As filed with Securities and Exchange Commission on January 12, 2005
Registration No. 333-120989
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
Under THE SECURITIES ACT OF 1933
Abraxas Petroleum Corporation
Eastside Coal Company, Inc.
Sandia Oil & Gas Corporation
Sandia Operating Corp.
Wamsutter Holdings, Inc.
Western Associated Energy Corporation
(Exact Name of Registrants as Specified in their Charters)
Nevada 1331 74-258403
Colorado 1331 74-227540
Texas 1331 74-236896
Texas 1331 74-246870
Wyoming 1331 74-289701
Texas 1331 74-193787
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification
incorporation or Classification Code Number)
organization) Number)
500 North Loop 1604 East, Suite 100, San Antonio, Texas 78232, (210) 490-4788
(Address, including zip code, and telephone number,
including area code, of registrants' principal executive offices)
Robert L. G. Watson
President and Chief Executive Officer
Abraxas Petroleum Corporation
500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
(210) 490-4788
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
With a copy to:
Cox Smith Matthews Incorporated
112 East Pecan, Suite 1800
San Antonio, Texas 78205
Attn: Steven R. Jacobs
(210) 554-5500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES 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. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________________
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] __________________________
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.
The information in this prospectus is not complete and may be changed. Abraxas
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer is not permitted.
SUBJECT TO COMPLETION, DATED JANUARY __, 2005
PROSPECTUS
ABRAXAS PETROLEUM CORPORATION
OFFER TO EXCHANGE UP TO
$125,000,000 PRINCIPAL AMOUNT FLOATING RATE SENIOR SECURED NOTES DUE 2009,
SERIES B AND GUARANTEES THEREOF
FOR ANY AND ALL OUTSTANDING
$125,000,000 PRINCIPAL AMOUNT FLOATING RATE SENIOR SECURED NOTES DUE 2009,
SERIES A AND GUARANTEES THEREOF
THE SERIES A/B EXCHANGE OFFER WILL EXPIRE AT midnight, NEW YORK CITY TIME,
ON __________, 2005, UNLESS EXTENDED.
The Floating Rate Senior Secured Notes due 2009, Series A
o were originally offered and sold on October 28, 2004 in an aggregate
principal amount of $125,000,000;
o will mature on December 1, 2009;
o accrue interest from the date of issuance at a per annum floating rate
of six-month LIBOR plus 7.50, initially being 9.72% per annum;
o interest is payable semi-annually on each June 1 and December 1,
commencing June 1, 2005;
o are guaranteed by each of Abraxas' current subsidiaries other than
Grey Wolf Exploration Inc., including Sandia Oil & Gas Corporation,
Sandia Operating Corp., Wamsutter Holdings, Inc., Western Associated
Energy Corporation and Eastside Coal Company, Inc. and will be
guaranteed by all of Abraxas' future subsidiaries;
o are secured by a shared lien on all of Abraxas' current and future
properties and assets, including, but not limited to, Abraxas' natural
gas and crude oil properties; and
o are not listed on any national securities exchange.
The Floating Rate Senior Secured Notes due 2009, Series B
o are offered in exchange for an equal principal amount of the
outstanding Series A notes;
o evidence the same indebtedness as the outstanding Series A notes and
are entitled to the benefits of the indenture under which those notes
were issued; and
o are not listed on any national securities exchange.
The Series A/B Exchange Offer
o expires at midnight, New York City time, on __________, 2005, unless
extended;
o is Abraxas' offer to exchange Abraxas' Series B notes, or exchange
notes, and guarantees thereof for an equal amount of our validly
tendered outstanding Series A notes, or outstanding notes, and
guarantees thereof;
o is not a taxable exchange for U.S. Federal income tax purposes; and
o is not subject to any condition other than that the Series A/B
exchange offer not violate applicable law or any applicable
interpretation of the staff of the Securities and Exchange Commission.
You should carefully consider the risk factors beginning on page 17 of
this prospectus before participating in the Series A/B exchange offer.
i
Neither the SEC nor any state securities commission has approved or
disapproved of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
Each broker-dealer that receives exchange notes for its own account
pursuant to the Series A/B exchange offer 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
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 broker-dealer in connection
with resales of exchange notes received in exchange for Securities where such
Securities were acquired by such broker-dealer as a result of market-making
activities or other trading activities. Abraxas has agreed that, for a period of
180 days after the Expiration Date (as defined herein), it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution".
The date of this prospectus is January __, 2005.
ii
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.
--------------------------
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS...................................................iv
SUMMARY..................................................................... 1
RISK FACTORS.................................................................17
USE OF PROCEEDS..............................................................30
CAPITALIZATION...............................................................30
RATIO OF EARNINGS TO FIXED CHARGES...........................................31
THE SERIES A/B EXCHANGE OFFER................................................32
UNAUDITED PRO FORMA FINANCIAL INFORMATION....................................39
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA..............................44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...............................................................45
BUSINESS.................................................................... 73
MANAGEMENT...................................................................87
EXECUTIVE COMPENSATION.......................................................90
DESCRIPTION OF THE EXCHANGE NOTES............................................93
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT..................................156
BOOK-ENTRY; DELIVERY AND FORM...............................................159
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS..............................162
PLAN OF DISTRIBUTION........................................................167
LEGAL MATTERS...............................................................168
EXPERTS.....................................................................168
WHERE YOU CAN FIND MORE INFORMATION.........................................168
GLOSSARY OF TERMS...........................................................169
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are not
making an offer to sell, or a solicitation of an offer to buy, these securities
in any jurisdiction where the offer or sale is not permitted. The information
contained in this prospectus speaks only as of the date of this prospectus.
This prospectus contains summaries of certain provisions contained in some
of the documents described herein, but reference is made to the actual documents
for complete information. All of the summaries are qualified in their entirety
by the actual documents. Copies of documents referred to in this prospectus will
be made available to prospective investors by Abraxas upon written request.
iii
FORWARD-LOOKING STATEMENTS
We make forward-looking statements throughout this prospectus. Whenever you
read a statement that is not simply a statement of historical fact (such as
statements including words like "believe," "expect," "anticipate," "intend,"
"plan," "seek," "estimate," "could," "potentially" or similar expressions), you
must remember that these are forward looking statements, and that our
expectations may not be correct, even though we believe they are reasonable. The
forward-looking information contained in this prospectus is generally located in
the material set forth under the headings "Summary," "Risk Factors," "Business,"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" but may be found in other locations as well. These forward-looking
statements generally relate to our plans and objectives for future operations
and are based upon our management's reasonable estimates of future results or
trends. The factors that may affect our expectations regarding our operations
include, among others, the following:
o our high debt level;
o our success in development, exploitation and exploration activities;
o our ability to make planned capital expenditures;
o declines in our production of natural gas and crude oil;
o prices for natural gas and crude oil;
o our ability to raise equity capital or incur additional indebtedness;
o political and economic conditions in oil producing countries,
especially those in the Middle East;
o price and availability of alternative fuels;
o our restrictive debt covenants;
o our acquisition and divestiture activities;
o results of our hedging activities; and
o other factors discussed elsewhere in this prospectus.
iv
SUMMARY
The following summarizes the more detailed information appearing elsewhere
in this prospectus. It is not complete and may not contain all of the
information that you should consider before engaging in the Series A/B exchange
offer. For a more complete understanding of our business and of all the terms of
the notes, you should carefully read this entire prospectus. As used in this
prospectus, unless the context otherwise requires, or as used in "Description of
the Exchange Notes," or as otherwise noted, "Abraxas" refers to Abraxas
Petroleum Corporation and all of its subsidiaries other than Grey Wolf. "Grey
Wolf" refers only to Abraxas' wholly-owned Canadian subsidiary, Grey Wolf
Exploration Inc., and "we," "our" and "us" refer to Abraxas and all of its
subsidiaries. Except as otherwise noted, (i) the reserve data reported in this
prospectus is based on the reserve estimates of our independent petroleum
engineers and (ii) all dollar amounts referenced in this prospectus are
references to U.S. dollars. Except as otherwise noted, or as used in
"Description of the Exchange Notes," the terms "on a pro forma basis" or "pro
forma" refer to our business, financial condition and results of operations, as
applicable, as if (i) Grey Wolf were not included as part of our operations or
in our consolidated financial information, as applicable, (ii) the refinancing
described in this prospectus had occurred at the times indicated and (iii) as a
result, the January 2003 financial restructuring described in this prospectus
did not take place. See "Glossary of Terms" for definitions of some technical
terms used in this prospectus.
Our Company
We are an independent energy company primarily engaged in the development
and production of natural gas and crude oil. Historically, we have grown through
the acquisition and subsequent development and exploitation of producing
properties, principally through the redevelopment of old fields utilizing new
technologies such as modern log analysis and reservoir modeling techniques as
well as 3-D seismic surveys and horizontal drilling. As a result of these
activities, we believe that we have a substantial inventory of low risk
development opportunities, which provide a basis for significant production and
reserve increases. In addition, we intend to expand upon our exploitation and
development activities with complementary low risk exploration projects in our
core areas of operation.
Abraxas' core areas of operation are in south and west Texas and east
central Wyoming. Abraxas' current producing properties are typically
characterized by long-lived reserves, established production profiles and an
emphasis on natural gas. Grey Wolf conducts operations in western Canada. The
following table sets forth certain information relating to Abraxas' and Grey
Wolf's proved reserves at December 31, 2003:
Percentage of PV-10
----------------------------------------------
Reserves Reserve Life PV-10 Developed Natural Gas Operated
----------------------------- ------------ -------------- ---------------- --------------
(Bcfe) (in years) (in millions)
Abraxas....... 100.1 16.2 $161.6 64% 80% 90%
Grey Wolf..... 21.0 19.1 $ 55.2 76% 77% 49%
In January 2003, we completed a series of transactions, which we sometimes
refer to as the January 2003 financial restructuring, including the sale of most
of our Canadian properties and the issuance of Abraxas' existing 11 1/2% secured
notes due 2007. The terms of those notes limited our ability to make capital
expenditures exceeding $10 million per year, which caused us to put a priority
on those projects which allowed us to maintain our leasehold positions and
comply with drilling requirements on non-operated properties, rather than on
those opportunities which we believed had the greatest potential for increasing
our production and reserves. Despite this limitation on capital expenditures, we
increased average daily production from the producing properties that we
continued to own after the Canadian sale in January 2003 from approximately 19
MMcfe in January 2003 to approximately 24 MMcfe in June 2004, while drilling a
total of 43 wells with a 93% success rate. In addition, during 2003, we added 16
Bcfe of proved reserves at a finding cost of $1.15 per Mcfe.
Abraxas believes that its high quality asset base, high degree of
operational control and large inventory of drilling projects position it for
future growth. Abraxas' properties are concentrated in locations that facilitate
substantial economies of scale in drilling and production operations and
efficient reservoir management practices.
1
Abraxas operates 94% of its propertiesaccounting for approximately 90% of its
PV-10, giving Abraxas substantial control over the timing and incurrence of
operating and capital expenditures. In addition, Abraxas has 47 proved
undeveloped locations and has identified over 100 drilling and recompletion
opportunities on its existing U.S. acreage, the successful development of which
Abraxas believes could significantly increase its daily production and proved
reserves.
The Refinancing
On October 28, 2004, in order to provide Abraxas with greater flexibility
in conducting its business, including increasing capital spending and exploiting
its additional drilling opportunities, Abraxas refinanced all of its then
existing indebtedness by redeeming its 11 1/2% secured notes due 2007 and
terminating its previous credit facility with the net proceeds from:
o the private issuance of $125.0 million aggregate principal amount of
the Floating Rate Senior Secured Notes due 2009, Series A;
o the proceeds of its new $25.0 million second lien increasing rate
bridge loan; and
o the payment to Abraxas by Grey Wolf of $35.0 million from the proceeds
of Grey Wolf's new $35.0 million term loan.
As a part of the refinancing, Abraxas also entered into a new $15.0 million
revolving credit facility, under which Abraxas currently has availability of
approximately $13.6 million.
Abraxas anticipates making capital expenditures on U.S. properties for 2005
of approximately $20.0 million, which Abraxas anticipates will include the
development activities related to approximately 23 projects.
Series A/B Exchange Offer
Simultaneously with the issuance of the outstanding notes, Abraxas entered
into an exchange and registration rights agreement with Guggenheim Capital
Markets, LLC, the initial purchaser of those notes. Under the terms of the
exchange and registration rights agreement, Abraxas agreed to file with the SEC
and cause to become effective, a registration statement relating to an offer to
exchange the outstanding notes and guarantees thereof for the exchange notes and
guarantees thereof described in this prospectus (the outstanding notes and the
exchange notes are sometimes referred to in this prospectus as the "notes").
Under the exchange and registration rights agreement, Abraxas must deliver this
prospectus to holders of the outstanding notes and must complete the Series A/B
exchange offer by June 6, 2005, subject to any extension that may be legally
required. If Abraxas fails to file the required registration statement, the SEC
does not declare the required registration statement effective or if Abraxas
does not complete the Series A/B exchange offer, in each case within the
applicable time periods required, Abraxas has agreed to pay additional interest
to the holders of the outstanding notes. You may exchange your outstanding notes
and guarantees thereof for exchange notes and guarantees thereof in the Series
A/B exchange offer (discussion of the exchange of outstanding notes for exchange
notes in this prospectus also includes the exchange of the respective guarantees
of each series of notes). You should read the discussion under the heading
"Summary of Terms of the Exchange Notes" and "Description of the Exchange Notes"
for further information regarding the exchange notes.
We believe that holders of the outstanding notes, upon completion of the
Series A/B exchange offer, may resell the exchange notes without complying with
the registration and prospectus delivery provisions of the Securities Act, if
certain conditions are met. You should read the discussion under the headings
"Summary of the Series A/B Exchange Offer", "Plan of Distribution" and "The
Series A/B Exchange Offer-Resales of Exchange Notes" for further information
regarding the Series A/B exchange offer and resales of the exchange notes.
2
The exchange notes will be recorded at the same carrying value as the
outstanding notes. Accordingly, no gain or loss for accounting purposes will be
recognized upon the closing of the Series A/B exchange offer. Costs associated
with the Series A/B exchange offer will be expensed as incurred.
Corporate Information
Abraxas was originally incorporated in Texas in 1977 and re-incorporated in
Nevada in 1990 when it became a public company. Abraxas' common stock is listed
on the American Stock Exchange under the symbol "ABP." Abraxas' principal
offices are located at 500 North Loop 1604 East, Suite 100, San Antonio, Texas
78232, and its telephone number is (210) 490-4788. Abraxas' Internet website
address is www.abraxaspetroleum.com.
3
Summary of the Series A/B Exchange Offer
The following is a brief summary of certain terms of the Series A/B
exchange offer.
Registration Rights.................... Abraxas issued the outstanding notes on
October 28, 2004 to the initial
purchaser in a private offering. The
initial purchaser, in turn, resold those
notes to (i) qualified institutional
buyers in reliance on Rule 144A under
the Securities Act, (ii) institutional
investors that qualified as accredited
investors as defined under Rule
501(a)(1), (2), (3), (7) (8) under the
Securities Act, (iii) a limited number
of individuals who qualified as
accredited investors as defined under
Rule 501(a)(4), (5), (6) under the
Securities Act and (iv) outside the
United States in compliance with
Regulation S under the Securities Act.
Simultaneously with the initial issuance
of the outstanding notes, Abraxas agreed
to provide the holders of the
outstanding notes with certain exchange
and registration rights. The exchange
and registration rights agreement
provides for the Series A/B exchange
offer.
You may exchange your outstanding notes
for exchange notes. After the Series A/B
exchange offer is completed, you
generally will not be entitled to any
further rights to exchange your
outstanding notes for exchange notes.
Series A/B Exchange Offer.............. Abraxas is offering to exchange
$125,000,000 aggregate principal amount
of its Floating Rate Senior Secured
Notes due 2009, Series B and guarantees
thereof, the offering of which has been
registered under the Securities Act, for
all outstanding Floating Rate Senior
Secured Notes due 2009, Series A and
guarantees thereof. To participate in
the Series A/B exchange offer, you must
have properly tendered your outstanding
notes, and Abraxas must have accepted
them. Abraxas will exchange all
outstanding notes that you validly
tender and do not validly withdraw.
Abraxas will issue registered exchange
notes at or promptly after the end of
the Series A/B exchange offer.
Resales.............................. Based on the SEC staff's letters to
third parties in other similar
transactions, Abraxas believes that you
can offer for resale, resell or
otherwise transfer the exchange notes
without complying with the registration
and prospectus delivery requirements of
the Securities Act if:
o you are acquiring the exchange
notes in the ordinary course of
your business;
o you are not participating, do
not intend to participate, and
have no arrangement or
understanding with any person to
participate in, the distribution
of the exchange notes; and
o you are not an "affiliate" of
Abraxas, as defined in Rule 405
of the Securities Act.
If any of these conditions is not
satisfied and you transfer any exchange
notes without delivering a proper
prospectus or without qualifying for a
registration exemption, you may incur
4
liability under the Securities Act. We
will not assume or indemnify you against
such liability.
Abraxas will not seek its own
interpretive letter, and cannot assure
you that the SEC staff will take the
same position on the Series A/B exchange
offer as it did in interpretive letters
to other parties.
Each broker-dealer that receives
exchange notes for its own account in
exchange for outstanding notes that such
broker-dealer acquired through
market-making or other trading
activities must acknowledge that it will
deliver a proper prospectus when it
transfers any exchange notes. A
broker-dealer may use this prospectus
for a limited period for an offer to
resell, a resale or other transfer of
the exchange notes.
ExpirationT........................... The Series A/B exchange offer expires at
midnight, New York City time, on
____________, 2005, unless we extend the
expiration time.
Conditions to the Series A/B Exchange
Offer...................................The Series A/B exchange offer is
subject to customary conditions, some of
which Abraxas may waive. You should read
the discussion under the heading "The
Series A/B Exchange Offer--Conditions to
the Series A/B Exchange Offer" in this
prospectus for more information.
Accrued Interest on the Exchange Notes. The exchange notes will bear interest
from October 28, 2004.
Procedures for Tendering
Outstanding Notes.......................Abraxas issued the outstanding notes in
global form. When the outstanding notes
were issued in October 2004, Abraxas
deposited global notes with U.S. Bank
National Association as custodian for
Cede & Co., the nominee for The
Depository Trust Company, or DTC, the
book-entry depositary. Beneficial
interests in the outstanding notes,
which are held by direct or indirect
participants in DTC, are shown on
records maintained in book-entry form by
DTC.
You may tender your outstanding notes
held in book-entry form through
book-entry transfer in accordance with
DTC's Automated Tender Offer Program, or
ATOP.
Special Procedures for Beneficial
Owners................................. If you are a beneficial owner whose
outstanding notes are registered in the
name of a broker, dealer, commercial
bank, trust company or other nominee and
wish to tender your outstanding notes in
the Series A/B exchange offer, please
contact the registered holder as soon as
possible and instruct it to tender on
your behalf and comply with the
instructions set forth elsewhere in this
prospectus.
Withdrawal Rights...................... You may withdraw the tender of your
outstanding notes at any time before
midnight, New York City time, on the
expiration date by following the
procedures for withdrawal set forth
under the heading "The Series A/B
Exchange Offer--Withdrawal Rights".
5
Appraisal or Dissenter's Rights.........Holders of outstanding notes do not
have any appraisal or dissenters' rights
in the Series A/B exchange offer. If you
do not tender your outstanding notes or
Abraxas rejects your tender, you will
not be entitled to any further rights to
exchange your outstanding notes for
exchange notes. If you do not tender
your outstanding notes, they will remain
outstanding and entitled to the benefits
of the indenture governing the notes.
You should read the discussion under the
heading "Risk Factors--Risks Related to
the Series A/B Exchange Offer" for
further information.
Federal Tax Consequences............... The exchange of notes generally is not a
taxable exchange for United States
federal income tax purposes. You
generally will not recognize any taxable
gain or loss or any interest income as a
result of such exchange. For additional
information regarding the federal tax
consequences of participating in the
Series A/B exchange offer and holding
the notes, you should read the
discussion under the heading "Certain U.
S. Federal Income Tax Considerations."
Exchange Agent......................... U.S. Bank National Association is
serving as the exchange agent in the
Series A/B exchange offer. The exchange
agent's address, and telephone and
facsimile numbers are listed in the
section of this prospectus entitled "The
Series A/B Exchange Offer--Exchange
Agent" and in the accompanying letter of
transmittal.
Use of Proceeds....................... We will not receive any proceeds from
the Series A/B exchange offer, and we
will pay the expenses of the Series A/B
exchange offer.
Risk Factors
Participating in the Series A/B exchange offer involves substantial risk.
You should carefully consider the information under the caption "Risk Factors"
and all other information included in this prospectus before participating in
the Series A/B exchange offer.
6
Summary of Terms of the Exchange Notes
The exchange notes represent the same debt as the outstanding notes, except
that the exchange notes will be registered under the Securities Act. As a
result, the exchange notes will not bear legends restricting their transfer and
will not contain the registration rights and damages provisions contained in the
outstanding notes, with certain limited exceptions in accordance with the terms
of the exchange and registration rights agreement. The outstanding notes and the
exchange notes are governed by the same indenture, and both series of notes are
sometimes interchangeably referred to herein as the "notes."
Issuer..................................Abraxas Petroleum Corporation.
Exchange Notes Offered..................$125 million aggregate principal amount
of Floating Rate Senior Secured Notes
due 2009, Series B.
Maturity Date...........................December 1, 2009.
Interest Rate..........................Interest on the exchange notes accrues at
a per annum floating rate of six-month
LIBOR plus 7.50%. The initial interest
rate on the exchange notes is 9.72% per
annum. The interest rate will be reset
semi-annually on each June 1 and
December 1, commencing on June 1, 2005.
Interest Payment Dates..................Interest is payable semi-annually in
arrears on June 1 and December 1 of each
year, commencing on June 1, 2005.
Regular Record Dates....................The 15th day of the month immediately
preceding the month in which the related
interest payment date occurs.
Ranking and Lien Priority
of the Exchange Notes...................The notes are senior secured
obligations of Abraxas. The notes rank
equally among themselves and with all of
Abraxas' unsubordinated and unsecured
indebtedness, including Abraxas' new
revolving credit facility, and senior in
right of payment to Abraxas' existing
and future subordinated indebtedness,
including the bridge loan. The notes are
effectively senior to Abraxas' existing
and future unsecured indebtedness to the
extent of the value of the collateral
securing the notes and available to the
holders of the notes under the
intercreditor agreement.
The provisions of the intercreditor
agreement among Abraxas, the subsidiary
guarantors, Wells Fargo Foothill, Inc.,
Guggenheim Corporate Funding, LLC and
U.S. Bank National Association provide
that upon notice of an event of default
with respect to the notes, the new
revolving credit facility or the bridge
loan and so long as an event of default
exists, payments made by Abraxas and the
subsidiary guarantors will be applied,
together with any proceeds from any
disposition of collateral:
o if a minimum collateral coverage
ratio of three times the
outstanding obligations under
the new revolving credit
facility is met, (i) to the
payment of interest on the notes
only if and when all accrued and
unpaid interest on the new
revolving credit facility has
been paid and (ii) to the
payment of principal of the
notes after the entire principal
amount outstanding under the new
revolving credit facility has
been repaid; or
7
o if that minimum collateral
coverage ratio is not then met,
to the payment of interest on
and principal of the notes only
if and when all outstanding
interest on and principal of the
new revolving credit facility
have been paid.
See "Description of the Exchange
Notes--Brief Description of the Exchange
Notes and the Subsidiary Guarantees;
Ranking and Lien Priority" and
"Intercreditor Agreement."
Subsidiary Guarantees.................. Each of Abraxas' current subsidiaries
other than Grey Wolf and its future
restricted subsidiaries have
unconditionally guaranteed, jointly and
severally, the payment of the principal
of, and premium and interest (including
any additional interest) on, the notes
on a senior secured basis. In addition,
any other subsidiary or affiliate of
Abraxas, including Grey Wolf, that in
the future guarantees any other
indebtedness of Abraxas or its
restricted subsidiaries will also be
required to guarantee the notes. Except
under the limited circumstances
described in this prospectus, the notes
are not, and will not be, guaranteed by
Grey Wolf, and are structurally
subordinated in right of payment to all
of its obligations, including Grey
Wolf's term loan and trade payables and
other debt of Grey Wolf.
The subsidiary note guarantee of each
subsidiary guarantor is the senior
secured obligation of the subsidiary
guarantor, ranks equally with all of its
unsubordinated and unsecured
indebtedness and senior in right of
payment to its existing and future
subordinated indebtedness, including its
guarantee of the bridge loan. The
subsidiary guarantee is effectively
senior to that subsidiary guarantor's
existing and future unsecured
indebtedness to the extent of the value
of the collateral securing that
subsidiary note guarantee and available
to the holders of the notes under the
intercreditor agreement.
Security............................... The notes and the subsidiary note
guarantees, together with the new
revolving credit facility and the
subsidiary guarantors' guarantees
thereof, are secured by shared first
priority perfected security interests,
subject to certain permitted
encumbrances, in all of Abraxas' and
each of its restricted subsidiaries'
material property and assets, including
substantially all of their natural gas
and crude oil properties and all of the
capital stock (or in the case of an
unrestricted subsidiary that is a
controlled foreign corporation, up to
65% of the outstanding capital stock) in
any entity, other than Grey Wolf, owned
by Abraxas and its restricted
subsidiaries (all of which is
collectively referred to in this
prospectus as the collateral). The notes
are not secured by any of the property
or assets of Grey Wolf (unless it
becomes a restricted subsidiary). The
shares of capital stock of Grey Wolf
owned by Abraxas do not constitute a
part of the collateral.
See "Description of the Exchange
Notes--Security."
Intercreditor Agreement.................The holders of the notes, together with
the lenders under Abraxas' new revolving
credit facility and bridge loan, are
subject to an intercreditor agreement.
8
The intercreditor agreement among other
things, (i) creates security interests
in collateral in favor of a collateral
agent for the benefit of the holders of
the notes, the new revolving credit
facility lenders and the bridge loan
lenders and (ii) governs the priority of
payments among such parties upon notice
of an event of default under the
indenture, the new revolving credit
facility or the bridge loan.
So long as no such event of default
exists, the collateral agent will not
collect payments under the new revolving
credit facility documents, the indenture
and other note documents or the bridge
loan documents, and all payments will be
made directly to the respective
creditor. Upon notice of an event of
default and for so long as an event of
default exists, payments to each new
revolving credit facility lender, holder
of the notes and bridge loan lender from
Abraxas and the subsidiary guarantors,
and proceeds from any disposition of any
collateral, will, subject to limited
exceptions, be collected by the
collateral agent for deposit into a
collateral account and then distributed
as described under "Intercreditor
Agreement--Priority of Distributions."
The collateral agent will act in
accordance with the intercreditor
agreement and as directed by the control
party. Prior to the occurrence of any
event of default, the control party will
be the holders of the notes and the new
revolving credit facility lenders,
acting as a single class, by vote of the
holders of a majority of the aggregate
principal amount of outstanding
obligations under the notes and the new
revolving credit facility. Upon notice
of any such event of default, the bridge
loan lenders will be the control party
for 240 days following such notice. If a
stay under the Bankruptcy Code occurs
during such 240-day period, that period
will be extended by the number of days
during which that stay was effective. If
the new revolving credit facility
lenders and holders of the notes have
not been paid in full by the end of such
specified period, they will become the
control party, acting as a single class,
by vote of the holders of a majority of
the aggregate principal amount of
outstanding obligations under the notes
and the new revolving credit facility.
For more information regarding the
Intercreditor Agreement, you should read
"Intercreditor Agreement."
Optional Redemption.....................After April 28, 2007, Abraxas may redeem
all or a portion of the notes at the
redemption prices set forth under
"Description of the Exchange
Notes--Optional Redemption," plus
accrued and unpaid interest to the date
of redemption. Prior to that date,
Abraxas may redeem up to 35% of the
aggregate original principal amount of
the notes using the net proceeds of one
or more equity offerings, in each case
at the redemption price calculated as
set forth under "Description of the
Exchange Notes--Optional Redemption."
Repurchase at the Option of Holders
Upon the Occurrence
of Certain Asset Sales..................If the bridge loan lenders exercise
their right under certain...
circumstances to require Abraxas to sell
assets, including assets comprising the
collateral, the net proceeds will be
applied in the following order, to the
extent available to:
o first, pay any interest then due
and payable under the new
9
revolving credit facility;
o second, pay any interest then
due and payable on the notes;
o third, pay any accrued and
unpaid interest on the new
revolving credit facility that
was not paid under clause
"first" of this paragraph;
o fourth, pay any outstanding
principal of the new revolving
credit facility;
o fifth, if the remaining
aggregate amount of such net
cash proceeds, together with any
net cash proceeds in the bridge
loan asset sale proceeds account
from a previous asset sale
consummated in accordance with
the provisions described in
"Description of the Exchange
Notes--Repurchase at the Option
of Holders Upon the Occurrence
of Certain Asset Sales," exceeds
$5.0 million, the entire amount
in the bridge loan asset sale
proceeds account is to be used
to make a net proceeds offer to
purchase notes from all holders
of the notes as if such net cash
proceeds remaining after any
payment made pursuant to clause
"first," "second," "third" or
"fourth" above, and any other
net cash proceeds in the bridge
loan asset sale proceeds
account, are excess proceeds
(see "Description of the
Exchange Notes--Certain
Covenants--Limitation on Asset
Sales"); and
o sixth, after the payment of all
amounts required by a net
proceeds offer made in
accordance with clause "fifth"
above repay all amounts
outstanding under the bridge
loan.
See "Description of the Exchange
Notes--Repurchase at the Option of
Holders Upon the Occurrence of Certain
Asset Sales."
Change Of Control.......................If Abraxas experiences specific kinds of
change of control events, each holder of
notes may require Abraxas to repurchase
all or any portion of such holder's
notes at a purchase price equal to 101%
of the principal amount of the notes,
plus accrued and unpaid interest to the
date of repurchase. See "Description of
the Exchange Notes-- Repurchase at the
Option of Holders Upon a Change of
Control."
Covenants.............................. The indenture governing the exchange
notes contains covenants that, among
other things, limit Abraxas' ability to:
o incur or guarantee additional
indebtedness and issue certain
types of preferred stock or
redeemable stock;
o transfer or sell assets;
o create liens on assets;
o pay dividends or make other
distributions on capital stock
10
or make other restricted
payments, including
repurchasing, redeeming or
retiring capital stock or
subordinated debt or making
certain investments or
acquisitions;
o engage in transactions with
affiliates;
o guarantee other indebtedness;
o permit restrictions on the
ability of its subsidiaries to
distribute or lend money to
Abraxas;
o cause a restricted subsidiary to
issue or sell its capital stock;
and
o consolidate, merge or transfer
all or substantially all of the
consolidated assets of Abraxas
and its restricted subsidiaries.
These covenants are subject to important
exceptions and qualifications, which are
described under "Description of the
Exchange Notes--Certain Covenants."
Events of Default.......................The indenture governing the notes
contains customary events of default,
including nonpayment of principal or
interest, violations of covenants, cross
default and cross acceleration to
certain other indebtedness, including
the new revolving credit facility and
bridge loan, bankruptcy, and material
judgments and liabilities.
Absence of a Public Market
for Exchange Notes......................For additional information regarding the
exchange notes, you should read the
discussion under the heading
"Description of the Exchange Notes"
below.
11
Summary Historical Consolidated and Pro Forma Financial Data
The information for the years ended December 31, 2001, 2002 and 2003 is
derived from our audited financial statements. The information for the nine
months ended September 30, 2003 and 2004 is derived from our unaudited financial
statements. It is important that you read this financial data along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Selected Historical Financial Data" and our consolidated financial
statements and the notes thereto included elsewhere in this prospectus.
The pro forma financial data presented below is unaudited and has been
derived from our consolidated financial statements included in this prospectus
and from unaudited historical and pro forma consolidated financial data. The pro
forma financial information presented below for the year ended December 31, 2003
and for the nine months ended September 30, 2004 reflects consolidated statement
of operations data relating to Abraxas and each of the subsidiary guarantors of
the notes and gives effect to:
o the exclusion of Grey Wolf from Abraxas' statement of operations;
o the consummation of the October 2004 financial restructuring; and
o the exclusion of the January 2003 financial restructuring
described under "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The pro forma condensed balance sheet reflects the consolidated balance
sheet data relating to Abraxas and each of the subsidiary guarantors of the
notes and gives effect to the exclusion of balance sheet data relating to Grey
Wolf as of September 30, 2004.
Grey Wolf, through which we conduct our Canadian operations and hold our
properties and assets located in Canada, is excluded from the pro forma results
because:
o except under the limited circumstances described in this
prospectus, the notes are not, and will not be, guaranteed by
Grey Wolf, and are structurally subordinated in right of payment
to all of its obligations, including Grey Wolf's term loan and
trade payables and other debt of Grey Wolf;
o the notes are not secured by any of the property or assets of
Grey Wolf (unless it becomes a restricted subsidiary); and
o the shares of capital stock of Grey Wolf owned by Abraxas do not
constitute a part of the collateral.
Accordingly, the notes are effectively junior to all the liabilities, including
all trade payables and other debt, of Grey Wolf.
The pro forma information set forth below is not necessarily indicative of
the results that actually would have been achieved if the Grey Wolf operations
had not been part of Abraxas' operations or the refinancing had been consummated
as of the dates indicated. The pro forma information in these tables should be
read in conjunction with "Unaudited Pro Forma Financial Information" included in
this prospectus.
