
Costs incurred in oil and gas property acquisitions, exploration and
development activities are as follows:
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------------------------------------------------
1995 1996 1997
------------------------------- --------------------------------------------------------------
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 .............. $ 719 $ 719 $ - $87,005 $37,609 $49,396 $13,800 $ - $13,800
Unproved ............ - - - 37,268 8,230 29,038 8,958 - 8,958
-------------------- ---------- -------------------- -------------------- --------------------
$ 719 $ 719 $ - $124,273 $45,839 $78,434 $22,758 $ - $22,758
==================== ========== ==================== ==================== ====================
Property development
and exploration costs $11,398 $11,398 $ - $ 18,133 $18,115 $ 18 $61,414 $53,363 $ 8,051
==================== ========== ==================== ==================== ====================
</TABLE>
<TABLE>
<CAPTION>
The results of operations for oil and gas producing activities are as
follows:
Years Ended December 31
----------------------------------------------------------------------------------------------
1995 1996 1997
------------------------------- --------------------------------------------------------------
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 .......... $13,660 $13,660 $ - $25,749 $21,758 $3,991 $65,826 $49,031 $16,795
Production costs .. (4,333) (4,333) - (5,858) (5,193) (665) (14,881) (10,749) (4,132)
Depreciation,
depletion, and
amortization ..... (5,313) (5,313) - (9,103) (7,695) (1,408) (27,803) (18,992) (8,811)
amortization .....
Proved property
impairment ....... - - - - - - (4,600) - (4,600)
General and
administrative ... (261) (261) - (483) (401) (82) (1,042) (721) (321)
Income taxes
(expense) benefit. - - - (148) - (148) 427 - 427
---------- ---------- ---------- --------- ----------- -------- ---------- --------- --------
Results of operations
from oil and gas
producing activities
(excluding corporate
overhead and
interest costs) ..... $3,753 $ 3,753 $ - $10,157 $ 8,469 $1,688 $17,927 $18,569 $ (642)
========== ========== ========== ========= ========== ========= ========= ========= ========
Depletion rate per
barrel of oil
equivalent ....... $ 4.67 $ 4.67 $ - $ 5.12 $ 5.10 $ 5.29 $ 5.62 $ 5.05 $ 6.98
========== ========== ========== ========= ========== ========= ========= ========= ========
</TABLE>
F-35
<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, 1995, 1996, and 1997. The
Company's management emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of producing
oil and gas properties. Accordingly, the estimates are expected to change as
future information becomes available. The estimates have been prepared by
independent petroleum reserve engineers.
<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, 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(1) 55,099
Revisions of previous estimates . (1,083) (4,554) (1,096) (10,343) 13 5,789
Extensions and discoveries ...... 2,262 48,405 2,190 40,877 72 7,528
Purchase of minerals in place ... 585 27,575 197 150 388 27,425
Production ...................... (1,929) (21,050) (1,736) (12,508) (193) (8,542)
Sale of minerals in place ....... (93) (6,322) (9) (42) (84) (6,280)
----------------------- ------------- ------------------------ -----------
Balance at December 31, 1997 ..... 17,777 221,314 16,261 140,295 1,516(1) 81,019(2)
======================= ============= ======================== ===========
</TABLE>
(1) Includes 120,400 and 260,200 barrels of liquid hydrocarbon reserves owned by
Cascade of which approximately 57,600 and 140,200 barrels are applicable to the
minority interest's share of these reserves at December 31, 1996 and 1997,
respectively.
(2) Includes 7,446 MMcf of natural gas reserves owned by Cascade of which 4,012
MMcf are applicable to the minority interest's share of these reserves at
December 31, 1997.
F-36
<PAGE>
<TABLE>
<CAPTION>
Estimated Quantities of Proved Oil and Gas Reserves (continued)
Total United States Canada
----------------------- ----------------------- -----------------------
Liquid Natural Liquid Natural Liquid Natural
Hydrocarbons Gas Hydrocarbons Gas Hydrocarbons Gas
----------------------- ------------- ----------------------- ----------
(Barrels) (Mcf) (Barrels) (Mcf) (Barrels) (Mcf)
(In Thousands)
Proved developed reserves:
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995 ................ 6,000 44,026 6,000 44,026 - -
======================= ============= ======================= ==========
December 31, 1996 ................ 14,961 157,660 13,641 103,639 1,320 54,021
======================= ============= ======================= ==========
December 31, 1997 ................ 14,254 186,490 12,750 109,456 1,504 77,034
======================= ============= ======================= ==========
</TABLE>
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-37
<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, 1997, adjusted for fixed and
determinable escalations, to the estimated future production of year-end proved
reserves. Future cash inflows were reduced by estimated future production and
development costs based on year-end costs to determine pre-tax cash inflows.
Future income taxes were computed by applying the statutory tax rate to the
excess of pre-tax cash inflows over the tax basis of the properties. Operating
loss carryforwards, tax credits, and permanent differences to the extent
estimated to be available in the future were also considered in the future
income tax calculations, thereby reducing the expected tax expense.
Future net cash inflows after income taxes were discounted using a 10%
annual discount rate to arrive at the Standardized Measure.
F-38
<PAGE>
Set forth below is the Standardized Measure relating to proved oil and gas
reserves for:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------------------------- ----------------------------------
1995 1996 1997
-------------------------------------------------------------- ----------------------------------
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 . $243,969 $243,969 $ - $1,009,420 $824,776 $184,644 $714,048 $530,627 $183,421
Future production
and development
costs.............. (79,910) (79,910) - (251,749) (201,498) (50,251) (249,604) (186,445) (63,159)
Future income tax
expense ........... (28,015) (28,015) - (207,834) (157,508) (50,326) (82,998) (48,736) (34,262)
---------- --------- --------- ------------ -------- -------- --------- --------- ---------
Future net cash
flows ............. 136,044 136,044 - 549,837 465,770 84,067 381,446 295,446 86,000
Discount ............ (48,884) (48,884) - (220,016) (193,221) (26,795) (129,367) (107,259) (22,108)
---------- --------- --------- ------------ -------- -------- --------- --------- ---------
Standardized Measure
of discounted
future net cash
relating to proved
reserves .......... $ 87,160 $ 87,160 $ - $ 329,821 $272,549 $ 57,272 $252,079 $188,187 $63,892
========== ========= ========= ========== ======== ======== ========= ========= ========
</TABLE>
F-39
<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
----------------------------------------
1995 1996 1997
------------- --------------------------
(In thousands)
Standardized Measure,
beginning of year......... $ 77,693 $ 87,160 $ 329,821
Sales and transfers of oil
and gas produced, net of
production costs ......... (9,351) (19,887) (50,945)
Net changes in prices and
development and production
costs from prior year .... 22,560 65,917 (190,174)
Extensions, discoveries, and
improved recovery, less
related costs ............ 13,475 30,699 49,471
Purchases of minerals in
place .................... 3,867 244,930 27,586
Sales of minerals in place . (3,355) (24) (5,720)
Revision of previous quantity
estimates ................ (24,937) 2,257 (8,150)
Change in future income tax
expense .................. 382 (87,393) 70,858
Other ...................... (943) (2,554) (12,389)
Accretion of discount ...... 7,769 8,716 41,721
------------- ------------ ------------
Standardized Measure, end of
year .................... $ 87,160 $ 329,821 $ 252,079
============= ============ ============
F-40
<PAGE>
AUDITORS' REPORT TO THE DIRECTORS
To the Board of Directors of
Canadian Abraxas Petroleum Ltd.
We have audited the statements of earnings (loss) and changes in
financial position for the years ended October 31, 1995 and 1996 of CGGS
Canadian Gas Gathering Systems Inc. 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
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all
material respects, the results of operations of the Company and the changes in
its financial position for the years ended October 31, 1995 and 1996 in
accordance with generally accepted accounting principles.
KPMG
Chartered Accountants
Calgary, Canada
December 16,1997
F-42
<PAGE>
<TABLE>
<CAPTION>
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
STATEMENTS OF EARNINGS (LOSS)
(In Canadian Dollars)
Year Ended October 31
--------------------------------
1995 1996
--------------- ----------------
<S> <C> <C>
Revenues:
Processing ................................ $33,100,000 $36,954,000
Production ................................ 22,408,000 26,791,000
Royalties, net ............................ (3,366,000) (3,975,000)
Other income .............................. 996,000 690,000
--------------- ----------------
53,138,000 60,460,000
Expenses:
Processing ................................ 14,763,000 19,207,000
Production ................................ 5,689,000 5,308,000
Administration (note 4) ................... 4,507,000 4,117,000
Interest on long-term shareholders' debt .. 16,227,000 16,172,000
Depletion and depreciation ................ 13,754,000 14,092,000
Amortization of deferred financing costs .. 146,000 146,000
Foreign exchange loss ..................... 795,000 1,134,000
--------------- ----------------
55,881,000 60,176,000
--------------- ----------------
Earnings (loss) before taxes ................ (2,743,000) 284,000
Large corporation tax ....................... 308,000 332,000
--------------- ----------------
Net loss .................................... $(3,051,000) $ (48,000)
=============== ================
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE>
<TABLE>
<CAPTION>
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
(In Canadian Dollars)
Year Ended October 31
--------------------------------
1995 1996
-------------- -----------------
<S> <C> <C>
Operating Activities:
Net loss .................................. $(3,051,000) $ (48,000)
Depletion and depreciation ................ 13,754,000 14,092,000
Amortization of deferred financing costs .. 146,000 146,000
Foreign exchange loss ..................... 795,000 1,134,000
Decrease (increase) in non-cash working (7,004,000) 2,176,000
capital items
--------------- ----------------
4,640,000 17,500,000
Investing Activities:
Expenditures on capital assets ............ (11,638,000) (8,722,000)
Increase in non-cash working capital .... (54,000) (2,000)
--------------- ----------------
(11,692,000) (8,724,000)
Increase (decrease) in cash and short-term (7,052,000) 8,776,000
deposits ..................................
Cash and Short-Term Deposits:
Beginning of year ....................... 8,326,000 1,274,000
--------------- ----------------
End of year ............................. $ 1,274,000 $10,050,000
=============== ================
</TABLE>
See accompanying notes to financial statements.
F-44
<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-45
<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 and 1995
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.
3. Future Site Restoration
A provision for future site restoration of $1,132,347 (1995 - $779,000)
was expensed during 1996.
F-46
<PAGE>
CGGS CANADIAN GAS GATHERING SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. Administration
Pursuant to the administration and management agreements, the following
expenses have been recorded:
Year Ended October 31
----------------------------------
1995 1996
----------------- ----------------
Management fees ............ $ 2,613,000 $2,531,000
Administration fees ........... 1,628,000 1,632,000
----------------- ----------------
4,241,000 4,163,000
Directors' fees and expenses .. 311,000 113,000
General corporate expenses .... 400,000 299,000
----------------- ----------------
4,952,000 4,575,000
Recoveries .................... (445,000) (458,000)
----------------- ----------------
$ 4,507,000 $4,117,000
================= ================
General corporate expenses include third-party professional fees,
insurance and other items of a general corporate nature.
5. 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.
6. 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.
7. 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
F-47
<PAGE>
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
Petroleums Gas B. Feshbach
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
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.
8. 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.
9. 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:
<TABLE>
<CAPTION>
Statement of Earnings
Year Ended October 31
----------------------------------
1995 1996
---------------- ----------------
<S> <C> <C>
Net loss as reported .............. $(3,051,000) $ (48,000)
Foreign currency translation ...... 1,893,000 1,024,000
================ ================
Net earnings (loss) in accordance with
U.S. GAAP ....................... $(1,158,000) $ 976,000
================ ================
</TABLE>
<TABLE>
<CAPTION>
Increase
As Reported (Decrease) U.S. GAAP
---------------- ----------------- ----------------
October 31, 1995
<S> <C> <C> <C>
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>
10. Changes in Non-cash Working Capital Components
Year Ended October 31
----------------------------------
1995 1996
---------------- ----------------
Decrease (increase) in non-cash
working capital
Operating:
Accounts receivable $(1,231,000) $ (690,000)
Accounts payable (5,773,000) 2,866,000
---------------- ----------------
$(7,004,000) $ 2,176,000
================ ================
Investing:
Debenture interest payable to
shareholders $ (54,000) $ (2,000)
================ ================
F-49
<PAGE>
===============================================================================
No person is authorized in connection
with any offer made hereby to give any
information or to make any
representation not contained in this
Prospectus in connection with the
offering made hereby and, if given or
made, such information or representation
must not be relied upon as having been
authorized by the Issuers. This
Prospectus does not constitute an offer
to sell, or a solicitation of an offer
to purchase, any securities in any
jurisdiction in which, or to any person
to whom, it is unlawful to make such
offer or solicitation. Neither the
delivery of this Prospectus or the ABRAXAS PETROLEUM
accompanying Letter of Transmittal or CORPORATION
both together nor any exchange of
securities made hereunder shall, under CANADIAN ABRAXAS
any circumstances, create any inference PETROLEUM LIMITED
that there has not been any change in
the affairs of the Issuers since the
date hereof.
-------------------------
TABLE OF CONTENTS
Page
Summary.......................... 5
Risk Factors..................... 11
Purpose of the Exchange Offer.... 19
Resale of the Exchange Notes..... 20
Plan of Distribution............. 20 Offer to Exchange
The Exchange Offer............... 21 11 1/2% Senior Notes Due 2004, Series D
Exchange Agent................... 28 for any and all Outstanding
Use of Proceeds.................. 29 11 1/2% Senior Notes due 2004, Series B
Capitalization................... 29 and
Selected Consolidated Financial 11 1/2% Senior Notes due 2004, Series C
Information.................... 30
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... 32
Description of Existing
Indebtedness.................... 37
Business......................... 39
Management....................... 52
Certain Transactions............. 59
Securities Holdings of Principal
Stockholders, Directors and
Officers........................ 60
Description of the Exchange
Notes........................... 63
Certain United States and
Canadian Income Tax
Considerations................. 91
Book-Entry; Delivery and Form.... 96
Available Information............ 98
Enforceability of Civil
Liabilities Against Foreign
Persons......................... 99 Prospectus
Legal Matters.................... 99
Experts.......................... 99 , 1998
Glossary of Terms................100
Index to Consolidated Financial
Statements......................F-1
Until __________, 1998 (90 days after
the date of this Prospectus) all dealers
effecting transactions in the registered
securities, whether or not participating
in this distribution, may be required to
deliver a Prospectus. This is in
addition to the obligation of dealers to
deliver a prospectus when acting as
underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Abraxas' Articles of Incorporation contain a provision that eliminates
the personal monetary liability of directors and officers to Abraxas and its
stockholders for a breach of fiduciary duties to the extent currently allowed
under the Nevada General Corporation Law (the "Nevada Statute"). In respect of
Canadian Abraxas, the Alberta Business Corporation Act ("ABCA") does not permit
any such limitations of a director's liability. If a director or officer of
Abraxas were to breach his fiduciary duties, neither Abraxas nor its
stockholders could recover monetary damages, and the only course of action
available to Abraxas' stockholders would be equitable remedies, such as an
action to enjoin or rescind a transaction involving a breach of fiduciary duty.
To the extent certain claims against directors or officers are limited to
equitable remedies, this provision of Abraxas' Articles of Incorporation may
reduce the likelihood of derivative litigation and may discourage stockholders
or management from initiating litigation against directors or officers for
breach of their duty of care. Additionally, equitable remedies may not be
effective in many situations. If a stockholder's only remedy is to enjoin the
completion of the Board of Director's action, this remedy would be ineffective
if the stockholder did not become aware of a transaction or event until after it
had been completed. In such a situation, it is possible that the stockholders
and the Company would have no effective remedy against the directors or
officers.
Liability for monetary damages has not been eliminated for acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law or payment of an improper dividend in violation of section 78.300 of the
Nevada Statute. The limitation of liability also does not eliminate or limit
director liability arising in connection with causes of action brought under the
Federal securities laws.
The Nevada Statute permits a corporation to indemnify certain persons,
including officers and directors, who are (or are threatened to be made) parties
against all expenses (including attorneys' fees) actually and reasonably
incurred by, or imposed upon, him in connection with the defense by reason of
his being or having been a director or officer if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful, except
where he has been adjudged by a court of competent jurisdiction (and after
exhaustion of all appeals) to be liable for gross negligence or willful
misconduct in the performance of duty. The Bylaws of Abraxas provide
indemnification to the same extent allowed pursuant to the foregoing provisions
of the Nevada Statute.
Nevada corporations also are authorized to obtain insurance to protect
officers and directors from certain liabilities, including liabilities against
which the corporation cannot indemnify its directors and officers. CBCA
corporations are permitted to obtain such insurance also, accept for liability
relating to the failure to act honestly and in good faith with a view to the
best interests of the corporation. Abraxas currently has a directors' and
officers' liability insurance policy in effect providing $3.0 million in
coverage and an additional $1.0 million in coverage for certain employment
related claims.
Abraxas has entered into indemnity agreements with each of its directors
and officers. These agreements provide for indemnification to the extent
permitted by the Nevada Statute.
Under the ABCA, except in respect of an action by or on behalf of a
corporation or a body corporate to procure a judgment in its favor, a
corporation may indemnify a director or officer, a former director or officer or
a person who acts or acted at the corporation's request as a director or officer
of a body corporate of which the corporation is or was a shareholder or
creditor, and his or her heirs and legal representatives (an "Indemnifiable
Person"), against all costs, charges and expenses, including an amount paid to
settle an action or satisfy a judgment, reasonably incurred by him or her in
respect of any civil, criminal or administrative action or proceeding to which
he or she is made a party by reason of being or having been a director or
II-1
<PAGE>
officer of such corporation or such body corporate, if: (a) he or she acted
honestly and in good faith with a view to the best interests of such
corporation; and (b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he or she had reasonable
grounds for believing that his or her conduct was lawful. Further, an
Indemnifiable Person is entitled to indemnity from the corporation in respect of
all costs, charges and expenses reasonably incurred in the defense of any such
civil, criminal or administrative action or proceeding if he or she was
substantially successful on the merits in his or her defense of the action or
proceeding, fulfilled the conditions set out in (a) and (b), above and is fairly
and reasonably entitled to indemnity. A corporation may, with the approval of a
court, also indemnify an Indemnifiable Person in respect of an action by or on
behalf of the corporation or body corporate to procure a judgment in its favor,
to which such person is made a party by reason of being or having been a
director or an officer of the corporation or body corporate, if he or she
fulfills the conditions set out in (a) and (b), above. The Canadian Abraxas
Bylaws provide for indemnification of directors and officers to the fullest
extent authorized by the ABCA.
Item 21. Exhibits and Financial Statement Schedules.
**3.1 Articles of Incorporation of Abraxas. (Filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-4, No. 33-36565 (the "S-4
Registration Statement")).
**3.2 Articles of Amendment to the Articles of Incorporation of Abraxas dated
October 22, 1990 (Filed as Exhibit 3.3 to the S-4 Registration Statement).
**3.3 Articles of Amendment to the Articles of Incorporation of Abraxas dated
December 18, 1990. (Filed as Exhibit 3.4 to the S-4 Registration Statement).
**3.4 Articles of Amendment to the Articles of Incorporation of Abraxas dated
June 8, 1995. (Filed as Exhibit 3.4 to the Company's Registration Statement on
Form S-3, No. 333-398 (the "S-3 Registration Statement")).
**3.5 Amended and Restated Bylaws of Abraxas. (Filed as Exhibit 3.5 to the S-3
Registration Statement).
**3.6 Articles of Incorporation of Canadian Abraxas (filed as Exhibit 3.7 to the
Issuer's Registration Statement on Form S-4, No. 33-18673, the "Exchange Offer
Registration Statement").
**3.7 By-Laws of Canadian Abraxas (Filed as Exhibit 3.8 to the Exchange Offer
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 and Trust Company (Filed as Exhibit 1 to
Amendment No. 1 to the Company's Registration Statement on Form 8-A filed on
August 20, 1997).