12
Summary Historical Consolidated and Pro Forma Statement of Operations
Years Ended December 31, Nine Months Ended September 30,
-------------------------------------------------------------- --------------------------------------
Pro Forma, Pro Forma,
Statement of Operations Data: 2001(1) 2002(1) 2003(1) 2003 2003(1) 2004 2004
---------- ----------- ------------- ------------- ------------- ------------ ------------
(dollars in thousands)
Revenue:
Oil and gas production revenue..... $ 73,201 $ 50,862 $ 38,105 $ 29,710 29,277 $ 34,249 $ 24,174
Gas processing revenue............. 2,438 2,420 133 -- 132 -- --
Rig revenue........................ 756 635 663 663 495 518 518
Other revenue...................... 848 403 118 7 67 218 9
---------- ----------- ---------- ----------- ----------- ---------- ---------
Total operating revenue (2).......... $ 77,243 $ 54,320 $ 39,019 $ 30,380 $ 29,971 $ 34,985 $ 24,701
Operating costs and expenses:
Lease and other operating expenses(3) 19,318 15,807 10,208 8,951 7,607 9,760 7,158
Depreciation, depletion and
amortization expense............. 32,484 26,539 10,803 7,608 7,861 9,398 5,402
Proved property impairment........... 2,638 115,993 -- -- - -- --
General and administrative expense... 6,445 6,884 5,360 3,995 3,769 4,813 3,759
Stock-based compensation............. (2,767) -- 1,106 1,106 467 1,122 1,122
---------- ----------- ---------- ----------- ----------- ---------- ---------
Total Operating expense.............. 58,118 165,223 27,477 21,660 19,704 25,093 17,441
---------- ----------- ---------- ----------- ----------- ---------- ---------
Operating income (loss).............. 19,125 (110,903) 11,542 8,720 10,267 9,892 7,260
Other (income) expense:
Interest expense, net of interest
income (4)........................... 31,445 34,058 16,925 15,120 12,899 13,688 11,356
Amortization of deferred financing
fee.................................. 2,268 2,095 1,678 2,260 1,244 1,380 1,695
Financing cost....................... -- 967 4,406 4,406 4,182 1,641 1,641
(Gain) loss on sale of foreign
subsidiaries......................... -- -- (68,933) (68,933) (67,258) -- --
(Gain) loss on sale of equity
investment........................... 845 -- -- -- -- -- --
Other................................ 207 201 774 100 774 11 11
---------- ----------- ---------- ----------- ----------- ---------- ---------
Income (loss) before income taxes,
minority interest and cumulative
effect of accounting change.......... (15,640) (148,224) 56,692 55,767 58,426 (6,828) (7,443)
Income tax provision................. 2,402 (29,697) 377 -- 377 -- --
Minority interest.................... 1,676 -- -- -- -- -- --
Cumulative effect of accounting
change............................... -- -- 395 395 395 -- --
---------- ----------- ---------- ----------- ----------- ---------- ---------
Net earnings (loss) ................. $(19,718) $(118,527) $ 55,920 $ 55,372 $ 57,654 $ (6,828) (7,443)
========== =========== ========== =========== =========== ========== =========
Income (loss) per common share:
Basic............................. $ (0.76) $ (3.95) $ 1.58 $ 1.57 $ 1.63 $ (0.19) $ (0.21)
Diluted........................... $ (0.76) $ (3.95) $ 1.55 $ 1.54 $ 1.60 $ (0.19) $ (0.21)
Other Data:
Capital expenditures (including
acquisitions)................... $ 57,056 $ 38,912 $ 18,349 $ 9,194 $ 16,327 $ 10,985 $ 4,789
Statement of Cash Flows Data Net cash provided by (used in):
Operating activities............. $ 16,263 $ (8,336) $ 23,850 $ 9,587 $ 15,306
Investing activities............. $(30,797) $ (5,036) $ 67,461 $ 70,524 $(10,985)
Financing activities............. $ 20,685 $ 10,836 $ (95,622) $(82,974) $ (1,288)
13
As at September 30, 2004
---------------------------
Historical Pro Forma
------------- -------------
(dollars in thousands)
Balance Sheet Data:
Cash and cash equivalents............................................ $ 3,601 $ 2,894
Net property and equipment........................................... 114,233 75,488
Total assets......................................................... 129,067 94,993
Total other liabilities.............................................. 14,938 6,560
Total debt........................................................... 190,516 150,000
Total stockholders' deficit.......................................... (76,387) (61,567)
--------------
(1) Data for 2001, 2002 and the first 23 days of 2003 includes Canadian
subsidiaries sold in January 2003.
(2) Consists of natural gas and crude oil production sales, revenue from
rig operations and other miscellaneous revenue, net of hedging
activities.
(3) Consists of lease operating expenses, production taxes and rig
operations.
(4) Interest expense on our indebtedness includes cash interest expense on
our existing credit facility and non-cash interest expense on the
existing notes (through the issuance of additional notes).
14
Summary Historical and Pro Forma Operating Data
The historical operating data presented below sets forth a summary of our
production and per unit sales price of crude oil, NGLs and natural gas and our
per unit expenses for the periods indicated. The pro forma operating data
presented below for the year ended December 31, 2003 and for the nine months
ended September 30, 2004 reflects the consolidated operating data for Abraxas
and each of the restricted subsidiaries and gives effect to the exclusion of
operating data relating to Grey Wolf.
Nine Months Ended
Years Ended December 31, September 30,
----------------------------------------------------- -------------------------------------
Pro Pro
Forma Forma
2001(1) 2002(1) 2003(1) 2003 2003(1) 2004 2004
---------- ---------- ---------- ---------- ---------- ---------- -----------
(dollars in thousands, except per unit data)
Total Sales:
Natural gas and crude oil $73,201 $50,862 $38,105 $29,710 $29,277 $34,249 $24,174
sales.........................
Production:
Crude oil (MBbls)............. 454 292 252 220 180 191 166
NGLs (MBbls).................. 278 242 37 9 31 41 7
Natural gas (MMcf)............ 17,496 15,453 6,189 4,781 4,669 5,093 3,382
Gas and Oil Sales (MMcfe)..... 21,888 18,657 7,923 6,155 5,935 6,485 4,420
Average daily sales (MMcfe)... 60.0 51.1 21.7 16.9 21.7 23.7 16.1
Average Sales Price:(2)
Crude oil (per Bbl)........... $ 24.63 $24.34 $ 30.32 $ 30.43 $ 30.55 $ 37.84 $ 37.91
NGLs (per Bbl)................ 21.51 17.94 24.47 20.47 24.27 32.00 24.71
Natural gas (per Mcf)......... 3.20 2.55 4.78 4.77 4.93 5.05 5.24
Per Mcfe...................... 3.34 2.73 4.81 4.82 4.93 5.28 5.47
Cost of production (per Mcfe):
Lease operating expense....... $ 0.85 $ 0.82 $ 1.21 $ 1.36 $ 1.21 $ 1.44 $ 1.52
Depreciation, depletion and
amortization................. $ 1.48 $ 1.42 $ 1.36 $ 1.24 $ 1.32 $ 1.45 $ 1.22
General and administrative.... $ 0.29 $ 0.37 $ 0.68 $ 0.65 $ 0.64 $ 0.74 $ 0.85
Interest expense.............. $ 1.44 $ 1.83 $ 2.14 $ 2.01 $ 2.17 $ 2.11 $ 2.57
--------------
(1) Data for 2001, 2002 and the first 23 days of 2003 includes Canadian
subsidiaries sold in January 2003.
(2) Average sales prices include effects of hedging activities.
15
Summary Historical and Pro Forma Reserve Data
The historical reserve data presented below sets forth a summary of our
estimated proved crude oil, NGLs and natural gas reserves as of the dates
indicated. The pro forma reserve data presented below for the year ended
December 31, 2003 reflects the consolidated reserve data for Abraxas and each of
the restricted subsidiaries and gives effect to and reflects the exclusion of
reserve data relating to Grey Wolf.
The reserve estimates were prepared in accordance with guidelines
established by the SEC regarding the present value of reserves and future net
revenues. The process of estimating natural gas and crude oil reserves is
complex and involves decisions and assumptions in the evaluation of available
geological, geophysical, engineering and economic data. Therefore, these
estimates are imprecise. See "Risk Factors--Estimates of our proved reserves and
future net revenue are uncertain and inherently imprecise."
Pro Forma
2001 2002 2003 2003
----------- ----------- ----------- -----------
(dollars in thousands)
Estimated Proved Reserves(1):
Crude oil and NGLs (MBbls).................... 6,802 4,605 4,134 3,320
Natural gas (MMcf)............................ 188,757 138,832 96,284 80,202
Natural gas equivalents (MMcfe)............... 229,569 166,462 121,088 100,122
% Proved developed (based on volume).......... 59% 65% 54% 51%
Estimated future net revenue before income
taxes......................................... $386,762 $460,987 $416,756 $333,761
PV-10......................................... $209,666 $254,853 $216,823 $161,584
% Proved developed (based on value)........... 82% 81% 67% 64%
--------------
(1) The weighted average prices utilized for the purposes of estimating our
proved reserves and future net revenues were $2.20, $3.79, $5.05 and
$5.13 per Mcf at December 31, 2001, 2002, 2003 and pro forma 2003,
respectively, and $18.26, $29.69, $31.03 and $31.03 per Bbl at December
31, 2001, 2002, 2003 and pro forma 2003, respectively.
The following table sets forth our developed and undeveloped acreage
for the period indicated:
As of December 31, 2003
------------------------------------------------
US Canada Total
------------- ------------ ---------------
Acreage:
Gross acres:
Developed................................... 26,871 18,238 45,109
Undeveloped................................. 63,375 155,246 218,621
------------- ------------ ---------------
Total .................................... 90,246 173,484 263,730
============= ============ ===============
Net acres:
Developed................................... 22,178 9,075 31,253
Undeveloped................................. 58,235 93,866 152,101
------------- ------------ ---------------
Total .................................... 80,413 102,941 183,354
============= ============ ===============
16
RISK FACTORS
You should consider carefully these risks together with all of the other
information included in this prospectus before deciding whether to exchange your
outstanding notes in the Series A/B exchange offer.
The risk factors noted in this section and other factors contained in this
prospectus describe examples of risks, uncertainties and events that may cause
our actual results to differ materially from those contained in any
forward-looking statement. If one or more of these risks or uncertainties
materialize, or if underlying assumptions prove incorrect, actual outcomes may
vary materially from those described in this prospectus.
Risks Related to the Series A/B Exchange Offer
If you do not exchange your outstanding notes, they will continue to be
subject to restrictions on transfer and may be difficult to resell.
If you do not exchange your outstanding notes in the Series A/B exchange
offer, you may be unable to freely sell your outstanding notes because, without
the benefit of an effective shelf registration statement, any outstanding notes
not exchanged will remain subject to the restrictions on transfer provided for
under the Securities Act. These restrictions on transfer of your outstanding
notes exist because Abraxas issued the outstanding notes pursuant to an
exemption from the registration requirements of the Securities Act and
applicable state securities laws.
Generally, the outstanding notes that are not exchanged for the exchange
notes pursuant to the Series A/B exchange offer will remain restricted
securities. Accordingly, any such outstanding notes may be resold only:
o to Abraxas (upon their redemption or otherwise);
o pursuant to an effective registration statement under the Securities
Act;
o so long as the outstanding notes are eligible for resale pursuant to
Rule 144A under the Securities Act to a qualified institutional buyer
within the meaning of Rule 144A in a transaction meeting the
requirements of Rule 144A;
o outside the United States to a foreign person pursuant to the exemption
from the registration requirements of the Securities Act provided by
Regulation S under the Securities Act;
o pursuant to an exemption from registration under the Securities Act
provided by Rule 144 thereunder (if available); or
o pursuant to another available exemption from the registration
requirements of the Securities Act, in each case in accordance with any
applicable securities laws of any state of the United States.
To the extent any outstanding notes are tendered and accepted in the Series
A/B exchange offer, the trading market, if any, for the outstanding notes that
remain outstanding after the Series A/B exchange offer is completed would be
adversely affected due to a reduction in market liquidity.
If you do not comply with the Series A/B exchange offer procedures, you
will not receive new, freely tradable exchange notes, and your outstanding notes
will continue to be subject to restrictions on transfer.
If you do not comply with the Series A/B exchange offer procedures, you
will not receive exchange notes and your outstanding notes will continue to be
subject to restrictions on transfer. Delivery of exchange notes in exchange of
your outstanding notes tendered and accepted for exchange pursuant to the Series
A/B exchange offer will be made only if you do one of the following prior to the
expiration or termination of the Series A/B exchange offer:
o tender your outstanding notes by sending the certificates for your
outstanding notes, in proper form for transfer, a properly completed
and duly executed letter of transmittal; or
17
o tender your outstanding notes by using book-entry transfer procedures
and transmitting a properly completed and duly executed letter of
transmittal or an agent's message instead of the letter of transmittal,
to the exchange agent.
Therefore, holders of outstanding notes who would like to tender
outstanding notes in exchange for exchange notes should be sure to allow enough
time for the outstanding notes to be delivered on time. We are not required to
notify you of defects or irregularities in tenders of outstanding notes for
exchange. Outstanding notes that are not tendered or that are tendered but we do
not accept for exchange will, following consummation of the Series A/B exchange
offer, continue to be subject to the existing transfer restrictions under the
Securities Act and, upon consummation of the Series A/B exchange offer, certain
registration and other rights under the registration rights agreement will
terminate.
There is currently no active trading market for the exchange notes, the
value of the exchange notes may fluctuate significantly and any market for the
exchange notes may be illiquid.
Although upon the completion of the Series A/B exchange offer, the exchange
notes will generally be freely transferable, there is currently no public market
for the exchange notes. Abraxas cannot assure you that an active market for the
exchange notes will develop, or, if such a market develops, that such market
will be liquid or that you will be able to sell your exchange notes in the
future at an acceptable price to you, if at all. Abraxas does not presently
intend to apply for the exchange notes to be listed on any national securities
exchange or to arrange for any quotation system to quote them. The exchange
notes have been declared eligible for trading in The PORTAL Market. The
liquidity of the market for the exchange notes will depend upon the amount
outstanding, the number of holders thereof and the interest of securities
dealers in maintaining a market in such exchange notes. If a liquid market were
to exist, the exchange notes could trade at prices that may be lower than the
principal amount or purchase price, depending on many factors, including
prevailing interest rates, the market for similar notes, Abraxas' financial
performance and other factors beyond Abraxas' control. The liquidity of, and
trading market for, the exchange notes also may be adversely affected by general
declines in the market for high yield securities. Such declines may adversely
affect the liquidity and trading markets for the notes.
Risks Related to Our Business
We have a highly leveraged capital structure, which limits our operating
and financial flexibility.
We have a highly leveraged capital structure. Abraxas currently has total
indebtedness, including the notes, of approximately $150.0 million, all of which
is secured indebtedness.
Our highly leveraged capital structure will have several important effects
on our future operations, including:
o A substantial amount of our cash flow from operations will be required
to service our indebtedness (including cash interest payments on the
notes), which will reduce the funds that would otherwise be available
for operations, capital expenditures and expansion opportunities,
including developing our properties;
o The covenants contained in Abraxas' new revolving credit facility and
bridge loan require Abraxas to meet certain financial tests and comply
with certain other restrictions, including limitations on capital
expenditures. These restrictions, together with those in the indenture
governing the notes, limit Abraxas' ability to undertake certain
activities and respond to changes in its business and its industry;
o The covenants contained in the new Grey Wolf term loan limit Grey
Wolf's ability to make distributions or pay dividends to Abraxas. As a
result, Grey Wolf's cash flow from operations is no longer available to
Abraxas to meet its debt service obligations and operating
requirements;
o Our debt level may impair our ability to obtain additional capital,
through equity offerings or debt financings, for working capital,
capital expenditures or refinancing of indebtedness;
18
o Our debt level makes us more vulnerable to economic downturns and
adverse developments in our industry (especially declines in natural
gas and crude oil prices) and the economy in general; and
o The notes and the new revolving credit facility are subject to variable
interest rates which makes us vulnerable to interest rate increases.
We may not be able to fund the substantial capital expenditures that will
be required for us to increase our reserves and our production.
We are required to make substantial capital expenditures to develop our
existing reserves and to discover new reserves. Historically, we have financed
our capital expenditures primarily with cash flow from operations, borrowings
under credit facilities and sales of producing properties. In addition to using
its cash flow from operations, Abraxas expects to use the new revolving credit
facility to fund capital expenditures. We cannot assure you that we will have
sufficient capital resources in the future to finance our capital expenditures.
Volatility in natural gas and crude oil prices, the timing of our drilling
program and our drilling results will affect our cash flow from operations.
Lower prices and/or lower production will also decrease revenues and cash flow,
thus reducing the amount of financial resources available to meet our capital
requirements, including reducing the amount available to pursue our drilling
opportunities. If our cash flow from operations does not increase as a result of
our planned capital expenditures, a greater percentage of our cash flow from
operations will be required for debt service (including cash interest payments
on the notes) and our planned capital expenditures would, by necessity, be
decreased.
The borrowing base under the new revolving credit facility will be
determined from time to time by Abraxas' lenders under the new revolving credit
facility, consistent with their customary natural gas and crude oil lending
practices. Reductions in estimates of Abraxas' natural gas and crude oil
reserves could result in a reduction in Abraxas' borrowing base, which would
reduce the amount of financial resources available under the new revolving
credit facility to meet Abraxas' capital requirements. Such a reduction could be
the result of lower commodity prices or production, inability to drill or
unfavorable drilling results, changes in natural gas and crude oil reserve
engineering, the lenders' inability to agree to an adequate borrowing base or
adverse changes in the lenders' practices regarding estimation of reserves.
If cash flow from operations or Abraxas' borrowing base decrease for any
reason, Abraxas' ability to undertake exploitation and development activities
could be adversely affected. As a result, Abraxas' ability to replace production
may be limited. In addition, if the borrowing base under Abraxas' new revolving
credit facility is reduced, Abraxas would be required to reduce its borrowings
under the new revolving credit facility so that such borrowings do not exceed
the borrowing base. This could further reduce the cash available to Abraxas for
capital spending and, if Abraxas did not have sufficient capital to reduce its
borrowing level, could cause Abraxas to default under the new revolving credit
facility, the notes and the bridge loan.
We have sold producing properties to provide us with liquidity and capital
resources in the past and may do so in the future. After any such sale, we would
expect to utilize the proceeds to drill new wells. If we cannot replace the
production lost from properties sold with production from new properties, our
cash flow from operations will likely decrease which, in turn, would decrease
the amount of cash available for debt service and additional capital spending.
19
We may be unable to acquire or develop additional reserves, in which case
our results of operations and financial condition would be adversely
affected.
Our future natural gas and crude oil production, and therefore our success,
is highly dependent upon our ability to find, acquire and develop additional
reserves that are profitable to produce. The rate of production from our natural
gas and crude oil properties and our proved reserves will decline as our
reserves are produced unless we acquire additional properties containing proved
reserves, conduct successful exploration, development and exploitation
activities or, through engineering studies, identify additional behind-pipe
zones or secondary recovery reserves. We cannot assure you that our exploration,
exploitation and development activities will result in increases in our proved
reserves. While we have had some success in pursuing these activities, we have
not been able to fully replace the production volumes lost from natural field
declines and property sales. As our proved reserves, and consequently our
production, decline, our cash flow from operations and the amount that Abraxas
is able to borrow under the new revolving credit facility will also decline. In
addition, approximately 36% of Abraxas' total estimated proved reserves at
December 31, 2003 were undeveloped. By their nature, estimates of undeveloped
reserves are less certain. Recovery of such reserves will require significant
capital expenditures and successful drilling operations.
Prior to the January 2003 financial restructuring, we implemented a number
of measures to conserve our cash resources, including postponement of drilling
projects. While these measures helped conserve our cash resources, they also
limited our ability to replenish our depleting reserves. We have also postponed
drilling projects as a result of the capital spending limitations that 0existed
in the 11 1/2% secured notes due 2007 which have been called for redemption. As
a result, our current producing properties have continued to deplete and we have
not been able to drill new wells at a rate that we would have desired in the
absence of these limitations. The terms of the new revolving credit facility and
the bridge loan place limits on Abraxas' capital expenditures, which will limit
Abraxas' ability to replenish its reserves and increase production.
Abraxas may incur additional indebtedness, which may exacerbate the risks
described above, including its ability to service indebtedness.
Abraxas may incur additional indebtedness. Although the terms of the notes,
and Abraxas' new revolving credit facility and bridge loan restrict Abraxas'
ability to incur additional indebtedness, these restrictions are subject to a
number of qualifications and exceptions, and under certain circumstances,
indebtedness incurred in compliance with these restrictions could be
substantial. Also, these restrictions do not prevent Abraxas from incurring
obligations that do not constitute indebtedness. Any additional indebtedness or
other obligations could exacerbate the risks described herein related to our
highly leveraged capital structure.
Restrictive debt covenants could limit Abraxas' growth and its ability to
finance its operations, fund its capital needs, respond to changing
conditions and engage in other business activities that may be in its best
interests.
The new revolving credit facility, bridge loan and the indenture governing
the notes contain a number of significant covenants that, among other things,
limit Abraxas' ability to: o incur or guarantee additional indebtedness and
issue certain types of preferred stock or redeemable stock;
o transfer or sell assets;
o create liens on assets;
o pay dividends or make other distributions on capital stock or make
other restricted payments, including repurchasing, redeeming or
retiring capital stock or subordinated debt or making certain
investment or acquisitions;
o engage in transactions with affiliates;
o guarantee other indebtedness;
o make any change in the principal nature of its business;
20
o prepay, redeem, purchase or otherwise acquire any of its or its
restricted subsidiaries' indebtedness;
o permit a change of control;
o directly or indirectly make or acquire any investment;
o cause a restricted subsidiary to issue or sell its capital stock; and
o consolidate, merge or transfer all or substantially all of the
consolidated assets of the Company and its restricted subsidiaries.
In addition, the new revolving credit facility and bridge loan require
Abraxas to maintain compliance with specified financial ratios and satisfy
certain financial condition tests. Abraxas' ability to comply with these ratios
and financial condition tests may be affected by events beyond its control, and
it cannot assure you that it will meet these ratios and financial condition
tests. These financial ratio restrictions and financial condition tests could
limit Abraxas' ability to obtain future financings, make needed capital
expenditures, withstand a future downturn in its business or the economy in
general or otherwise conduct necessary or desirable corporate activities.
A breach of any of these covenants or Abraxas' inability to comply with the
required financial ratios or financial condition tests could result in a default
under the new revolving credit facility and bridge loan and the notes. A
default, if not cured or waived, could result in all of Abraxas' indebtedness,
including the notes, becoming immediately due and payable. If that should occur,
Abraxas may not be able to pay all such debt or to borrow sufficient funds to
refinance it. Even if new financing were then available, it may not be on terms
that are acceptable to Abraxas. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Long-Term Indebtedness" and
"Description of the Exchange Notes--Events of Default and Remedies."
The marketability of our production depends largely upon the availability,
proximity and capacity of natural gas gathering systems, pipelines and
processing facilities.
The marketability of our production depends in part upon processing and
transportation facilities. Transportation space on such gathering systems and
pipelines is occasionally limited and at times unavailable due to repairs or
improvements being made to such facilities or due to such space being utilized
by other companies with priority transportation agreements. Our access to
transportation options can also be affected by U.S. Federal and state, and
Canadian Federal and provincial regulation of natural gas and crude oil
production and transportation, general economic conditions and changes in supply
and demand. These factors and the availability of markets are beyond our
control. If market factors dramatically change, the financial impact on us could
be substantial and adversely affect our ability to produce and market natural
gas and crude oil.
Hedging transactions have in the past and may in the future impact Abraxas'
cash flow from operations.
Abraxas enters into hedging arrangements from time to time to reduce its
exposure to fluctuations in natural gas and crude oil prices and to achieve more
predictable cash flow. In 2001, 2002 and 2003, we experienced hedging losses of
$12.1 million, $3.2 million and $842,000, respectively, resulting from the price
ceilings we established being exceeded by the index prices. Currently, we
believe our hedging arrangements, which are in the form of price floors, do not
expose us to significant financial risk. Although Abraxas' hedging activities
may limit its exposure to declines in natural gas and crude oil prices, such
activities may also limit, and have in the past limited, additional revenues
from increases in natural gas and crude oil prices.
Abraxas cannot assure you that the hedging transactions it has entered
into, or will enter into, will adequately protect it from financial loss due to
circumstances such as:
o highly volatile natural gas and crude oil prices;
o Abraxas' production being less than expected; or
o a counterparty to one of Abraxas' hedging transactions defaulting on
its contractual obligations.
21
We have experienced recurring significant operating losses.
We recorded net losses for 1998, 1999, 2001 and 2002 of $84.0 million,
$36.7 million, $19.7 million and $118.5 million, respectively.
Although we recorded net income of $8.4 million for 2000, we experienced a
significant gain on the sale of an interest in a partnership, absent which we
would have experienced a net loss of $25.5 million for that year. Similarly,
although we recorded net income of $55.9 million for 2003, if the gain on the
sale of certain of our Canadian properties were excluded, we would have
experienced a net loss for the year of $13.0 million. We cannot assure you that
we will become profitable in the future.
Lower natural gas and crude oil prices increase the risk of ceiling
limitation write-downs.
We use the full cost method to account for our natural gas and crude oil
operations. Accordingly, we capitalize the cost to acquire, explore for and
develop natural gas and crude oil properties. Under full cost accounting rules,
the net capitalized cost of natural gas and crude oil properties may not exceed
a "ceiling limit" which is based upon the present value of estimated future net
cash flows from proved reserves, discounted at 10%, plus the lower of cost or
fair market value of unproved properties. If net capitalized costs of natural
gas and crude oil properties exceed the ceiling limit, we must charge the amount
of the excess to earnings. This is called a "ceiling limitation write-down."
This charge does not impact cash flow from operating activities, but does reduce
our stockholders' equity and earnings. The risk that we will be required to
write-down the carrying value of natural gas and crude oil properties increases
when natural gas and crude oil prices are low. In addition, write-downs may
occur if we experience substantial downward adjustments to our estimated proved
reserves. An expense recorded in one period may not be reversed in a subsequent
period even though higher natural gas and crude oil prices may have increased
the ceiling applicable to the subsequent period.
We have incurred ceiling limitation write-downs in the past. At June 30,
2002, for example, we recorded a ceiling limitation write-down of $116 million.
We cannot assure you that we will not experience additional ceiling limitation
write-downs in the future.
Use of our net operating loss carryforwards may be limited.
At December 31, 2003, Abraxas had, subject to the limitation discussed
below, $100.6 million of net operating loss carryforwards for U.S. tax purposes.
These loss carryforwards will expire through 2022 if not utilized. In connection
with the January 2003 financial restructuring, certain of the loss carryforwards
were utilized. In addition, as to a portion of the U.S. net operating loss
carryforwards, the amount of such carryforwards that we can use annually is
limited under U.S. tax law. Moreover, uncertainties exist as to the future
utilization of the operating loss carryforwards under the criteria set forth
under FASB Statement No. 109. Therefore, we have established a valuation
allowance of $99.1 million and $76.1 million for deferred tax assets at December
31, 2002 and 2003, respectively.
Abraxas depends on its Chairman, President and CEO and the loss of his
services could have an adverse effect on our operations.
Abraxas 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. Mr. Watson may terminate his employment
agreement with Abraxas at any time on 30 days notice, but, if he terminates
without cause, he would not be entitled to the severance benefits provided under
the terms of that agreement. Mr. Watson is not precluded from working for, with
or on behalf of a competitor upon termination of his employment with Abraxas. If
Mr. Watson were no longer able or willing to act as our Chairman, the loss of
his services could have an adverse effect on our operations.
22
Risks Related to Our Industry
We may not find any commercially productive natural gas or crude oil
reservoirs.
We cannot assure you that the new wells we drill will be productive or that
we will recover all or any portion of our capital investment. Drilling for
natural gas and crude oil may be unprofitable. Dry holes and wells that are
productive but do not produce sufficient net revenues after drilling, operating
and other costs are unprofitable. The inherent risk of not finding commercially
productive reservoirs will be compounded by the fact that 36% of Abraxas' total
estimated proved reserves at December 31, 2003 were undeveloped. By their
nature, estimates of undeveloped reserves are less certain. Recovery of such
reserves will require significant capital expenditures and successful drilling
operations. In addition, our properties may be susceptible to drainage from
production by other operations on adjacent properties. If the volume of natural
gas and crude oil we produce decreases, our cash flow from operations will
decrease.
We operate in a highly competitive industry which may adversely affect our
operations, including our ability to secure drilling equipment to service
our core areas.
We operate in a highly competitive environment. The principal resources
necessary for the exploration and production of natural gas and crude oil are
leasehold prospects under which natural gas and crude oil reserves may be
discovered, drilling rigs and related equipment to explore for such reserves and
knowledgeable personnel to conduct all phases of natural gas and crude oil
operations. We must compete for such resources with both major natural gas and
crude oil companies and independent operators. Many of these competitors have
financial and other resources substantially greater than ours. In the past, we
have had difficulty securing drilling equipment in certain of our core areas.
Although we believe our current operating and financial resources are adequate
to preclude any significant disruption of our operations in the immediate
future, we cannot assure you that such materials and resources will be available
to us.
Market conditions for natural gas and crude oil, and particularly
volatility of prices for natural gas and crude oil, could adversely affect
our revenue, cash flows, profitability and growth.
Our revenue, cash flows, profitability and future rate of growth depend
substantially upon prevailing prices for natural gas and crude oil. Natural gas
prices affect us more than crude oil prices because most of our production and
reserves are natural gas. Prices also affect the amount of cash flow available
for capital expenditures and our ability to borrow money or raise additional
capital. Lower prices may also make it uneconomical for us to increase or even
continue current production levels of natural gas and crude oil.
Prices for natural gas and crude oil are subject to large fluctuations in
response to relatively minor changes in the supply and demand for natural gas
and crude oil, market uncertainty and a variety of other factors beyond our
control, including:
o changes in foreign and domestic supply and demand for natural gas and
crude oil;
o political stability and economic conditions in oil producing countries,
particularly in the Middle East;
o general economic conditions;
o domestic and foreign governmental regulation; and
o the price and availability of alternative fuel sources.
In addition to decreasing our revenue and cash flow from operations, low or
declining natural gas and crude oil prices could have additional material
adverse effects on us, such as:
o reducing the overall volume of natural gas and crude oil that we can
produce economically, thereby adversely affecting our revenue,
profitability and cash flow and our ability to perform our obligations
with respect to the notes; and
23
o impairing our borrowing capacity and our ability to obtain equity
capital.
Estimates of our proved reserves and future net revenue are uncertain and
inherently imprecise.
The process of estimating natural gas and crude oil reserves is complex,
involving decisions and assumptions in evaluating available geological,
geophysical, engineering and economic data. Accordingly, these estimates are
imprecise. Actual future production, natural gas and crude oil prices, revenues,
taxes, development expenditures, operating expenses and quantities of
recoverable natural gas and crude oil reserves most likely will vary from those
estimated. Any significant variance could materially affect the estimated
quantities and present value of reserves set forth in this prospectus. In
addition, we may adjust estimates of proved reserves to reflect production
history, results of exploration and development, prevailing natural gas and
crude oil prices and other factors, many of which are beyond our control.
The estimates of our reserves are based upon various assumptions about
future production levels, prices and costs that may not prove to be correct over
time. In particular, estimates of natural gas and crude oil reserves, future net
revenue from proved reserves and the PV-10 thereof for the natural gas and crude
oil properties described in this prospectus are based on the assumption that
future natural gas and crude oil prices remain the same as natural gas and crude
oil prices at December 31, 2003. The average sales prices as of such date used
for purposes of such estimates were $31.03 per Bbl of crude oil, $27.19 per Bbl
of NGLs and $5.05 per Mcf of natural gas. These estimates also assume that we
will make future capital expenditures of approximately $50.4 million in the
aggregate through 2019, which are necessary to develop and realize the value of
proved undeveloped reserves on our properties. Any significant variance in
actual results from these assumptions could also materially affect the estimated
quantity and value of reserves set forth in this prospectus.
The present value of future net revenues referred to in this prospectus may
not be the current market value of our estimated natural gas and crude oil
reserves. In accordance with SEC requirements, the estimated discounted future
net cash flows from proved reserves are generally based on prices and costs as
of the end of the period of the estimate. Actual future prices and costs may be
materially higher or lower than the prices and costs as of the end of the year
of the estimate. Any changes in consumption by natural gas purchasers or in
governmental regulations or taxation will also affect actual future net cash
flows. The timing of both the production and the expenses from the development
and production of natural gas and crude oil properties will affect the timing of
actual future net cash flows from proved reserves and their present value. In
addition, the 10% discount factor, which is required by the SEC to be used in
calculating discounted future net cash flows for reporting purposes, is not
necessarily the most accurate discount factor. The effective interest rate at
various times and the risks associated with us or the natural gas and crude oil
industry in general will affect the accuracy of the 10% discount factor.
Our operations are subject to numerous risks of natural gas and crude oil
drilling and production activities.
Our natural gas and crude oil drilling and production activities are
subject to numerous risks, many of which are beyond our control. These risks
include the risk of fire, explosions, blow-outs, pipe failure, abnormally
pressured formations and environmental hazards. Environmental hazards include
oil spills, natural gas leaks, ruptures and discharges of toxic gases. In
addition, title problems, weather conditions and mechanical difficulties or
shortages or delays in delivery of drilling rigs, work boats and other equipment
could negatively affect our operations. If any of these or other similar
industry operating risks occur, we could have substantial losses. Substantial
losses also may result from injury or loss of life, severe damage to or
destruction of property, clean-up responsibilities, regulatory investigation and
penalties and suspension of operations. In accordance with industry practice, we
maintain insurance against some, but not all, of the risks described above. We
cannot assure you that our insurance will be adequate to cover losses or
liabilities. Also, we cannot predict the continued availability of insurance at
premium levels that justify its purchase.
Our natural gas and crude oil operations are subject to various U.S.
Federal, state and local and Canadian Federal and provincial governmental
regulations that materially affect our operations.
Matters regulated include discharge permits for drilling operations,
drilling and abandonment bonds, reports concerning operations, the spacing of
wells and unitization and pooling of properties and taxation. At various times,
24
regulatory agencies have imposed price controls and limitations on production.
In order to conserve supplies of natural gas and crude oil, these agencies have
restricted the rates of flow of natural gas and crude oil wells below actual
production capacity. Federal, state, provincial and local laws regulate
production, handling, storage, transportation and disposal of natural gas and
crude oil, by-products from natural gas and crude oil and other substances and
materials produced or used in connection with natural gas and crude oil
operations. To date, our expenditures related to complying with these laws and
for remediation of existing environmental contamination have not been
significant. We believe that we are in substantial compliance with all
applicable laws and regulations. However, the requirements of such laws and
regulations are frequently changed. We cannot predict the ultimate cost of
compliance with these requirements or their effect on our operations.
Risks Related to the Notes
Our ability to generate the significant amount of cash that will be
required to service our indebtedness depends on many factors beyond our
control, and any failure to meet our debt service obligations could harm
our business, financial condition and results of operations.
Our ability to make payments on our indebtedness, including the notes, will
depend on our ability to generate cash from operations in the future and our
ability to successfully increase production. This, to a certain extent, is
subject to general economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control, including the prices that we receive
for natural gas and crude oil. It is also dependent upon our ability to
successfully complete our drilling opportunities.
We cannot assure you that Abraxas will generate sufficient cash flow from
operations to pay its indebtedness, including the notes, as well as to continue
drilling new wells. If Abraxas' cash flow from operations and capital resources
are insufficient to fund Abraxas' debt service obligations, Abraxas may be
forced to decrease its drilling activities, sell assets, seek additional equity
capital or restructure its debt. We cannot assure you that any of these
alternatives could, if necessary, be effected on commercially reasonable terms,
or at all. Our cash flow from operations and capital resources may be
insufficient for payment of interest on and principal of our debt in the future,
including payments on the notes, and any such alternative measures may be
unsuccessful or may not permit us to meet scheduled debt service obligations,
which could cause us to default on our obligations, including the notes, and
could impair our liquidity.
The notes are subject to an intercreditor agreement that places
limitations, which would not otherwise exist, on the ability of the
noteholders to deal with Abraxas with respect to certain matters. Among
such limitations is a requirement that during an event of default, certain
payments be made under the new revolving credit facility before being made
to holders of the notes.
The terms of an intercreditor agreement may require Abraxas and the
subsidiary guarantors to make all payments in respect of the notes, Abraxas' new
revolving credit facility and Abraxas' bridge loan to a collateral agent during
the existence of an event of default under the indenture. The collateral agent
will then be required to apply these amounts, together with any proceeds from
any disposition of the collateral,
o if a minimum collateral coverage ratio of three times the outstanding
obligations under the new revolving credit facility is met, (i) to the
payment of interest on the notes only if and when all accrued and
unpaid interest on the new revolving credit facility has been paid and
(ii) to the payment of principal of the notes after the entire
principal amount outstanding under the new revolving credit facility
has been repaid; or
o if that minimum collateral coverage ratio is not then met, to the
payment of interest on and principal of the notes only if and when all
outstanding interest on and principal of the new revolving credit
facility have been paid.
The terms of the intercreditor agreement also limit the ability of the
noteholders to exercise remedies and other rights with respect to the collateral
following an event of default that would otherwise be available absent the
intercreditor agreement. Accordingly, your ability to recover your investment in
the notes could be significantly limited and/or delayed by the effect of the
intercreditor agreement. The intercreditor agreement also limits the ability of
25
Abraxas to modify certain terms of the notes if this would adversely affect the
rights of the other parties to that agreement, even if this modification is
approved by the holders of the notes in accordance with the terms of the
indenture.
The collateral pledged to secure the notes may be inadequate to satisfy all
amounts due and owing to the holders of the notes.
Abraxas' subsidiaries that guarantee its obligations under the notes also
guarantee Abraxas' obligations under the new revolving credit facility. The
notes and the subsidiary note guarantees, together with the new revolving credit
facility and each subsidiary guarantor's guarantee thereof, are secured by
shared first priority security interests, subject to certain permitted
encumbrances, in substantially all of Abraxas' and each of its restricted
subsidiaries' material property and assets, including substantially all of their
respective natural gas and crude oil properties, and substantially all of the
capital stock of any entity, other than Grey Wolf, owned by Abraxas and its
restricted subsidiaries. Except under limited circumstances, the notes are not
guaranteed or secured by any of the property, assets or capital stock of Grey
Wolf. We cannot assure you that the value of the collateral or the proceeds from
the sale of the collateral allocable to the notes would be sufficient to satisfy
all amounts due on the notes following a foreclosure upon the collateral or a
liquidation of Abraxas' assets. The ability of the holders of the notes to
realize upon the collateral is subject to certain limitations in the indenture
governing the notes and the related collateral documents, including the
intercreditor agreement, and may also be limited by applicable state laws. If
the net proceeds received from the sale of the collateral, after repayment of
principal outstanding on the new revolving credit facility in accordance with
the terms of the intercreditor agreement, are not sufficient to repay all
amounts due with respect to the notes, you would as a holder of notes, to the
extent of the insufficiency, have only an unsecured claim against Abraxas'
remaining assets.
The terms of the notes permit, without the consent of holders of the notes
or the trustee under the indenture, releases of collateral pledged to
secure the notes in certain circumstances.
Collateral that is sold, transferred or otherwise disposed of in accordance
with the terms of the new revolving credit facility, the indenture governing the
notes and the bridge loan will automatically be released from the liens securing
the notes and the subsidiary guarantees of the notes. For example, lenders under
the bridge loan may, if the bridge loan is not timely repaid, direct Abraxas to
sell certain property and assets included in the collateral. If Abraxas sells,
transfers or otherwise disposes of the collateral in transactions that do not
violate the asset disposition covenant in the indenture governing the notes,
that collateral will be released from the liens securing the notes and the
subsidiary note guarantees without the consent of holders of the notes. If an
event of default has occurred and is continuing, the collateral agent, upon
instructions from the control party under the intercreditor agreement, may
release collateral in accordance with the terms of the intercreditor agreement
in connection with the foreclosure, sale or disposition of that collateral to
satisfy Abraxas' secured obligations. Any collateral released would cease to act
as security for the notes and the subsidiary note guarantees.
Any subsidiary guarantee of the notes may be released without action by, or
consent of, any holder of the notes or the trustee under the indenture if
the subsidiary guarantor is no longer a guarantor or an obligor of other
indebtedness of Abraxas or any of its restricted subsidiaries.
A subsidiary guarantor's guarantee may be released if the release occurs in
the context of an asset sale of such subsidiary guarantor or the subsidiary
guarantor's designation as an unrestricted subsidiary that is not prohibited by
the indenture or the collateral documents. Upon release of a subsidiary
guarantor of the notes under its subsidiary guarantee, the collateral documents
related to the indenture provide that the security interests in the assets of
that subsidiary guarantor securing the notes and subsidiary note guarantees will
be released simultaneously. You will not have a claim as a creditor against any
subsidiary that is no longer a subsidiary guarantor of the new notes, and the
indebtedness and other liabilities, including trade payables, whether secured or
unsecured, of those subsidiaries will effectively be senior to your claims.
26
In certain circumstances, lenders under Abraxas' bridge loan may be
entitled to direct asset sales and control certain rights and remedies with
respect to the collateral pledged to secure the notes and the subsidiary
guarantees.
Abraxas' bridge loan is secured by a second priority perfected security
interest on the collateral that is subordinate to the liens securing the notes
and the new revolving credit facility and is guaranteed on a subordinated
secured basis by its restricted subsidiaries which also guarantee Abraxas'
obligations under the notes and the new revolving credit facility. The lenders
under the bridge loan are entitled to direct Abraxas to consummate one or more
asset sales if the bridge loan is not fully repaid after 15 months and there is
not then an event of default with respect to the notes or under either the new
revolving credit facility or bridge loan. The lenders under the bridge loan, as
the control party under the intercreditor agreement, also have the right to
exclusively control certain rights and remedies with respect to the collateral
for at least 240 days following a notice of an event of default with respect to
the notes or under either the new revolving credit facility or bridge loan.
However, in either case, lenders under the new revolving credit facility and
holders of the notes, in the priority specified in the intercreditor agreement,
will receive all proceeds from any realization on the collateral until that
facility and the notes, respectively, are paid in full. If there were an event
of default under the notes, the bridge loan lenders, as the control party, could
decide not to proceed against the collateral, in which case the only remedy
available to holders of the notes during the period of time that the bridge loan
lenders remained the control party would be to sue for payment on the notes and
the subsidiary note guarantees. Abraxas' bridge loan lenders may have
significantly different or adverse interests than Abraxas' first lien lenders,
including the holders of the notes, and may have very little indebtedness
outstanding. Abraxas' bridge loan lenders are under no obligation to take
interests of Abraxas' first lien lenders, including the holders of the notes,
into account in determining whether to direct asset sales or exercise their
rights and remedies in respect of the collateral, subject to the intercreditor
agreement, and their interests may differ or be adverse to yours. The collateral
agent is required to conduct sales of the collateral in accordance with the
standards, if any, under applicable law, which may include the Uniform
Commercial Code. This method of sale will not necessarily benefit the first lien
lenders, including the holders of the notes or result in fair market value sales
as determined by other measures. In addition, the rights of the collateral agent
to exercise significant remedies (such as foreclosure) are, subject to certain
exceptions, generally limited to a payment default, Abraxas' bankruptcy or the
acceleration of the indebtedness.
Bankruptcy laws may limit your ability to realize value from the collateral.
Upon the occurrence of an event of default, the collateral agent will have
the right to repossess and dispose of the collateral if so directed in
accordance with the provisions of the intercreditor agreement. This right,
however, would be subject to limitations under, and is likely to be
significantly impaired by, applicable bankruptcy law if Abraxas becomes a debtor
in a case under the bankruptcy code before the collateral agent repossess and
disposes of the collateral. Under the automatic stay imposed by the bankruptcy
code, a secured creditor is prohibited from repossessing its security from a
debtor subject to a bankruptcy case or disposing of the security repossessed
from the debtor, without bankruptcy court authorization. Moreover, the
bankruptcy code permits the debtor to continue to retain and to use collateral
even though the debtor is in default under the applicable debt instruments,
provided that the bankruptcy court can require that the secured creditor be
given "adequate protection" if and at such times as the court in its discretion
determines that the value of the secured creditor's interest in the collateral
is declining during the pendency of the bankruptcy case. The meaning of the term
"adequate protection" may vary according to circumstances, but it is intended in
general to protect the value of the secured creditor's interest in the
collateral and may include cash payments or the granting of additional security.
In view of the lack of a precise definition of the term "adequate protection"
and the broad discretionary powers of a bankruptcy court, it is impossible to
predict:
o how long payments under the notes could be delayed following
commencement of a bankruptcy case;
o whether or when the collateral trustee could repossess or dispose of
the collateral; or
o whether or to what extent holders of the notes would be compensated for
any delay in payment or loss of value of the collateral through the
requirement of "adequate protection."
27
Under certain circumstances a bankruptcy court could order that certain
payments made under the notes be returned.
The bankruptcy code allows the bankruptcy trustee (or Abraxas, acting as
debtor-in-possession) to avoid certain transfers of a debtor's property as a
"preference." Under the bankruptcy code a preference is:
o a transfer of the debtor's property;
o to or for the benefit of a creditor on account of an existing debt;
o made while the debtor was insolvent (presumed in the 90 days before a
bankruptcy filing);
o if the creditor receives more than it would have received in a
bankruptcy liquidation if the transfer had not been made; and
o if the transfer/payment was made in the 90 days before the bankruptcy
filing, or, if the creditor was an "insider" within one year before the
bankruptcy filing (a creditor that is also a director, officer or
controlling stockholder of a debtor may be deemed to be an insider).
Abraxas' payment of principal and/or accrued interest, or its grant of a
lien or security interest, including payments made or liens or security
interests granted under the notes, may be deemed to be a preference if all of
the factors discussed above are present, subject to any applicable defenses,
including that payments are made in the ordinary course. If such transfers were
deemed to be preferential transfers, the payments could be recovered from the
holders of the notes and the lien or security interest could be avoided.
If the notes are fully secured (i.e., the value of collateral exceeds the
amount it secures), payments on such notes would not constitute preferential
transfers. However, if, or to the extent, the notes are undersecured (i.e., the
value of the collateral is less than the amount which it secures), payments
could be considered preferential transfers. Therefore, if Abraxas is involved in
a bankruptcy proceeding, holders of the notes may be required to disgorge
payments made on such notes if all the statutory elements of a preferential
transfer are met and there are no valid defenses.
The subsidiary guarantees could be voided if they constitute fraudulent
transfers under the bankruptcy code or similar state laws, which would
prevent the holders of notes from relying on the subsidiary guarantors to
satisfy our payment obligations under the notes.
The obligations of Abraxas under the notes are guaranteed on a senior
secured basis by each of its current U.S. subsidiaries and by each of its future
restricted subsidiaries. Federal and state laws allow courts, under specific
circumstances, to subordinate claims under the subsidiary guarantees to all
other debts of the subsidiary guarantors or to void the subsidiary guarantees
and to require creditors such as the noteholders to return payments received
from subsidiary guarantors. Under Federal bankruptcy law and comparable
provisions of state fraudulent transfer laws, a subsidiary guarantee could be
subordinated to all other debts of the subsidiary guarantor or voided if, for
example, a court were to find that a subsidiary guarantor, at the time it
entered into a subsidiary guarantee:
o intended to hinder, delay or defraud any present or future creditor;
o received less than fair consideration or reasonably equivalent value
for entering into the subsidiary guarantee;
o was insolvent or rendered insolvent by making the guarantee;
o was engaged in a business or transaction for which the remaining assets
of the subsidiary guarantor constituted unreasonably small capital; or
o intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending on the law applied in any proceeding to determine whether a
fraudulent transfer has occurred. Generally, however, a guarantor would be
28
considered insolvent if: the sum of its debts, including contingent liabilities,
were greater than the value of its assets; if the value of its assets were less
than the amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become absolute and
mature; or it could not pay its debts as they become due. In addition, a legal
challenge of a guarantee issued by a subsidiary guarantor as a fraudulent
transfer may focus on the benefits, if any, realized by the subsidiary guarantor
as a result of Abraxas' issuance of the notes. A court might find that the
subsidiary guarantors did not benefit from incurrence of the indebtedness
represented by such notes.
To the extent that a guarantee is voided as a fraudulent transfer or found
unenforceable for any other reason, holders of the notes would cease to have any
claim in respect of the applicable guarantor. In such event, the claims of the
holders of the notes against such guarantor would be subject to the prior
payment of all liabilities and preferred stock claims of such guarantor. There
can be no assurance that, after providing for all claims and preferred stock
interests, if any, there would be sufficient assets to satisfy the claims of the
holders of the notes relating to any voided portion of such guarantee.
Abraxas may not be able to repurchase the notes upon a change of control.
Upon the occurrence of certain change of control events, Abraxas will be
required to offer to repurchase all or any part of their notes at a cash price
equal to 101% of their aggregate principal amount, plus accrued and unpaid
interest, if any. Abraxas may not have sufficient funds at the time of the
change of control to make the required repurchases of such notes. The source of
funds for any repurchase required as a result of any change of control will be
Abraxas' available cash or cash generated from natural gas and crude oil
operations or other sources, including borrowings, sales of assets, sales of
equity or funds provided by a new controlling entity. Abraxas cannot assure you,
however, that sufficient funds would be available at the time of any change of
control to make any required repurchases of the notes tendered. Furthermore,
using available cash to fund the potential consequences of a change of control
may impair Abraxas' ability to obtain additional financing in the future.
29
USE OF PROCEEDS
Abraxas will not receive any proceeds from the Series A/B exchange offer.
CAPITALIZATION
The following table sets forth our cash, cash equivalents and
short-term investments and capitalization as of September 30, 2004:
o on an actual basis; and
o on an as adjusted basis to reflect the consummation of the refinancing.
This table should be read in conjunction with "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements, including the notes
thereto, included elsewhere in this prospectus.
As of September 30, 2004
------------------------------------
Actual As Adjusted
------------- ----------------
(dollars in thousands)
(unaudited)
Cash, cash equivalents and short-term investments.................. $ 3,601 $ 3,601
============== ================
Debt:
Previous credit facility...................................... $ 47,362 (1) $ --
11 1/2% secured notes due 2007................................... 143,154 (1) --
New revolving credit facility................................. -- --
Floating rate senior secured notes due 2009................... -- 125,000
Bridge loan................................................... -- 25,000
Grey Wolf term loan (2) ...................................... -- 35,000
-------------- ----------------
Total debt................................................ $ 190,516 $ 185,000
-------------- ----------------
Stockholders' equity:
Common stock.................................................. $ 364 $ 364
Additional paid-in capital.................................... 143,076 144,263
Retained earnings (deficit)................................... (220,527) (205,645)
Treasury stock................................................ (549) (549)
Other comprehensive income.................................... 1,249 --
-------------- -----------------
Total stockholders' deficit............................... (76,387) (61,567)
-------------- -----------------
Total capitalization............................................... $ 114,129 $ 123,433
============== =================
--------------
(1) On October 28, 2004, Abraxas repurchased all of its outstanding 11 1/2%
secured notes due 2007, including accrued interest. The purchase price
was financed by the issuance of the outstanding notes, borrowings by
Abraxas under its new bridge loan and from a $35 million payment from
Grey Wolf from proceeds of Grey Wolf's new term loan.
(2) Non-recourse to Abraxas.
30
RATIO OF EARNINGS TO FIXED CHARGES
Our consolidated ratio of earnings to fixed charges for each of the periods
indicated are as follows:
Years Ended December 31, Nine Months Ended
September 30,
------------------------------------------------------------ ----------------------
1999 2000 2001 2002 2003 2003 2004
---------- ---------- ----------- ---------- ---------- ---------- ----------
Ratio of earnings to fixed charges * 1.4x * * 4.0x 5.1x *
--------------
* Earnings inadequate to cover fixed charges.
Earnings consist of income (loss) before income taxes plus fixed charges.
Fixed charges consist of interest expense, amortization of deferred financing
fees and premium on the 11 1/2% secured notes 2007. Our earnings were inadequate
to cover fixed charges in 1999, 2001 and 2002 by $49.0 million, $15.6 million
and $148.2 million, respectively. In 2000 we had earnings of $44.9 million and
fixed charges of $33.2 million, in 2003, we had earnings of $74.9 million and
fixed charges of $18.6 million. Our ratio of earnings to fixed charges was 1.4x
and 4.0x in 2000 and 2003, respectively. For the nine months ended September 30,
2003, we had earnings of $72.2 million and fixed charges of $14.1 million. Our
ratio of earnings to fixed charges for the nine months ended September 30, 2003
was 5.1x. For the nine months ended September 30, 2004, our earnings were
inadequate to cover fixed charges by $6.8 million.
31
THE SERIES A/B EXCHANGE OFFER
Purpose of the Series A/B Exchange Offer
Abraxas issued $125,000,000 principal amount of the outstanding notes in a
private offering on October 28, 2004. In connection with the private offering,
Abraxas agreed in an exchange and registration rights agreement to conduct the
Series A/B exchange offer.
The offering of the exchange notes will be registered under the Securities
Act, and, therefore the exchange notes will not be subject to restrictions on
transfer, and holders of the exchange notes will not be entitled to additional
interest due to a registration default.
Each broker-dealer that receives exchange notes for its own account in
exchange for outstanding notes, where such outstanding notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes. See "Plan of Distribution".
Series A/B Exchange Offer Registration Statement
9 The exchange and registration rights agreement requires Abraxas to:
o file a registration statement with the SEC with respect to an offer to
exchange the outstanding notes for the exchange notes that have been
registered under the Securities Act no later than December 27, 2004;
o use reasonable best efforts to cause such exchange offer registration
statement to be declared effective under the Securities Act by April
26, 2005; and
o use its reasonable best efforts to complete the Series A/B exchange
offer by June 6, 2005 and to keep the Series A/B exchange offer open
for not less than 30 days, or longer if required by applicable law,
after the date on which notice of the Series A/B exchange offer is
mailed to the holders of the outstanding notes.
If Abraxas fails to file the required registration statement, the SEC does
not declare the required registration statement effective or Abraxas does not
complete the Series A/B exchange offer, in each case within the applicable time
period specified above, Abraxas has agreed to pay additional interest to holders
of the outstanding notes. For a more complete description of the exchange and
registration rights agreement, see "Exchange and Registration Rights Agreement".
Terms of the Series A/B Exchange Offer
Abraxas is offering to exchange $125 million total principal amount of
exchange notes for a like total principal amount of outstanding notes. The
outstanding notes must be tendered properly on or before the expiration time and
not withdrawn. In exchange for outstanding notes properly tendered and accepted,
Abraxas will issue a like total principal amount of up to $125 million in
exchange notes.
The Series A/B exchange offer is not conditioned upon holders tendering a
minimum principal amount of outstanding notes. As of the date of this
prospectus, $125 million aggregate principal amount of outstanding notes are
outstanding.
Holders of the outstanding notes do not have any appraisal or dissenters'
rights in the Series A/B exchange offer. If holders do not tender outstanding
notes or tender outstanding notes that Abraxas does not accept, their
outstanding notes will remain outstanding. Any outstanding notes will continue
to be entitled to the benefits under the indenture. See "Risk Factors--Risks
Related to the Series A/B Exchange Offer".
32
After the expiration time, Abraxas will return to the holder any tendered
outstanding notes that Abraxas did not accept for exchange.
Holders exchanging outstanding notes will not have to pay brokerage
commissions or fees or transfer taxes if they follow the instructions in the
letter of transmittal. Abraxas will pay the charges and expenses, other than
certain taxes described below, in the Series A/B exchange offer. See "--Fees and
Expenses" for further information regarding fees and expenses.
NEITHER ABRAXAS NOR ITS BOARD OF DIRECTORS RECOMMENDS YOU TO TENDER OR NOT
TENDER OUTSTANDING NOTES IN THE SERIES A/B EXCHANGE OFFER. IN ADDITION, ABRAXAS
HAS NOT AUTHORIZED ANYONE TO MAKE ANY RECOMMENDATION. YOU MUST DECIDE WHETHER TO
TENDER IN THE SERIES A/B EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF
OUTSTANDING NOTES TO TENDER.
The expiration time is midnight, New York City time, on _____________,
2005, unless Abraxas extends the Series A/B exchange offer.
Abraxas has the right, in accordance with applicable law, at any time:
o to delay the acceptance of the outstanding notes;
o to terminate the Series A/B exchange offer if Abraxas determines that
any of the conditions to the Series A/B exchange offer have not
occurred or have not been satisfied;
o to extend the expiration time of the Series A/B exchange offer and keep
all outstanding notes tendered other than those notes properly
withdrawn; and
o to waive any condition or amend the terms of the Series A/B exchange
offer.
If Abraxas materially changes the Series A/B exchange offer, or if Abraxas
waives a material condition of the Series A/B exchange offer, Abraxas will
promptly distribute a prospectus supplement to the holders of the outstanding
notes disclosing the change or waiver. Abraxas also will extend the Series A/B
exchange offer as required by Rule 14e-1 under the Securities Exchange Act of
1934, as amended.
If Abraxas exercises any of the rights listed above, it will promptly give
oral or written notice of the action to the exchange agent and will issue a
release to an appropriate news agency. In the case of an extension, an
announcement will be made no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled expiration time.
Acceptance for Exchange and Issuance of Exchange Notes
Promptly after the expiration time, Abraxas will issue exchange notes for
outstanding notes tendered and accepted and not withdrawn. Delivery of the
exchange notes issued in global form will occur through the facilities of DTC,
and the exchange agent will deliver the exchange notes issued in certificated
form. If a tendering outstanding noteholder tenders certificated outstanding
notes, the exchange agent might not deliver the exchange notes to all of such
tendering holders at the same time. The timing of delivery depends upon when the
exchange agent receives and processes the required documents.
Abraxas will be deemed to have exchanged outstanding notes validly tendered
and not withdrawn when Abraxas gives oral or written notice to the exchange
agent of their acceptance. The exchange agent is an agent for Abraxas for
receiving tenders of outstanding notes, letters of transmittal and related
documents. The exchange agent is also an agent for tendering holders for these
same purposes, and in the case of holders who tender certificated outstanding
notes, the exchange agent is also their agent for the delivery of their exchange
notes. If for any reason, Abraxas (1) delays the acceptance or exchange of any
outstanding notes; (2) extends the Series A/B exchange offer; or (3) is unable
to accept or exchange outstanding notes, then the exchange agent may, on behalf
of Abraxas and subject to Rule 14e-1(c) under the Exchange Act, retain tendered
outstanding notes. Outstanding notes retained by the Exchange Agent may not be
33
withdrawn, except according to the withdrawal procedures outlined in the section
entitled "--Withdrawal Rights" below.
In tendering outstanding notes, you must represent and warrant in the
letter of transmittal or in an agent's message (described below) that:
o you have full power and authority to tender, exchange, sell, assign and
transfer outstanding notes;
o Abraxas will acquire good, marketable and unencumbered title to the
tendered outstanding notes, free and clear of all liens, restrictions,
charges and other encumbrances; and
o the outstanding notes tendered for exchange are not subject to any
adverse claims, rights or proxies.
You also must warrant and agree that you will, upon request, execute and
deliver any additional documents requested by Abraxas or the exchange agent to
complete the exchange, sale, assignment and transfer of the outstanding notes.
Procedures for Tendering Outstanding Notes
Valid Tender
You may tender your outstanding notes by book-entry transfer or by other
means. For book-entry transfer, (1) you must deliver to the exchange agent
either a completed and signed letter of transmittal or (2) DTC must deliver an
agent's message, meaning a message transmitted to the exchange agent by DTC
stating that you agree to be bound by the terms of the letter of transmittal.
You must deliver your letter of transmittal by mail, facsimile, hand delivery or
overnight courier or DTC must deliver the agent's message to the exchange agent
on or before the expiration time. In addition, to complete a book-entry
transfer, you must also either (1) have DTC transfer the outstanding notes into
the exchange agent's account at DTC using the ATOP procedures for transfer, and
obtain a confirmation of such a transfer, or (2) follow the guaranteed delivery
procedures described below under "--Guaranteed Delivery Procedures."
If you tender fewer than all of your outstanding notes, you should fill in
the amount of outstanding notes tendered in the appropriate box on the letter of
transmittal. If you do not indicate the amount tendered in the appropriate box,
Abraxas will assume you are tendering all outstanding notes that you hold.
To tender certificated outstanding notes or to otherwise tender your
outstanding notes other than by book-entry transfer, you must deliver a
completed and signed letter of transmittal to the exchange agent. You must
deliver the letter of transmittal by mail, facsimile, hand delivery or overnight
courier to the exchange agent on or before the expiration time. In addition, to
complete a valid tender, you must either (1) deliver your outstanding notes to
the exchange agent on or before the expiration time, or (2) follow the
guaranteed delivery procedures set forth below under "--Guaranteed Delivery
Procedures."
DELIVERY OF REQUIRED DOCUMENTS BY WHATEVER METHOD YOU CHOOSE IS AT YOUR
SOLE RISK. DELIVERY IS COMPLETE WHEN THE EXCHANGE AGENT ACTUALLY RECEIVES THE
ITEMS TO BE DELIVERED. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S
PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. IF DELIVERY IS BY
MAIL, THEN REGISTERED MAIL, RETURN RECEIPT REQUESTED, PROPERLY INSURED, OR AN
OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES, YOU SHOULD ALLOW
SUFFICIENT TIME TO ENSURE TIMELY DELIVERY.
34
Signature Guarantees
You do not need to endorse certificates for the outstanding notes or
provide signature guarantees on the letter of transmittal, unless (a) someone
other than the registered holder tenders the certificate or (b) you complete the
box entitled "Special Issuance Instructions" or "Special Delivery Instructions"
in the letter of transmittal. In the case of (a) or (b) above, you must sign
your outstanding notes or provide a properly executed bond power, with the
signature on the bond power and on the letter of transmittal guaranteed by a
firm or other entity identified in Rule 17Ad-15 under the Exchange Act as an
"eligible guarantor institution." Eligible guarantor institutions include: (1) a
bank; (2) a broker, dealer, municipal securities broker or dealer or government
securities broker or dealer; (3) a credit union; (4) a national securities
exchange, registered securities association or clearing agency; or (5) a savings
association that is a participant in a securities transfer association.
Guaranteed Delivery Procedures
If you want to tender your outstanding notes in the Series A/B exchange
offer and (1) the certificates for the outstanding notes are not lost but are
not immediately available, (2) all required documents are unlikely to reach the
exchange agent on or before the expiration time, or (3) a book-entry transfer
cannot be completed in time, you may tender your outstanding notes if you comply
with the following guaranteed delivery procedures:
o the tender is made by or through an eligible guarantor institution;
o you deliver a properly completed and signed notice of guaranteed
delivery, similar to the form provided with the letter of transmittal,
to the exchange agent on or before the expiration time; and
o you deliver the certificates or a confirmation of book-entry transfer
and a properly completed and signed letter of transmittal to the
exchange agent within three New York Stock Exchange trading days after
the notice of guaranteed delivery is executed.
You may deliver the notice of guaranteed delivery by hand, facsimile or
mail to the exchange agent and must include a guarantee by an eligible guarantor
institution in the form described in the notice.
Abraxas' acceptance of properly tendered outstanding notes is a binding
agreement between the tendering holder and Abraxas upon the terms and subject to
the conditions of the Series A/B exchange offer.
Determination Of Validity
Abraxas will resolve all questions regarding the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange of
any tendered outstanding notes. Abraxas' resolution of these questions as well
as Abraxas' interpretation of the terms and conditions of the Series A/B
exchange offer (including the letter of transmittal) is final and binding on all
parties. A tender of outstanding notes is invalid until all irregularities have
been cured or waived. Neither Abraxas, any affiliates or assigns of Abraxas, the
exchange agent nor any other person is under any obligation to give notice of
any irregularities in tenders nor will they be liable for failing to give any
such notice. Abraxas reserves the absolute right, in its sole and absolute
discretion, to reject any tenders determined to be in improper form or unlawful.
Abraxas also reserves the absolute right to waive any of the conditions of the
Series A/B exchange offer or any condition or irregularity in the tender of
outstanding notes by any holder. Abraxas need not waive similar conditions or
irregularities in the case of other holders.
If any letter of transmittal, endorsement, bond power, power of attorney,
or any other document required by the letter of transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
that person must indicate that capacity when signing. In addition, unless waived
by Abraxas, the person must submit proper evidence satisfactory to Abraxas, in
its sole discretion, of his or her authority to so act.
A beneficial owner of outstanding notes that are held by or registered in
the name of a broker, dealer, commercial bank, trust company or other nominee or
custodian should contact that entity promptly if the holder wants to participate
in the Series A/B exchange offer.
35
Withdrawal Rights
You can withdraw tenders of outstanding notes at any time on or before the
expiration time.
For a withdrawal to be effective, you must deliver a written, telegraphic,
telex or facsimile transmission of a notice of withdrawal to the exchange agent
on or before the expiration time. The notice of withdrawal must specify the name
of the person tendering the outstanding notes to be withdrawn, the total
principal amount of outstanding notes withdrawn, and the name of the registered
holder of the outstanding notes if different from the person tendering the
outstanding notes. If you delivered outstanding notes to the exchange agent in
certificated form, you must submit the serial numbers of the outstanding notes
to be withdrawn and the signature on the notice of withdrawal must be guaranteed
by an eligible guarantor institution, except in the case of outstanding notes
tendered for the account of an eligible guarantor institution. If you tendered
outstanding notes as a book-entry transfer, the notice of withdrawal must
specify the name and number of the account at DTC to be credited with the
withdrawal of outstanding notes and you must deliver the notice of withdrawal to
the exchange agent by written, telegraphic, telex or facsimile transmission. You
may not rescind withdrawals of tender. Outstanding notes properly withdrawn may
again be tendered at any time on or before the expiration time.
Abraxas will determine all questions regarding the validity, form and
eligibility of withdrawal notices. Abraxas' determination will be final and
binding on all parties. Neither Abraxas, any affiliate or assign of Abraxas, the
exchange agent nor any other person is under any obligation to give notice of
any irregularities in any notice of withdrawal, nor will they be liable for
failing to give any such notice. Withdrawn outstanding notes will be returned to
the holder after withdrawal.
Resales of Exchange Notes
Abraxas is exchanging the outstanding notes for exchange notes based upon
the position of the SEC staff set forth in interpretive letters to third parties
in other similar transactions. Abraxas will not seek its own interpretive
letter, unless contractually required to in accordance with the terms of the
exchange and registration rights agreement. As a result, Abraxas cannot assure
you that the SEC staff will take the same position on the Series A/B exchange
offer as it did in interpretive letters to other parties. Based on the SEC
staff's letters to other parties, Abraxas believes that holders of exchange
notes, other than broker-dealers, can offer the exchange notes for resale,
resell and otherwise transfer the exchange notes without delivering a prospectus
to prospective purchasers. However, prospective holders must acquire the
exchange notes in the ordinary course of business and have no intention of
engaging in a distribution of the exchange notes, as a "distribution" is defined
by the Securities Act.
Any holder of outstanding notes who is an "affiliate" of Abraxas or who
intends to distribute exchange notes, or any broker-dealer who purchased
outstanding notes from Abraxas for resale pursuant to Rule 144A or any other
available exemption under the Securities Act:
o cannot rely on the SEC staff's interpretations in the above-mentioned
interpretive letters;
o cannot tender outstanding notes in the Series A/B exchange offer; and
o must comply with the registration and prospectus delivery requirements
of the Securities Act to transfer the outstanding notes, unless the
sale is exempt.
In addition, each broker-dealer that receives exchange notes for its own
account in exchange for outstanding notes, where such outstanding notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes. See "Plan of Distribution".
If you want to exchange your outstanding notes for exchange notes, you will
be required to affirm that:
o you are not an "affiliate" of Abraxas;
o you are acquiring the exchange notes in the ordinary course of your
business;
36
o you have no arrangement or understanding with any person to participate
in a distribution of the exchange notes (within the meaning of the
Securities Act); and
o you are not a broker-dealer, not engaged in, and do not intend to
engage in, a distribution of the exchange notes (within the meaning of
the Securities Act).
In addition, Abraxas may require you to provide information regarding the
number of "beneficial owners" (within the meaning of Rule 13d-3 under the
Exchange Act) of the outstanding notes. Each broker-dealer that receives
exchange notes for its own account must acknowledge that it acquired the
outstanding notes for its own account as the result of market-making activities
or other trading activities and must agree that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale of
exchange notes. By making this acknowledgment and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" under the
Securities Act. Based on the SEC staff's position in certain interpretive
letters, Abraxas believes that broker-dealers who acquired outstanding notes for
their own accounts as a result of market-making activities or other trading
activities may fulfill their prospectus delivery requirements with respect to
the exchange notes with a prospectus meeting the requirements of the Securities
Act. Accordingly, a broker-dealer may use this prospectus to satisfy such
requirements. Abraxas has agreed that a broker-dealer may use this prospectus
for a period ending 180 days after the expiration time or, if earlier, when a
broker-dealer has disposed of all exchange notes. See "Plan of Distribution" for
further information. A broker-dealer intending to use this prospectus in the
resale of exchange notes must notify Abraxas, on or prior to the expiration
time, that it is a participating broker-dealer (as described in "Plan of
Distribution"). This notice may be given in the letter of transmittal or may be
delivered to the exchange agent. Any participating broker-dealer who is an
"affiliate" of Abraxas may not rely on the SEC staff's interpretive letters and
must comply with the registration and prospectus delivery requirements of the
Securities Act when reselling exchange notes.