**4.5 Indenture dated November 14, 1996 by and among the Company, Canadian
Abraxas 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).
<PAGE>
**4.6 Indenture dated January 27, 1998 by and among the Company, Canadian
Abraxas and IBJ Schroder Bank & Trust Company (filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K dated February 5, 1998).
**4.7 Form of Series B Note. (Filed as Exhibit 4.7 to the Company's and Canadian
Abraxas' Registration Statement on Form S-4, No. 333-18673 (the "Exchange Offer
Registration Statement")).
**4.8 Form of Series C Note (Filed as Exhibit A to Exhibit 4.6)
**4.9 Form of Exchange Note (Filed as Exhibit B to Exhibit 4.6)
*4.10 Form of Letter of Transmittal.
**4.11 Specimen Common Stock Certificate of Canadian Abraxas (Filed as Exhibit
4.9 to the Exchange Offer Registration Statement)
*5.1 Opinion of Cox & Smith Incorporated.
*5.2 Opinion of Osler, Hoskin & Harcourt.
+**10.1 Abraxas Petroleum Corporation 1984 Non-Qualified Stock Option Plan, as
amended and restated. (Filed as Exhibit 10.7 to the Company's Annual Report on
Form 10-K filed April 14, 1993).
+**10.2 Abraxas Petroleum Corporation 1984 Incentive Stock Option Plan, as
amended and restated. (Filed as Exhibit 10.8 to the Company's Annual Report on
Form 10-K filed April 14, 1993).
+**10.3 Abraxas Petroleum Corporation 1993 Key Contributor Stock Option Plan.
(Filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K filed April
14, 1993
+**10.4 Abraxas Petroleum Corporation 401(k) Profit Sharing Plan. (Filed as
Exhibit 10.4 to the Exchange Offer Registration Statement).
+**10.5 Abraxas Petroleum Corporation Director Stock Option Plan. (Filed as
Exhibit 10.5 to the Exchange Offer Registration Statement).
+**10.6 Abraxas Petroleum Corporation Restricted Share Plan for Directors.
(Filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K filed on
April 12, 1994).
+**10.7 Abraxas Petroleum Corporation 1994 Long Term Incentive Plan. (Filed as
Exhibit 10.21 to the Company's Annual Report on Form 10-K filed on April 12,
1994).
+**10.8 Abraxas Petroleum Corporation Incentive Performance Bonus Plan. (Filed
as Exhibit 10.24 to the Company's Annual Report on Form 10-K filed on April 12,
1994).
**10.9 Registration Rights and Stock Registration Agreement dated as of August
11, 1993 by and among Abraxas, EEP and Endowment Energy Partners II, Limited
Partnership ("EEP II"). (Filed as Exhibit 10.33 to the Company's Registration
Statement on Form S-1, Registration No. 33-66446 (the "S-1 Registration
Statement")).
**10.10 First Amendment to Registration Rights and Stock Registration Agreement
dated June 30, 1994 by and among Abraxas, EEP and EEP II. (Filed as Exhibit 10.3
to the Registrant's Current Report on Form 8-K filed on July 14, 1994).
<PAGE>
**10.11 Second Amendment to Registration Rights and Stock Registration Agreement
dated September 2, 1994 by and among Abraxas, EEP and EEP II. (Filed as Exhibit
10.3 to the Company's Annual Report on Form 10-K filed March 31, 1995)
**10.12 Third Amendment to Registration Rights and Stock Registration Agreement
dated November 17, 1995 by and among Abraxas, EEP and EEP II. (Filed as Exhibit
10.17 to the Company's Annual Report on Form 10-K filed March 31, 1995)
**10.13 Common Stock Purchase Warrant dated as of December 18, 1991 between
Abraxas and EEP. (Filed as Exhibit 12.3 to the Company's Current Report on Form
8-K filed January 9, 1992).
**10.14 Common Stock Purchase Warrant dated as of August 1, 1993 between Abraxas
and EEP. (Filed as Exhibit 10.35 to the S-1 Registration Statement).
**10.15 Common Stock Purchase Warrant dated August 11, 1993 between Abraxas and
EEP II. (Filed as Exhibit 10.36 to the S-1 Registration Statement).
**10.16 Common Stock Purchase Warrant dated August 11, 1993 between Abraxas and
Associated Energy Managers, Inc. (Filed as Exhibit 10.37 to the S-1 Registration
Statement).
**10.17 Letter dated September 2, 1994 from Abraxas to EEP and EEP II. (Filed as
Exhibit 10.13 to the Company's Annual Report on Form 10-K filed March 31, 1995)
**10.18 Amended and Restated Credit Agreement dated as of November 14, 1996
among Abraxas, Bankers Trust Company, Inc. (U.S.) Capital Corporation and the
Lenders named therein. (Filed as Exhibit 10.5 to the Company's Current Report on
Form 8-K filed November 27, 1996).
**10.19 Warrant Agreement dated as of July 27, 1994 between Abraxas and FUNB.
(Filed as Exhibit 10.3 to the Company's Current Report on Form 8-K filed August
5, 1994).
**10.20 Warrant Agreement dated as of December 16, 1994, between Abraxas and
FUNB. (Filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K filed
March 31, 1995).
**10.21 First Amendment to Warrant Agreement dated as of August 31, 1995 between
Abraxas and FUNB. (Filed as Exhibit 10.21 to the S-3 Registration Statement).
**10.22 Form of Indemnity Agreement between Abraxas and each of its directors
and officers. (Filed as Exhibit 10.30 to the S-1 Registration Statement).
+*10.23 Employment Agreement between Abraxas and Robert L. G. Watson.
+*10.24 Employment Agreement between Abraxas and Chris E. Williford.
+*10.25 Employment Agreement between Abraxas and Robert Patterson.
+*10.26 Employment Agreement between Abraxas and Stephen T. Wendel.
+*10.27 Employment Agreement between Abraxas and Lowell Lischer.
+*10.28 Employment Agreement between Abraxas and Jack M. Roney.
**10.29 Management Agreement dated November 14, 1996 by and between Canadian
Abraxas and Cascade Oil & Gas Ltd. (Filed as Exhibit 10.36 to the Exchange Offer
Registration Statement).
<PAGE>
**10.30 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 (Filed as Exhibit 10.29 to the
Company's Registration Statement on Form S-4, No. 333-43949).
**10.31 Amendment No. 2 to Amended and Restated Credit Agreement dated January
27, 1998 by and among Abraxas, Bankers Trust Company, ING (U.S.) Capital
Corporation and the Lenders named therein (filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K dated February 5, 1998).
**10.32 Registration Rights Agreement dated January 27, 1998 by and among
Abraxas, Canadian Abraxas and Jefferson & Co., Inc. (Filed as Exhibit 10.2 to
the Company's Current Report on Form 8-K dated February 5, 1998).
*12.1 Statement Regarding Computation of Earnings to Fixed Charges
**21.1 Subsidiaries of Abraxas. (Filed as Exhibit 21.1 to the Company's
Registration Statement on Form S-4, No. 333-43949).
*23.1 Consent of Ernst & Young LLP.
*23.2 Consent of DeGolyer & MacNaughton.
*23.3 Consent of McDaniel & Associates Consultants, Ltd.
*23.4 Consent of Cox & Smith Incorporated (included in Exhibit 5.1).
*23.5 Consent of KPMG.
*23.6 Consent of Osler, Hoskin & Harcourt (included in Exhibit 5.2).
*24.1 Power of Attorney of Franklin Burke.
*24.2 Power of Attorney of Harold D. Carter.
*24.3 Power of Attorney of Robert D. Gershen.
*24.4 Power of Attorney of Richard M. Kleberg, III.
*24.5 Power of Attorney of James C. Phelps.
*24.6 Power of Attorney of Paul A. Powell, Jr.
*24.7 Power of Attorney of Richard M. Riggs
*24.8 Power of Attorney of Donald A. Engle
*24.9 Power of Attorney of Roger L. Bruton
*25.1 Form T-1 Statement of Eligibility and Qualification of IBJ Schroder Bank &
Trust Company, as Trustee.
*27.1 Financial Data Schedule.
* Filed herewith.
** Incorporated by reference to the filing indicated.
+ Management Compensatory Plan or Agreement.
<PAGE>
Item 22. Undertakings
A. Each of the undersigned registrants hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
B. Each of the undersigned registrants hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
C. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of each of the registrants pursuant to the foregoing provisions, or
otherwise, the registrants have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrants of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceedings)
is asserted by such director, officer or controlling person in connection with
the securities being registered, the registrants will, unless in the opinion of
their counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
either of them is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
D. Each of the undersigned registrants hereby undertakes to supply by
means of a post-effective amendment all information concerning a transaction,
and the company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
<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 April 9, 1998.
ABRAXAS PETROLEUM CORPORATION
_________________________________________
By: /s/ Robert L. G. Watson
Robert L. G. Watson, Chairman of the Board,
Chief Executive Officer and President
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature Name and Title Date
/s/ Robert L. G. Watson Chairman of the Board, April 9, 1998
- -------------------------- President, Chief Executive Officer
Robert L.G. Watson (Principal Executive Officer) and
Director of the Company
/s/ Chris E. Williford Executive Vice President, April 9, 1998
- -------------------------- Treasurer, Chief Financial
Chris E. Williford Officer and Director (Principal
Financial and Accounting Officer)
of the Company
* Director of the Company April 9, 1998
- ---------------------------
Franklin Burke
* Director of the Company April 9, 1998
- ---------------------------
Harold D. Carter
* Director of the Company April 9, 1998
- ---------------------------
Robert D. Gershen
* Director of the Company April 9, 1998
- ---------------------------
Richard M. Kleberg, III
* Director of the Company April 9, 1998
- ---------------------------
James C. Phelps
* Director of the Company April 9, 1998
- ---------------------------
Paul A. Powell, Jr.
* Director of the Company April 9, 1998
- ---------------------------
Richard M. Riggs
By: /s/ Chris E. Williford
Chris E. Williford
Attorney-in-fact
II-8
<PAGE>
<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 April 9, 1998.
CANADIAN ABRAXAS PETROLEUM LIMITED
By: /s/ Robert L. G. Watson
__________________________________
Robert L. G. Watson, President
II-9
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature Name and Title Date
/s/ Robert L. G. Watson Chairman of the Board, April 9, 1998
- ----------------------------- President, and Director of
Robert L.G. Watson Canadian Abraxas
(Principal Executive Officer)
/s/Chris E. Williford Vice President and Assistant April 9, 1998
- ----------------------------- Secretary of Canadian Abraxas
Chris E. Williford (Principal Accounting Officer)
* Secretary and Director of April 9, 1998
- ----------------------------- Canadian Abraxas
Donald A. Engle
*---------------------------- Executive Vice President April 9, 1998
Roger L. Bruton and Director of Canadian Abraxas
By:/s/ Chris E. Williford_________
Chris E. Williford
Attorney-in-fact
<PAGE>
EXHIBIT INDEX
Exhibit Number: Exhibit Page Number
4.10 Form of Letter of Transmittal. __
5.1 Opinion of Cox & Smith Incorporated
5.2 Opinion of Osler, Hoskin & Harcourt
10.23 Employment Agreement between Abraxas and
Robert L.G. Watson
10.24 Employment Agreement between Abraxas and
Chris E. Williford
10.25 Employment Agreement between Abraxas and
Robert Patterson
10.26 Employment Agreement between Abraxas and
Stephen T. Wendel
10.27 Employment Agreement between Abraxas and
Lowell Lischer
10.28 Employment Agreement between Abraxas and
Jack M. Roney
12.1 Statement Regarding Computation of Earnings
to Fixed Charges
23.1 Consent of Ernst & Young LLP.
23.2 Consent of DeGoyler & MacNaughton
23.3 Consnet of McDaniel & Associates Consultants Ltd.
23.4 Consent of Cox & Smith Incorporated (included
in Exhibit 5.1)
23.5 Consent of KPMG
23.6 Consent of Osler, Hoskin & Harcourt (included
in Exhibit 5.2)
24.1 Power of Attorney of Franklin Burke
24.2 Power of Attorney of Harold D. Carter
24.3 Power of Attorney of Robert D. Gershen
24.4 Power of Attorney of Richard M. Kleberg, III
24.5 Power of Attorney of James C. Phelps
24.6 Power of Attorney of Paul A. Powell, Jr.
24.7 Power of Attorney of Richard M. Riggs
1
<PAGE>
24.8 Power of Attorney of Donald A. Engle
24.9 Power of Attorney of Roger L. Bruton
25.1 Form T-1 Statement of Eligibility and Qualification of
IBJ Schroder Bank & Trust Company, as Trustee
27.1 Financial Data Schedule
2
<PAGE>
EXHIBIT 4.10
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON__________ , 1998 UNLESS EXTENDED.
FORM OF LETTER OF TRANSMITTAL
TO ACCOMPANY 11 1/2% SENIOR NOTES DUE 2004,
SERIES B (CUSIP NO. ____________)
AND 11 1/2% SENIOR NOTE DUE 2004, SERIES C
(CUSIP NO. ______________)
OF
ABRAXAS PETROLEUM CORPORATION
(a Nevada corporation)
AND
CANADIAN ABRAXAS PETROLEUM LIMITED
(a Canada corporation)
TENDERED PURSUANT TO THE PROSPECTUS
DATED ____________, 1997
3
<PAGE>
(PLEASE READ THE INSTRUCTIONS CAREFULLY)
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE HEREOF) AND ALL OTHER
DOCUMENTS AND INSTRUMENTS REQUIRED HEREBY SHOULD BE SENT OR DELIVERED TO THE
EXCHANGE AGENT AT THE ADDRESS SET FORTH BELOW. TENDERS MUST BE RECEIVED BY THE
EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS THE
EXCHANGE OFFER IS EXTENDED (THE "EXPIRATION DATE").
The Exchange Agent
IBJ SCHRODER BANK & TRUST COMPANY
Facsimile Transmission Telephone Number: Address for Mailing:
(212) 858-2611 One State Street
New York, N.Y. 10004
Attn: Reorganization Operations
Department
Confirm by Telephone: Address for Couriers and
Hand Deliveries:
(212) 858-2103 One State Street
New York, N.Y. 10004
Attn: Securities Processing
Window,
Subcellar One (SC-1)
------------------------
DELIVERY TO ANY ADDRESS OTHER THAN AS SET FORTH HEREIN WILL NOT CONSTITUTE VALID
DELIVERY.
------------------------
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
This Letter of Transmittal is to be completed by holders of Series B
Notes and Series C Notes (as defined below) only (a) if Series B Notes and
Series C Notes are to be forwarded herewith or (b) if delivery of such Series B
Notes and Series C Notes is to be made by book-entry transfer to the account
maintained by the Exchange Agent at The Depository Trust Company (DTC) pursuant
to the procedures set forth under the caption "The Exchange Offer -- How to
Tender" in the Prospectus (as defined below). DELIVERY OF DOCUMENTS TO DTC DOES
NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Holders of Series B Notes and Series C Notes who cannot deliver their Series B
Notes or Series CNotes or deliver confirmation of the book-entry transfer of
their Series B Notes and Series C Notes into the Exchange Agent's account at DTC
and all other documents required hereby to the Exchange Agent on or prior to the
Expiration Date must tender their Series B Notes and Series C Notes pursuant to
the guaranteed delivery procedure set forth under the caption "The Exchange
Offer -- How to Tender" in the Prospectus. See Instruction 2 herein.
4
<PAGE>
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY)
/ / CHECK HERE IF TENDERED SERIES B OR SERIES C NOTES ARE BEING DELIVERED
BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE
AGENT WITH DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution_________________________________________________
DTC Account Number ___________________________________________________________
Transaction Code Number ______________________________________________________
/ / CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED
DELIVERY IF TENDERED SERIES B OR SERIES C NOTES ARE BEING DELIVERED
PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE
EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name of Registered Owner(s) __________________________________________________
Date of Execution of Notice of Guaranteed Delivery ___________________________
Name of Institution which Guaranteed delivery ________________________________
If Delivered By Book-Entry Transfer:
Name of Tendering Institution ________________________________________________
DTC Account Number ___________________________________________________________
Transaction Code Number ______________________________________________________
/ / CHECK HERE IF TENDERING BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED
SERIES B OR SERIES C NOTES ARE TO BE RETURNED BY CREDITING THE DTC
ACCOUNT NUMBER SET FORTH ABOVE.
5
<PAGE>
DESCRIPTION OF SERIES B OR SERIES C NOTES TENDERED
SERIES B OR SERIES C NOTES TENDERED_________________________________________
IF BLANK, PRINT NAME AND ADDRESS OF REGISTERED HOLDER.
- ----------------------------------------------------------------------------
(ATTACH ADDITIONAL LIST IF NECESSARY)
- --------------------------------------------------------------------------------
AGGREGATE PRINCIPAL PRINCIPAL AMOUNT OF
SERIES B OR SERIES C AMOUNT OF SERIES B OR SERIES B OR SERIES C
NOTES NUMBER(S)* SERIES C NOTES NOTES TENDERED**
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
- ---------- ---------------------- ------------------------ ---------------------
TOTALS:
- ---------- ---------------------- ------------------------ ---------------------
* Need not be completed by Book-Entry Holders.
** The aggregate principal amount of all Series B Notes or Series C Notes held
shall be deemed tendered unless a lesser principal amount is specified in this
column. See Instruction 4.
6
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Pursuant to the terms and subject to the conditions of the Exchange
Offer (as described below) of Abraxas Petroleum Corporation, a Nevada
corporation ("Abraxas"), and Canadian Abraxas Petroleum Limited, a Canada
corporation ("Canadian Abraxas" and, together with Abraxas, the "Issuers"), to
holders of the Issuers' 11 1/2% Senior Notes due 2004, Series B (the "Series B
Notes") and 11 1/2% Senior Notes due 2004, Series C (the "Series C Notes"), as
set forth in the Prospectus dated ___________, 1998 (the "Prospectus") and this
Letter of Transmittal (which, together with the Prospectus, constitute the
Exchange Offer), the signer of this Letter of Transmittal (the "Holder") hereby
accepts the Exchange Offer and tenders the Series B Notes and the Series C Notes
listed on this Letter of Transmittal in exchange for a like principal amount of
11 1/2% Senior Notes due 2004, Series D (the "Exchange Notes"). The Exchange
Notes are substantially identical to the Series B Notes and the Series C Notes
except that the resale of the Exchange Notes will not be subject to the
restrictions of Rule 144A under the Securities Act of 1933, as amended (the
"Securities Act"), and the Exchange Notes will not be subject to certain
interest rate increase provisions which were applicable to the Series C Notes in
certain circumstances relating to the timing of the Exchange Offer. The Exchange
Notes evidence the same debt as the Series B Notes and Series C Notes (which
they replace). The Holder hereby acknowledges receipt of the Prospectus.
Capitalized terms used but not defined herein have the respective meanings given
such terms in the Prospectus.
Accordingly, subject to, and effective upon, acceptance for exchange of
the Series B Notes and the Series C Notes tendered herewith in accordance with
the terms and conditions of the Exchange Offer, the Holder hereby sells, assigns
and transfers to the Issuers all right, title and interest in and to all of the
Series B Notes and the Series C Notes that are being tendered for exchange
hereby, and hereby irrevocably constitutes and appoints the Exchange Agent the
true and lawful agent and attorney-in-fact of the Holder with respect to such
securities, with full power of substitution (such power of attorney being deemed
to be an irrevocable power coupled with an interest), to (i) deliver Series B
Notes and Series C Notes tendered hereby or transfer ownership of such
securities on the account books maintained by DTC together, in either such case,
with the accompanying evidences of transfer and authority, to the Issuers upon
the receipt by the Exchange Agent, as the Holder's agent, of the consideration
therefor pursuant to the Exchange Offer, and (ii) receive all benefits and
otherwise exercise all rights of beneficial ownership of such Series B Notes and
Series C Notes.