Conditions to the Series A/B Exchange Offer
Abraxas need not exchange any outstanding notes, may terminate the Series
A/B exchange offer or may waive any conditions to the Series A/B exchange offer
or amend the Series A/B exchange offer, if any of the following conditions have
occurred:
o the SEC staff no longer allows the exchange notes to be offered for
resale, resold and otherwise transferred by certain holders without
compliance with the registration and prospectus delivery provisions of
the Securities Act;
o a governmental body passes any law, statute, rule or regulation which,
in Abraxas' opinion, prohibits or prevents the Series A/B exchange
offer;
o an action or proceeding shall have been instituted or threatened in any
court or by or before any governmental agency with respect to the
exchange offer which, in Abraxas' judgment would reasonably be expected
to impair Abraxas' ability to proceed with the exchange offer;
o the SEC or any state securities authority issues a stop order
suspending the effectiveness of the registration statement or initiates
or threatens to initiate a proceeding to suspend the effectiveness of
the registration statement; or
o Abraxas is unable to obtain any governmental approval that Abraxas
believes is necessary to complete the Series A/B exchange offer.
If Abraxas reasonably believes that any of the above conditions has
occurred, it may (1) terminate the Series A/B exchange offer, whether or not any
outstanding notes have been accepted for exchange, (2) waive any condition to
the Series A/B exchange offer or (3) amend the terms of the Series A/B exchange
offer in any respect subject to Abraxas' contractual obligation in the
registration rights agreement to seek a no-action letter or other favorable
decision from the SEC that would permit the consummation of the Series A/B
exchange offer. If Abraxas' waiver or amendment materially changes the Series
A/B exchange offer, Abraxas will promptly disclose the waiver or amendment
through a prospectus supplement, distributed to the registered holders of the
outstanding notes. The prospectus supplement also will extend the Series A/B
exchange offer as required by Rule 14e-1 of the Exchange Act.
37
Exchange Agent
Abraxas has appointed U.S. Bank National Association as exchange agent for
the Series A/B exchange offer. Holders should direct questions and requests for
assistance, requests for additional copies of this prospectus or of the letter
of transmittal and requests for notice of guaranteed delivery to the exchange
agent addressed as follows:
Regular Mail, Couriers Or By Requests for
By Registered Or Certified Mail: Hand Delivery: By Facsimile: Information:
U.S. Bank National Association U.S. Bank National Association (651) 495-8158 (800) 934-6802
60 Livingston Avenue 60 Livingston Avenue Attn: Specialized
Finance St. Paul, MN 55107 St. Paul, MN 55107 (For Eligible
Attn.: Specialized Finance Attn.: Specialized Finance Institutions Only)
If you deliver letters of transmittal or any other required documents to an
address or facsimile number other than those listed above, your tender is
invalid.
Fees and Expenses
Abraxas will pay the exchange agent reasonable and customary fees for its
services and reasonable out-of-pocket expenses. Abraxas also will pay brokerage
houses and other custodians, nominees and fiduciaries their reasonable
out-of-pocket expenses for sending copies of this prospectus and related
documents to holders of outstanding notes, and in handling or tendering for
their customers.
Abraxas will pay the transfer taxes for the exchange of the outstanding
notes in the Series A/B exchange offer. If, however, exchange notes are
delivered to or issued in the name of a person other than the registered holder,
or if a transfer tax is imposed for any reason other than for the exchange of
outstanding notes in the Series A/B exchange offer, then the tendering holder
will pay the transfer taxes. If a tendering holder does not submit satisfactory
evidence of payment of taxes or exemption from taxes with the letter of
transmittal, the taxes will be billed directly to the tendering holder.
Abraxas will not make any payment to brokers, dealers or other nominees
soliciting acceptances in the Series A/B exchange offer.
Accounting Treatment
The exchange notes will be recorded at the same carrying value as the
outstanding notes. Accordingly, no gain or loss for accounting purposes will be
recognized by upon the closing of the Series A/B exchange offer. Costs
associated with the Series A/B exchange offer will be expensed as incurred.
38
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The pro forma financial data presented below is unaudited and has been
derived from our consolidated financial statements included in this prospectus
and from unaudited historical and pro forma consolidated financial data. The pro
forma financial information presented below for the year ended December 31, 2003
and for the nine months ended September 30, 2004 reflects consolidated statement
of operations data relating to Abraxas and each of the U.S. subsidiary
guarantors of the notes and gives effect to:
o the exclusion of Grey Wolf from Abraxas' statement of operations;
o the consummation of the October 2004 financial restructuring; and
o the exclusion of the January 2003 financial restructuring described
under "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The pro forma condensed balance sheet reflects the consolidated balance
sheet data relating to Abraxas and each of the subsidiary guarantors of the
notes and gives effect to the exclusion of balance sheet data relating to Grey
Wolf as of September 30, 2004.
Grey Wolf, through which we conduct our Canadian operations and hold our
properties and assets located in Canada, is excluded from the pro forma results
because:
o except under the limited circumstances described in this prospectus,
the notes are not, and will not be, guaranteed by Grey Wolf, and are
structurally subordinated in right of payment to all of its
obligations, including Grey Wolf's term loan and trade payables and
other debt of Grey Wolf;
o the notes are not secured by any of the property or assets of Grey Wolf
(unless it becomes a restricted subsidiary); and
o the shares of capital stock of Grey Wolf owned by Abraxas do not
constitute a part of the collateral.
Accordingly, the notes are effectively junior to all the liabilities, including
all trade payables and other debt, of Grey Wolf.
The pro forma information set forth below is not necessarily indicative of
the results that actually would have been achieved if the Grey Wolf operations
had not been part of Abraxas' operations or the refinancing had been consummated
as of the dates indicated.
39
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2003
Historical
Abraxas
Petroleum Financing
Corporation Grey Wolf Transaction Pro Forma
-------------- ------------- ------------- -------------
(dollars in thousands, except per share data)
Revenues:
Oil and gas production revenues...... $38,105 $(8,395) (1) $ -- $29,710
Gas processing revenues.............. 133 (133) (1) -- --
Rig revenues......................... 663 -- -- 663
Other................................ 118 (111) (1) -- 7
-------------- ------------- ------------- -------------
Total revenues................ 39,019 (8,639) -- 30,380
Operating costs and expenses:
Lease operating and production taxes. 9,599 (1,257) (1) -- 8,342
Depreciation, depletion and
Amortization.................... 10,803 (3,195) (1) -- 7,608
Rig operations....................... 609 -- -- 609
General and administrative........... 5,360 (1,365) (1) -- 3,995
Stock-based compensation............. 1,106 -- -- 1,106
-------------- ------------- ------------- -------------
Total operating expenses...... 27,477 (5,817) -- 21,660
-------------- ------------- ------------- -------------
Operating income (loss)................ 11,542 (2,822) 8,720
Other (income) expense:
Interest income...................... (30) -- -- (30)
Amortization of deferred
financing fees.................. 1,678 (48) (1) (1,630) (2)
2,260 (2) 2,260
Interest expense.................... 16,955 (632) (1) (16,323) (3)
15,150 (3) 15,150
Financing costs........................ 4,406 -- -- 4,406 (4)
Gain of sale of foreign subsidiary..... (68,933) -- -- (68,933)
Other.................................. 774 (674) (1) -- 100
-------------- ------------- ------------- -------------
Income (loss) from operations before
income tax........................... 56,692 (1,468) 543 55,767
Income tax expense (benefit):.......... 377 (377) (1) -- --
Cumulative effect of accounting change. 395 -- -- 395
-------------- ------------- ------------- -------------
Net income............................. $55,920 $(1,091) $ 543 $55,372
============== ============= ============= =============
Weighted average common shares:
Basic.............................. 35,364,363 35,364,363
-------------- -------------
Diluted............................ 36,076,291 36,076,291
-------------- -------------
Net income per share:
Basic.............................. $ 1.58 $ 1.57
-------------- -------------
Diluted............................ $ 1.55 $ 1.54
-------------- -------------
--------------
See notes to unaudited pro forma financial information.
40
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2004
Historical
Abraxas
Petroleum Financing
Corporation Grey Wolf Transaction Pro Forma
-------------- --------------- --------------- ------------
(dollars in thousands, except per share data)
Revenues:
Oil and gas production revenues.. $34,249 $(10,075) (1) $ -- $24,174
Rig revenues..................... 518 -- -- 518
Other............................ 218 (209) (1) -- 9
-------------- --------------- --------------- ------------
Total revenues............. 34,985 (10,284) -- 24,701
Operating costs and expenses:
Lease operating and production taxes 9,318 (2,602) (1) -- 6,716
Depreciation, depletion and
Amortization................... 9,398 (3,996) (1) -- 5,402
Rig operation.................... 442 -- -- 442
General and administrative....... 4,813 (1,054) (1) -- 3,759
Stock-based compensation......... 1,122 -- -- 1,122
-------------- --------------- --------------- ------------
Total operating expenses... 25,093 (7,652) -- 17,441
-------------- --------------- --------------- ------------
Operating income (loss)............. 9,892 (2,632) -- 7,260
Other (income) expense:
Interest income.................. (12) (5) (1) -- (7)
Interest expense................. 13,700 (284) (1) 11,363 (3)
(13,416) (3) 11,363
Amortization of deferred
financing fees................. 1,380 -- (1,330) (2)
1,695 (2) 1,695
Financing cost................... 1,641 -- -- 1,641
Other............................ 11 -- -- 11
-------------- --------------- --------------- ------------
Net income (loss).................. $(6,828) $ (2,353) $ 1,738 $(7,443)
Weighted average common shares:
Basic............................... 36,164,268 36,164,268
-------------- ------------
Diluted............................. 36,164,268 36,164,268
-------------- ------------
Net loss per share:
Basic............................... $(0.19) $ (0.21)
-------------- ------------
Diluted............................. $(0.19) $ (0.21)
-------------- ------------
--------------
See notes to unaudited pro forma financial information.
41
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
As of September 30, 2004
Historical
Abraxas
Petroleum Financing
Corporation Grey Wolf Transaction Pro Forma
-------------- ---------------- -------------- ----------------
(dollars in thousands)
Assets:
Cash......................... $ 3,601 $ (707) (1) $ -- $ 2,894
Accounts receivable.......... 4,804 (859 (1) -- 3,947
Other........................ 1,282 (212) (1) -- 1,070
-------------- ---------------- -------------- ----------------
Total current assets....... 9,687 (1,776) -- 7,911
Net property and equipment....... 114,233 (38,745) (1) -- 75,488
Deferred financing fees.......... 4,853 -- (4,853) (2)
11,300 (2) 11,300
Other assets..................... 294 -- -- 294
-------------- ---------------- -------------- ----------------
Total assets............... $ 129,067 $ (40,521) $ 6,447 $ 94,993
============== ================ ============== ================
Liabilities and stockholders
equity(deficit):
Current Liabilities:
Accounts payable............. $ 5,820 $ (1,988) (1) $ -- $ 3,832
Other current liabilities.... 7,354 -- (5,492) (3) 1,862
-------------- ---------------- -------------- ----------------
Total current liabilities.. 13,174 (1,988) (5,492) 5,694
Long-term debt:
Secured notes due 2007....... 143,154 -- (143,154) (4) --
Existing credit facility..... 47,362 -- (47,362) (4) --
New notes due 2009........... -- -- 125,000 (4) 125,000
Bridge facility.............. -- -- 25,000 (4) 25,000
-------------- ---------------- -------------- ----------------
Total...................... 190,516 (1,988) (40,516) 150,000
Other liabilities................ 1,764 (898) (1) -- 866
Stockholders' equity (deficit):
Common stock................. 364 -- -- 364
Additional paid-in capital... 143,076 (33,813) (1) 35,000 (5) 144,263
Accumulated deficit.......... (220,527) (2,573) (1) 17,455 (205,645)
Accumulated other
comprehensive
Income adjustment.......... 1,249 (1,249) (1) -- --
Treasury stock............... (549) -- -- (549)
-------------- ---------------- -------------- ----------------
Total stockholders' equity
(deficit)................ (76,387) (37,635) 52,455 (61,567)
-------------- ---------------- -------------- ----------------
Total liabilities and
stockholders' equity
(deficit)................ $ 129,067 $ (40,521) $ 6,447 $ 94,993
============== ================ ============== ================
--------------
See notes to unaudited pro forma financial information.
42
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
Notes to the Unaudited Pro Forma Condensed Consolidated Statements of
Operations:
1. Adjust for Grey Wolf operations for the year ended December 31, 2003
and nine months ended September 30, 2004.
2. Reverse recorded amortization of deferred financing fees associated
with retired debt and record amortization of deferred financing fees
related to the new debt. The amortization period for the deferred
financing fees related to the transaction is 60 months.
3. Reverse recorded interest expense associated with retired debt and
record interest expense on new debt, interest on the notes is
calculated at an assumed annual rate of 9.72%. Interest on the Bridge
Facility is calculated at an assumed annual rate of 12.0%.
4. Financing costs relate to debt retired with this transaction. Had the
described transaction actually occurred at the beginning of the period
presented, these costs would not have been incurred.
There is no current deferred income tax expense reflected in the pro forma
statements due to net operating loss carryforwards.
Notes to the Unaudited Pro Forma Condensed Consolidated Balance Sheet:
1. Remove balance sheet of Grey Wolf at September 30, 2004.
2. Reverse deferred financing fees related to retired debt and record
deferred financing fees related to new debt. Deferred financing fees
related to the retired debt were charged to expenses as of October 28,
2004.
3. Remove accrued interest related to retired debt
4. Remove retired debt and record notes and bridge facility.
5. Record dividend distribution from Grey Wolf.
43
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The historical consolidated financial data presented below has been derived
from our consolidated financial statements included in this prospectus.
Information for the years ended December 31, 1999, 2000, 2001, 2002 and 2003 is
derived from our audited financial statements. Information for the nine months
ended September 30, 2003 and 2004 is derived from our unaudited financial
statements. It is important that you read this financial data along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the notes thereto
included elsewhere in this prospectus.
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------------------------------- -----------------------
1999 2000 2001 2002 2003 2003 2004
--------- ---------- ---------- --------- ---------- ---------- ----------
(dollars in thousands, except per share data)
Consolidated Statements of
Operations Data:
Operating revenue:
Oil and gas production revenues........ $ 59,025 $ 72,973 $ 73,201 $ 50,862 $ 38,105 $ 29,277 $ 34,249
Gas processing revenue................. 4,244 2,717 2,438 2,420 133 132 --
Rig and other revenue.................. 3,501 910 1,604 1,038 781 562 736
--------- ---------- ---------- --------- ---------- ---------- ----------
Total operating revenue................ 66,770 76,600 77,243 54,320 39,019 29,971 34,985
--------- ---------- ---------- --------- ---------- ---------- ----------
Operating costs and expenses:
Lease operating and production taxes... 17,938 18,783 18,616 15,240 9,599 7,164 9,318
Depreciation, depletion and
amortization expense................... 34,811 35,857 32,484 26,539 10,803 7,861 9,398
General and administrative expense..... 5,269 6,533 6,445 6,884 5,360 3,769 4,813
General and administrative
(Stock-based compensation)........... -- 2,767 (2,767) -- 1,106 467 1,122
Other.................................. 624 717 702 567 609 443 442
Proved property impairment............. 19,100 -- 2,638 115,993 -- -- --
--------- ---------- ---------- --------- ---------- ---------- ----------
Total operating expenses............ 77,742 64,657 58,118 165,223 27,477 19,704 25,093
--------- ---------- ---------- --------- ---------- ---------- ----------
Operating income (loss).................. (10,972) 11,943 19,125 (110,903) 11,542 10,267 9,892
Net interest expense................... 36,149 30,610 31,445 34,058 16,925 12,899 13,688
Amortization of deferred financing
Fees................................... 1,915 2,091 2,268 2,095 1,678 1,244 1,380
Financing cost........................ -- -- -- 967 4,406 4,182 1,641
Gain on debt extinguishment............ -- (1,773) -- -- -- -- --
(Gain) loss on sale of equity
investment............................. -- (33,983) 845 -- -- -- --
Gain on sale of foreign subsidiaries... -- -- -- -- (68,933) (67,258) --
Other (income) expense................. -- 1,563 207 201 774 774 11
--------- ---------- ---------- --------- ---------- ---------- ----------
Income (loss) before taxes and
cumulative effect of accounting
change................................. (49,036) 13,435 (15,640) (148,224) 56,692 58,426 (6,828)
Cumulative effect of accounting
change................................. -- -- -- -- (395) (395) --
Income tax (expense) benefit........... 12,625 (3,705) (2,402) 29,697 (377) (377) --
Minority interest in income (loss) of
consolidated foreign subsidiaries...... (269) (1,281) (1,676) -- -- -- --
--------- ---------- ---------- --------- ---------- ---------- ----------
Income (loss)............................ $(36,680) $ 8,449 $(19,718) $ (118,527) $ 55,920 $ 57,654 $ (6,828)
========= ========== ========== ========= ========== ========== ==========
Income (loss) from per common
share:
Basic.................................. $ (5.41) $ 0.37 $ (0.76) $ (3.95) $ 1.58 $ 1.63 $ (0.19)
Diluted................................ $ (5.41) $ 0.26 $ (0.76) $ (3.95) $ 1.55 $ 1.60 $ (0.19)
Consolidated Balance Sheet Data:
Total assets........................... $ 322,284 $ 335,560 $303,616 $181,425 $126,437 $124,203 $129,067
Long-term debt - excluding current 273,421 266,441 285,184 236,943 184,649 177,012 190,516
maturities.............................
Stockholder's (deficit)................ (9,505) (6,503) (28,585) (142,254) (72,203) (72,464) (76,387)
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our consolidated financial condition,
results of operations, liquidity and capital resources. This discussion should
be read in conjunction with our consolidated financial statements and the notes
thereto included in this prospectus.
General
We are an independent energy company primarily engaged in the development
and production of natural gas and crude oil. Historically, we have grown through
the acquisition and subsequent development and exploitation of producing
properties, principally through the redevelopment of old fields utilizing new
technologies such as modern log analysis and reservoir modeling techniques as
well as 3-D seismic surveys and horizontal drilling. As a result of these
activities, we believe that we have a substantial inventory of low risk
development opportunities, which provide a basis for significant production and
reserve increases. In addition, we intend to expand upon our exploitation and
development activities with complementary low risk exploration projects in our
core areas.
We incurred net losses in three of the last five years and in the nine
months ended September 30, 2004, and our financial results continue to depend
upon many factors which significantly affect our results of operations,
including the following:
o the sales prices of natural gas, natural gas liquids and crude oil;
o the level of our total sales volumes of natural gas, natural gas
liquids and crude oil;
o the availability of, and our ability to raise additional, capital
resources and provide liquidity to meet cash flow needs;
o our ability to use our cash flow from operations for capital
expenditures to increase production and reserves;
o the level and success of exploitation, exploration and development
activity; and
o the level of our borrowings.
During 2003, Grey Wolf had $8.6 million of revenues and cash flow from
operations of $6.3 million, all of which was used to fund operations in Canada.
In addition, in 2003, $6.0 million of Abraxas' cash flow from operations was
used to fund operations in Canada. It is anticipated that Grey Wolf will finance
its future operations out of its own financial resources. However, Abraxas may
also provide limited funds to Grey Wolf under the terms of the new revolving
credit facility, notes and the bridge loan. Grey Wolf is currently not permitted
to distribute money or pay dividends to Abraxas. Instead, it is expected that
Grey Wolf's cash flow from operations will be used to pay debt service and to
repay Grey Wolf's indebtedness under its term loan and to finance its on-going
operations. Grey Wolf has pledged all of its material assets as security for
that indebtedness. In addition, Abraxas has pledged all of the capital stock of
Grey Wolf that it owns solely as security for the bridge loan, and this capital
stock does not constitute a part of the collateral securing the notes or pledged
for the benefit of the noteholders.
Commodity Prices and Hedging Activities. Our results of operations are
significantly affected by fluctuations in commodity prices. Price volatility in
the natural gas and crude oil markets has remained prevalent in the last few
years. In January 2001, the market price of natural gas was at its highest level
in our operating history and the price of crude oil was also at a high level.
However, over the course of 2001 and the beginning of the first quarter of 2002,
prices again became depressed, primarily due to the economic downturn. Beginning
in March 2002, commodity prices began to increase and continued higher through
December 2003. Prices remained strong during 2004 and have continued to remain
strong during the beginning of 2005.
45
The table below illustrates how natural gas prices fluctuated over the
eight quarters Ended September 30, 2004. The table below contains the last three
day average of NYMEX traded contracts price and the prices we realized during
the eight quarters ended September 30, 2004, including the impact of our hedging
activities.
Natural Gas Prices by Quarter
(in $ per Mcf)
Quarter Ended
-------------------------------------------------------------------------
Dec. 31, March 31, June 30, Sept,30 Dec. 31, Mar. 31, June 30, Sept.30
2002 2003 2003 2003 2003 2004 2004 2004
-------- --------- -------- -------- -------- --------- --------- -------
Index $3.99 $6.61 $5.51 $5.10 $4.60 $5.69 $5.97 $5.85
Realized $3.47 $5.13 $5.11 $4.50 $4.30 $4.83 $5.23 $5.46
The NYMEX natural gas price on January 4, 2005 was $5.90 per Mcf.
The table below contains the last three day average of NYMEX traded
contracts price and the prices we realized during the eight quarters ended
September 30, 2004.
Crude Oil Prices by Quarter
(in $ per Bbl)
Quarter Ended
-------------------------------------------------------------------------
Dec. 31, March 31, June 30, Sept,30 Dec. 31, Mar. 31, June 30, Sept.30
2002 2003 2003 2003 2003 2004 2004 2004
-------- --------- -------- -------- -------- --------- --------- -------
Index $28.29 $33.71 $29.87 $30.85 $29.64 $34.76 $38.48 $42.32
Realized $24.83 $33.22 $28.53 $29.52 $29.73 $34.19 $37.09 $42.37
The NYMEX crude oil price on January 4, 2005 was $44.08 per Bbl.
We seek to reduce our exposure to price volatility by hedging our
production through swaps, floors, options and other commodity derivative
instruments. In 2001 and 2002, we experienced hedging losses of $12.1 million
and $3.2 million, respectively. In October 2002, all of these hedge agreements
expired. We made total payments over the term of these arrangements to various
counterparties in the amount of $35.1 million.
Under the terms of Abraxas' new revolving credit facility, Abraxas is
required to maintain hedging positions with respect to not less than 25% nor
more than 75% of its natural gas and crude oil production, on an equivalent
basis, for a rolling six month period. As of November 1, 2004, Abraxas had the
following hedges in place:
Time Period Notional Quantities Price
---------------------------------- -------------------------------------------- ----------------------
January 2005 7,100 MMbtu of production per day Floor of $4.50
400 Bbls of crude oil production per day Floor of $25.00
February 2005 7,100 MMbtu of production per day Floor of $4.50
400 Bbls of crude oil production per day Floor of $25.00
March 2005 7,100 MMbtu of production per day Floor of $4.50
400 Bbls of crude oil production per day Floor of $25.00
April 2005 7,100 MMbtu of production per day Floor of $4.50
400 Bbls of crude oil production per day Floor of $25.00
May - December 2005 9,500 MMbtu of production per day Floor of $5.00
46
Production Volumes. Because our proved reserves will decline as natural
gas, natural gas liquids and crude oil are produced, unless we acquire
additional properties containing proved reserves or conduct successful
exploration and development activities, our reserves and production will
decrease. Our ability to acquire or find additional reserves in the near future
will be dependent, in part, upon the amount of available funds for acquisition,
exploitation, exploration and development projects.
Abraxas anticipates making capital expenditures for U.S. properties for
2005 of approximately $20.0 million, which Abraxas anticipates will development
activities related to approximately 23 projects. If natural gas and crude oil
prices return to depressed levels or if our production levels decrease, our
revenues, cash flow from operations and financial condition will be materially
adversely affected.
Availability of Capital. As described more fully under "Liquidity and
Capital Resources" below, Abraxas' sources of capital going forward will
primarily be cash from operating activities, funding under its new revolving
credit facility, cash on hand, and if an appropriate opportunity presents
itself, proceeds from the sale of properties. Abraxas currently has
approximately $13.6 million of availability under its new revolving credit
facility. Similarly, Grey Wolf's sources of capital going forward will primarily
be cash from operating activities, funding under its term loan, cash on hand,
and if an appropriate opportunity presents itself, proceeds from the sale of
properties.
Exploitation and Development Activity. Despite the $10 million capital
spending limits contained in 11 1/2% secured notes due 2007, which caused us to
put a priority on those projects which allowed us to maintain our leasehold
positions and comply with drilling requirements on non-operated properties,
rather than on those opportunities which we believe have the greatest potential
for increasing our production and reserves, during 2003, we increased average
daily production from the producing properties that we continued to own after
the sale of most of our Canadian properties in January 2003 from approximately
19 MMcfe in January 2003 to approximately 24 MMcfe in June 2004, while drilling
a total of 43 wells with a 93% success rate. In addition, during 2003, we added
16 Bcfe of proved reserves at a finding cost of $1.15 per Mcfe.
Abraxas believes that its high quality asset base, high degree of
operational control and large inventory of drilling projects position it for
future growth. Abraxas' properties are concentrated in locations that facilitate
substantial economies of scale in drilling and production operations and more
efficient reservoir management practices. Abraxas operates 94% of the properties
accounting for approximately 90% of its PV-10, giving Abraxas substantial
control over the timing and incurrence of operating and capital expenditures. In
addition, Abraxas has 47 proved undeveloped locations and has identified over
100 drilling and recompletion opportunities on its existing U.S. acreage, the
successful development of which Abraxas believes could significantly increase
its daily production and proved reserves.
Abraxas' future natural gas and crude oil production, and therefore its
success, is highly dependent upon its ability to find, acquire and develop
additional reserves that are profitable to produce. The rate of production from
Abraxas' natural gas and crude oil properties and its proved reserves will
decline as its reserves are produced unless Abraxas acquires additional
properties containing proved reserves, conducts successful exploration,
development and exploitation activities or, through engineering studies,
identifies additional behind-pipe zones or secondary recovery reserves. Abraxas
cannot assure you that its exploration, exploitation and development activities
will result in increases in its proved reserves. In addition, approximately 36%
of Abraxas' total estimated proved reserves at December 31, 2003 were
undeveloped. By their nature, estimates of undeveloped reserves are less
certain. Recovery of such reserves will require significant capital expenditures
and successful drilling operations. For a more complete discussion of these
risks please see "Risk Factors--We may be unable to acquire or develop
additional reserves, in which case our results of operations and financial
condition would be adversely affected."
Borrowings and Interest. Abraxas currently has total indebtedness of
approximately $150 million and availability of $13.6 million under the new
revolving credit facility. In addition, Grey Wolf has total indebtedness of
approximately $35 million. We paid interest under our 11 1/2% secured notes due
2007 by the issuance of additional notes, which caused our cash interest expense
to be $4.3 million during 2003 and $3.7 million during the first nine months of
2004. On a pro forma basis, Abraxas would have paid interest of $12.4 million in
2003 and $11.4 million during the first nine months of 2004 and Grey Wolf would
have paid $3.9 million and $2.9 million during the same time periods. This
47
increase in cash interest expense will require us to increase our production and
cash flow from operations in order to meet our debt service requirements, as
well as to fund the development of Abraxas' numerous drilling opportunities.
Selected Operating Data. The following table sets forth certain of our
operating data for the periods presented.
Nine Months Ended
Years Ended September 30,
December 31, (unaudited)
-------------------------------------- --------------------------
(dollars in thousands, except per unit data)
2001(1) 2002(1) 2003(1) 2003(1) 2004
------------ ------------ ------------ ------------- ------------
Operating revenue:
Crude oil sales(2)................................ $11,184 $ 7,114 $ 7,627 $ 5,490 $ 7,226
NGLs sales........................................ 5,979 4,343 911 761 1,314
Natural gas sales(2).............................. 56,038 39,405 29,567 23,026 25,709
Gas processing revenue............................ 2,438 2,420 133 132 --
Rig and other..................................... 1,604 1,038 781 562 736
------------ ------------ ------------ ------------- ------------
Total operating revenues.......................... $77,243 $ 54,320 $39,019 $29,971 $34,985
Operating income (loss)........................... $19,125 $(110,903) $11,542 $10,267 $ 9,892
Crude oil production (MBbls)...................... 454 292 252 180 192
NGLs production (MBbls)........................... 278 242 37 31 41
Natural gas production (MMcf)..................... 17,496 15,453 6,189 4,669 5,093
Average crude oil sales price (per Bbl)(2)........ $ 24.63 $ 24.34 $ 30.32 $ 30.55 $ 37.84
Average NGLs sales price (per Bbl)................ $ 21.51 $ 17.94 $ 24.47 $ 24.27 $ 32.00
Average natural gas sales price (per Mcf)(2)... ... $ 3.20 $ 2.55 $ 4.78 $ 4.93 $ 5.05
----------
(1) Data for 2001, 2002 and the first 23 days of 2003 includes Canadian
subsidiaries sold in January 2003.
(2) Revenue and average sales prices are net of hedging activities.
The above table includes operations data relating to Grey Wolf. Because
Grey Wolf is not a guarantor of the notes, and Abraxas' obligations under the
notes are not secured by any of the properties, assets or capital stock of Grey
Wolf, the notes are structurally subordinated in right of payment to all of the
obligations, including trade payables and other debt, of Grey Wolf. The
"Unaudited Pro Forma Financial Information" included in this prospectus gives
effect to the exclusion of the statement of operations and balance sheet data
relating to Grey Wolf and the completion of the refinancing described in this
prospectus, as if Grey Wolf were excluded and the refinancing were consummated
as of the dates indicated.
48
Comparison of Nine Months Ended September 30, 2004 to Nine Months Ended
September 30, 2003
Operating Revenue. During the nine months ended September 30, 2004,
operating revenue from crude oil, natural gas and natural gas liquids sales
increased to $34.2 million as compared to $29.3 million in the nine months ended
September 30, 2002. The increase in revenue was due to increased production
volumes and higher commodity prices during the period. Increased production
volumes contributed $2.6 million while higher commodity prices contributed $2.3
million to crude oil and natural gas revenue during the nine months ended
September 30, 2004.
Average sales prices net of hedging costs for the nine months ended
September 30, 2004 were:
o $37.84 per Bbl of crude oil,
o $32.00 per Bbl of natural gas liquids, and
o $5.05 per Mcf of natural gas
Average sales prices net of hedging costs for the nine months ended
September 30, 2003 were:
o $30.55 per Bbl of crude oil,
o $24.27 per Bbl of natural gas liquids, and
o $4.93 per Mcf of natural gas
Crude oil production volumes increased to 191.0 MBbls during the nine
months ended September 30, 2004 from 179.7 MBbls for the same period of 2003.
Crude oil production volumes related to our Canadian operations increased to
25.4 MBbls during the nine months ended September 30, 2004 from 15.2 MBbls for
the same period of 2003. Offsetting the increased production was the loss of
production related to the properties sold in connection with the sale of Old
Grey Wolf and Canadian Abraxas in January 2003. The properties sold contributed
2.4 MBbls during the first 23 days of 2003 prior to the sale. Natural gas
production volumes increased to 5,093 MMcf for the nine months ended September
30, 2004 from 4,669 MMcf for the same period of 2003. As with the increase in
crude oil volumes, the increase in natural gas production volumes was the result
of drilling activities during the latter part of 2003 and the first nine months
of 2004, primarily related to our Canadian operations. Natural gas production
related to our Canadian operations increased from 1,123 MMcf for the first nine
months of 2003 to 1,711 MMcf for the same period of 2004. Offsetting the
increase was the loss of production related to the Canadian properties sold in
January 2003. Prior to the sale, these properties contributed 559 MMcf to 2003.
Lease Operating Expenses. Lease operating expenses for the nine months
ended September 30, 2004 increased to $9.3 million from $7.2 million for the
same period in 2003. The increase was due to increased production taxes as a
result of higher production volumes as well as pipeline charges in Canada
related to startup cost associated with previously stranded gas. LOE on a per
Mcfe basis for the nine months ended September 30, 2004 was $1.44 compared to
$1.21 for the same period of 2003.
G&A Expenses. G&A expenses increased to $4.8 million for the first nine
months of 2004 from $3.8 million for the first nine months of 2003. The increase
was primarily due to performance bonuses paid during the second quarter of 2004.
G&A expense on a per Mcfe basis was $0.74 for the first nine months of 2004
compared to $0.63 for the same period of 2003.
Stock-based Compensation. Effective July 1, 2000, the Financial Accounting
Standards Board ("FASB") issued FIN 44, "Accounting for Certain Transactions
Involving Stock Compensation", an interpretation of Accounting Principles Board
Opinion No. ("APB") 25. Under the interpretation, certain modifications to fixed
stock option awards which were made subsequent to December 15, 1998, and not
exercised prior to July 1, 2000, require that the awards be accounted for as
variable expenses until they are exercised, forfeited, or expired. In January
2003, we amended the exercise price to $0.66 per share on certain options with
an existing exercise price greater than $0.66 per share. We recognized expense
of approximately $1.1 million and approximately $467,000 during the nine months
ended September 30, 2004 and 2003 respectively related to these repricings, due
to an increase in the price of our common stock.
49
DD&A Expenses. Depreciation, depletion and amortization expense increased
to $9.4 million for the nine months ended September 30, 2004 from $7.9 million
for the same period of 2003. The increase was primarily due to increased
production volumes during the nine months ended September 30, 2004 as compared
to the same period of 2003. Our DD&A on a per Mcfe basis for the nine months
ended September 30, 2004 was $1.45 per Mcfe as compared to $1.32 in 2003.
Interest Expense. Interest expense increased to $13.7 million for the first
nine months of 2004 compared to $12.9 million in 2003. The increase in interest
expense was due to an increase in our overall long-term debt from $177.0 million
as of September 30, 2003 to $190.5 million as of September 30, 2004. The
increase in long-term debt was due to the issuance of additional notes in
payment of interest on our 11 1/2% secured notes due 2007.
Income taxes. Income taxes decreased to zero for the nine months ended
September 30, 2004 from $377,000 for the nine months ended September 30, 2003.
There is no current or deferred income tax benefit for the current net losses
due to the valuation allowance which has been recorded against such benefits.
Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002.
Operating Revenue. During the year ended December 31, 2003, operating
revenue from crude oil, natural gas and natural gas liquids sales decreased by
$12.8 million from $50.9 million in 2002 to $38.1 million in 2003. The decrease
in revenue was primarily due to decreased production volumes, primarily due to
the sale of our Canadian subsidiaries in January 2003, which was partially
offset by higher commodity prices realized during the period. Higher commodity
prices contributed $16.5 million to natural gas and crude oil revenue while
reduced production volumes had a $29.3 million negative impact on revenue. The
Canadian properties which were sold in January 2003 contributed $29.3 million to
revenues from natural gas and crude oil for the year ended December 31, 2002,
compared to $3.1 million in 2003 through the date of sale (January 23, 2003).