THE HOLDER HEREBY REPRESENTS AND WARRANTS THAT THE HOLDER HAS FULL POWER
AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE SERIES B NOTES
AND SERIES C NOTES TENDERED HEREBY AND TO ACQUIRE THE EXCHANGE NOTES ISSUABLE
UPON THE EXCHANGE OF SUCH TENDERED SECURITIES, THAT THE EXCHANGE AGENT, AS AGENT
OF THE ISSUERS, WILL ACQUIRE GOOD AND UNENCUMBERED TITLE TO SUCH TENDERED SERIES
B NOTES AND SERIES C NOTES, FREE AND CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES
AND ENCUMBRANCES, AND THE SERIES B NOTES AND SERIES C NOTES TENDERED HEREBY ARE
NOT SUBJECT TO ANY ADVERSE CLAIM OR ENCUMBRANCE WHEN THE SAME ARE ACCEPTED BY
THE ISSUERS. THE HOLDER WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL
DOCUMENTS DEEMED BY THE ISSUERS OR THE EXCHANGE AGENT TO BE NECESSARY OR
DESIRABLE TO COMPLETE THE EXCHANGE, SALE, ASSIGNMENT AND TRANSFER OF THE SERIES
B NOTES AND SERIES C NOTES TENDERED HEREBY.
All authority herein conferred or agreed to be conferred in this Letter
of Transmittal shall survive the death or incapacity of the Holder, and any
obligation of the Holder hereunder shall be binding upon the heirs, personal
representatives, successors and assigns of the Holder. Except as stated in the
Prospectus, this tender is irrevocable.
7
<PAGE>
A tender of Series B Notes and Series C Notes pursuant to the procedures
described in the Prospectus and in the instructions hereto will constitute the
Holder's acceptance of the terms and conditions of the Exchange Offer and a
binding agreement between the tendering Holder of Series B Notes and Series C
Notes and the Issuers upon the terms and subject to the conditions of the
Exchange Offer. The Holder recognizes that, under certain circumstances set
forth in the Prospectus, the Issuers may not be required to accept any of the
Series B Notes and the Series C Notes tendered for exchange hereby. The Holder
hereby directs that the Exchange Notes and/or any Series B Notes and Series C
Notes representing any principal amount of such securities not exchanged be
issued in the name of the Holder. The Holder understands that Holders who tender
Series B Notes and Series C Notes by book-entry transfer ("Book-Entry Holders")
will receive their Exchange Notes and any principal amount of Series B Notes and
Series C Notes not exchanged will be returned to such Book-Entry Holder by
crediting in the name of such Book-Entry Holder the account maintained by DTC.
The Holder recognizes that the Issuers have no obligation to transfer any Series
B Notes and Series C Notes from the name(s) of the registered holder(s) thereof.
BY TENDERING SERIES B NOTES AND SERIES C NOTES AND EXECUTING THIS LETTER
OF TRANSMITTAL, THE HOLDER IS DEEMED TO REPRESENT AND AGREE, AND HEREBY
REPRESENTS AND AGREES, THAT (I) IT IS ACQUIRING THE EXCHANGE NOTES ISSUABLE IN
EXCHANGE THEREFOR IN THE ORDINARY COURSE OF ITS BUSINESS, (II) UNLESS IT IS A
BROKER-DEALER REFERRED TO IN THE NEXT SENTENCE, IT IS NOT ENGAGING AND DOES NOT
INTEND TO ENGAGE IN THE DISTRIBUTION OF THE EXCHANGE NOTES, (III) AT THE TIME OF
CONSUMMATION OF THE EXCHANGE OFFER THE HOLDER WILL HAVE NO ARRANGEMENT OR
UNDERSTANDING WITH ANY PERSON TO PARTICIPATE IN THE DISTRIBUTION OF THE EXCHANGE
NOTES IN VIOLATION OF THE PROVISIONS OF THE SECURITIES ACT, (IV) THE HOLDER IS
NOT AN AFFILIATE OF ANY OF THE ISSUERS WITHIN THE MEANING OF RULE 405 UNDER THE
SECURITIES ACT AND (V) IF IT PARTICIPATES IN THE EXCHANGE OFFER FOR THE PURPOSE
OF DISTRIBUTING THE EXCHANGE NOTES IT MUST COMPLY WITH THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT IN CONNECTION WITH ANY
RESALE OF THE EXCHANGE NOTES. EACH HOLDER WHO IS A PARTICIPATING BROKER-DEALER
(AS DEFINED IN THE PROSPECTUS) HOLDING SERIES B NOTES AND SERIES C NOTES
ACQUIRED FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING
ACTIVITIES THAT WILL RECEIVE EXCHANGE NOTES IN EXCHANGE FOR SUCH SERIES B NOTES
AND SERIES C NOTES PURSUANT TO THE EXCHANGE OFFER FURTHER REPRESENTS AND AGREES
THAT IT WILL DELIVER A PROSPECTUS (WHICH MAY BE THE PROSPECTUS) IN CONNECTION
WITH ANY RESALE OF SUCH EXCHANGE NOTES DURING THE PERIOD REQUIRED BY THE
SECURITIES ACT. BY ACKNOWLEDGING THAT IT WILL DELIVER AND BY DELIVERING A
PROSPECTUS, A PARTICIPATING BROKER-DEALER WILL NOT BE DEEMED TO ADMIT THAT IT IS
AN "UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT.
8
<PAGE>
HOLDER SIGN HERE
X______________________________________________________________
X______________________________________________________________
(Signature(s) of Owner(s))
Dated_________________________________________________ , 1998
Holder's Telephone Number
(Must be signed by the registered holder(s) exactly as name(s) appear(s) on
Series B Notes or Series C Notes. If signature is by an attorney, executor,
administrator, trustee, guardian or others acting in a fiduciary capacity,
please set forth full title and see Instruction 5.)
Signature(s)
Guaranteed
(See Instruction 1)
- -------------------------------------------------------------------------------
(Firm -- Please Print)
- -------------------------------------------------------------------------------
(Authorized Signature)
- -------------------------------------------------------------------------------
(Date)
SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 1, 4, 5 and 6)
To be completed ONLY by registered holders and ONLY if Exchange Notes or
Series B Notes or Series C Notes representing any principal amount of such
securities not exchanged are to be sent to the Holder at an address other than
that shown above.
Mail Exchange Notes (or Series B Notes or Series C Notes) to:
(Name -- Please Print) _______________________________________________________
(Address) (Include Zip Code)__________________________________________________
- ------------------------------------------------------------------------------
FOR PARTICIPATING BROKER-DEALERS ONLY
(See Instruction 11)
Please send______________ copies of the Prospectus and any supplements or
amendments thereto to the following address:
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
9
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. GUARANTEE OF SIGNATURES. Signatures on Letters of Transmittal need not
be guaranteed, except as provided in this Instruction 1. In cases where
Series B Notes or Series C Notes are tendered for exchange by a
registered holder of Series B Notes or Series C Notes who has completed
the box entitled "Special Delivery Instructions" on the Letter of
Transmittal, signatures on Letters of Transmittal (or facsimiles
thereof) must be guaranteed by a commercial bank or trust company having
an office or correspondent in the United States or a firm which is a
member of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. (an "Eligible
Institution").
2. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES. In order to
participate in the Exchange Offer and receive Exchange Notes, a holder
must properly complete and duly execute (with signatures guaranteed if
required by Instruction 1) the Letter of Transmittal (or a facsimile
thereof) and mail or deliver it, together with the Series B Notes and
the Series C Notes to be tendered for exchange (or the Exchange Agent
must receive a timely confirmation of a book-entry transfer of such
Series B Notes and Series C Notes into the Exchange Agent's account at
DTC as described in the Prospectus) and any other required documents, to
the Exchange Agent. The Exchange Agent must receive the foregoing
documents and instruments on or prior to the Expiration Date. DELIVERY
OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
If a holder desires to tender Series B Notes or Series C Notes pursuant
to the Exchange Offer and such holder's Series B Notes or Series C Notes
are not immediately available, or if the procedure for book-entry
transfer cannot be completed on a timely basis, or such holder cannot
deliver the Series B Notes or Series C Notes and all other required
documents to the Exchange Agent prior to the Expiration Date, such
Series B Notes and Series C Notes may be tendered if all of the
following guaranteed delivery procedures are complied with: (i) such
tenders are made by or through an Eligible Institution; (ii) a properly
completed and duly executed Notice of Guaranteed Delivery, in
substantially the form provided by the Issuers, is received by the
Exchange Agent on or prior to the Expiration Date; and (iii) the Series
B Notes and the Series C Notes, in proper form for transfer (or
confirmation of book-entry transfer of such Series B Notes and Series C
Notes into the Exchange Agent's account at DTC as described in the
Prospectus), together with a properly completed and duly executed Letter
of Transmittal and all other documents required by this Letter of
Transmittal, are received by the Exchange Agent within three New York
Stock Exchange, Inc. trading days after the date of execution of such
Notice of Guaranteed Delivery, all as provided under the caption "The
Exchange Offer -- How to Tender" in the Prospectus.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptability of Series B Notes and Series C Notes tendered
will be determined by the Issuers in their sole discretion, and such
determinations will be final and binding. The Issuers reserve the right
to reject any and all tenders determined by their not to be in proper
form or otherwise not valid or the acceptance for exchange of which may,
in the opinion of the Issuers' counsel, be unlawful or to waive any
irregularities or conditions. The Issuers' interpretation of the terms
and conditions of the Exchange Offer (including the Letter of
Transmittal and Instructions thereto) will also be final and binding.
The Issuers and the Exchange Agent are not under any duty to give
notification of any irregularities or defects and shall not incur any
liability for failure to give any such notification. Tenders will not be
deemed to have been made until such irregularities or defects have been
cured or waived. Any tender (including the Letter of Transmittal and
Series B Notes and Series C Notes) that is not properly completed and
executed, and as to which irregularities or defects are not cured or
waived, will be returned by the Exchange Agent to the tendering holder
promptly after the Expiration Date without cost to the tendering holder
10
<PAGE>
(or, in the case of Series B Notes and Series C Notes delivered by
book-entry transfer within DTC, the tendered Series B Notes and Series C
Notes will be credited to the account maintained within DTC by the
participant).
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE SERIES B NOTES
AND SERIES C NOTES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY
THROUGH DTC, IS AT THE ELECTION AND RISK OF THE TENDERING HOLDER AND,
EXCEPT AS OTHERWISE PROVIDED IN THIS INSTRUCTION 2, THE DELIVERY WILL BE
DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF
DELIVERY IS BY MAIL, REGISTERED MAIL, WITH RETURN RECEIPT REQUESTED,
PROPERLY INSURED, IS RECOMMENDED.
No alternative, conditional or contingent tenders will be accepted. All
tendering holders, by execution of this Letter of Transmittal or
facsimile hereof, waive any rights to receive any notice of the
acceptance of their tender.
3. INADEQUATE SPACE. If the space provided herein is inadequate, the Series
B and Series C Note numbers and the principal amount of Series B Notes
and Series C Notes should be listed on a separate signed schedule
attached hereto.
4. PARTIAL TENDERS. If less than all of the principal amount represented by
any Series B Note or Series C Note submitted is to be tendered, the
principal amount of the Series B Notes or Series C Notes which are to be
tendered should be stated in the box entitled "Principal Amount of
Series B Notes or Series C Notes Tendered." New Series B Notes or Series
C Notes for the remaining principal amount of the old Series B Note(s)
or Series C Note(s) will either be sent to the registered holder of the
Series B Note(s) or Series C Note(s) tendered as soon as practicable
after the tender has been accepted or credited to the holder's account
in accordance with appropriate book-entry procedures. The aggregate
principal amount of all Series B Notes and Series C Notes listed are
deemed to have been tendered unless otherwise indicated. Partial tenders
of all Series B Notes and Series C Notes may be made only if (i) the
principal amount tendered is equal to $1,000 or an integral multiple
thereof; and (ii) the remaining untendered portion of such Series B and
Series C Note is in a principal amount of $250,000, or any integral
multiple of $1,000 in excess of such amount.
5. SIGNATURES ON LETTER OF TRANSMITTAL. This Letter of Transmittal must be
signed by the registered holder of the Series B Note(s) or Series C
Note(s) tendered hereby and if the Series B Note(s) or Series C Note(s)
are registered the signature must correspond exactly with the name as
written on the face of the Series B Note(s) or Series C Note(s) without
alteration, enlargement or any change whatsoever.
If the Series B Notes or Series C Notes tendered hereby are owned of
record by two or more joint owners, all such owners must sign this
Letter of Transmittal.
If this Letter of Transmittal is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations
or others acting in a fiduciary or representative capacity, such persons
should so indicate when signing, and proper evidence satisfactory to the
Issuers of their authority to so act must be submitted.
6. DELIVERY OF EXCHANGE NOTES. Delivery of Exchange Notes will be made
promptly after the Expiration Date for all Series B Notes or Series C
Notes properly tendered and accepted for exchange by the Issuers. The
Exchange Notes of registered holders will be issued in the name of the
registered holder(s) of the Series B Notes or Series C Notes and will
either be mailed to such holder(s) or credited to such holder's account
in accordance with appropriate book-entry procedures. In the case of
11
<PAGE>
tenders by Notice of Guaranteed Delivery, Exchange Notes will not be
delivered until the Letter of Transmittal, the Series B Notes or Series
C Notes relating to such Notice of Guaranteed Delivery (or a timely
confirmation of a book-entry transfer of such Series B Notes or Series C
Notes into the Exchange Agent's account of DTC) and all other required
documents have been received by the Exchange Agent.
7. SECURITY TRANSFER TAXES. The Issuers will pay all security transfer
taxes, if any, applicable to the exchange of Series B Notes or Series C
Notes tendered and accepted pursuant to the Exchange Offer.
8. BACKUP FEDERAL INCOME TAX WITHHOLDING AND SUBSTITUTE FORM W9. Under the
federal income tax laws, payments that may be made by the Issuers on
account of Exchange Notes issued pursuant to the Exchange Offer may be
subject to backup withholding at the rate of 31%. In order to avoid such
backup withholding, each tendering holder should complete and sign the
Substitute Form W-9 included in this Letter of Transmittal and either
(a) provide the correct taxpayer identification number ("TIN") and
certify, under penalties of perjury, that the TIN provided is correct
and that (i) the holder has not been notified by the Internal Revenue
Service (the "IRS") that the holder is subject to backup withholding as
a result of failure to report all interest or dividends or (ii) the IRS
has notified the holder that the holder is no longer subject to backup
withholding; or (b) provide an adequate basis for exemption. If the
tendering holder has not been issued a TIN and has applied for one, or
intends to apply for one in the near future, such holder should write
"Applied For" in the space provided for the TIN in Part I of the
Substitute Form W-9, sign and date the Substitute Form W-9 and sign the
Certificate of Payee Awaiting Taxpayer Identification Number. If
"Applied For" is written in Part I, the Issuers (or the Paying Agent
under the Indenture governing the Exchange Notes) shall retain 31% of
payments made to the tendering holder during the sixty day period
following the date of the Substitute Form W-9. If the holder furnishes
the Exchange Agent or the Issuers with its TIN within sixty days after
the date of the Substitute Form W-9, the Issuers (or the Paying Agent)
shall remit such amounts retained during the sixty day period to the
holder and no further amounts shall be retained or withheld from
payments made to the holder thereafter. If, however, the holder has not
provided the Exchange Agent or the Issuers with its TIN within such
sixty day period, the Issuers (or the Paying Agent) shall remit such
previously retained amounts to the IRS as backup withholding. In
general, if a holder is an individual, the TIN is the Social Security
number of such individual. If the Exchange Agent or the Issuers are not
provided with the correct TIN, the holder may be subject to a $50
penalty imposed by the IRS. Certain holders (including, among others,
all corporations and certain foreign individuals) are not subject to
these backup withholding and reporting requirements. In order for a
foreign individual to qualify as an exempt recipient, such holder must
submit a statement (generally, IRS Form W-8), signed under penalties of
perjury, attesting to that individual's exempt status. Such statements
can be obtained from the Exchange Agent.
Failure to complete the Substitute Form W-9 will not, by itself, cause
Notes to be deemed invalidly tendered, but may require the Issuers (or
the Paying Agent) to withhold 31% of the amount of any payment made on
account of the Exchange Notes. Backup withholding is not an additional
federal income tax. Rather, the federal income tax liability of a person
subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund
may be obtained from the IRS.
9. WAIVER OF CONDITIONS. Subject to limitations set forth in the
Prospectus, the conditions of the Exchange Offer may be waived by the
Issuers, in whole or in part, at any time or from time to time, in the
Issuers' sole discretion in the case of any Series B Notes and Series C
Notes tendered.
10. LOST, DESTROYED OR STOLEN NOTES. If any Series B Note or Series C Note
has been lost, stolen, mutilated or destroyed, the holder should
12
<PAGE>
promptly notify the Trustee, IBJ Schroder Bank & Trust Company, of such
fact in writing, or call (212) 858-2103. The holder will then be
directed as to the steps that must be taken in order to replace the
Series B Note or Series C Note. The Letter of Transmittal and related
documents cannot be processed until the procedures for replacing lost,
stolen, mutilated or destroyed Series B Notes or Series C Notes have
been followed.
11. REQUEST FOR ADDITIONAL COPIES. Questions and requests for additional
copies of the Prospectus and this Letter of Transmittal may be obtained
from the Exchange Agent at the address and telephone number set forth in
the Prospectus.
12. PARTICIPATING BROKER-DEALERS. Each Holder which is a Participating
Broker-Dealer must advise the Exchange Agent as to the number of copies
of the Prospectus (including supplements and amendments thereto) it will
require in order to satisfy the prospectus delivery requirements for
resales of Exchange Notes which are exchanged for Series B Notes and
Series C Notes acquired by it for its own account as a result of
market-making or other trading activities.
(DO NOT WRITE IN SPACE BELOW)
- --------------------------- -------------------------- -------------------------
CERTIFICATE SURRENDERED EXISTING NOTES TENDERED EXISTING NOTES ACCEPTED
- --------------------------- -------------------------- -------------------------
- --------------------------- -------------------------- -------------------------
- --------------------------- -------------------------- -------------------------
- --------------------------- -------------------------- -------------------------
- --------------------------- -------------------------- -------------------------
- --------------------------- -------------------------- -------------------------
- --------------------------- -------------------------- -------------------------
- --------------------------- -------------------------- -------------------------
- --------------------------- -------------------------- -------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------- ----------------------------------------------------
Dated Received
- --------------------------- ----------------------------------------------------
- --------------------------- ----------------------------------------------------
Accepted by
- --------------------------- ----------------------------------------------------
- --------------------------- ----------------------------------------------------
Checked by
- --------------------------- ----------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------- ----------------------------------------------------
Delivery Prepared by
- --------------------------- ----------------------------------------------------
- --------------------------- ----------------------------------------------------
Checked by
- --------------------------- ----------------------------------------------------
- --------------------------- ----------------------------------------------------
Date
- --------------------------- ----------------------------------------------------
IMPORTANT TAX INFORMATION
Under federal income tax laws, a holder whose tendered Series B Notes or
Series C Notes are accepted for payment is required to provide the Exchange
Agent (as payor) with such holder's correct TIN on Substitute Form W-9 below or
otherwise establish a basis for exemption from backup withholding. If such
holder is an individual, the TIN is his social security number. If the Exchange
Agent is not provided with the correct TIN, a $50 penalty may be imposed by the
Internal Revenue Service.
Certain holders (including, among others, all corporations and certain
foreign persons) are not subject to these backup withholding and reporting
requirements. Exempt holders should indicate their exempt status on Substitute
Form W-9. A foreign person may qualify as an exempt recipient by submitting to
the Exchange Agent a properly completed Internal Revenue Service Form W-8,
signed under penalties of perjury, attesting to that holder's exempt status. A
Form W-8 can be obtained from the Exchange Agent.