Natural gas liquids volumes declined from 242.0 MBbls in 2002 to 37.3 MBbls
in 2003. The decline in natural gas liquids volumes was due almost entirely to
the sale of our Canadian subsidiaries in January 2003. These properties
contributed 232.5 MBbls of natural gas liquids in 2002 compared to 11.7 MBbls
during 2003. Crude oil sales volumes declined from 292.3 MBbls in 2002 to 251.6
MBbls during 2003. The Canadian properties which were sold in January 2003
contributed 27.7 MBbls of crude oil production in 2002 compared to 2.4 MBbls in
2003 through the date of the sale. Crude oil production volumes relating to the
Canadian properties which were retained and current drilling activities in
Canada resulted in an increase to 29.0 MBbls in 2003 compared to 9.5 MBbls in
2002. Crude oil production from U.S. operations decreased due primarily to
natural field declines. Natural gas sales volumes decreased from 15.5 Bcf in
2002 to 6.2 Bcf in 2003. This decrease is primarily due to the sale of our
Canadian subsidiaries in January 2003. The Canadian properties sold contributed
9.8 Bcf in 2002 compared to .5 Bcf in 2003 through the date of sale.
Average sales prices in 2003 net of hedging costs were:
o $30.32 per Bbl of crude oil,
o $24.47 per Bbl of natural gas liquids, and
o $4.78 per Mcf of natural gas.
Average sales prices in 2002 net of hedging costs were:
o $24.34 per Bbl of crude oil,
o $17.94 per Bbl of natural gas liquids, and
o $2.55 per Mcf of natural gas.
Lease Operating Expense. Lease operating expense, or LOE, decreased from
$15.2 million in 2002 to $9.6 million in 2003. The decrease in LOE was primarily
due to the sale of most of our Canadian properties in January 2003. LOE related
to these Canadian properties was $7.3 million for the year ended December 31,
2002. Excluding the properties sold, LOE attributable to on going operations
increased, primarily due to higher production taxes associated with higher
50
commodity prices in 2003 as compared to 2002. Our LOE on a per Mcfe basis for
the year ended December 31, 2003 was $1.21 per Mcfe compared to $0.82 for 2002,
primarily due to the decrease in production volumes.
G&A Expense. General and administrative, or G&A, expense decreased from
$6.9 million in 2002 to $5.4 million in 2003. The decrease in G&A expense was
primarily due to a reduction in personnel in connection with the sale of most of
our Canadian properties on January 23, 2003. Our G&A expense on a per Mcfe basis
increased from $0.37 in 2002 to $0.67 in 2003. The increase in the per Mcfe cost
was due primarily to lower production volumes in 2003 as compared to 2002.
G&A - Stock-based Compensation Expense. Effective July 1, 2000, the
Financial Accounting Standards Board ("FASB") issued FIN 44, "Accounting for
Certain Transactions Involving Stock Compensation", an interpretation of
Accounting Principles Board Opinion No. ("APB") 25. Under the interpretation,
certain modifications to fixed stock option awards which were made subsequent to
December 15, 1998, and not exercised prior to July 1, 2000, require that the
awards be subject to variable accounting until they are exercised, forfeited, or
expired. In March 1999, we amended the exercise price to $2.06 on all options
with an existing exercise price greater than $2.06. In January 2003, we amended
the exercise price to $0.66 per share on certain options with an existing
exercise price greater than $0.66 per share which resulted in variable
accounting. We charged approximately $1.1 million to stock based compensation
expense in 2003 related to these repricings. During 2002, we did not recognize
any stock-based compensation due to the decline in the price of our common
stock.
DD&A Expense. Depreciation, depletion and amortization, or DD&A, expense
decreased by $15.7 million from $26.5 million in 2002 to $10.8 million in 2003.
The decrease in DD&A was primarily due to the sale of our Canadian subsidiaries
in January 2003 as well as ceiling limitation write-downs in the second quarter
of 2002. Our DD&A expense on a per Mcfe basis for 2003 was $1.33 per Mcfe as
compared to $1.42 per Mcfe in 2002.
Interest Expense. Interest expense decreased from $34.1 million to $17.0
million for 2003 compared to 2002. The decrease in interest expense was due to
the reduction in debt in 2003. Total debt was reduced as a result of the
transactions which occurred on January 23, 2003. Total debt was $300.4 million
as of December 31, 2002 compared to $184.6 million at December 31, 2003.
Ceiling Limitation Write-down. We record the carrying value of our natural
gas and crude oil properties using the full cost method of accounting. For more
information on the full cost method of accounting, you should read the
description under "Critical Accounting Policies--Full Cost Method of Accounting
for Natural Gas and Crude Oil Activities". At June 30, 2002, our net capitalized
costs of natural gas and crude oil properties exceeded the present value of our
estimated proved reserves by $138.7 million ($28.2 million on the U.S.
properties and $110.5 million on the Canadian properties). These amounts were
calculated considering June 30, 2002 prices of $26.12 per Bbl for crude oil and
$2.16 per Mcf for natural gas as adjusted to reflect the expected realized
prices for each of the full cost pools. Subsequent to June 30, 2002, commodity
prices increased in Canada and we utilized these increased prices in calculating
the ceiling limitation write-down. The total write-down was approximately $116.0
million. At December 31, 2003 our net capitalized cost of natural gas and crude
oil properties did not exceed the present value of our estimated reserves, due
to increased commodity prices during 2003 and, as such, no write-down was
recorded in 2003. We cannot assure you that we will not experience additional
ceiling limitation write-downs in the future.
The risk that we will be required to write-down the carrying value of our
natural gas and crude oil assets increases when natural gas and crude oil prices
are depressed or volatile. In addition, write-downs may occur if we have
substantial downward revisions in our estimated proved reserves or if purchasers
or governmental action cause an abrogation of, or if we voluntarily cancel,
long-term contracts for our natural gas. We cannot assure you that we will not
experience additional write-downs in the future. If commodity prices decline or
if any of our proved resources are revised downward, a further write-down of the
carrying value of our natural gas and crude oil properties may be required.
Income taxes. Income tax expense increased from a benefit of $29.7 million
for the year ended December 31, 2002 to an expense of $377,000 for the year
ended December 31, 2003. The expense in 2003 was related to the operations of
the Canadian properties prior to their sale on January 23, 2003. There is no
current or deferred income tax expense for 2003 related to on-going operations
51
due to the valuation allowance which has been recorded against the deferred tax
asset.
Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001
Operating Revenue. During the year ended December 31, 2002, operating
revenue from crude oil, natural gas and natural gas liquids sales decreased by
$22.3 million from $73.2 million in 2001 to $50.9 million in 2002. This decrease
was primarily attributable to a decrease in production volumes and lower
commodity prices in 2002 as compared to 2001. Natural gas and crude oil revenue
was impacted by $11.5 million from a decline in commodity prices and $10.8
million from reduced production. The decline in production was due to the
disposition of certain properties in south Texas and natural field declines.
Natural gas liquids volumes declined from 278.0 MBbls in 2001 to 242.0
MBbls in 2002. Crude oil sales volumes declined from 454.1 MBbls in 2001 to
292.3 MBbls during 2002. Natural gas sales volumes decreased from 17.5 Bcf in
2001 to 15.5 Bcf in 2002. Production declines were primarily attributable to our
disposition of assets during 2002 and natural field declines.
Average sales prices in 2002 net of hedging losses were:
o $24.34 per Bbl of crude oil,
o $17.94 per Bbl of natural gas liquids, and
o $2.55 per Mcf of natural gas.
Average sales prices in 2001 net of hedging losses were:
o $24.63 per Bbl of crude oil,
o $21.51 per Bbl of natural gas liquids, and
o $3.20 per Mcf of natural gas.
Lease Operating Expense. Lease operating expense ("LOE") decreased from
$18.6 million in 2001 to $15.2 million in 2002. LOE on a per Mcfe basis for 2002
was $0.82 per Mcfe as compared to $0.83 per Mcfe in 2001. The decrease in the
per Mcfe cost is due to a reduced operating cost offset by the decline in
production volumes.
G&A Expense. General and administrative ("G&A") expense increased slightly
from $6.4 million in 2001 to $6.9 million in 2002. This increase was due
primarily to increased legal expenses related to ongoing litigation in 2002. Our
G&A expense on a per Mcfe basis increased from $0.30 in 2001 to $0.37 in 2002.
The increase in the per Mcfe cost was due primarily to lower production volumes
in 2002 as compared to 2001.
G&A - Stock-based Compensation Expense. Effective July 1, 2000, the
Financial Accounting Standards Board ("FASB") issued FIN 44, "Accounting for
Certain Transactions Involving Stock Compensation", an interpretation of
Accounting Principles Board Opinion No. ("APB") 25. Under the interpretation,
certain modifications to fixed stock option awards which were made subsequent to
December 15, 1998, and not exercised prior to July 1, 2000, require that the
awards be subject to variable accounting until they are exercised, forfeited, or
expired. In March 1999, we amended the exercise price to $2.06 on all options
with an existing exercise price greater than $2.06. We charged approximately
$2.8 million to stock-based compensation expense in 2000 compared to crediting
approximately $2.8 million in 2001. This was due to the decline in the market
price of our common stock during 2001. During 2002, we did not recognize any
stock-based compensation expense due to the decline in the price of our common
stock.
DD&A Expense. Depreciation, depletion and amortization ("DD&A") expense
decreased by $5.9 million from $32.4 million in 2001 to $26.5 million in 2002.
The decline in DD&A is due to reductions in our full cost pool resulting from
ceiling test write-downs, as well as lower production volumes. Our DD&A expense
on a per Mcfe basis for 2002 was $1.42 per Mcfe as compared to $1.74 per Mcfe in
2001.
52
Interest Expense. Interest expense increased from $31.5 million to $34.1
million for 2002 compared to 2001. The increase was the result of additional
sales pursuant to our production payment arrangement with Mirant Americas as
well as increased borrowings under a previously existing Canadian credit
facility in 2002. The production payment was reacquired in June 2002 for
approximately $6.8 million.
Ceiling Limitation Write-down. We record the carrying value of our natural
gas and crude oil properties using the full cost method of accounting. For more
information on the full cost method of accounting, you should read the
description under "--Critical Accounting Policies--Full Cost Method of
Accounting for Natural Gas and Crude Oil Activities". As of December 31, 2001,
our net capitalized costs of natural gas and crude oil properties exceeded the
present value of its estimated proved reserves by $71.3 million. These amounts
were calculated considering 2001 year-end prices of $19.84 per Bbl for crude oil
and $2.57 per Mcf for natural gas as adjusted to reflect the expected realized
prices for each of the full cost pools. We did not adjust our capitalized costs
for its U.S. properties because subsequent to December 31, 2001, natural gas and
crude oil prices increased such that capitalized costs for its U.S. properties
did not exceed the present value of the estimated proved natural gas and crude
oil reserves for its U.S. properties as determined using increased realized
prices on March 22, 2002 of $24.16 per Bbl for crude oil and $2.89 per Mcf for
natural gas.
At June 30, 2002, our net capitalized costs of natural gas and crude oil
properties exceeded the present value of our estimated proved reserves by $138.7
million ($28.2 million on the U.S. properties and $110.5 million on the Canadian
properties). These amounts were calculated considering June 30, 2002 prices of
$26.12 per Bbl for crude oil and $2.16 per Mcf for natural gas as adjusted to
reflect the expected realized prices for each of the full cost pools. Subsequent
to June 30, 2002, commodity prices increased in Canada and we utilized these
increased prices in calculating the ceiling limitation write-down. The total
write-down was approximately $116.0 million. At December 31, 2002 our net
capitalized cost of natural gas and crude oil properties did not exceed the
present value of our estimated reserves, due to increased commodity prices
during the fourth quarter and, as such, no further write-down was recorded. We
cannot assure you that we will not experience additional ceiling limitation
write-downs in the future.
The risk that we will be required to write-down the carrying value of our
natural gas and crude oil assets increases when natural gas and crude oil prices
are depressed or volatile. In addition, write-downs may occur if we have
substantial downward revisions in our estimated proved reserves or if purchasers
or governmental action cause an abrogation of, or if we voluntarily cancel,
long-term contracts for our natural gas. We cannot assure you that we will not
experience additional write-downs in the future. If commodity prices decline or
if any of our proved resources are revised downward, a further write-down of the
carrying value of our natural gas and crude oil properties may be required.
Income taxes. Income tax expense decreased from an expense of $2.4 million
for the year ended December 31, 2001 to a benefit of $29.7 million for the year
ended December 31, 2002. The decrease was primarily due to the tax benefit
relating to the ceiling limitation write-down related to our Canadian
properties.
Liquidity and Capital Resources
General. The natural gas and crude oil industry is a highly capital
intensive and cyclical business. Our capital requirements are driven principally
by our obligations to service debt and to fund:
o the development of existing properties, including drilling and
completion costs of wells;
o acquisition of interests in additional natural gas and crude oil
properties; and
o production and transportation facilities.
The amount of capital expenditures we are able to make has a direct impact on
our ability to increase cash flow from operations and, thereby, will directly
affect our ability to service our debt obligations and to continue to grow the
business through the development of existing properties and the acquisition of
new properties.
Abraxas' sources of capital going forward will primarily be cash from
operating activities, funding under its new revolving credit facility, cash on
hand, and if an appropriate opportunity presents itself, proceeds from the sale
53
of properties. However, under the terms of the notes, proceeds of optional sales
of Abraxas' assets that are not timely reinvested in new natural gas and crude
oil assets will be required to be used to reduce indebtedness and proceeds of
mandatory sales must be used to repay or redeem indebtedness.
Working Capital. At September 30, 2004, we had current assets of
approximately $9.7 million and current liabilities of approximately $13.2
million, resulting in a working capital deficit of $3.5 million. This compares
to a working capital deficit of approximately $2.4 million at December 31, 2003
and $9.3 million at September 30, 2003. Current liabilities at September 30,
2004 consisted of trade payables of $3.6 million, revenues due third parties of
$2.3 million and accrued interest of $5.5 million, of which $5.1 million is
non-cash and other accrued liabilities of $1.9 million. At September 30, 2004,
current assets relating to U.S. operations of approximately $14.5 million
exceeded current liabilities relating to U.S. operations of approximately $11.2
million, resulting in working capital of approximately $3.3 million. Current
liabilities at September 30, 2004 relating to Canadian operations of
approximately $8.5 million exceeded current assets relating to Canadian
operations of approximately $1.8 million, resulting in a working capital deficit
of approximately $6.7 million. On a pro forma basis, at September 30, 2004,
Abraxas' current assets of $7.9 million would have exceeded its current
liabilities of approximately $5.7 million, resulting in working capital of
approximately $2.2 million.
Capital Expenditures. The table below sets forth the components of our
capital expenditures for the three years ended December 31, 2003 and for the
nine months ended September 30, 2003 and 2004.
Nine Months Ended
Year Ended December 31, September 30,
--------------------------------------- -------------------------
2001 2002 2003 2003 2004
------------ ------------- ------------ ------------ -------------
(dollars in thousands)
Expenditure category:
Development................... $56,694 $38,560 $18,313 $15,595 $10,836
Facilities and other.......... 362 154 36 732 149
------------ ------------- ------------ ------------ -------------
$57,056 $38,714 $18,349 $16,327 $10,985
============ ============= ============ ============ =============
During the nine months ended September 30, 2003 and 2004 and during 2002
and 2003, capital expenditures were devoted primarily to the development of
existing properties. Abraxas anticipates making capital expenditures for U.S.
properties for 2005 of approximately 20.0 million, respectively, which Abraxas
anticipates will include development activities related to approximately 23
projects. Grey Wolf anticipates making capital expenditures for Canadian
properties for 2005 of approximately $14.4 million. Our capital expenditures
could also include expenditures for acquisition of producing properties if such
opportunities arise, but we currently have no agreements, arrangements or
undertakings regarding any material acquisitions. We have no material long-term
capital commitments and are consequently able to adjust the level of our
expenditures as circumstances dictate. Additionally, the level of capital
expenditures will vary during future periods depending on market conditions and
other related economic factors. Should the prices of natural gas and crude oil
decline from current levels, our cash flows will decrease which may result in a
reduction of the capital expenditures budget. If we decrease our capital
expenditures budget, we may not be able to offset natural gas and crude oil
production volumes decreases caused by natural field declines and sales of
producing properties, if any.
54
Sources of Capital. The net funds provided by and/or used in each of
operating, investing and financing activities are summarized in the following
table:
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------- --------------------------
2001 2002 2003 2003 2004
---------- ---------- ----------- ---------- -----------
(dollars in thousands)
Net cash provided by (used in) operating
activities............................... $ 16,263 $ (8,336) $ 23,850 $ 9,587 $ 15,306
Net cash provided by (used in) investing
activities............................... (30,797) (5,036) 67,461 70,524 (10,985)
Net cash provided by (used in) financing
activities............................... 20,685 10,836 (95,662) (82,974) (1,288)
---------- ---------- ----------- ---------- -----------
Total.................................... $ 6,151 $ (2,536) $ (4,351) $ (2,863) $ 3,033
========== ========== =========== ========== ===========
Operating activities during the nine months ended September 30, 2004
provided us with $15.3 million in cash compared with $9.6 million in the same
period in 2003. Net income plus non-cash expense items and net changes in
operating assets and liabilities accounted for most of these funds. Financing
activities used $1.3 million for the first nine months of 2004 compared to using
$83.0 million for the same period of 2003. Most of these funds were used to
reduce our long-term debt and for financing fees. In 2003, funds were used to
reduce our long-term debt and were generated by the sale of our Canadian
subsidiaries and the Series A/B exchange offer completed in January 2003.
Expenditures during the nine months ended September 30, 2004 were primarily for
the development of existing properties. Investing activities used $11.0 million
during the nine months ended September 30, 2004 compared to providing $70.5
million for the nine months ended September 30, 2003. The sale of our Canadian
subsidiaries in January 2003 contributed $86.6 million in 2003 reduced by $10.0
million in exploration and development expenditures.
Operating activities for the year ended December 31, 2003 provided us with
$23.9 million of cash. Investing activities provided us $67.5 million during
2003. Financing activities used $95.7 million during 2003. Most of these funds
were used to reduce our long-term debt and were generated by the sale of our
Canadian subsidiaries and the Series A/B exchange offer completed in January
2003. The sale of our Canadian subsidiaries contributed $85.8 million in 2003
reduced by $18.3 million in exploration and development expenditures.
Expenditures in 2003 were primarily for the development of natural gas and crude
oil properties.
Operating activities for the year ended December 31, 2002 used $8.3 million
of cash. Investing activities used $5.0 million during 2002. Our investing
activities included the sale of properties which provided $33.9 million, and the
use of $38.9 million primarily for the development of producing properties.
Financing activities provided us with $10.8 million during 2002, relating
primarily to advances on a previously existing Canadian credit facility.
Operating activities for the year ended December 31, 2001, provided us
$16.3 million of cash. Investing activities included the sale of properties
which provided $28.9 million, and the use of $57.1 million for the development
of producing properties and $2.7 million for the acquisition of the minority
interest in Grey Wolf. Financing activities provided $20.7 million during 2001,
including the provision of additional funding of $11.7 million under a
production payment, and the provision of $18.3 million under a previously
existing Canadian credit facility. Payments on long term debt used $9.3 million
during 2001.
Future Capital Resources. Abraxas currently has four principal sources of
liquidity going forward: (i) cash from operating activities, (ii) funding under
its new revolving credit facility, (iii) cash on hand, and (iv) if an
appropriate opportunity presents itself, the sale of producing properties. While
Abraxas is no longer subject to the $10 million limitation on capital
expenditures under its 11 1/2% secured notes due 2007, covenants under the
indenture for the new notes and the new revolving credit facility restrict
55
Abraxas' use of cash from operating activities, cash on hand and any proceeds
from asset sales. Under the terms of the notes, proceeds of optional sales of
Abraxas' assets that are not timely reinvested in new natural gas and crude oil
assets will be required to be used to reduce indebtedness and proceeds of
mandatory sales must be used to redeem indebtedness. The terms of the notes and
the new revolving credit facility also substantially restrict Abraxas' ability
to:
o incur additional indebtedness;
o grant liens;
o pay dividends or make certain other restricted payments;
o merge or consolidate with any other person; or
o sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets.
Our cash flow from operations depends heavily on the prevailing prices of
natural gas and crude oil and our production volumes of natural gas and crude
oil. Significant downturns in commodity prices, such as that experienced in the
last nine months of 2001 and the first quarter of 2002, can reduce our cash flow
from operating activities. Although we have hedged a portion of our natural gas
and crude oil production and will continue this practice as required pursuant to
the new revolving credit facility, future natural gas and crude oil price
declines would have a material adverse effect on our overall results, and
therefore, our liquidity. Low natural gas and crude oil prices could also
negatively affect our ability to raise capital on terms favorable to us.
Our cash flow from operations will also depend upon the volume of natural
gas and crude oil that we produce. Unless we otherwise expand reserves, our
production volumes will decline as reserves are produced. Due to sales of
properties in 2002 and January 2003, and restrictions on capital expenditures
under the terms of our existing indebtedness, we now have significantly reduced
reserves and production as compared with pre-2003 levels. In the future, if an
appropriate opportunity presents itself, we may sell additional properties,
which could further reduce our production volumes. To offset the loss in
production volumes resulting from natural field declines and sales of producing
properties, we must conduct successful exploration, exploitation and development
activities, acquire additional producing properties or identify additional
behind-pipe zones or secondary recovery reserves. While we have had some success
in pursuing these activities since January 1, 2003, we have not been able to
fully replace the production volumes lost from natural field declines and
property sales. We believe our numerous drilling opportunities will allow us to
increase our production volumes; however, our drilling activities are subject to
numerous risks, including the risk that no commercially productive natural gas
or crude oil reservoirs will be found. The risk of not finding commercially
productive reservoirs will be compounded by the fact that 36% of Abraxas' total
estimated proved reserves at December 31, 2003 were undeveloped. If the volume
of natural gas and crude oil we produce decreases, our cash flow from operations
will decrease.
The increase in our total indebtedness and in Abraxas' cash interest
expense as a result of issuing the new notes and entering into the new revolving
credit facility require Abraxas to increase its production and cash flow from
operations in order to meet its debt service requirements, as well as to fund
the development of Abraxas' numerous drilling opportunities. The ability to
satisfy these new obligations will depend upon Abraxas' drilling success as well
as prevailing commodity prices.
56
Contractual Obligations
We are committed to making cash payments in the future on the following
types of agreements:
o Long-term debt, and
o Operating leases for office facilities.
We have no off-balance sheet debt or unrecorded obligations and we have not
guaranteed the debt of any other party. Below is a schedule of the future
payments that we would have been obligated to make with respect to Long-Term
Debt and are obligated to make with respect to Operating Leases based on
agreements in place as of September 30, 2004:
Contractual Obligations Payments due in:
Less than More than
Total one year 1-3 years 3-5 years 5 years
------------ ------------- ------------- ------------ -------------
(dollars in thousands)
Long-Term Debt (1) $245,367 $ - $245,367 $ - -
Operating Leases (2) 1,081 412 629 40 -
(1) These amounts represent the balances outstanding under our previous credit
facility and the 11 1/2% secured notes due 2007. These repayments assume
that interest would have been capitalized under the 11 1/2& secured notes
due 2007 and that periodic interest on our previous credit facility would
have been paid on a monthly basis and that we would not have drawn down
additional funds thereunder. The long-term debt described above was repaid
in connection with the October 2004 refinancing. For more information
regarding the October 2004 refinancing, see "Liquidity and Capital
Resources--Recent Events".
(2) Office lease obligations for office space for Abraxas and Grey Wolf expire
in April 2006 and April 2008, respectively.
Other Obligations. We make and will continue to make substantial capital
expenditures for the acquisition, exploitation, development, exploration and
production of natural gas and crude oil. In the past, we have funded our
operations and capital expenditures primarily through cash flow from operations,
sales of properties, sales of production payments and borrowings under our bank
credit facilities and other sources. Given our high degree of operating control,
the timing and incurrence of operating and capital expenditures is largely
within our discretion.
Contingencies. In 2001, the Company and a limited partnership, of which
Wamsutter Holdings, Inc. is the general partner (the "Partnership"), were named
in a lawsuit filed in U.S. District Court in the District of Wyoming. The claim
asserted breach of contract, fraud and negligent misrepresentation by the
Company and the Partnership related to the responsibility for year 2000 ad
valorem taxes on crude oil and natural gas properties sold by Abraxas and the
Partnership. In February 2002, a summary judgment was granted to the plaintiff
in this matter and a final judgment in the amount of $1.3 million was entered.
The Company and the Partnership appealed the District Court's judgment and on
November 3, 2004, the U.S. Court of Appeals for the 10th Circuit affirmed the
District Court's decision. On December 14, 2004, the U.S. Court of Appeals for
the 10th Circuit eneteed a mandate for the District Court of enforce the
judgement. As of December 27, 2004 the final judgement amount was approximately
$1.55 million (which includes accrued and unpaid interest since February 2002).
The Company has decided not to pursue further appeals and intends to pay its
portion of the final judgement, approximately $1 million, for which the Company
had previously established a reserve in the amount of $845,000.
57
Long-Term Indebtedness
The following table sets forth our long-term indebtedness as of September
30, 2004 as adjusted for the completion of the offering and the refinancing
transactions described in this prospectus.
Long-Term Indebtedness
September 30,
2004
------------------
(dollars in
thousands)
Floating rate senior secured notes due 2009.. $125.0
New revolving credit facility................ 0.0
------------------
Grey Wolf term loan (1)..................... 35.0
Bridge loan................................. 25.0
Less current maturities..................... 0.0
------------------
$185.0
=================
----------
(1) Non-recourse to Abraxas
Floating Rate Senior Secured Notes due 2009. In connection with the October
2004 financial restructuring, Abraxas issued $125 million in principal aggregate
amount of Floating Rate Senior Secured Notes due 2009. The notes were issued
under an indenture with U.S. Bank National Association. For a more complete
description of the notes, see "Description of the Exchange Notes" contained in
this prospectus.
Abraxas' New $15 Million Senior Secured Revolving Credit Facility. On
October 28, 2004, Abraxas entered into an agreement for a new revolving credit
facility having a maximum commitment of $15 million, which includes a $2.5
million subfacility for letters of credit. Availability under the new revolving
credit facility is subject to a borrowing base consistent with normal and
customary natural gas and crude oil lending transactions.
Outstanding amounts under the new revolving credit facility bear interest
at the prime rate announced by Wells Fargo Bank, National Association plus
1.00%.
Subject to earlier termination rights and events of default, the stated
maturity date under the new revolving credit facility is October 28, 2008.
Abraxas is permitted to terminate the new revolving credit facility, and
under certain circumstances, may be required, from time to time, to permanently
reduce the lenders' aggregate commitment under the new revolving credit
facility. Such termination and each such reduction is subject to a premium equal
to the percentage listed below multiplied by the lenders' aggregate commitment
under the new revolving credit facility, or, in the case of partial reduction,
the amount of such reduction.
Year % Premium
-------------- --------------------
1 1.5
2 1.0
3 0.5
4 0.0
Each of Abraxas' current subsidiaries, other than Grey Wolf, has
guaranteed, and each of Abraxas' future restricted subsidiaries will guarantee,
Abraxas' obligations under the new revolving credit facility on a senior secured
basis. In addition, any other subsidiary or affiliate of Abraxas, including Grey
Wolf, that in the future guarantees any other indebtedness of Abraxas or of its
restricted subsidiaries will be required to guarantee Abraxas' obligations under
the new revolving credit facility. Obligations under the new revolving credit
facility are secured, together with the notes, by a shared first priority
58
perfected security interest, subject to certain permitted encumbrances, in all
of Abraxas' and each of its restricted subsidiaries' material property and
assets, including substantially all of their natural gas and crude oil
properties and all of the capital stock (or in the case of an unrestricted
subsidiary that is a controlled foreign corporation, up to 65% of the
outstanding capital stock) in any entity, other than Grey Wolf, owned by Abraxas
and its restricted subsidiaries. The new revolving credit facility is not
secured by any of the property or assets of Grey Wolf (unless it becomes a
restricted subsidiary).
Under the new revolving credit facility, Abraxas is subject to customary
covenants, including certain financial covenants and reporting requirements. The
new revolving credit facility requires Abraxas to maintain a minimum net cash
interest coverage and also requires Abraxas to enter into hedging agreements on
not less than 25% or more than 75% of Abraxas' projected natural gas and crude
oil production.
In addition to the foregoing and other customary covenants, the new
revolving credit facility contains a number of covenants that, among other
things, restrict Abraxas' ability to:
o incur or guarantee additional indebtedness and issue certain types of
preferred stock or redeemable stock;
o transfer or sell assets;
o create liens on assets;
o pay dividends or make other distributions on capital stock or make
other restricted payments, including repurchasing, redeeming or
retiring capital stock or subordinated debt or making certain
investments or acquisitions;
o engage in transactions with affiliates;
o guarantee other indebtedness;
o make any change in the principal nature of its business;
o prepay, redeem, purchase or otherwise acquire any of its or its
restricted subsidiaries' indebtedness;
o permit a change of control;
o directly or indirectly make or acquire any investment;
o cause a restricted subsidiary to issue or sell its capital stock; and
o consolidate, merge or transfer all or substantially all of the
consolidated assets of the Company and its restricted subsidiaries.
The new revolving credit facility also contains customary events of
default, including nonpayment of principal or interest, violations of covenants,
cross default and cross acceleration to certain other indebtedness, bankruptcy
and material judgments and liabilities, and is subject to the intercreditor
agreement, the material terms of which are described under "Intercreditor
Agreement."
Abraxas' New $25 Million Second Lien Increasing Rate Bridge Loan. On
October 28, 2004, Abraxas borrowed $25 million under its new $25 million bridge
loan.
Interest on the bridge loan currently accrues at a rate of 12.0% per annum
until October 28, 2005, and is payable monthly in cash. Interest on the bridge
loan will thereafter accrue at a rate of 15.0% per annum, and will be payable
in-kind. Subject to earlier termination rights and events of default, the stated
maturity date under the bridge loan is October 28, 2010.
Abraxas' obligations under the bridge loan are guaranteed by each of
Abraxas' current subsidiaries, other than Grey Wolf, and each of its future
restricted subsidiaries. Obligations under the bridge loan are secured by a
second priority perfected security interest, subject to certain permitted
encumbrances, in all of Abraxas' and each of its restricted subsidiaries'
material property and assets, including substantially all of their natural gas
and crude oil properties and all of the capital stock (or in the case of an
unrestricted subsidiary that is a controlled foreign corporation, up to 65% of
59
the outstanding capital stock) in any entity, other than Grey Wolf, owned by
Abraxas and its restricted subsidiaries.
The bridge loan is also secured by a first priority perfected security
interest in all of the capital stock of Grey Wolf owned by Abraxas and its
restricted subsidiaries. The bridge loan provides for the release of such
security interest in connection with a sale of such capital stock by Abraxas
permitted by the terms of the bridge loan, but not a distribution thereof to
Abraxas' shareholders. Except under the limited circumstances described herein,
the bridge loan is not directly secured by any of the property or assets of Grey
Wolf (unless it becomes a restricted subsidiary).
Any prepayment of principal on the bridge loan will be repaid with an
additional amount equal to the principal amount being so prepaid multiplied by a
repayment factor. The repayment factor is currently equal 1.025 and, following
July 28, 2004, will increase monthly by 0.03.
If the bridge loan is not fully repaid by January 28, 2006, so long as an
event of default does not exist thereunder or under the new revolving credit
facility or the notes, the bridge loan lenders have the right to require
Abraxas' and its restricted subsidiaries to consummate one or more asset sales.
Each such asset sale is required to be at fair market value and to generate at
least 80% of the proceeds in cash or cash equivalents. The net cash proceeds
from each such asset sale (other than with respect to any capital stock of Grey
Wolf, which will be exclusively applied to repay the bridge loan) will be
applied by Abraxas and its restricted subsidiaries in the following order, to
the extent available:
o first, to pay any interest then due and payable under the new revolving
credit facility;
o second, to pay any interest then due and payable on the notes;
o third, to pay any accrued and unpaid interest on the new revolving
credit facility that was not paid under clause "first" of this
paragraph;
o fourth, to pay any outstanding principal of the new revolving credit
facility;
o fifth, if the remaining aggregate amount of such net cash proceeds,
together with any net cash proceeds in the bridge loan ----- asset sale
proceeds account from a previous asset sale consummated in accordance
with the provisions described in "Description of the Exchange
Notes--Repurchase at the Option of Holders Upon the Occurrence of
Certain Asset Sales," exceeds $5.0 million, the entire amount in the
bridge loan asset sale proceeds account is to be used to make a net
proceeds offer to purchase notes from all holders of the notes as if
such net cash proceeds remaining after any payment made pursuant to
clause "first," "second," "third" or "fourth" of this paragraph, and
any other net cash proceeds in the bridge loan asset sale proceeds
account, are excess proceeds (see "Description of the Exchange
Notes--Certain Covenants--Limitation on Asset Sales"); and
o sixth, after the payment of all amounts required by a net proceeds
offer made in accordance with clause "fifth" of this paragraph to repay
all amounts outstanding under the bridge loan.
Under the bridge loan, Abraxas is subject to substantially the same
covenants and reporting requirements, and substantially the same events of
default, as are set forth in the new revolving credit facility (see "--Abraxas'
New $15 Million Senior Secured Revolving Credit Facility").
The bridge loan is subject to the intercreditor agreement, the material
terms of which are described under "--Intercreditor Agreement."
Grey Wolf's $35 Million Senior Secured Term Loan. On October 28, 2004, Grey
Wolf entered into an agreement with Guggenheim Corporate Funding, LLC for a $35
million senior secured term loan. Interest on the Grey Wolf term loan currently
accrues at the prime rate announced by the administrative agent plus 6.25% and
will increase by 0.75% at the end of each six month period during which the Grey
Wolf term loan is outstanding. Such interest is payable quarterly in cash, with
the first interest payment to be made on January 1, 2005. If the Grey Wolf term
loan is still outstanding at the end of the first year, an amortization schedule
requires Grey Wolf to prepay at least 5.0% of the initial principal amount of
the loan at the end of each of the first three years and 10.0% of the initial
60
principal amount of the loan at the end of the fourth year, with the balance of
the loan due at maturity. Subject to earlier termination rights and events of
default, the Grey Wolf term loan will mature on October 29, 2009. Abraxas paid
pay all of the fees and costs related to the establishment of the Grey Wolf term
loan.
Grey Wolf's obligations under its term loan are guaranteed by each of Grey
Wolf's future subsidiaries. Obligations under the Grey Wolf term loan are
secured by a first priority perfected security interest, subject to certain
permitted encumbrances, in all of Grey Wolf's and each of its subsidiaries'
material property and assets, including substantially all of their natural gas
and crude oil properties and all of the capital stock in any entity owned by
Grey Wolf and its subsidiaries.
The Grey Wolf term loan is prepayable, in whole or in part, upon not less
than 10 days written notice, at Grey Wolf's option at any time at a price of
100% of the principal amount of the loan being prepaid, plus accrued and unpaid
interest to the date of prepayment.
Under this term loan, Grey Wolf is subject to substantially the same
covenants and reporting requirements, and substantially the same events of
default, as are set forth in the new revolving credit facility (see "--Abraxas'
New $15 Million Senior Secured Revolving Credit Facility").In connection with
the October 20004 refinancing transactions described in this prospectus, Abraxas
issued $125 million aggregate principal amount of floating rate senior secured
notes due December 1, 2009. The notes were issued under an indenture with U.S.
Bank National Association. For a more complete description of the notes, see
"Description of the Exchange Notes" contained in this prospectus.
Hedging Activities
Our results of operations are significantly affected by fluctuations in
commodity prices and we seek to reduce our exposure to price volatility by
hedging our production through swaps, options and other commodity derivative
instruments. Under our new revolving credit facility, we are required to
maintain hedge positions on not less than 25% or more than 75% of our projected
oil and gas production for a six month rolling period. See "--Quantitative and
Qualitative Disclosures about Market Risk--Hedging Sensitivity" for further
information.
Net Operating Loss Carryforwards
At December 31, 2003 we had, subject to the limitation discussed below,
$100.6 million of net operating loss carryforwards for U.S. tax purposes. These
loss carryforwards will expire through 2022 if not utilized. In connection with
financial restructuring transactions described in Note 2, in Notes to
Consolidated Financial Statements, certain of the loss carryforwards were
utilized.
Uncertainties exist as to the future utilization of the operating loss
carryforwards under the criteria set forth under FASB Statement No. 109.
Therefore, we have established a valuation allowance of $99.1 million and $76.1
million for deferred tax assets at December 31, 2002 and 2003, respectively.
61
Quantitative and Qualitative Disclosures about Market Risk
Commodity Price Risk. As an independent natural gas and crude oil producer,
our revenue, cash flow from operations, other income and profitability, reserve
values, access to capital and future rate of growth are substantially dependent
upon the prevailing prices of crude oil, natural gas and natural gas liquids.
Declines in commodity prices will materially adversely affect our financial
condition, liquidity, ability to obtain financing and operating results. Lower
commodity prices may reduce the amount of natural gas and crude oil that we can
produce economically. Prevailing prices for such commodities are subject to wide
fluctuation in response to relatively minor changes in supply and demand and a
variety of additional factors beyond our control, such as global political and
economic conditions. Historically, prices received for natural gas and crude oil
production have been volatile and unpredictable, and such volatility is expected
to continue. Most of our production is sold at market prices. Generally, if the
commodity indexes fall, the price that we receive for our production will also
decline. Therefore, the amount of revenue that we realize is partially
determined by factors beyond our control. Assuming the production levels we
attained during the year ended December 31, 2003 a 10% decline in unhedged crude
oil, natural gas and natural gas liquids prices would have reduced our operating
revenue, cash flow and net income by approximately $3.8 million for the year.
Hedging Sensitivity. On January 1, 2001, we adopted SFAS 133 as amended by
SFAS 137 and SFAS 138. Under SFAS 133, all derivative instruments are recorded
on the balance sheet at fair value. If the derivative does not qualify as a
hedge or is not designated as a hedge, the gain or loss on the derivative is
recognized currently in earnings. To qualify for hedge accounting, the
derivative must qualify either as a fair value hedge or cash flow hedge. If the
derivative qualifies for cash flow hedge accounting, the gain or loss on the
derivative is deferred in Other Comprehensive Income (Loss), a component of
Stockholders' Equity, to the extent that the hedge is effective. As of September
30, 2004, none of the derivatives that we have in place are designated as
hedges. Accordingly, changes in the fair market value of the derivatives are
recorded in current period oil and gas revenue.
If the derivative qualifies for hedge accounting, the relationship between
the hedging instrument and the hedged item must be highly effective in achieving
the offset of changes in cash flows attributable to the hedged risk both at the
inception of the contract and on an ongoing basis. Hedge accounting is
discontinued prospectively when a hedge instrument becomes ineffective. Gains
and losses deferred in accumulated Other Comprehensive Income/Loss related to a
cash flow hedge that becomes ineffective, remain unchanged until the related
production is delivered. If we determine that it is probable that a hedged
transaction will not occur, deferred gains or losses on the hedging instrument
are recognized in earnings immediately.
Gains and losses on qualified hedging instruments related to accumulated
Other Comprehensive Income and adjustments to carrying amounts on hedged
production are included in natural gas or crude oil production revenue in the
period that the related production is delivered. For derivatives not qualifying
for hedge accounting, changes in the fair market value of the instrument are
charged to income in the current period.
In 2001 and 2002, we experienced hedging costs of $12.1 million and $3.2
million, respectively. In October 2002, all of these hedge agreements expired.
We made total payments to various counterparties of $35.1 million during the
terms of these expired hedge agreements.
Under the terms of our new revolving credit facility, we are required to
maintain hedging positions with respect to not less than 25% nor more than 75%
of our natural gas and crude oil production for a rolling six month period.
All hedge transactions are subject to our risk management policy, which has
been approved by the Board of Directors. We formally document all relationships
between hedging instruments and hedged items, as well as our risk management
objectives and strategy for undertaking the hedge. This process includes
specific identification of the hedging instrument and the hedged transaction,
the nature of the risk being hedged and how the hedging instrument's
effectiveness will be assessed. Both at the inception of the hedge and on an
ongoing basis, we assess whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in cash flows of hedged
items.
62
As of November 1, 2004, Abraxas had the following hedges in place:
Time Period Notional Quantities Price
---------------------------------- -------------------------------------------- ----------------------
Jaunuar 2005 7,100 MMbtu of production per day Floor of $4.50
400 Bbls of crude oil production per day Floor of $25.00
February 2005 7,100 MMbtu of production per day Floor of $4.50
400 Bbls of crude oil production per day Floor of $25.00
March 2005 7,100 MMbtu of production per day Floor of $4.50
400 Bbls of crude oil production per day Floor of $25.00
April 2005 7,100 MMbtu of production per day Floor of $4.50
400 Bbls of crude oil production per day Floor of $25.00
May - December 2005 9,500 MMbtu of production per day Floor of $5.00
Interest Rate Risk. As a result of the October 2004 refinancing, the debt
under our new revolving credit facility bears interest at the prime rate
announced by the administrative agent plus 1.00%. As of September 30, 2004 we
had $47.4 million in outstanding indebtedness under our previous credit
facility, which pursuant to the October 2004 refinancing has been repaid. Our
new notes accrue interest at a per annum rate of six-month LIBOR plus 7.5%. The
current rate on the new notes is 9.72%. For each percentage point that the base
rate increases, interest expense would increase by $1.5 million annually.
Foreign Currency Risk. Our Canadian operations are measured in the local
currency of Canada. As a result, our financial results are affected by changes
in foreign currency exchange rates or weak economic conditions in the foreign
markets. Our Canadian operations reported a pre-tax income of $218,000 for the
year ended December 31, 2003. It is estimated that a 5% change in the value of
the U.S. dollar to the Canadian dollar would have changed our net income by
approximately $10,900. We do not maintain any derivative instruments to mitigate
the exposure to translation risk. However, this does not preclude the adoption
of specific hedging strategies in the future.
Related Party Transactions
Accounts receivable - Other in the consolidated balances sheets includes
approximately $51,211 and $35,558 as of December 31, 2002 and 2003,
respectively, representing amounts due from officers and stockholders relating
to advances made to employees.
Wind River Resources Corporation ("Wind River"), all of the capital stock
of which was owned by Abraxas' President, previously owned a twin-engine
airplane. The airplane was available for business use by employees of Abraxas
from time to time at Wind River's cost. Abraxas paid Wind River a total of
approximately $314,000, $345,000 and $132,000 in 2001, 2002 and 2003,
respectively. The airplane was sold in July 2003 to a third party. In connection
with the sale, Abraxas acquired Wind River from Mr. Watson in consideration of
the issuance of 106,977 shares of Abraxas common stock and the payment of
$35,000. Wind River was subsequently dissolved.
Abraxas has adopted a policy that transactions 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.
63
Critical Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management apply accounting
policies and make estimates and assumptions that affect results of operations
and the reported amounts of assets and liabilities in the financial statements.
The following represents those policies that management believes are
particularly important to the financial statements and that require the use of
estimates and assumptions to describe matters that are inherently uncertain.
Full Cost Method of Accounting for Natural Gas and Crude Oil Activities.
SEC Regulation S-X defines the financial accounting and reporting standards for
companies engaged in natural gas and crude oil activities. Two methods are
prescribed: the successful efforts method and the full cost method. Abraxas has
chosen to follow the full cost method under which all costs associated with
property acquisition, exploration and development are capitalized. We also
capitalize internal costs that can be directly identified with our acquisition,
exploration and development activities and do not include any costs related to
production, general corporate overhead or similar activities. Under the
successful efforts method, geological and geophysical costs and costs of
carrying and retaining undeveloped properties are charged to expense as
incurred. Costs of drilling exploratory wells that do not result in proved
reserves are charged to expense. Depreciation, depletion, amortization and
impairment of natural gas and crude oil properties are generally calculated on a
well by well or lease or field basis versus the "full cost" pool basis.
Additionally, gain or loss is generally recognized on all sales of natural gas
and crude oil properties under the successful efforts method. As a result our
financial statements will differ from companies that apply the successful
efforts method since we will generally reflect a higher level of capitalized
costs as well as a higher depreciation, depletion and amortization on our
natural gas and crude oil properties.
At the time it was adopted, management believed that the full cost method
would be preferable, as earnings tend to be less volatile than under the
successful efforts method. However, the full cost method makes us susceptible to
significant non-cash charges during times of volatile commodity prices because
the full cost pool may be impaired when prices are low. These charges are not
recoverable when prices return to higher levels. We have experienced this
situation several times over the years, most recently in 2002. Our natural gas
and crude oil reserves have a relatively long life. However, temporary drops in
commodity prices can have a material impact on our business including impact
from the full cost method of accounting.
Under full cost accounting rules, the net capitalized cost of natural gas
and crude oil properties may not exceed a "ceiling limit" which is based upon
the present value of estimated future net cash flows from proved reserves,
discounted at 10%, plus the lower of cost or fair market value of unproved
properties. If net capitalized costs of natural gas and crude oil properties
exceed the ceiling limit, we must charge the amount of the excess to earnings.
This is called a "ceiling limitation write-down." This charge does not impact
cash flow from operating activities, but does reduce our stockholders' equity
and reported earnings. The risk that we will be required to write down the
carrying value of natural gas and crude oil properties increases when natural
gas and crude oil prices are depressed or volatile. In addition, write-downs may
occur if we experience substantial downward adjustments to our estimated proved
reserves or if purchasers cancel long-term contracts for our natural gas
production. An expense recorded in one period may not be reversed in a
subsequent period even though higher natural gas and crude oil prices may have
increased the ceiling applicable to the subsequent period.
For the year ended December 31, 2002, we recorded a write-down of $116.0
million. The write-down in 2002 was due to low commodity prices. We cannot
assure you that we will not experience additional write-downs in the future.
Estimates of Proved Natural Gas and Crude Oil Reserves. Estimates of our
proved reserves included in this prospectus are prepared in accordance with GAAP
and SEC guidelines. The accuracy of a reserve estimate is a function of:
o the quality and quantity of available data;
o the interpretation of that data;
o the accuracy of various mandated economic assumptions; and
64
o and the judgment of the persons preparing the estimate.
Our proved reserve information included in this prospectus was based on
evaluations prepared by independent petroleum engineers. Estimates prepared by
other third parties may be higher or lower than those included herein. Because
these estimates depend on many assumptions, all of which may substantially
differ from future actual results, reserve estimates will be different from the
quantities of oil and gas that are ultimately recovered. In addition, results of
drilling, testing and production after the date of an estimate may justify
material revisions to the estimate.
You should not assume that the present value of future net cash flows is
the current market value of our estimated proved reserves. In accordance with
SEC requirements, we based the estimated discounted future net cash flows from
proved reserves on prices and costs on the date of the estimate. Actual future
prices and costs may be materially higher or lower than the prices and costs as
of the date of the estimate.
The estimates of proved reserves materially impact DD&A expense. If the
estimates of proved reserves decline, the rate at which we record DD&A expense
will increase, reducing future net income. Such a decline may result from lower
market prices, which may make it uneconomic to drill for and produce higher cost
fields.
Use of Estimates. The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America 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 consolidated 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 natural gas and crude oil revenues
could significantly change in the future.
Revenue Recognition. We recognize natural gas and crude oil revenue from
our interest in producing wells as natural gas and crude oil is sold from those
wells, net of royalties. Revenue from the processing of natural gas is
recognized in the period the service is performed. We utilize the sales method
to account for gas production volume imbalances. Under this method, income is
recorded based on our net revenue interest in production taken for delivery. We
had no material gas imbalances.
Asset Retirement Obligations. The estimated costs of restoration and
removal of facilities are accrued. The fair value of a liability for an asset's
retirement obligation is recorded in the period in which it is incurred and the
corresponding cost capitalized by increasing the carrying amount of the related
long-lived asset. The liability is accreted to its then present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. If the liability is settled for an amount other than the recorded
amount, a gain or loss is recognized. For all periods presented, we have
included estimated future costs of abandonment and dismantlement in our full
cost amortization base and amortize these costs as a component of our depletion
expense.
Hedge Accounting. From time to time, we use commodity price hedges to limit
our exposure to fluctuations in natural gas and crude oil prices. Results of
those hedging transactions are reflected in natural gas and crude oil sales.
Statement of Financial Accounting Standards, ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities", was effective for us on
January 1, 2001. SFAS 133, as amended and interpreted, establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Under this
statement, all derivatives, whether designated in hedging relationships or not,
are required to be recorded at fair value on our balance sheet. The accounting
for changes in the fair value of a derivative instrument depends on the intended
use of the derivative and the resulting designation, which is established at the
inception of a derivative. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results of the hedged item in
the consolidated statement of operations. For derivative instruments designated
as cash flow hedges, changes in fair value, to the extent the hedge is
effective, are recognized in other comprehensive income until the hedged item is
recognized in earnings. For derivative instruments designated as fair value
hedges, changes in fair value, to the extent the hedge is effective, are
recognized as an increase or decrease to the value of the hedged item until the
hedged item is recognized in earnings. Hedge effectiveness is measured at least
65
quarterly based on the relative changes in fair value between the derivative
contract and the hedged item over time. Any change in the fair value resulting
from ineffectiveness, as defined by SFAS 133, is recognized immediately in
earnings. Changes in fair value of contracts that do not meet the SFAS 133
definition of a cash flow or fair value hedge are also recognized in earnings
through risk management income. All amounts initially recorded in this caption
are ultimately reversed within the same caption and included in oil and gas
sales or interest expense, as applicable, over the respective contract terms.
One of the primary factors that can have an impact on our results of
operations is the method used to value our derivatives. We have established the
fair value of all derivative instruments using estimates determined by our
counterparties and subsequently evaluated internally using established index
prices and other sources. These values are based upon, among other things,
futures prices, volatility, time to maturity and credit risk. The values we
report in our financial statements change as these estimates are revised to
reflect actual results, changes in market conditions or other factors, many of
which are beyond our control.
Another factor that can impact our results of operations each period is our
ability to estimate the level of correlation between future changes in the fair
value of the hedge instruments and the transactions being hedged, both at the
inception and on an ongoing basis. This correlation is complicated because
energy commodity prices, the primary risk we hedge, have quality and location
differences that can be difficult to hedge effectively. The factors underlying
our estimates of fair value and our assessment of correlation of our hedging
derivatives are impacted by actual results and changes in conditions that affect
these factors, many of which are beyond our control.
Due to the volatility of natural gas and crude oil prices and, to a lesser
extent, interest rates, our financial condition and results of operations can be
significantly impacted by changes in the market value of our derivative
instruments. As of December 31, 2003 the net market value of our derivatives was
an asset of $21,136. As of December 31, 2002, we did not have any outstanding
derivatives.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 was effective for us January 1,
2003. SFAS No. 143 requires that the fair value of a liability for an asset's
retirement obligation be recorded in the period in which it is incurred and the
corresponding cost capitalized by increasing the carrying amount of the related
long-lived asset. The liability is accreted to its then present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. If the liability is settled for an amount other than the recorded
amount, a gain or loss is recognized. For all periods presented, we have
included estimated future costs of abandonment and dismantlement in our full
cost amortization base and amortize these costs as a component of our depletion
expense in the accompanying financial statements.
We adopted SFAS 143 effective January 1, 2003. For the year ended December
31, 2003 we recorded a charge of $395,341 for the cumulative effect of the
change in accounting principal and a liability of $1.3 million. During 2003, we
charged approximately $379,000 to expense related to the accretion of the
liability. The impact on each of the prior periods was not material.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). Effective January 1,
2002, we adopted SFAS 144. SFAS 144 retains the requirement to recognize an
impairment loss only where the carrying value of a long-lived asset is not
recoverable from its undiscounted cash flows and to measure such loss as the
difference between the carrying amount and fair value of the asset. SFAS 144,
among other things, changes the criteria that have to be met to classify an
asset as held-for-sale and requires that operating losses from discontinued
operations be recognized in the period that the losses are incurred rather than
as of the measurement date. This new standard had no impact on our consolidated
financial statements for the years ended December 31, 2002 and 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). Effective January 1,
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2003 we adopted SFAS 146. SFAS 146 requires costs associated with exit of
disposal activities to be recognized when they are incurred rather than at the
date of commitment to an exit or disposal plan. This new standard had no impact
on our financial statement for the year ended December 31, 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149, among other things, clarifies the
circumstances under which a contract with an initial net investment meets the
characteristic of a derivative and amends the definition of an "underlying" to
conform it to language used in FIN 45. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003. We adopted this statement
effective July 1, 2003. Implementation of this new standard did not have an
effect on our consolidated financial position or results of operations.
In November 2002 the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued, including loan
guarantees such as standby letters of credit. It also requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligations it has undertaken in issuing the guarantee. The Interpretation
does not specify the subsequent measurement of the guarantor's recognized
liability over the term of the related guarantee. The guidance in FIN 45 does
not apply to certain guarantee contracts, such as those issued by insurance
companies or for a lessee's residual value guarantee embedded in a capital
lease. The provisions related to recognizing a liability at inception of the
guarantee for the fair value of the guarantor's obligations would not apply to
product warranties or to guarantees accounted for as derivatives. The initial
recognition and initial measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002, regardless of the
guarantor's fiscal year-end. FIN 45 specifies additional disclosures effective
for financial statements of interim or annual periods ending after December 15,
2002.
In January 2003 (amended December 2003), the FASB issued FASB
Interpretation No. 46 (FIN 46), "Consolidation of Variable-Interest Entities
(VIEs)." FIN 46 establishes the definition of VIEs to encompass a broader group
of entities than those previously considered special-purpose entities (SPEs).
FIN 46 specifies the criteria under which it is appropriate for an investor to
consolidate VIEs; in order for an investor to consolidate a VIE, the entity must
fall within the definition of VIE and the investor must fall within the
definition of primary beneficiary, both newly defined terms under this FIN. The
revised effective date of FIN 46 for public companies with VIEs meeting certain
conditions will be the end of the first interim or annual period ending after
December 15, 2003. In December 2003, the FASB issued FASB Interpretation no.
46(R)m which expanded and clarified the guidelines of FIN 46.
In May 2003, the FASB issued FAS No. 150, entitled "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS
150). This statement is effective for financial instruments entered into or
modified after May 31, 2003, and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. We have no financial
instruments affected by SFAS 150, therefore, our adoption of it as of July 1,
2003 will not impact our financial statements.
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus
that mineral rights, as defined in EITF Issue No. 04-2, "Whether Mineral Rights
Are Tangible or Intangible Assets," are tangible assets and that they should be
removed as examples of intangible assets in SFAS No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets". The FASB has
recently ratified this consensus and directed the FASB staff to amend SFAS Nos.
141 and 142 through the issuance of FASB Staff Position FAS Nos. 141-1 and
142-1. Historically, the Company has included the costs of such mineral rights
as tangible assets, which is consistent with the EITF's consensus. As such, EITF
04-02 has not affected the Company's consolidated financial statements.
On December 16, 2004, the FASB published FASB Statement No. 123 (revised
2004) "Share-Based Payment" This statement addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for: (1) equity instruments of the enterprise or (2)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issues of such equity instruments. The
67
statement eliminates the ability to account for share-based compensation
transactions using APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and generally requires that public companies instead account for such
transactions be using a fair value-based method. This statement is be effective
for the Company for fiscal periods (including both interim and annual periods)
beginning after June 15, 2005. The Company is currently unable to determine what
effect this statement will have on the Company's financial position or results
of operations.
68
INTERCREDITOR AGREEMENT
The trustee, on behalf of the holders of the notes, entered into an
intercreditor, security and collateral agency agreement (the "Intercreditor
Agreement") with Abraxas and its restricted subsidiaries, the new revolving
credit facility administrative agent, on behalf of the new revolving credit
facility lenders, the bridge loan administrative agent, on behalf of the bridge
loan lenders, and the collateral agent. The Intercreditor Agreement provides for
the allocation of rights among the holders of the notes, the new revolving
credit facility lenders and the bridge loan lenders with respect to their
respective interests in the collateral and the exercise of remedies relating to
the collateral, and with respect to certain payments received from Abraxas and
the subsidiary guarantors and in respect of the collateral.
The following description is an overview of the material provisions of the
Intercreditor Agreement. The summary does not purport to be complete. It is
qualified in its entirety by reference to the provisions of the Intercreditor
Agreement and to the Trust Indenture Act of 1939. Copies of the Intercreditor
Agreement will be made available to prospective investors by Abraxas upon
written request.
Granting of Security Interests
Each of Abraxas and its restricted subsidiaries (the "Borrower Parties")
has granted to the collateral agent:
o a shared first priority security interest (subject to certain permitted
encumbrances) in the collateral for the benefit of the new revolving
credit facility lenders, which is pari passu with the security interest
granted for the benefit of the holders of the notes except as described
under "--Priority of Distributions;"
o a shared first priority security interest (subject to certain permitted
encumbrances) in the collateral for the benefit of the holders of the
notes, which is pari passu with the security interest granted for the
benefit of the new revolving credit facility lenders except as
described under "--Priority of Distributions;" and
o a second priority security interest in the collateral for the benefit
of the bridge loan lenders, which is junior only to the shared first
priority security interest in the collateral granted for the benefit of
the new revolving credit facility lenders and the holders of the notes
(and to certain permitted encumbrances).
Payment of Obligations; Collateral Account
So long as an event of default does not exist under the indenture, the new
revolving credit facility or the bridge loan, the collateral agent generally
will not collect distributions under any of the new revolving credit facility
documents or note documents (collectively, the "Senior Documents") or the bridge
loan documents (the "Bridge Loan Documents" and collectively with the Senior
Documents, the "Secured Documents"), and all payments will be made directly to
the respective creditor under the applicable Secured Document.
Upon notice of any such event of default and for so long as an event of
default exists, payments to each new revolving credit facility lender, holder of
the notes and bridge loan lender (collectively, the "Secured Parties") from the
Borrower Parties, and proceeds from any disposition of any collateral, will,
subject to limited exceptions, be collected by the collateral agent for deposit
into a collateral account and then distributed as described under "--Priority of
Distributions;" provided, however, any payment made with proceeds from the sale
or other disposition of Grey Wolf stock will be applied exclusively to pay
amounts with respect to the bridge loan, and no such proceeds will be deposited
into the collateral account or will be subject to the payment priority described
under "--Priority of Distributions."
69
Priority of Distributions
Upon notice of any such event of default and so long as an event of default
exists, funds in the collateral account will be distributed by the collateral
agent generally in the following order of priority:
first, to reimburse the collateral agent for expenses incurred in
protecting and realizing upon the value of the collateral;
second, to reimburse the new revolving credit facility administrative
agent, the trustee and the bridge loan administrative agent, on a
pro rata basis, for expenses incurred in protecting and realizing
upon the value of the collateral while any of these parties was
acting on behalf of the Control Party (as defined below);
third, to reimburse the new revolving credit facility administrative
agent, the trustee and the bridge loan administrative agent, on a
pro rata basis, for expenses incurred in protecting and realizing
upon the value of the collateral while any of these parties was
not acting on behalf of the Control Party;
fourth, to pay all accrued and unpaid interest (and then any unpaid
commitment fees) under the new revolving credit facility;
fifth, if, a minimum collateral coverage ratio of three times the
outstanding obligations under the new revolving credit facility
would be met after giving effect to any payment under this clause
"fifth," to pay all accrued and unpaid interest on the notes;
sixth, to pay all outstanding principal of (and then any other unpaid
amounts, including, without limitation, any fees, expenses,
premiums and reimbursement obligations) the new revolving credit
facility;
seventh, to pay all accrued and unpaid interest on the notes (if not paid
under clause "fifth");
eighth, to pay all outstanding principal of (and then any other unpaid
amounts, including, without limitation, any premium with respect
to) the notes;
ninth, to pay the bridge loan lenders all accrued and unpaid interest
under the bridge loan;
tenth, to pay all outstanding principal of (and then any other unpaid
amounts, including, without limitation, any premium with respect
to) the bridge loan; and
eleventh, to pay each new revolving credit facility lender, holder of the
notes, bridge loan lender and other secured party, on a pro rata
basis, all other amounts outstanding under the new revolving
credit facility, the notes and the bridge loan.
To the extent there exists any excess monies or property in the collateral
account after all obligations of Abraxas and the subsidiary guarantors under the
new revolving credit facility, the indenture and the notes and the bridge loan
are paid in full, the collateral agent is required to return such excess to
Abraxas.
Control Party
The collateral agent will act in accordance with the Intercreditor
Agreement and as directed by the "Control Party." Prior to the occurrence of an
event of default under the new revolving credit facility, the indenture or the
bridge loan, the Control Party will be the holders of the notes and the new
revolving credit facility lenders, acting as a single class, by vote of the
holders of a majority of the aggregate principal amount of outstanding
obligations under the notes and the new revolving credit facility (the "Senior
Secured Parties"). Upon notice of any such event of default, the bridge loan
lenders will be the Control Party for 240 days following such notice. If a stay
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under the Bankruptcy Code occurs during such 240-day period, that period will be
extended by the number of days during which that stay was effective. If the
Senior Secured Parties have not been paid in full by the end of such specified
period, the Senior Secured Parties will become the Control Party, acting as a
single class, by vote of the holders of a majority of the aggregate principal
amount of outstanding obligations under the notes and the new revolving credit
facility. The bridge loan lenders can remain the Control Party by paying the
outstanding obligations under the new revolving credit facility and the notes
(collectively, the "Senior Indebtedness") in full, at which time the bridge loan
lenders will be subrogated to the rights of the Senior Secured Parties. Once the
Senior Indebtedness is paid in full, the bridge loan lenders will be the Control
Party.
Exercise of Remedies and Disposition of Collateral
The Intercreditor Agreement provides that, upon the occurrence of an event
of default under the indenture, the new revolving credit facility or the bridge
loan for which notice is given, the Control Party will have the sole right to
direct the collateral agent in the exercise of remedies with respect to the
collateral under the Secured Documents, including the sale of the collateral.
The collateral agent will, upon receipt of any funds pursuant to the exercise of
remedies with respect to the collateral, deposit such funds in the collateral
account for distribution according to the priority described under "--Priority
of Distributions."
Amendments
The Intercreditor Agreement provides that none of its provisions may be
modified without the consent of the parties thereto, except that the consent of
Abraxas is not required if such amendment does not have a material adverse
effect on Abraxas and its subsidiaries, taken as a whole.
The Intercreditor Agreement also provides that none of the bridge loan
documents may be amended without the prior consent of the Senior Secured Parties
acting by majority vote, except that that the bridge loan documents may be
supplemented, amended or modified without such consent in order (i) to cure any
ambiguity or omission or to correct any mistake, (ii) to correct or supplement
any provision (to the extent not adverse to the interests of the Senior Secured
Parties) or (iii) in connection with any permitted refinancing of the bridge
loan.
In addition, the Intercreditor Agreement provides that none of the note
documents may be amended without the prior consent of the new revolving credit
facility lenders and bridge loan lenders acting by majority vote as a single
class, except that the note documents may be supplemented, amended or modified
without such consent in order (i) to cure any ambiguity or omission or to
correct any mistake, (ii) to correct or supplement any provision (to the extent
not adverse to the interests of the other Senior Secured Parties or the bridge
loan lenders) or (iii) in connection with any permitted refinancing of the note
documents.
Similarly, the Intercreditor Agreement also provides that none of the new
revolving credit facility documents may be amended without the prior consent of
the holders of the notes and the bridge loan lenders acting by majority vote as
a single class, except that the new revolving credit facility documents may be
supplemented, amended or modified without such consent in order (i) to cure any
ambiguity or omission or to correct any mistake, (ii) to correct or supplement
any provision (to the extent not adverse to the interests of the other Senior
Secured Parties or the bridge loan lenders) or (iii) in connection with any
permitted refinancing of the revolving credit facility documents.
Release of Lien; Termination of the Security Interests
Abraxas and its restricted subsidiaries have the right to consummate
certain asset sales and other dispositions so long as any such asset sale or
other disposition complies with the limitations on asset sales contained in the
Secured Documents (including, with respect to the notes, as described under
"Description of the Exchange Notes--Certain Covenants--Limitation on Asset
Sales" and "Description of the Exchange Notes--Repurchase at the Option of
Holders Upon the Occurrence of Certain Asset Sales").
The Intercreditor Agreement provides that the lien on the assets
constituting part of the collateral that is sold or otherwise disposed of in
accordance with the terms of each Secured Document may be released if (i) no
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default or event of default exists under any of the Secured Documents, (ii)
Abraxas has delivered an officers' certificate to each of the collateral agent,
the trustee, the new revolving credit facility administrative agent and the
bridge loan administrative agent, certifying that the proposed sale or other
disposition of assets is either permitted or required by, and is in accordance
with the provisions of, the applicable Secured Documents and (iii) the
collateral agent has acknowledged such certificate.
The Intercreditor Agreement provides for the termination of security
interests on the date that all obligations under the Secured Documents are paid
in full.
Concerning the Collateral Agent
U.S. Bank National Association is currently the collateral agent under the
Intercreditor Agreement. Abraxas and its affiliates may from time to time enter
into banking and trustee relationships with the collateral agent and its
affiliates, and the collateral agent is currently the trustee under the
indenture governing the notes. The collateral agent's address is U.S. Bank
National Association, 60 Livingston Avenue, Saint Paul, Minnesota 55107.
The collateral agent may resign at any time, in which event a successor
collateral agent will be appointed as provided in the Intercreditor Agreement.
Abraxas is permitted to, at any time, when no event of default under the new
revolving credit facility, indenture or bridge loan exists, and the Control
Party is permitted to, at any time, when there exists such an event of default,
remove the collateral agent as provided in the Intercreditor Agreement. In such
circumstances, a successor collateral agent will be appointed as provided in the
Intercreditor Agreement. Any resignation or removal of the collateral agent and
appointment of a successor collateral agent will not become effective until
acceptance of the appointment by the qualified successor collateral agent.
72
BUSINESS
General
We are an independent energy company primarily engaged in the development
and production of natural gas and crude oil. Historically, we have grown through
the acquisition and subsequent development and exploitation of producing
properties, principally through the redevelopment of old fields utilizing new
technologies such as modern log analysis and reservoir modeling techniques as
well as 3-D seismic surveys and horizontal drilling. As a result of these
activities, we believe that we have a substantial inventory of low risk
development opportunities, which provide a basis for significant production and
reserve increases. In addition, we intend to expand upon our exploitation and
development activities with complementary low risk exploration projects in our
core areas of operation.
Abraxas' core areas of operation are in south and west Texas and east
central Wyoming. Abraxas' current producing properties are typically
characterized by long-lived reserves, established production profiles and an
emphasis on natural gas. Grey Wolf conducts operations in western Canada.
In January 2003, we completed a series of transactions, which we sometimes
refer to as the January 2003 financial restructuring, including the sale of most
of our Canadian properties and the issuance of Abraxas' existing 11 1/2% secured
notes due 2007. The terms of those notes currently limit our ability to make
capital expenditures exceeding $10 million per year, which has caused us to put
a priority on those projects which allow us to maintain our leasehold positions
and comply with drilling requirements on non-operated properties, rather than on
those opportunities which we believe have the greatest potential for increasing
our production and reserves. Despite this limitation on capital expenditures, we
have increased average daily production from the producing properties that we
continued to own after the Canadian sale in January 2003 from approximately 19
MMcfe in January 2003 to approximately 24 MMcfe in June 2004, while drilling a
total of 43 wells with a 93% success rate. In addition, during 2003, we added 16
Bcfe of proved reserves at a finding cost of $1.15 per Mcfe.
Abraxas believes that its high quality asset base, high degree of
operational control and large inventory of drilling projects position it for
future growth. Abraxas' properties are concentrated in locations that facilitate
substantial economies of scale in drilling and production operations and
efficient reservoir management practices. Abraxas operates 94% of its properties
accounting for approximately 90% of its PV-10, giving Abraxas substantial
control over the timing and incurrence of operating and capital expenditures. In
addition, Abraxas has 47 proved undeveloped locations and has identified over
100 drilling and recompletion opportunities on its existing U.S. acreage, the
successful development of which Abraxas believes could significantly increase
its daily production and proved reserves.
Recent Refinancing
On October 28, 2004, in order to provide Abraxas with greater flexibility
in conducting its business, including increasing capital spending and exploiting
its additional drilling opportunities, Abraxas refinanced all of its then
existing indebtedness by redeeming its 11 1/2% secured notes due 2007 and
terminating its previous credit facility with the net proceeds from:
o the private issuance of $125.0 million aggregate principal amount of
the Floating Rate Senior Secured Notes due 2009, Series A;
o the proceeds of its new $25.0 million second lien increasing rate
bridge loan; and
o the payment to Abraxas by Grey Wolf of $35.0 million from the proceeds
of Grey Wolf's new $35.0 million term loan.