If backup withholding applies, the Exchange Agent is required to
withhold 20% of any payments made to the holder or other payee. Backup
withholding is not an additional federal income tax. Rather, the federal income
tax liability of persons subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained from the Internal Revenue Service.
13
<PAGE>
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments made with respect to the
Exchange Offer, the holder is required to provide the Exchange Agent with
either: (i) the holder's correct TIN by completing the form below, certifying
that the TIN provided on Substitute Form W-9 is correct (or that such holder is
awaiting a TIN) and that (A) the holder has been notified by the Internal
Revenue Service that the holder is subject to backup withholding as a result of
failure to report all interest or dividends or (B) the Internal Revenue Service
has notified the holder that the holder is no longer subject to backup
withholding, or (ii) an adequate basis for exemption.
PAYER'S NAME: IBJ SCHRODER BANK & TRUST COMPANY
- ------------------- ------------------------------------------- ----------------
SUBSTITUTE Part 1 - PLEASE PROVIDE YOUR TIN IN THE Social Security
BOX AT THE RIGHT AND CERTIFY BY SIGNING Number
Form W - 9 AND DATING BELOW. or Employer
Identification
Number
------------------------------------------ -----------------
Part 2 - Certification - Under penalties of perjury,
I certify that:
(1)The number shown on this form is my correct
Taxpayer Identification Number (or I am waiting
for a number to be issued to me) and
Department of the (2)I am not subject to backup withholding because: (a)
Treasury I am exempt from backup withholding, or (b) I have not
Internal Revenue been notified by the Internal Revenue Service (the
Service "IRS") that I am subject to backup withholding as
a result of a failure to report all interest or
dividends, or (c) the IRS has notified me that I
am no longer subject to backup withholding.
Payer's Request for Certification Instructions - You must cross out Item (2)
Taxpayer above if you have been notified by the IRS that you are
Identification currently subject to backup withholding because of
Number ("TIN") under-reporting interest or dividends on your tax
return. However, if after being notified by the IRS
that you were subject to backup withholding you
received another notification from the IRS that you
are no longer subject to backup withholding, do not
cross out such Item (2).
-----------------------------------------------------------
SIGN HERE SIGNATURE. . . . . . . . . . . . . . Part 3 ---
. . . . . . . . . . . . . . . .. . .
. . . . .
DATE. . . . . . . . . . . . . . . . Awaiting TIN [ ]
. . . . . . . . . . . . . . . . . .
- --------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE
OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR
ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 3 OF SUBSTITUTE FORM W-9.
14
<PAGE>
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office, or (2) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of all
reportable payments made to me will be withheld, but that such amounts will be
refunded to me if I then provide a Taxpayer Identification Number within sixty
(60) days.
Signature. . . . . . . . . . . . . . . . . Date. . . . . . . . . ., 19 . . .
- --------------------------------------------------------------------------------
15
<PAGE>
EXHIBIT 5.1
April 8, 1998
Abraxas Petroleum Corporation
500 North Loop 1604 East
Suite 100
San Antonio, Texas 78232
Re: Registration Statement No. 333-____on Form S-4
filed by Abraxas Petroleum Corporation
Dear Sirs:
We have acted as counsel to Abraxas Petroleum Corporation, a Nevada
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended, pursuant to Registration Statement No.
333-______ on Form S-4 (the "Registration Statement"), of an aggregate of
$275,000,000 principal amount of the Company's 11 1/2% Senior Notes Due 2004,
Series D (the "Exchange Notes").
We have examined and are familiar with originals or copies, the
authenticity of which have been established to our satisfaction, of all such
documents, corporate records, certificates of officers of the Company and public
officials, and other instruments as we have deemed necessary to express the
opinion hereinafter set forth. In expressing our opinion as to the valid
issuance of shares of the Exchange Notes, we express no opinion as to compliance
with federal and state securities laws.
Based upon the foregoing, it is our opinion that:
(1) the Exchange Notes to be issued and sold as described in the
Registration Statement have been duly and validly authorized for such issue and
sale and, when so issued, sold and delivered, will be validly issued, fully paid
and nonassessable; and
(2) the Exchange Notes, when issued, sold and delivered, will be binding
obligations of the Company except to the extent that the enforceability of the
Exchange Notes may be limited by bankruptcy, insolvency, moratorium,
reorganization, fraudulent conveyance or other laws or decisions relating to or
affecting the enforcement of creditors' rights generally and by general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
The opinion expressed herein is limited to the laws of the State of
Texas, the corporation laws of the State of Nevada and the federal laws of the
United States.
<PAGE>
We hereby consent to the use of our name in the Registration Statement
as counsel who has expressed an opinion upon certain legal matters in connection
with the issue and sale of the Exchange Notes (including specifically the
reference contained under the caption "Legal Matters") and to the use of this
opinion as an exhibit to the Registration Statement.
Yours very truly,
COX & SMITH INCORPORATED
By: /s/Steven R. Jacobs
Steven R. Jacobs,
For the Firm
<PAGE>
EXHIBIT 5.2
[Opinion of Osler, Hoskin & Harcourt]
April 8, 1998
Canadian Abraxas Petroleum Limited
300 - 5th Avenue, 12th Floor
Calgary, Alberta
Re: Registration Statement on Form S-4 filed by Canadian
Abraxas Petroleum Limited
Dear Sirs:
We have acted as counsel to Canadian Abraxas Petroleum Limited, an
Alberta corporation (the "Company"), in connection with the registration under
the Securities Act of 1933, as amended, pursuant to Registration Statement on
Form S-4 (the "Registration Statement"), of an aggregate of $275,000,000
principal amount of the Company's 11 1/2% Senior Notes Due 2004, Series D (the
"Exchange Notes").
We have examined and are familiar with originals or copies, the
authenticity of which have been established to our satisfaction, of all such
documents, corporate records, certificates of officers of the Company and public
officials, and other instruments as we have deemed necessary to express the
opinion hereinafter set forth. In expressing our opinion as to the valid
issuance of shares of the Exchange Notes, we express no opinion as to compliance
with federal and state securities laws.
Based on the foregoing, it is our opinion that:
1. the Exchange Notes to be issued and sold as described in the
Registration Statement have been duly and validly authorized for such issue and
sale and, when so issued, sold and delivered, will be validly issued, fully paid
and non-assessable; and
2. the Exchange Notes to be issued, sold and delivered, will be binding
obligations of the Company.
Our opinion is subject to the following qualifications:
1. the enforceability of the Exchange Notes is subject to or may be
limited by applicable bankruptcy, insolvency, reorganization, arrangement,
moratorium or other similar laws relating to or affecting the rights of
creditors generally;
2. the enforceability of the Exchange Notes is subject to general
principles of equity, including the fact that equitable remedies, such as
specific performance and injunctions, may only be awarded in the discretion of
the court;
3. an Alberta court will only render a judgment in lawful currency of
Canada;
4. each of the Exchange Notes are stated to be governed by and
construed in accordance with the laws of the State of New York. With respect to
any opinions relating to enforceability of the Exchange Notes, we have assumed
that the laws of the State of New York are not materially different from those
of the Province of Alberta and the laws of Canada applicable therein.
3
<PAGE>
The opinion expressed herein is limited to the laws of the Province of
Alberta and the federal laws of Canada applicable therein.
This opinion is intended solely for the use of the persons to whom it
is addressed in connection with the transactions provided for in the Agreements
and may not be relied upon by any other person or for any other purpose, nor
quoted from or referred to in any other document, without our prior written
consent.
We hereby consent to the use of our name in the Registration Statement
as counsel who has expressed an opinion upon certain legal matters in connection
with the issue and sale of the Exchange Notes (including specifically the
references contained under the captions "Enforceability of Civil Liabilities
Against Foreign Persons" and "Legal Matters") and to the use of this opinion as
an exhibit to the Registration Statement.
Yours very truly,
/s/ Osler, Hoskin & Harcourt
4
<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 17, 1998 in the Registration Statement (Form S-4)
and related Prospectus of Abraxas Petroleum Corporation and Canadian Abraxas
Petroleum Limited for the Registration of $275,000,000 of 11 1/2% Senior Notes
due 2004.
/s/ Ernst & Young LLP
San Antonio, Texas
April 8, 1998
5
<PAGE>
EXHIBIT 12.1
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Years Ended December 31,
-----------------------------------------------
(dollars in thousands)
1993 1994 1995 1996 1997
-------- ------- ------- ------- -------
Consolidated pre tax income
(loss) from continuing
operations $(1,393) $ 113 $(1,208) $2,116 $(10,376)
Interest 2,531 2,359 3,911 6,706 25,586
Net amortization of debt
issuance expense 649 400 214 280 1,260
-------- ------- ------- ------- --------
Earnings (loss) 1,787 2,872 2,917 9,102 16,470
======== ======= ======= ======= ========
Interest 2,531 2,359 3,911 6,706 25,586
Net amortization of debt
issuance expense 649 400 214 280 1,260
-------- ------- ------- ------- --------
Fixed Charges 3,180 2,759 4,125 6,986 26,876
======== ======= ======= ======= ========
Ratio or (deficiency of
Earnings to Fixed
Charges $(1,393) 1.04 to 1 $(1,208) 1.30 to 1 $(10,376)
<PAGE>
EXHIBIT 23.2
April 7, 1998
Abraxas Petroleum Corporation
500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
Gentlemen:
We hereby consent to the incorporation in your Registration Statement on
Form S-4 of the references to DeGolyer and MacNaughton in the "Reserves
Information" section on page 44 and in the "Experts" section on page 101, and to
the use by reference of information contained in our "Appraisal Report as of
December 31, 1997 on Certain Interests owned by Abraxas Petroleum Corporation,
provided, however, that since the crude oil, condensate, natural gas liquids,
and natural gas reserves estimates set forth in this Report have been combined
with reserves estimates of other petroleum consultants, we are necessarily
unable to verify the accuracy of the reserves values contained in the
aforementioned Registration Statement.