As a part of the refinancing, Abraxas also entered into a new $15 million
revolving credit facility, under which Abraxas currently has availability of
approximately $13.6 million.
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Abraxas anticipates making capital expenditures on U.S. properties for 2005
of approximately $20.0 million, which Abraxas anticipates will include
development activities related to approximately 23 projects. Abraxas has five
new drilling projects planned, which, combined with several workovers and
facility upgrades, have a total cost of approximately $7.5 million. One 100%
owned Edwards horizontal well will be drilled in south Texas to a total measured
depth of 15,800 feet. In west Texas:
o a 100% owned horizontal Devonian well will be drilled to a total
measured depth of 17,000 feet;
o a shallow development drilling program will commence on a waterflood
project in which Abraxas owns a 58% working interest;
o development will continue in the 100% owned Clearfork Slope oil plays
at depths ranging from 5,600 feet to 8,500 feet; and
o a 6,500-foot infill well will be drilled in the Abraxas Cherry Canyon
field in which the Company owns an 81% working interest.
Primary Operating Areas
Texas. Abraxas' operations are concentrated in south and west Texas with
over 99% of the PV-10 of its natural gas and crude oil properties at December
31, 2003 located in those two regions. Abraxas operates 94% of its wells in
Texas. During 2003, Abraxas drilled a total of six wells (3.73 net) in Texas
with a 100% success rate. During the first nine months of 2004, Abraxas drilled
2 wells (2) net in Texas with a 50% success rate.
Operations in South Texas are concentrated along the Edwards trend in Live
Oak and Dewitt Counties, the Frio/Vicksburg trend in San Patricio County and the
Wilcox trend in Goliad County. In total in South Texas Abraxas owns an average
93% working interest in 43 wells with average daily production of 239 net Bbls
of crude oil and NGLs and 6,210 net Mcf of natural gas per day (7,644 net Mcfe
per day) for the year ended December 31, 2003. During the nine months ended
September 30, 2004, average daily production was 329 net Bbls of crude oil and
NGLs and 7,547 net Mcf of natural gas (9,521 net Mcfe). As of December 31, 2003
Abraxas had estimated net proved reserves in South Texas of 28.6 Bcfe (82%
natural gas) with a PV-10 of $57.7 million, 70% of which was attributable to
proved developed reserves. In South Texas, Abraxas has four incremental drilling
locations on its existing acreage in addition to 12 proved undeveloped
locations.
Abraxas' West Texas operations are concentrated along the deep
Devonian/Ellenburger formations and shallow Cherry Canyon sandstones in Ward
County and in the Sharon Ridge Clearfork Field in Scurry County. In total in
West Texas, Abraxas owns an average 74% working interest in 158 wells with
average daily production of 338 net Bbls of crude oil and NGLs and 6,887 net Mcf
of natural gas per day (8,915 Mcfe per day) for the year ended December 31,
2003. During the nine months ended September 30, 2004, average daily production
was 566 net Bbls of crude oil and NGLs and 11,034 net Mcf of natural gas (14,433
net Mcfe). As of December 31, 2003, Abraxas had estimated net proved reserves in
West Texas of 71.1 Bcfe (80% natural gas) with a PV-10 of $103.6 million, 60% of
which was attributable to proved developed reserves. In West Texas, Abraxas has
identified 31 incremental drilling locations on its existing acreage in addition
to 35 proved undeveloped locations.
Wyoming. Abraxas currently holds over 56,000 contiguous acres in the Powder
River Basin in East Central Wyoming. Abraxas has drilled and currently operates
five wells in Converse and Niobrara counties that were completed in the Turner
and Niobrara formations. Abraxas owns a 100% working interest in these wells
that produced an average of 31 net barrels of crude oil per day in 2003. As of
December 31, 2003, Abraxas had estimated net proved producing reserves in
Wyoming of 68,669 barrels of crude oil with a PV-10 of $280,343. During 2001,
Abraxas shot 3-D seismic over approximately one-third of its acreage position.
Based on interpretation of the 3-D seismic and well control, Abraxas has
identified 18 prospective locations on its existing acreage. During 2004,
Abraxas drilled one successful well that is currently on a long-term production
test in the Muddy formation.
Western Canada. Grey Wolf owns properties in western Canada, consisting
primarily of natural gas reserves and undeveloped acreage in the provinces of
Alberta and British Columbia. Grey Wolf's Alberta properties are in two
concentrated areas: the Caroline field, 60 miles northwest of Calgary, and the
Peace River Arch area in northwestern Alberta. Grey Wolf entered into a farmout
agreement with PrimeWest in connection with the sale of our Canadian
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subsidiaries in January 2003 to jointly develop these areas in the future. Grey
Wolf's other Canadian operations are located in the Ladyfern area of northeast
British Columbia. During 2003, Grey Wolf drilled a total of 18 new wells (8.1
net) with a 95% success rate. During the nine months ended September 30, 2004,
Grey Wolf drilled a total of 11 new wells (5.6 net) with a 91% success rate.
As of December 31, 2003, Grey Wolf had estimated net proved reserves of
21.0 Bcfe (77% natural gas) with a PV-10 of $55.2 million of which 76% was
attributable to proved developed reserves. For the year ended December 31, 2003,
the Canadian properties produced an average of approximately 111 net Bbls of
crude oil and NGLs per day and 2,328 net Mcf of natural gas per day.
Markets and Customers
The revenue generated by our operations is highly dependent upon the prices
of, and demand for, natural gas and crude oil. Historically, the markets for
natural gas and crude oil have been volatile and are likely to continue to be
volatile in the future. The prices we receive for our natural gas and crude oil
production are subject to wide fluctuations and depend on numerous factors
beyond our control including seasonality, the condition of the United States
economy (particularly the manufacturing sector), foreign imports, political
conditions in other crude 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 natural gas and
crude oil have had, and could have in the future, an adverse effect on the
carrying value of our proved reserves and our revenue, profitability and cash
flow from operations. You should read the discussion under "Risk Factors--Risks
Relating to Our Business--Market conditions for natural gas and crude oil, and
particularly volatility of prices for natural gas and crude oil, could adversely
affect our revenues, cash flows, profitability and growth" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Critical Accounting Policies" for more information relating to the
effects on us of decreases in natural gas and crude oil prices.
In order to manage our exposure to price risks in the marketing of our
natural gas and crude oil, from time to time we have entered into fixed price
delivery contracts, financial swaps and natural gas and crude oil futures
contracts as hedging devices. To ensure a fixed price for future production, we
may sell a futures contract and thereafter either (i) make physical delivery of
natural gas or crude oil to comply with such contract or (ii) buy a matching
futures contract to unwind our futures position and sell our production to a
customer. These contracts may expose us to the risk of financial loss in certain
circumstances, including instances where production is less than expected, our
customers fail to purchase or deliver the contracted quantities of natural gas
or crude oil, or a sudden, unexpected event materially impacts natural gas or
crude oil prices. These contracts may also restrict our ability to benefit from
unexpected increases in natural gas and crude oil prices. You should read the
discussion under "Management's Discussion and Analysis of Financial Condition
And Results of Operations--Liquidity and Capital Resources," and "Quantitative
and Qualitative Disclosures about Market Risk--Commodity Price Risk" for more
information regarding our historical hedging activities.
Substantially all of our natural gas and crude oil is sold at current
market prices under short-term arrangements, as is customary in the industry.
During the year ended December 31, 2003, three purchasers accounted for
approximately 80% of our United States natural gas and crude oil sales. We
believe that there are numerous other companies available to purchase our
natural gas and crude oil and that the loss of one or more of these purchasers
would not materially affect our ability to sell natural gas and crude oil. The
prices we realize for the sale of our natural gas and crude oil are subject to
our hedging activities. You should read the discussion under "Management's
Discussion and Analysis of Financial Condition And Results of
Operations--Liquidity and Capital Resources" and "Quantitative and Qualitative
Disclosures about Market Risk--Commodity Price Risk" for more historical
information regarding our hedging activities.
75
Exploratory and Developmental Acreage
Our principal natural gas and crude oil properties consist of non-producing
and producing natural gas and crude oil leases, including reserves of natural
gas and crude oil in place. The following table indicates our interest in
developed and undeveloped acreage as of December 31, 2003:
Developed and Undeveloped Acreage
-----------------------------------------------------------------------
As of December 31, 2003
-----------------------------------------------------------------------
Developed Acreage Undeveloped Acreage
--------------------------------- -----------------------------------
Gross Acres Net Acres Gross Acres Net Acres
--------------- --------------- -------------- ------------------
Grey Wolf
Canada...... 18,238 9,075 155,246 93,866
Abraxas
Texas....... 23,671 18,978 5,864 4,692
Wyoming..... 3,200 3,200 57,431 53,519
N. Dakota... - - 80 24
--------------- --------------- -------------- ------------------
Total..... 45,109 31,253 218,621 152,101
=============== =============== ============== ==================
Productive Wells
The following table sets forth our total gross and net productive wells
expressed separately for natural gas and crude oil, as of December 31, 2003:
Productive Wells
---------------------------------------------------------------------
As of December 31, 2003
---------------------------------------------------------------------
Crude Oil Natural Gas
-------------------------------- ----------------------------------
Gross Net Gross Net
--------------- -------------- --------------- ----------------
Grey Wolf
Canada......... 29.0 5.1 205.0 17.0
Abraxas
Texas.......... 140.5 112.6 60.5 44.7
Wyoming........ 5.0 5.0 18.0 -
N. Dakota...... 1.0 - - -
--------------- -------------- --------------- ----------------
Total....... 175.5 122.7 283.5 61.7
=============== ============== =============== ================
Reserves Information
The natural gas and crude oil reserves of Abraxas' operations only have
been estimated as of January 1, 2004, January 1, 2003, and January 1, 2002, by
DeGolyer and MacNaughton, of Dallas, Texas. The reserves of the Canadian
operations as of January 1, 2004 have been estimated by DeGolyer and MacNaughton
and the reserves as of January 1, 2002 were estimated by McDaniel and Associates
Consultants Ltd. of Calgary, Alberta. The January 1, 2003 reserves attributable
to the Canadian operations were estimated internally. The January 1, 2004
reserves related to an override which was retained by Grey Wolf after the sale
of certain Canadian assets, were estimated internally. Natural gas and crude oil
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 natural
gas and crude oil 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.
76
The following table sets forth certain information regarding estimates of
our crude oil, natural gas liquids and natural gas reserves as of January 1,
2002, January 1, 2003 and January 1, 2004:
Abraxas/U.S. Grey Wolf/Canada(1)
Estimated Proved Reserves Estimated Proved Reserves
------------------------- -------------------------
Proved Proved Total Proved Proved Total
Developed Undeveloped Proved Developed Undeveloped Proved
-------------- --------------- ------------ ------------- --------------- ------------
As of January 1, 2004
Crude oil (MBbls) 1,791 1,264 3,055 260 315 575
NGLs (MBbls) 95 170 265 167 73 240
Natural gas (MMcf) 39,372 40,830 80,202 13,027 3,055 16,082
As of January 1, 2003
Crude oil (MBbls) 1,647 1,317 2,964 134 - 134
NGLs (MBbls) 105 168 273 1,117 117 1,234
Natural gas (MMcf) 34,776 43,419 78,195 55,598 5,039 60,637
As of January 1, 2002
Crude oil (MBbls) 1,841 1,170 3,011 139 - 139
NGLs (MBbls) 1,051 345 1,396 2,016 240 2,256
Natural gas (MMcf) 40,514 67,954 108,468 70,729 9,560 80,289
------------------
(1) January 2002 and 2003 numbers include reserves of Canadian operations sold
in the January 2003 financial restructuring.
The process of estimating natural gas and crude oil reserves is complex and
involves decisions and assumptions in the evaluation of available geological,
geophysical, engineering and economic data. Therefore, these estimates are
imprecise.
Actual future production, natural gas and crude oil prices, revenues,
taxes, development expenditures, operating expenses and quantities of
recoverable natural gas and crude oil reserves most likely will vary from those
estimated. Any significant variance could materially affect the estimated
quantities and present value of reserves set forth in this prospectus. In
addition, we may adjust estimates of proved reserves to reflect production
history, results of exploration and development, prevailing natural gas and
crude oil prices and other factors, many of which are beyond our control.
You should not assume that the present value of future net revenues
referred to in this prospectus is the current market value of our estimated
natural gas and crude oil reserves. In accordance with SEC requirements, the
estimated discounted future net cash flows from proved reserves are generally
based on prices and costs as of the end of the year of the estimate, or
alternatively, if prices subsequent to that date have increased, a price near
the periodic filing date of our financial statements. Because we use the full
cost method to account for our natural gas and crude oil operations, we are
susceptible to significant non-cash charges during times of volatile commodity
prices because the full cost pool may be impaired when prices are low. At June
30, 2002, we incurred a ceiling test writedown of approximately $116.0 million.
A ceiling test writedown does not impact cash flow from operating activities but
does reduce our stockholders' equity and reported earnings. We cannot assure you
that we will not experience additional ceiling limitation write-downs in the
future. For more information regarding the full cost method of accounting, you
should read the information under "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Critical Accounting Policies."
Actual future prices and costs may be materially higher or lower than the
prices and costs as of the end of the year of the estimate. Any changes in
consumption by natural gas purchasers or in governmental regulations or taxation
will also affect actual future net cash flows. The timing of both the production
and the expenses from the development and production of natural gas and crude
oil properties will affect the timing of actual future net cash flows from
proved reserves and their present value. In addition, the 10% discount factor,
which is required by the SEC to be used in calculating discounted future net
cash flows for reporting purposes, is not necessarily the most accurate discount
77
factor. The effective interest rate at various times and the risks associated
with us or the natural gas and crude oil industry in general will affect the
accuracy of the 10% discount factor.
The estimates of our reserves are based upon various assumptions about
future production levels, prices and costs that may not prove to be correct over
time. In particular, estimates of natural gas and crude oil reserves, future net
revenue from proved reserves and the PV-10 thereof for the natural gas and crude
oil properties described in this prospectus are based on the assumption that
future natural gas and crude oil prices remain the same as natural gas and crude
oil prices at December 31, 2003. The average sales prices as of such date used
for purposes of such estimates were $31.03 per Bbl of crude oil, $27.19 per Bbl
of NGLs and $5.05 per Mcf of natural gas. It is also assumed that we will make
future capital expenditures of approximately $50.4 million in the aggregate,
which are necessary to develop and realize the value of proved undeveloped
reserves on our properties. Any significant variance in actual results from
these assumptions could also materially affect the estimated quantity and value
of reserves set forth herein.
We file reports of our estimated natural gas and crude oil 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, Natural Gas Liquids, and Natural Gas Production and Sales Prices
The following table presents our net crude oil, net natural gas liquids and
net natural gas production, the average sales price per Bbl of natural gas and
crude oil liquids and per Mcf of natural gas produced and the average cost of
production per BOE of production sold, for the three years ended December 31,
2003, and for the nine months ended September 30, 2004.
September 30,
2001 (1)(2) 2002 (1)(2) 2003 (1)(2) 2004 (1)
-------------- ---------------- -------------- ---------------
Crude oil production (Bbls) 454,063 292,264 251,567 190,981
Natural gas production (Mcf) 17,495,598 15,452,721 6,189,359 5,092,826
Natural gas liquids production (Bbls) 277,969 242,032 37,258 41,043
MMcfe 21,888 18,658 7,922 6,485
Average sales price per Bbl of crude oil $ 24.63 $ 24.34 $ 30.32 $ 37.84
Average sales price per Mcf of natural gas $ 3.20 $ 2.55 $ 4.78 $ 5.05
Average sales price per Bbl of natural gas
liquids $ 21.51 $ 17.94 $ 24.47 $ 32.00
Average sales price per Mcfe $ 3.34 $ 2.72 $ 4.81 $ 5.28
Average cost of production per Mcfe produced (3) $ 0.85 $ 0.82 $ 1.21 $ 1.44
------------------
(1) Average sales prices are net of hedging activity.
(2) Data for 2001, 2002 and the first 23 days of 2003, includes Canadian
subsidiaries sold in January 2003.
(3) Natural gas and crude oil were combined by converting natural gas and crude
oil liquids to a Mcf equivalent on the basis of 1 Bbl of natural gas and
crude oil liquid equals 6 Mcf of natural gas. Production costs include
direct operating costs, ad valorem taxes and gross production taxes.
78
Drilling Activities
The following table sets forth our gross and net working interests in
exploratory and development wells drilled during the three years ended December
31, 2003, and for the nine months ended September 30, 2004.
September 30,
2001 2002 2003 2004
--------------------- ---------------------- --------------------- ----------------------
Gross Net Gross Net Gross Net Gross Net
--------- -------- ---------- -------- --------- -------- ---------- -------
Exploratory
Productive
Crude oil - - 1.0 1.0 1.0 1.0 2.0 2.0
Natural gas 2.0 1.0 3.0 0.5 - - - -
Dry holes 1.0 .5 3.0 1.5 1.0 0.5 - -
--------- -------- ---------- -------- --------- -------- ---------- -------
Total 3.0 1.5 7.0 3.0 2.0 1.5 2.0 2.0
========= ======== ========== ======== ========= ======== ========== =======
Development
Productive
Crude oil 2.0 2.0 - - 2.0 2.0 3.0 3.0
Natural gas 13.0 11.0 14.0 11.8 20.0 8.3 7.0 2.2
Dry holes - - 1.0 1.0 - - 2.0 1.3
--------- -------- ---------- -------- --------- -------- ---------- -------
Total 15.0 13.0 15.0 12.8 22.0 10.3 12.0 6.5
========= ======== ========== ======== ========= ======== ========== =======
Competition
We operate in a highly competitive environment. Competition is particularly
intense with respect to the acquisition of desirable undeveloped natural gas and
crude oil properties. The principal competitive factors in the acquisition of
such undeveloped natural gas and crude oil properties include the staff and data
necessary to identify, investigate and purchase such properties, and the
financial resources necessary to acquire and develop such properties. We compete
with major and independent natural gas and crude oil companies for properties
and the equipment and labor required to develop and operate such properties.
Many of these competitors have financial and other resources substantially
greater than ours.
The principal resources necessary for the exploration and production of
natural gas and crude oil are leasehold prospects under which natural gas and
crude oil reserves may be discovered, drilling rigs and related equipment to
explore for such reserves and knowledgeable personnel to conduct all phases of
natural gas and crude oil operations. We must compete for such resources with
both major natural gas and crude oil companies and independent operators.
Although we believe our current operating and financial resources are adequate
to preclude any significant disruption of our operations in the immediate future
we cannot assure you that such materials and resources will be available to us.
We face significant competition for obtaining additional natural gas
supplies for gathering and processing operations, for marketing NGLs, residue
gas, helium, condensate and sulfur, and for transporting natural gas and
liquids. Our principal competitors include major integrated oil companies and
their marketing affiliates and national and local gas gatherers, brokers,
marketers and distributors of varying sizes, financial resources and experience.
Certain competitors, such as major natural gas and crude oil companies, have
capital resources and control supplies of natural gas substantially greater than
ours. Smaller local distributors may enjoy a marketing advantage in their
immediate service areas.
We compete against other companies in our natural gas processing business
both for supplies of natural gas and for customers to which we sell our
products. Competition for natural gas supplies is based primarily on location of
natural gas gathering facilities and natural gas gathering plants, operating
efficiency and reliability and ability to obtain a satisfactory price for
products recovered. Competition for customers is based primarily on price and
delivery capabilities.
79
Regulation of Natural Gas and Crude Oil Activities
The exploration, production and transportation of all types of hydrocarbons
are subject to significant governmental regulations. Our operations are affected
from time to time in varying degrees by political developments and Federal,
state, provincial and local laws and regulations. In particular, natural gas and
crude oil production operations and economics are, or in the past have been,
affected by industry specific 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 past, maximum selling prices for certain
categories of crude oil, natural gas, condensate and NGLs in the United States
were subject to significant Federal regulation. At the present time, however,
all sales of our crude oil, natural gas, condensate and NGLs produced in the
United States under private contracts may be sold at market prices. Congress
could, however, reenact price controls in the future. If controls that limit
prices to below market rates are instituted, our revenue would be adversely
affected.
Natural gas and crude oil 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. Natural gas and crude oil
exports for a term of less than two years must be made pursuant to an NEB order,
or, in the case of exports for a longer duration, pursuant to an NEB license and
Governor in Council approval.
The provincial governments of Alberta, British Columbia and Saskatchewan
also regulate the volume of natural gas that may be removed from these provinces
for consumption elsewhere based on such factors as reserve availability,
transportation arrangements and marketing considerations.
The North American Free Trade Agreement. On January 1, 1994, the North
American Free Trade Agreement ("NAFTA") among the governments of the United
States, Canada and Mexico became effective. In the context of energy resources,
Canada remains free to determine whether exports to the U.S. or Mexico will be
allowed provided that any export restrictions do not: (i) reduce the proportion
of energy resources exported relative to the total supply of the energy resource
(based upon the proportion prevailing in the most recent 36 month period); (ii)
impose an export price higher than the domestic price; or (iii) disrupt normal
channels of supply. All three countries are prohibited from imposing minimum
export or import price requirements.
NAFTA contemplates the reduction of Mexican restrictive trade practices in
the energy sector and prohibits discriminatory border restrictions and export
taxes. The agreement also contemplates clearer disciplines on regulators to
ensure fair implementation of any regulatory changes and to minimize disruption
of contractual arrangements, which is important for Canadian natural gas
exports. The Texas Railroad Commission has recently become the lead agency for
Texas for coordinating permits governing Texas to Mexico cross border pipeline
projects. The availability of selling natural gas into Mexico may substantially
impact the interstate natural gas market on all producers in the coming years.
United States Natural Gas Regulation. Historically, the natural gas
industry as a whole has been more heavily regulated than the crude oil or other
liquid hydrocarbons market. Most regulations focused on transportation
practices. Currently, the Federal Energy Regulatory Commission ("FERC"),
requires 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 natural 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 markets natural gas as a merchant, it
does so pursuant to private contracts in direct competition with all of the
sellers, such as us; however, pipeline companies and their affiliates are not
required to remain "merchants" of natural gas, and most of the interstate
pipeline companies have become "transporters only," although many have
affiliated marketers.
Transportation pipeline availability and shipping cost are major factors
affecting the production and sale of natural gas. Our physical sales of natural
gas are affected by the actual availability, terms and cost of pipeline
80
transportation. The price and terms for access onto the pipeline transportation
systems remain subject to extensive Federal regulation. Although FERC does not
directly regulate our production and marketing activities, it does affect how
buyers and sellers gain access to and use of the necessary transportation
facilities and how we and our competitors sell natural gas in the marketplace.
FERC continues to review and modify its regulations regarding the transportation
of natural gas. For example, FERC has recently begun a broad review of its
natural gas transportation regulations, including how its regulations operate in
conjunction with state proposals for natural gas marketing restructuring and in
the increasingly competitive marketplace for all post-wellhead services related
to natural gas.
In recent years FERC also has pursued a number of important policy
initiatives which could significantly affect the marketing of natural gas in the
United States. Most of these initiatives are intended to enhance competition in
natural gas markets. FERC rules encouraging "spin downs," or the breakout of
unregulated gathering activities from regulated transportation services, may
have the adverse effect of increasing the cost of doing business on some in the
industry, including us, as a result of the geographic monopolization of certain
facilities by their new, unregulated owners. As to all of FERC initiatives, the
ongoing, or, in some instances, preliminary and evolving nature makes it
impossible at this time to predict their ultimate impact on our business.
However, we do not believe that any FERC initiatives will affect us any
differently than other natural gas producers and marketers with which we
compete.
FERC decisions involving onshore facilities are 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 in the past classified as "transmission" may now be classified as
"gathering." We ship certain of our natural gas through gathering facilities
owned by others, including interstate pipelines, under existing long term
contractual arrangements. Although FERC decisions create the potential for
increasing the cost of shipping our natural gas on third party gathering
facilities, our shipping activities have not been materially affected by these
decisions.
In summary, all of FERC activities related to the transportation of natural
gas result in improved opportunities to market our physical production to a
variety of buyers and market places, while at the same time increasing access to
pipeline transportation and delivery services. Additional proposals and
proceedings that might affect the natural gas industry in the United States are
considered from time to time by Congress, FERC, state regulatory bodies and the
courts. We cannot predict when or if any such proposals might become effective
or their effect, if any, on our operations. The natural gas and crude oil
industry historically has been very heavily regulated; thus there is no
assurance that the less stringent regulatory approach recently pursued by FERC
and Congress will continue indefinitely into the future.
State and Other Regulation. All of the jurisdictions in which we own
producing natural gas and crude oil properties have statutory provisions
regulating the exploration for and production of natural gas and crude oil.
These include provisions requiring permits for the drilling of wells and
maintaining bonding requirements in order to drill or operate wells and
provisions relating to the location of wells, the method of drilling and casing
wells, the surface use and restoration of properties upon which wells are
drilled and the plugging and abandoning of wells. Our operations are also
subject to various conservation laws and regulations. These include the
regulation of the size of drilling and spacing units or proration units on an
acreage basis and the density of wells which may be drilled and the unitization
or pooling of natural gas and crude oil properties. In this regard, some states
and provinces allow the forced pooling or integration of tracts to facilitate
exploration while other states and provinces rely on voluntary pooling of lands
and leases. In addition, state and provincial conservation laws establish
maximum rates of production from natural gas and crude oil 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 all of these conservation regulations is to
limit the speed, timing and amounts of natural gas and crude oil we can produce
from our wells, and to limit the number of wells or the location at which we can
drill.
State and provincial regulation of gathering facilities generally includes
various safety, environmental, and in some circumstances, non-discriminatory
take requirements, but does not generally entail rate regulation. In the United
States, natural gas gathering has received greater regulatory scrutiny at both
the state and Federal levels in the wake of the interstate pipeline
restructuring under FERC Order 636. For example, the Texas Railroad Commission
81
enacted a Natural Gas Transportation Standards and Code of Conduct to provide
regulatory support for the State's more active review of rates, services and
practices associated with the gathering and transportation of natural gas by an
entity that provides such services to others for a fee, in order to prohibit
such entities from unduly discriminating in favor of their affiliates.
For those operations on U.S. Federal or Indian oil and gas leases, such
operations must comply with numerous regulatory restrictions, including various
non-discrimination statutes, and certain of such operations must be conducted
pursuant to certain on-site security regulations and other permits issued by
various Federal agencies. In addition, in the United States, the Minerals
Management Service ("MMS") prescribes or severely limits the types of costs that
are deductible transportation costs for purposes of royalty valuation of
production sold off the lease. In particular, MMS prohibits deduction of costs
associated with marketer fees, cash out and other pipeline imbalance penalties,
or long-term storage fees. Further, the MMS has been engaged in a process of
promulgating new rules and procedures for determining the value of crude oil
produced from Federal lands for purposes of calculating royalties owed to the
government. The natural gas and crude oil industry as a whole has resisted the
proposed rules under an assumption that royalty burdens will substantially
increase. We cannot predict what, if any, effect any new rule will have on our
operations.
Canadian Royalty Matters. In addition to Canadian federal regulation, each
province has legislation and regulations that govern land tenure, royalties,
production rates, environmental protection and other matters. The royalty regime
is a significant factor in the profitability of crude oil and natural gas
production. Royalties payable on production from lands other than Crown lands
are determined by negotiations between the mineral owner and the lessee. Crown
royalties are determined by governmental regulation and are generally calculated
as a percentage of the value of the gross production, and the rate of royalties
payable generally depends in part on prescribed preference prices, well
productivity, geographical location, field discovery date and the type and
quality of the petroleum product produced.
From time to time the governments of Alberta and British Columbia, the
provinces where almost all of Grey Wolf's production is located, have
established incentive programs which have included royalty rate reductions,
royalty holidays and tax credits for the purpose of encouraging crude oil and
natural gas exploration or enhanced planning projects. All of Grey Wolf's
production is from oil and gas rights which have been granted by the Provinces.
The Province of Alberta requires the payment from lessees of oil and gas
rights of annual rental payments as well as royalty payments. Regulations made
pursuant to the Mines and Minerals Act (Alberta) provide various incentives for
exploring and developing crude oil reserves in Alberta. Crude oil produced from
horizontal extensions commenced at least five years after the well was
originally spudded may qualify for a royalty reduction. An 8,000 cubic meters
exemption is available to production from a well that has not produced for a
12-month period prior to January 31, 1993 or 24 months following such date. In
addition, crude oil production from eligible new field and new pool wildcat
wells and deeper pool test wells spudded or deepened after September 30, 1992,
is entitled to a 12-month royalty exemption (to a maximum of CDN $1 million).
Crude oil produced from low productivity wells, enhanced recovery schemes (such
as injection wells) and experimental projects is also subject to royalty
reductions.
The Alberta government classifies conventional crude oil into three
categories, being Old Oil, New Oil and Third Tier Oil. Each has a base royalty
rate of 10%. The rate caps on the categories are 25% for oil from crude oil
pools discovered after September 30, 1992, being the Third Tier Oil, 30% for oil
from pools or pool extensions discovered after April 1, 1974, from wells drilled
or deepened after October 31, 1991 or from reactivated wells and which are not
Third Tier Oil, and 35% for Old Oil.
Effective January 1, 1994, the calculation and payment of natural gas
royalties became subject to a simplified process. The royalty reserved to the
Crown, subject to various incentives, is between 15% or 30%, in the case of new
natural gas, and between 15% and 35%, in the case of old natural gas, depending
upon a prescribed or corporate average reference price. Natural gas produced
from qualifying exploratory gas wells spudded or deepened after July 1, 1985 and
before June 1, 1988 are eligible for a royalty exemption for a period of 12
months, or such later time that the value of the exempted royalty quantity
equals a prescribed maximum amount. Natural gas produced from qualifying
82
intervals in eligible natural gas wells spudded or deepened to a depth below
2,500 meters is also subject to a royalty exemption, the amount of which depends
on the depth of the well.
In Alberta, a producer of crude oil or natural gas is entitled to credit
against the royalties payable to the Crown by virtue of the Alberta Royalty Tax
Credit ("ARTC") program. The ARTC program is based on a price-sensitive formula,
and the ARTC rate currently varies between 75% for prices for crude oil at or
below CDN $100 per cubic meter and 35% for prices above CDN $210 per cubic
meter. The ARTC rate is currently applied to a maximum of CDN $2.0 million of
Alberta Crown royalties payable for each producer or associated group of
producers. Crown royalties on production from producing properties acquired from
corporations claiming maximum entitlement to ARTC will generally not be eligible
for ARTC. The rate is established quarterly based on average "par price", as
determined by the Alberta Department of Energy for the previous quarterly
period.
Producers of crude oil and natural gas in British Columbia are also
required to pay annual rental payments in respect of Crown leases and royalties
and freehold production taxes in respect of crude oil and natural gas produced
from Crown and freehold lands respectively. British Columbia also classifies
conventional crude oil into the three categories of Old Oil, New Oil and Third
Tier Oil. The amount payable as a royalty in respect of crude oil depends on the
vintage of the crude oil (whether it was produced from a pool discovered before
or after October 31, 1975) or a pool in which no well was completed on June 1,
1998), the quantity of crude oil produced in a month and the value of the crude
oil. Crude oil produced from a discovery well may be exempt from the payment of
a royalty for the first 36 months of production to a maximum production of
11,450 m3. The royalty payable on natural gas is determined by a sliding scale
based on a classification of the gas based on whether it is conservation gas
(gas associated with marketed oil production) and by drilling and land lease
date and on a reference price which is the greater of the amount obtained by the
producer and at prescribed minimum price. Conservation gas has a minimum royalty
of 8%. The royalty rate ranges from between 9% and 27% for wells drilled on
lands issued after May 31, 1998 and before January 1, 2003 and completed within
5 years of the date the lands were issued and between 12% and 27% for wells
spudded after May 31, 1998 on lands where rights had been issued as of May 31,
1998.
Environmental Matters. Our operations are subject to numerous Federal,
state, provincial and local laws and regulations controlling the generation,
use, storage, and discharge of materials into the environment or otherwise
relating to the protection of the environment. These laws and regulations may
require the acquisition of a permit or other authorization before construction
or drilling commences; restrict the types, quantities, and concentrations of
various substances that can be released into the environment in connection with
drilling, production, and natural gas processing activities; suspend, limit or
prohibit construction, drilling and other activities in certain lands lying
within wilderness, wetlands, and other protected areas; require remedial
measures to mitigate pollution from historical and on-going operations such as
use of pits and plugging of abandoned wells; restrict injection of liquids into
subsurface strata that may contaminate groundwater; and impose substantial
liabilities for pollution resulting from our operations. Environmental permits
required for our operations may be subject to revocation, modification, and
renewal by issuing authorities. Governmental authorities have the power to
enforce compliance with their regulations and permits, and violations are
subject to injunction, civil fines, and even criminal penalties. Our management
believes that we are in substantial compliance with current environmental laws
and regulations, and that we will not be required to make material capital
expenditures to comply with existing laws. Nevertheless, changes in existing
environmental laws and regulations or interpretations thereof could have a
significant impact on us as well as the natural gas and crude oil industry in
general, and thus we are unable to predict the ultimate cost and effects of
future changes in environmental laws and regulations.
In the United States, the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), also known as "Superfund," and
comparable state statutes impose strict, joint, and several liability on certain
classes of persons who are considered to have contributed to the release of a
"hazardous substance" into the environment. These persons include the owner or
operator of a disposal site or sites where a release occurred and companies that
generated, disposed or arranged for the disposal of the hazardous substances
released at the site. Under CERCLA such persons or companies may be
retroactively liable for the costs of cleaning up the hazardous substances that
have been released into the environment and for damages to natural resources,
and it is common for neighboring land owners and other third parties to file
claims for personal injury, property damage, and recovery of response costs
allegedly caused by the hazardous substances released into the environment. The
Resource Conservation and Recovery Act ("RCRA") and comparable state statutes
govern the disposal of "solid waste" and "hazardous waste" and authorize
imposition of substantial civil and criminal penalties for failing to prevent
surface and subsurface pollution, as well as to control the generation,
83
transportation, treatment, storage and disposal of hazardous waste generated by
natural gas and crude oil operations. Although CERCLA currently contains a
"petroleum exclusion" from the definition of "hazardous substance," state laws
affecting our operations impose cleanup liability relating to petroleum and
petroleum related products, including crude oil cleanups. In addition, although
RCRA regulations currently classify certain oilfield wastes which are uniquely
associated with field operations as "non-hazardous," such exploration,
development and production wastes could be reclassified by regulation as
hazardous wastes thereby administratively making such wastes subject to more
stringent handling and disposal requirements.