Very truly yours,
/s/ DeGOLYER and MacNAUGHTON
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the reference to our firm under the caption
"Business - Reserves Information" and "Experts" in the Registration Statement on
Form S-4 (the "Registration Statement") of Abraxas Petroleum Corporation and
Canadian Abraxas Petroleum Limited.
/s/ McDaniel & Associates Consultants, Ltd.
Calgary, Alberta
April 8, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
To the Board of Directors of
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 the Registration
Statement.
/s/ KPMG
Calgary, Canada
April 8, 1998
<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: April 8, 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: April 8, 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: April 8, 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: April 8, 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: April 8, 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: April 8, 1998.
/s/ Paul A. Powell, Jr.
Paul A. Powell, Jr.
<PAGE>
SECTION 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: April 8, 1998.
/s/ Richard M. Riggs
Richard M. Riggs
<PAGE>
EXHIBIT 24.8
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
Canadian Abraxas Petroleum Limited and any or all amendments (including
post-effective amendments) thereto and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Dated: April 8, 1998.
/s/ Donald A. Engle
Donald A. Engle
<PAGE>
EXHIBIT 24.9
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
Canadian Abraxas Petroleum Limited and any or all amendments (including
post-effective amendments) thereto and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Dated: April 8, 1998.
/s/ Roger L. Bruton
Roger L. Bruton
<PAGE>
EXHIBIT 25.1
-------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)
---------------
IBJ SCHRODER BANK & TRUST COMPANY
(Exact name of trustee as specified in its charter)
New York 13-5375195
(Jurisdiction of incorporation (I.R.S. employer
or organization if not a U.S. national bank) identification No.)
One State Street, New York, New York 10004
(Address of principal executive offices) (Zip code)
IBJ SCHRODER BANK & TRUST COMPANY
One State Street
New York, New York 10004
(212) 858-2000
(Name, address and telephone number of agent for service)
ABRAXAS PETROLEUM CORPORATION
CANADIAN ABRAXAS PETROLEUM LIMITED
(Exact names of obligors as specified in its charter)
Nevada 74-2584033
Canada N/A
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
(Address of principal executive offices) (Zip code)
11 1/2% Senior Notes due 2004, Series D
--------------------
(Title of indenture securities)
1
<PAGE>
Item 1. General information
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising
authority to which it is subject.
New York State Banking Department,
Two Rector Street, New York, New York
Federal Deposit Insurance Corporation, Washington, D.C.
Federal Reserve Bank of New York Second District,
33 Liberty Street, New York, New York
(b) Whether it is authorized to exercise corporate trust powers.
Yes
Item 2. Affiliations with the Obligors.
If the obligors are an affiliate of the trustee, describe
each such affiliation.
The obligors are not an affiliate of the trustee.
Item 13. Defaults by the Obligors.
(a) State whether there is or has been a default with respect
to the securities under this indenture. Explain the nature
of any such default.
None
(b) If the trustee is a trustee under another indenture under
which any other securities, or certificates of interest or
participation in any other securities, of the obligors are
outstanding, or is trustee for more than one outstanding
series of securities under the indenture, state whether
there has been a default under any such indenture or
series, identify the indenture or series affected, and
explain the nature of any such default.
None
List of exhibits.
List below all exhibits filed as part of this statement of
eligibility.
*1. A copy of the Charter of IBJ Schroder Bank & Trust Company
as amended to date. (See Exhibit 1A to Form T-1,
Securities and Exchange Commission File No. 22-18460).
*2. A copy of the Certificate of Authority of the trustee to
Commence Business (Included in Exhibit 1 above).
*3. A copy of the Authorization of the trustee to exercise
corporate trust powers, as amended to date (See Exhibit 4
to Form T-1, Securities and Exchange Commission File No.
22-19146).
2
<PAGE>
*4. A copy of the existing By-Laws of the trustee, as amended
to date (See Exhibit 4 to Form T-1, Securities and
Exchange Commission File No. 22-19146).
5. Not Applicable
6. The consent of United States institutional trustee
required by Section 321(b) of the Act.
7. A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its
supervising or examining authority.
* The Exhibits thus designated are incorporated herein by reference as
exhibits hereto. Following the description of such Exhibits is a
reference to the copy of the Exhibit heretofore filed with the
Securities and Exchange Commission, to which there have been no
amendments or changes.
NOTE
In answering any item in this Statement of Eligibility which relates to
matters peculiarly within the knowledge of the obligors and its
directors or officers, the trustee has relied upon information furnished
to it by the obligors.
Inasmuch as this Form T-1 is filed prior to the ascertainment by the
trustee of all facts on which to base responsive answers to Item 2, the
answer to said Item is based on incomplete information.
Item 2, may, however, be considered as correct unless amended by an
amendment to this Form T-1.
Pursuant to General Instruction B, the trustee has responded to Items 1,
2 and 16 of this form since to the best knowledge of the trustee as
indicated in Item 13, the obligors are not in default under any
indenture under which the applicant is trustee.
3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of
1939, the trustee, IBJ Schroder Bank & Trust Company, a corporation
organized and existing under the laws of the State of New York, has duly
caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of New York, and
State of New York, on the 2nd day of April, 1998.
IBJ SCHRODER BANK & TRUST COMPANY
By: /s/ Stephen J. Giurlando
Stephen J. Giurlando
Assistant Vice President
4
<PAGE>
Exhibit 6
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture
Act of 1939, as amended, in connection with the issue by Abraxas Petroleum
Corporation and Canadian Abraxas Petroleum Limited, of its 11 1/2% Senior Notes
due 2004, Series D, we hereby consent that reports of examinations by Federal,
State, Territorial, or District authorities may be furnished by such authorities
to the Securities and Exchange Commission upon request therefor.
IBJ SCHRODER BANK & TRUST COMPANY
By: /s/ Stephen J. Giurlando
Stephen J. Giurlando
Assistant Vice President
Dated: April 2, 1998
5
<PAGE>
EXHIBIT 7
<TABLE>
<CAPTION>
CONSOLIDATED REPORT OF CONDITION OF
IBJ SCHRODER BANK & TRUST COMPANY
of New York, New York
And Foreign and Domestic Subsidiaries
Report as of December 31, 1997
Dollar Amounts
in Thousands
ASSETS
<S> <C>
1. Cash and balance due from depository institutions:
a. Noninterest-bearing balances and currency and coin......................$ 45,276
b. Interest-bearing balances...............................................$ 121,534
2. Securities:
a. Held-to-maturity securities.............................................$ 184,821
b. Available-for-sale securities...........................................$ 74,043
3. Federal funds sold and securities purchased under agreements to resell in
domestic offices of the bank and of its Edge and Agreement subsidiaries and
in IBFs:
Federal Funds sold and Securities purchased under agreements to resell......$ 202,104
4. Loans and lease financing receivables:
a. Loans and leases, net of unearned income................................$1,797,414
b. LESS: Allowance for loan and lease losses...............................$ 61,962
c. LESS: Allocated transfer risk reserve...................................$ -0-
d. Loans and leases, net of unearned income, allowance, and reserve........$1,735,452
5. Trading assets held in trading accounts.....................................$ 479
6. Premises and fixed assets (including capitalized leases)....................$ 2,952
7. Other real estate owned.....................................................$ -0-
8. Investments in unconsolidated subsidiaries and associated companies.........$ -0-
9. Customers' liability to this bank on acceptances outstanding................$ 1,447
10. Intangible assets...........................................................$ -0-
11. Other assets................................................................$ 67,256
12. TOTAL ASSETS................................................................$2,435,364
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES
<S> <C>
13. Deposits:
a. In domestic offices.....................................................$ 791,520
(1) Noninterest-bearing ....................................................$ 247,397
(2) Interest-bearing........................................................$ 544,123
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs...........$1,229,810
(1) Noninterest-bearing.....................................................$ 14,607
(2) Interest-bearing........................................................$1,215,203
14. Federal funds purchased and securities sold under agreements to repurchase
in domestic offices of the bank and of its Edge and Agreement subsidiaries,
and in IBFs:
Federal Funds purchased and Securities sold under agreements to repurchase..$ 10,000
15. a. Demand notes issued to the U.S. Treasury................................$ 5,000
b. Trading Liabilities.....................................................$ 108
16. Other borrowed money:
a. With a remaining maturity of one year or less...........................$ 83,453
b. With a remaining maturity of more than one year.........................$ 1,763
c. With a remaining maturity of more than three years......................$ 2,242
17. Not applicable.
18. Bank's liability on acceptances executed and outstanding....................$ 1,447
19. Subordinated notes and debentures...........................................$ -0-
20. Other liabilities...........................................................$ 70,284
21. TOTAL LIABILITIES...........................................................$2,195,627
22. Limited-life preferred stock and related surplus............................$ -0-
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus...............................$ -0-
24. Common stock................................................................$ 29,649
25. Surplus (exclude all surplus related to preferred stock)....................$ 217,008
26. a. Undivided profits and capital reserves..................................$ (7,130)
b. Net unrealized gains (losses) on available-for-sale securities..........$ 210
27. Cumulative foreign currency translation adjustments.........................$ -0-
28. TOTAL EQUITY CAPITAL........................................................$ 239,737
29. TOTAL LIABILITIES AND EQUITY CAPITAL........................................$2,435,364
</TABLE>
7
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> Dec-30-1997
<CASH> 2836
<SECURITIES> 0
<RECEIVABLES> 14638
<ALLOWANCES> (36)
<INVENTORY> 367
<CURRENT-ASSETS> 18313
<PP&E> 385442
<DEPRECIATION> (74597)
<TOTAL-ASSETS> 338528
<CURRENT-LIABILITIES> 27457
<BONDS> 248617
0
0
<COMMON> 63
<OTHER-SE> 26750
<TOTAL-LIABILITY-AND-EQUITY> 338528
<SALES> 70931
<TOTAL-REVENUES> 70931
<CGS> 0
<TOTAL-COSTS> 55781
<OTHER-EXPENSES> 571
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24620
<INCOME-PRETAX> (10041)
<INCOME-TAX> (3891)
<INCOME-CONTINUING> (6485)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6668)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> (1.11)
</TABLE>