We currently own or lease, and have in the past owned or leased, numerous
properties that for many years have been used for the exploration and production
of natural gas and crude oil. Although we utilized standard industry operating
and disposal practices at the time, hydrocarbons or other wastes may have been
disposed of or released on or under the properties we owned or leased or on or
under other locations where such wastes have been taken for disposal. In
addition, many of these properties have been operated by third parties whose
treatment and disposal or release of hydrocarbons or other wastes was not under
our control. These properties and the wastes disposed thereon may be subject to
CERCLA, RCRA, and analogous state laws. Our operations are also impacted by
regulations governing the disposal of naturally occurring radioactive materials
("NORM"). We must comply with the Clean Air Act and comparable state statutes
which prohibit the emissions of air contaminants, although a majority of our
activities are exempted under a standard exemption. Moreover, owners, lessees
and operators of natural gas and crude oil properties are also subject to
increasing civil liability brought by surface owners and adjoining property
owners. Such claims are predicated on the damage to or contamination of land
resources occasioned by drilling and production operations and the products
derived therefrom, and are usually causes of action based on negligence,
trespass, nuisance, strict liability and fraud.
United States Federal regulations also require certain owners and operators
of facilities that store or otherwise handle crude oil, such as us, to prepare
and implement spill prevention, control and countermeasure plans and spill
response plans relating to possible discharge of crude oil into surface waters.
The Federal Oil Pollution Act ("OPA") contains numerous requirements relating to
prevention of, reporting of, and response to crude oil spills into waters of the
United States. For facilities that may affect state waters, OPA requires an
operator to demonstrate $10 million in financial responsibility. State laws
mandate crude oil cleanup programs with respect to contaminated soil.
Grey Wolf's Canadian operations are also subject to environmental
regulation pursuant to local, provincial and federal legislation which generally
require operations to be conducted in a safe and environmentally responsible
manner. Canadian environmental legislation provides for restrictions and
prohibitions relating to the discharge of air, soil and water pollutants and
other substances produced in association with certain crude oil and natural gas
industry operations, and environmental protection requirements, including
certain conditions of approval and laws relating to storage, handling,
transportation and disposal of materials or substances which may have an adverse
effect on the environment. Environmental legislation can affect the location of
wells and facilities and the extent to which exploration and development is
permitted. In addition, legislation requires that well and facilities sites be
abandoned and reclaimed to the satisfaction of provincial authorities. A breach
of such legislation may result in the imposition of fines or issuance of
clean-up orders.
Certain federal environmental laws that may affect Grey Wolf include the
Canadian Environmental Assessment Act which ensures that the environmental
effects of projects receive careful consideration prior to licenses or permits
being issued, to ensure that projects that are to be carried out in Canada or on
federal lands do not cause significant adverse environmental effects outside the
jurisdictions in which they are carried out, and to ensure that there is an
opportunity for public participation in the environmental assessment process;
the Canadian Environmental Protection Act ("CEPA") which is the most
comprehensive federal environmental statute in Canada, and which controls toxic
substances (broadly defined), includes standards relating to the discharge of
air, soil and water pollutants, provides for broad enforcement powers and
remedies and imposes significant penalties for violations; the National Energy
Board Act which can impose certain environmental protection conditions on
approvals issued under the Act; the Fisheries Act which prohibits the depositing
of a deleterious substance of any type in water frequented by fish or in any
place under any condition where such deleterious substance may enter any such
water and provides for significant penalties; the Navigable Waters Protection
Act which requires any work which is built in, on, over, under, through or
across any navigable water to be approved by the Minister of Transportation, and
84
which attracts severe penalties and remedies for non-compliance, including
removal of the work.
In Alberta, environmental compliance has been governed by the Alberta
Environmental Protection and Enhancement Act ("AEPEA") since September 1, 1993.
In addition to consolidating a variety of environmental statutes, the AEPEA also
imposes certain new environmental responsibilities on crude oil and natural gas
operators in Alberta. The AEPEA sets out environmental standards and compliance
for releases, clean-up and reporting. The Act provides for a broad range of
liabilities, enforcement actions and penalties.
We are not currently involved in any administrative, judicial or legal
proceedings arising under domestic or foreign Federal, state, or local
environmental protection laws and regulations, or under Federal or state common
law, which would have a material adverse effect on our financial position or
results of operations. Moreover, we maintain insurance against costs of clean-up
operations, but we are not fully insured against all such risks. A serious
incident of pollution may result in the suspension or cessation of operations in
the affected area.
We believe that we have obtained and are in compliance with all material
environmental permits, authorizations and approvals.
All of our oil and gas wells will require proper plugging and abandonment
when they are no longer producing. We post bonds with most regulatory agencies
to ensure compliance with our plugging responsibility. Plugging and abandonment
operations and associated reclamation of the surface production site are
important components of our environmental management system. We plan accordingly
for the ultimate disposition of properties that are no longer producing.
Title to Properties
As is customary in the natural gas and crude oil industry, we make only a
cursory review of title to undeveloped natural gas and crude oil leases at the
time we acquire them. However, before drilling commences, we require a thorough
title search to be conducted, and any material defects in title are remedied
prior to the time actual drilling of a well begins. To the extent title opinions
or other investigations reflect title defects, we, rather than the seller of the
undeveloped property, are typically obligated to cure any title defect at our
expense. If we were unable to remedy or cure any title defect of a nature such
that it would not be prudent to commence drilling operations on the property, we
could suffer a loss of our entire investment in the property. We believe that we
have good title to our natural gas and crude oil properties, some of which are
subject to immaterial encumbrances, easements and restrictions. The natural gas
and crude oil properties we own are also typically subject to royalty and other
similar non-cost bearing interests customary in the industry. We do not believe
that any of these encumbrances or burdens will materially affect our ownership
or use of our properties.
Employees
As of September 30, 2004, Abraxas had 48 full-time employees in the United
States, including 3 executive officers, 3 non-executive officers, 1 petroleum
engineer, 1 geologist, 6 managers, 1 landman, 12 secretarial and clerical
personnel and 21 field personnel. Additionally, Abraxas retains contract pumpers
on a month-to-month basis. Abraxas retains independent geological and
engineering consultants from time to time on a limited basis and expects to
continue to do so in the future.
As of September 30, 2004, Grey Wolf had 13 full-time employees, including 3
executive officers, 1 non-executive officer, 2 petroleum engineers, 2
geologists, 1 geophysicist, and 4 technical and clerical personnel.
Office Facilities
Our executive and administrative offices are located at 500 North Loop 1604
East, Suite 100, San Antonio, Texas 78232. We also have an office in Midland,
Texas. These offices, consisting of approximately 12,650 square feet in San
Antonio and 570 square feet in Midland, are leased until March 2006 at an
aggregate base rate of $20,943 per month.
85
Grey Wolf leases 7,350 square feet of office space in Calgary, Alberta
pursuant to a lease, which expires in April, 2008.
Other Properties
We own 10 acres of land, an office building, workshop, warehouse and house
in Sinton, Texas, 2.8 acres of land, an office building and 600 acres of fee
land in Scurry County, Texas and 160 acres of land in Coke County, Texas. All
three properties are used for the storage of tubulars and production equipment.
We also own 19 vehicles which are used in the field by employees. We own 2
workover rigs, which are used for servicing our wells.
Litigation
In 2001, the Company and a limited partnership, of which Wamsutter
Holdings, Inc. is the general partner (the "Partnership"), were named in a
lawsuit filed in U.S. District Court in the District of Wyoming. The claim
asserted breach of contract, fraud and negligent misrepresentation by the
Company and the Partnership related to the responsibility for year 2000 ad
valorem taxes on crude oil and natural gas properties sold by Abraxas and the
Partnership. In February 2002, a summary judgment was granted to the plaintiff
in this matter and a final judgment in the amount of $1.3 million was entered.
The Company and the Partnership appealed the District Court's judgment and on
November 3, 2004, the U.S. Court of Appeals for the 10th Circuit affirmed the
District Court's decision. On December 14, 2004, the U.S. Court of Appeals for
the 10th Circuit eneteed a mandate for the District Court of enforce the
judgement. As of December 27, 2004 the final judgement amount was approximately
$1.55 million (which includes accrued and unpaid interest since February 2002).
The Company has decided not to pursue further appeals and intends to pay its
portion of the final judgement, approximately $1 million, for which the Company
had previously established a reserve in the amount of $845,000.
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 September 30, 2004, 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.
86
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. The term of the Class I director of
Abraxas expires in 2006, the term of the Class II directors expires in 2005 and
the term of the Class III directors expires in 2007 (other than Mr. Phelps,
whose term expires in 2006).
Name and Municipality of Residence Age Office Class
Robert L. G. Watson, 54 Chairman of the Board, President and Chief III
San Antonio, Texas Executive Officer
Chris E. Williford, 53 Executive Vice President, Chief Financial --
San Antonio, Texas Officer and Treasurer
Robert W. Carington, Jr., 43 Executive Vice President --
San Antonio, Texas
Craig S. Bartlett, Jr., 71 Director II
Montclair, New Jersey
Franklin A. Burke, 70 Director I
Doyleston, Pennsylvania
Harold D. Carter, 65 Director III
Dallas, Texas
Ralph F. Cox, 72 Director II
Ft. Worth, Texas
Barry J. Galt, 71 Director III
Houston, Texas
Dennis E. Logue 60 Director II
Norman, Oklahoma
James C. Phelps, 82 Director III
San Antonio, Texas
Joseph A. Wagda, 61 Director II
Danville, California
Robert L. G. Watson has served as Chairman of the Board, President, Chief
Executive Officer and a director of Abraxas since 1977. From May 1996 to January
2003, Mr. Watson also served as Chairman of the Board and a director of Grey
Wolf Exploration Inc., which Abraxas sold in January 2003 and we refer to as Old
Grey Wolf. Since January 2003, he has served as Chairman of the Board and a
director of Grey Wolf. In November 1996, Mr. Watson was elected Chairman of the
Board, President and as a director of Canadian Abraxas, a former wholly-owned
Canadian subsidiary of Abraxas. Prior to joining Abraxas, Mr. Watson was
employed in various petroleum engineering positions with Tesoro Petroleum
Corporation, a natural gas and crude oil exploration and production company,
from 1972 through 1977, and DeGolyer and MacNaughton, an independent petroleum
engineering firm, from 1970 to 1972. Mr. Watson received a Bachelor of Science
degree in Mechanical Engineering from Southern Methodist University in 1972 and
a Master of Business Administration degree from the University of Texas at San
Antonio in 1974.
Chris E. Williford was elected Vice President, Treasurer and Chief
Financial Officer of Abraxas in January 1993, and as Executive Vice President
and a director of Abraxas in May 1993. In November 1996, Mr. Williford was
elected Vice President and Assistant Secretary of Canadian Abraxas. In December
1999, Mr. Williford resigned as a director of Abraxas. Prior to joining Abraxas,
Mr. Williford was Chief Financial Officer of American Natural Energy
Corporation, a natural gas and crude oil exploration and production company,
from July 1989 to December 1992 and President of Clark Resources Corp., a
natural gas and crude oil exploration and production company, from January 1987
87
to May 1989. Mr. Williford received a Bachelor of Science degree in Business
Administration from Pittsburgh State University in 1973.
Robert W. Carington, Jr. was elected Executive Vice President and a
director of Abraxas in July 1998. In December 1999, Mr. Carington resigned as a
director of Abraxas. Prior to joining Abraxas, Mr. Carington was a Managing
Director with Jefferies & Company, Inc. Prior to joining Jefferies & Company,
Inc. in January 1993, Mr. Carington was a Vice President at Howard, Weil,
Labouisse, Friedrichs, Inc. Prior to joining Howard, Weil, Labouisse,
Friedrichs, Inc., Mr. Carington was a petroleum engineer with Unocal Corporation
from 1983 to 1990. Mr. Carington received a Bachelor of Science in Mechanical
Engineering from Rice University in 1983 and a Masters of Business
Administration from the University of Houston in 1990.
Craig S. Bartlett Jr., a director of Abraxas since December 1999, has over
forty years of commercial banking experience, the most recent being with
National Westminster Bank USA, rising to the position of Executive Vice
President, Senior Lending Officer and Chairman of the Credit Policy Committee.
Mr. Bartlett currently serves on the board of NVR, Inc. and is active in
securities arbitration. Mr. Bartlett attended Princeton University, and has a
certificate in Advanced Management from Pennsylvania State University.
Franklin A. Burke, a director of Abraxas since June 1992, has served as
President and Treasurer of Venture Securities Corporation since 1971, where he
is in charge of research and portfolio management. He has also been a general
partner and director of Burke, Lawton, Brewer & Burke, a securities brokerage
firm, since 1964, where he is responsible for research and portfolio management.
Mr. Burke also serves as a director of Suburban Community Bank in Chalfont,
Pennsylvania. 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 Abraxas since October 2003.
Mr. Carter has more than 40 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 to 1989.
Mr. Carter consults for Associated Energy Managers, Inc. with respect to its
Energy Income Fund, L.P. and is a director of Brigham Exploration Company, and
Energy Partners, Ltd., both publicly traded companies, and Longview Production
Company, a private company. Mr. Carter was a director of Abraxas from 1996 to
1999 and served as an advisory director from 1999 to September 2003.
Ralph F. Cox, a director of Abraxas since December 1999, has over 45 years
of oil and gas industry experience, over thirty of which was with Arco. Mr. Cox
retired from Arco in 1985 after having become Vice Chairman. Mr. Cox then joined
what was known as Union Pacific Resources prior to its acquisition by Anadarko
Petroleum in July 2000, retiring in 1989 as President and Chief Operating
Officer. Mr. Cox then joined Greenhill Petroleum Corporation as President until
leaving in 1994 to pursue his consulting business. Mr. Cox has in the past and
continues to serve on many boards including CH2M Hill Companies, and is a
trustee for the Fidelity group of funds. Mr. Cox earned Petroleum and Mechanical
Engineering degrees from Texas A&M University with advanced studies at Emory
University.
Barry J. Galt, a director of Abraxas since October 2003, has served as a
director of Ocean Energy, Inc. since his retirement in 1999 until the
acquisition of Ocean by Devon Energy Corporation in April 2003. He served as
Chairman and Chief Executive Officer of Seagull Energy Corporation, the
predecessor to Ocean, from 1983 through 1998 and as Vice Chairman of Seagull
from January 1999 until May 1999. Prior to his employment by Seagull, Mr. Galt
acted as President and Chief Operating Officer of The Williams Companies. Mr.
Galt has also served as a director of Trinity Industries, Inc. since 1989, a
director of StanCorp Financial Group, Inc. since 1989 and a director of Dynegy
Inc. since September 2002.
Dennis E. Logue, a director of Abraxas since April 2003, is Dean and Fred
E. Brown Chair at the Michael F. Price College of business at the University of
Oklahoma. Prior to joining Price College in 2001, he was the Steven Roth
Professor at the Amos Tuck School at Dartmouth Collage where he had been since
1974. He is currently a director of Sallie Mae (GSE) and Waddell & Reed
Financial, Inc. He is also on the editorial boards of several scholarly
journals, including the Journal of Banking and Finance, the Journal of Portfolio
88
Management, and the Journal of Management Strategy Education. Mr. Logue holds
degrees from Fordham College, Rutgers, and Cornell University.
James C. Phelps, a director of Abraxas since December 1983, has been a
consultant to natural gas and crude oil exploration and production companies
such as Panhandle Producing Company and Tesoro Petroleum Corporation since April
1981. Mr. Phelps served as a director of Old Grey Wolf from January 1996 to
January 2003. From April 1995 to May 1996, Mr. Phelps served as Chairman of the
Board and Chief Executive Officer of Old Grey Wolf, and from January 1996 to May
1996, he served as President of Old Grey Wolf. From March 1983 to September
1984, he served as President of Osborn Heirs Company, a privately owned crude
oil exploration and production company based in San Antonio. Mr. Phelps was
President and Chief Operating Officer of Tesoro Petroleum Corporation from 1971
to 1981 and prior to that was Senior Vice President and Assistant to the
President of Continental Oil Company. He received a Bachelor of Science degree
in Industrial Engineering and a Master of Science degree in Industrial
Engineering from Oklahoma State University.
Joseph A. Wagda, a director of Abraxas since December 1999, has been
involved in a variety of business activities over a twenty-nine year career.
From 2000 to the present, Mr. Wagda has been Chief Executive Officer and a
director of BrightStar Information Technology Group, Inc., an information
technology company, and was named Chairman in 2001. He also is an attorney and
president of Altamont Capital Management, Inc., where he was involved from 1997
to 2001 in a number of investment projects as an investor and consultant,
including leadership roles as a member of Campus in 1999 to 2000 and as a
managing member of AltaNet Partners, LLC from 2000. Previously, Mr. Wagda was
President and Chief Executive Officer of American Heritage Group, Inc., a
modular home builder, and a Senior Managing Director and co-founder of the Price
Waterhouse corporate finance practice. He also served with the finance staff of
Chevron Corporation and in the general counsel's office at Ford Motor Company.
Mr. Wagda received an undergraduate degree from Fordham College, a Masters of
Business Administration, with distinction, from the Johnson Graduate School of
Management, Cornell University, and a JD, with honors, from Rutgers University.
89
EXECUTIVE COMPENSATION
Compensation Summary
The following table sets forth a summary of compensation for the fiscal
years ended December 31, 2001, 2002 and 2003 paid by Abraxas to Robert L.G.
Watson, Abraxas' Chairman of the Board, President and Chief Executive Officer,
Chris E. Williford, Abraxas' Executive Vice President, Chief Financial Officer
and Treasurer, Robert W. Carington, Jr., Abraxas' Executive Vice President, Lee
T. Billingsley, Abraxas' Vice President--Exploration, and to William H. Wallace,
Abraxas' Vice President--Operations.
Summary Compensation Table
Long Term
Compensation
Awards -
Securities
Underlying
Name and Principal Position Year Salary($) Bonus($) Options (#)
------ --------- ---------- ------------
Annual Compensation
---------------------------------------
Robert L. G. Watson, 2001 $259,615 $27,388 60,000
Chairman of the Board, 2002 $271,442 $24,592 90,000
President and Chief Executive 2003 $291,750 $200,200 (1) 0
Officer
Chris E. Williford, 2001 $155,769 $16,433 20,000
Executive Vice President, 2002 $163,653 $14,848 43,000
Chief Financial Officer and Treasurer 2003 $175,615 $120,400 (2) 0
Robert W. Carington, Jr., 2001 $207,629 $21,910 20,000
Executive Vice President 2002 $215,577 $19,488 55,000
2003 $225,961 $154,000 (3) 0
Lee T. Billingsley 2001 $134,077 $10,331 15,000
Vice President-- 2002 $156,885 $9,792 22,000
Exploration 2003 $168,346 $42,023 (4) 0
William H. Wallace, 2001 $131,577 $10,331 15,000
Vice President-- 2002 $156,885 $9,792 22,000
Operations 2003 $168,346 $42,023 (4) 0
-------------------
(1) Of this amount, $177,719 will be paid in cash and $22,481 in restricted
stock.*
(2) Of this amount, $101,051 will be paid in cash and $19,349 in restricted
stock.*
(3) Of this amount, $121,211 will be paid in cash and $32,789 in restricted
stock.*
(4) Of this amount, $32,123 will be paid in cash and $9,900 in restricted
stock.*
* The number of shares of stock was determined based upon a price of
$2.69 per share, which was the closing price of the Company's common
stock on the AMEX on April 15, 2004.
Grants of Stock Options and Stock Appreciation Rights During the Fiscal Year
Ended December 31, 2003
Pursuant to the Abraxas Petroleum Corporation 1984 Incentive Stock Option
Plan (the "ISO Plan"), the Abraxas Petroleum Corporation 1993 Key Contributor
Stock Option Plan (the "1993 Plan"), and the Abraxas Petroleum Corporation 1994
Long Term Incentive Plan (the "LTIP"), Abraxas grants to its employees and
officers (including its directors who are also employees) incentive stock
options and non-qualified stock options. The ISO Plan, the 1993 Plan, and the
LTIP are administered by the Compensation Committee which, based upon the
recommendation of the Chief Executive Officer, determines the number of shares
subject to each option.
90
Option Grants in Fiscal Year 2003
No options were granted to Messers. Watson, Williford, Carington and
Wallace or Dr. Billingsley during 2003.
Aggregated Option Exercises in Fiscal 2003 and Fiscal Year End Option Values
The table below contains certain information concerning exercises of stock
options during the fiscal year ended December 31, 2003, by Messrs. Watson,
Williford, Carington and Wallace and Dr. Billingsley and the fiscal year end
value of unexercised options held by Messrs. Watson, Williford, Carington and
Wallace and Dr. Billingsley.
Option Exercises in Fiscal Year
Shares Value Number of Unexercised Options Value of Unexercised Options
Acquired By Realized on December 31, 2003(#) on December 31, 2003 ($)
Name Exercise(#) ($) Exercisable/Unexercisable(1) Exercisable/Unexercisable
------------------ ----------- --- ---------------------------- -------------------------
Robert L. G. Watson 2,019 0 592,167/134,358 337,535/76,584
Chris E. Williford 20,000 0 185,750/52,250 105,878/29,783
Robert W. Carington, Jr. 0 0 373,750/61,250 213,038/34,913
Lee T. Billingsley 0 0 101,000/39,000 57,570/22,230
William H. Wallace 0 0 63,500/39,000 36,195/22,230
Employment Agreements
Abraxas has entered into employment agreements with each of Messrs. Watson,
Williford, Carington and Wallace and with Dr. Billingsley pursuant to which each
of Messrs. Watson, Williford, Carington and Wallace and Dr. Billingsley will
receive compensation as determined from time to time by the board in its sole
discretion.
The employment agreements for Messrs. Watson, Williford, and Carington are
scheduled to terminate on December 21, 2004, and shall be automatically extended
for additional one-year terms unless Abraxas gives the officer 120 days notice
prior to the expiration of the original term or any extension thereof of its
intention not to renew the employment agreement. If, during the term of the
employment agreements for each of such officers, the officer's employment is
terminated by Abraxas other than for cause or disability, by the officer other
than by reason of such officer's death or retirement, or by the officer, for
"good reason" (as defined in each officer's respective employment agreement),
then such officer will be entitled to receive a lump sum payment equal to the
greater of (a) his annual base salary for the last full year during which he was
employed by Abraxas or (b) his annual base salary for the remainder of the term
of each of their respective employment agreements.
If a change of control occurs during the term of the employment agreement
for Mr. Watson, Mr. Williford or Mr. Carington, and if subsequent to such change
of control, such officer's employment is terminated by Abraxas other than for
cause or disability, by reason of the officer's death or retirement or by such
officer, for good reason, then such officer will be entitled to the following,
as applicable:
Mr. Watson:
(1) if such termination occurs prior to the end of the first
year of the initial term of his employment agreement, a lump
sum payment equal to five times his annual base salary;
(2) if such termination occurs after the end of the first year
of the initial term of his employment agreement but prior to
the end of the second year of the initial term of his
employment agreement, a lump sum payment equal to four times
his annual base salary;
(3) if such termination occurs after the end of the second
year of the initial term of his employment agreement but prior
to the end of the third year of the initial term of his
employment agreement, a lump sum payment equal to three times
his annual base salary; and
91
(4) if such termination occurs after the end of the third year
of the initial term of his employment agreement a lump sum
payment equal to 2.99 times his annual base salary.
Mr. Williford or Mr. Carington:
(1) if such termination occurs prior to the end of the first
year of the initial term of the officer's employment
agreement, a lump sum payment equal to four times the
officer's annual base salary;
(2) if such termination occurs after the end of the first year
of the initial term of the officer's employment agreement but
prior to the end of the second year of the initial term of the
employment agreement, a lump sum payment equal to three times
the officer's annual base salary; and
(3) if such termination occurs after the end of the second
year of the initial term of the officer's employment
agreement, a lump sum payment equal to 2.99 times the
officer's annual base salary.
Abraxas has entered into employment agreements with Mr. Wallace and Dr.
Billingsley pursuant to which each of Mr. Wallace and Dr. Billingsley will
receive compensation as determined from time to time by the board in its sole
discretion. The employment agreements, originally scheduled to terminate on
December 31, 1998 for Dr. Billingsley and December 31, 2000 for Mr. Wallace,
were automatically extended and will terminate on December 31, 2004, and may be
automatically extended for an additional year if by December 1 of the prior year
neither Abraxas nor Mr. Wallace or Dr. Billingsley, as the case may be, has
given notice to the contrary. Except in the event of a change in control, at all
times during the term of the employment agreements, each of Mr. Wallace's and
Dr. Billingsley's employment is at will and may be terminated by Abraxas 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.
Wallace's and Dr. Billingsley's employment agreement is automatically extended
to a date no earlier than three years following the effective date of such
change in control. If, following a change in control, either Mr. Wallace's or
Dr. Billingsley's employment is terminated other than for Cause (as defined in
each of the employment agreements) or Disability (as defined in each of the
Employment Agreements), by reason of Mr. Wallace's or Dr. Billingsley's death or
retirement or by Mr. Wallace or Dr. Billingsley, as the case may be, for Good
Reason (as defined in each of the employment agreements), then the terminated
officer will be entitled to receive a lump sum payment equal to three times his
annual base salary.
If any lump sum payment to Messrs. Watson, Williford, Carington, Wallace or
Dr. Billingsley would individually or together with any other amounts paid or
payable constitute an "excess parachute payment" within the meaning of Section
280G of the Internal Revenue Code of 1986, as amended, and applicable
regulations there under, the amounts to be paid will be increased so that
Messrs. Watson, Williford, Carington, Wallace or Dr. Billingsley, as the case
may be, will be entitled to receive the amount of compensation provided in his
contract after payment of the tax imposed by Section 280G.
Compensation of Directors
Stock Options. In 1999, each of Messrs. Bartlett, Cox and Wagda were each
granted options to purchase 75,000 shares of common stock at an exercise price
of $0.98 per share. In April 2003, Mr. Burke was granted options to purchase
45,000 shares of common stock at an exercise price of $0.68 and Mr. Phelps was
granted options to purchase 43,000 shares at an exercise price of $0.68. In
September 2003, Mr. Carter was granted options to purchase 45,000 shares of
common stock and Mr. Galt was granted options to purchase 75,000 shares of
common stock each at an exercise price of $1.01.
Other Compensation. During 2003, each director who was not an employee of
Abraxas or its affiliates, received an annual fee of $8,000 plus $1,000 for each
board meeting attended and $500 for each committee meeting attended. Aggregate
fees paid to directors in 2003 were $149,400. Except for the foregoing, the
directors of Abraxas received no other compensation for services as directors,
except for reimbursement of travel expenses to attend board meetings.
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DESCRIPTION OF THE EXCHANGE NOTES
General
Abraxas issued the outstanding notes and will issue the exchange notes
under an indenture among Abraxas, its subsidiaries named in the indenture as
initial subsidiary guarantors and U.S. Bank National Association, as trustee.
The terms of the notes include those expressly set forth in the indenture and
those made part of the indenture by reference to the Trust Indenture Act of
1939. The intercreditor agreement and other collateral documents described under
"--Security" and "Intercreditor Agreement" define the terms of the security
interests securing the notes and the note guarantees.
The following description is an overview of the material provisions of the
notes, the indenture and the intercreditor agreement and other collateral
documents and it does not contain all of the information that may be important
to you. Since the following description does not purport to be complete, it is
qualified in its entirety by reference to all of the provisions of those
documents, including the definitions of certain terms, and to the Trust
Indenture Act of 1939, and we urge you to carefully read the indenture and the
intercreditor agreement and other collateral documents and the information
contained in this prospectus before you decide to invest in the notes.
You will find the definitions of certain capitalized terms used in this
"Description of the Exchange Notes" under "--Certain Definitions." Certain other
defined terms used in this "Description of the Exchange Notes" but not defined
under "--Certain Definitions" have the meanings assigned to them in the
indenture. In this "Description of the Exchange Notes,"
o references to "interest" include any additional or default interest
payable at the time in question, the term "Abraxas" refers only to
Abraxas Petroleum Corporation and does not include any of its existing
or future subsidiaries;
o the term "Grey Wolf" refers to Grey Wolf Exploration Inc. and its
future subsidiaries;
o references to "we," "our" and "us" refer to Abraxas and its existing
and future restricted subsidiaries, which excludes Grey Wolf; and
o references to the Revolving Credit Facility, the Bridge Loan and the
Grey Wolf Term Loan refer to our new $15 million senior secured
revolving credit facility, our new $25 million second lien increasing
rate bridge loan and Grey Wolf's new $35 million senior secured term
loan, respectively, described in this prospectus under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Long-Term Indebtedness."
Brief Description of the Notes and the Subsidiary Guarantees; Ranking and Lien
Priority
The Notes
The Notes are:
o general obligations of Abraxas;
o unconditionally Guaranteed, on a senior secured basis in accordance
with the provisions of the Intercreditor Agreement, by (1) all current
Subsidiaries of Abraxas, other than Grey Wolf (so long as Grey Wolf is
neither a Restricted Subsidiary nor a Guarantor of any of our other
Indebtedness), (2) all future Restricted Subsidiaries and (3) any other
Affiliate of Abraxas that Guarantees any of our other Indebtedness (see
"--Subsidiary Guarantees of Notes");
o secured, together with the Revolving Credit Facility Obligations, by a
shared first priority perfected security interest (subject to Permitted
Prior Liens) in all material real and personal property and assets of
Abraxas and its Restricted Subsidiaries, including, without limitation,
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(1) substantially all of our natural gas and crude oil properties and
(2) all of the Capital Stock (or in the case of a Foreign Unrestricted
Subsidiary, up to 65% of the outstanding Capital Stock) in any company
or other entity, including, without limitation, in each of our
Subsidiaries other than Grey Wolf, that is owned by Abraxas and the
Restricted Subsidiaries, as more fully described under "--Security" and
"Intercreditor Agreement;"
o rank senior in right of payment to all existing and future Subordinated
Indebtedness of Abraxas, including, without limitation, the Bridge Loan
Obligations; and
o rank effectively senior in right of payment to all existing and future
unsecured Indebtedness of Abraxas to the extent of the value of the
Collateral available to the holders of the Notes.
The provisions of the Intercreditor Agreement provide for Abraxas to make
payments in respect of the Secured Obligations to the Collateral Agent during
the existence of an Event of Default, or an "event of default" under the
Revolving Credit Facility or the Bridge Loan, of which notice thereof has been
given to the parties to the Intercreditor Agreement by the Trustee, the
Revolving Credit Facility Administrative Agent or the Bridge Loan Administrative
Agent. The Collateral Agent will be required to apply such amounts during the
existence of such an Event of Default (or such an "event of default"), together
with amounts received from the Subsidiary Guarantors and any proceeds from any
disposition of the Collateral,
o if a minimum collateral coverage ratio equal to three times the
outstanding Revolving Credit Facility Obligations is then met, (i) to
the payment of interest on the Notes only if and when all accrued and
unpaid interest on the Revolving Credit Facility Obligations has been
paid and (ii) to the payment of principal of the Notes only if and when
the outstanding principal of the Revolving Credit Facility has been
repaid; or
o if such minimum collateral coverage ratio is not then met, to the
payment of interest on and principal of the Notes only if and when all
outstanding interest on and principal of the Revolving Credit Facility
have been paid. See "Intercreditor Agreement--Priority of
Distributions."
The Subsidiary Guarantees
The Notes are Guaranteed by each current Subsidiary of Abraxas, other than
Grey Wolf (so long as Grey Wolf is neither a Restricted Subsidiary nor a
Guarantor of any of our other Indebtedness). The Notes will also be Guaranteed
by all future Restricted Subsidiaries and any other Affiliate of Abraxas that
Guarantees any of our other Indebtedness. See "--Subsidiary Guarantees of
Notes." Each such Subsidiary Guarantee:
o is a general obligation of the respective Subsidiary Guarantor;
o is secured, together with the respective Subsidiary Guarantor's
Guarantee of the Revolving Credit Facility Obligations, by a shared
first priority perfected security interest (subject to Permitted Prior
Liens) in all of such Subsidiary Guarantor's material real and personal
property and assets, including, without limitation, (1) substantially
all of its natural gas and crude oil properties and (2) all of the
Capital Stock (or in the case of a Foreign Unrestricted Subsidiary, up
to 65% of the outstanding Capital Stock) in any company or other
entity, including, without limitation, in each Subsidiary of such
Subsidiary Guarantor, that is owned by such Subsidiary Guarantor, as
more fully described under "--Security" and "Intercreditor Agreement;"
o ranks senior in right of payment to all existing and future
Subordinated Indebtedness of the respective Subsidiary Guarantor,
including, without limitation, its Guarantee of the Bridge Loan
Obligations; and
o ranks effectively senior in right of payment to all existing and future
unsecured Indebtedness of the respective Subsidiary Guarantor to the
extent of the value of the Collateral available to the holders of the
Notes.
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The provisions of the Intercreditor Agreement provide for the Subsidiary
Guarantors to make payments in respect of the Secured Obligations to the
Collateral Agent during the existence of an Event of Default, or an "event of
default" under the Revolving Credit Facility or the Bridge Loan, of which notice
thereof has been given to the parties to the Intercreditor Agreement by the
Trustee, the Revolving Credit Facility Administrative Agent or the Bridge Loan
Administrative Agent. The Collateral Agent will be required to apply such
amounts during the existence of such an Event of Default (or such an "event of
default"), together with amounts received from Abraxas and any proceeds from the
disposition of any Collateral,
o if a minimum collateral coverage ratio equal to three times the
outstanding Revolving Credit Facility Obligations is then met, (i) to
the payment of interest on the Notes only if and when all accrued and
unpaid interest on the Revolving Credit Facility Obligations has been
paid and (ii) to the payment of principal of the Notes only if and when
the outstanding principal of the Revolving Credit Facility has been
repaid; or
o if such minimum collateral coverage ratio is not then met, to the
payment of interest on and principal of the Notes only if and when all
outstanding interest on and principal of the Revolving Credit Facility
have been paid. See "Intercreditor Agreement--Priority of
Distributions."
Each Subsidiary of Abraxas on October 28, 2004, other than Grey Wolf, is a
Subsidiary Guarantor and a Restricted Subsidiary. However, Abraxas is permitted
to designate one or more of its Subsidiaries (whether or not any such Subsidiary
was a Subsidiary of Abraxas on October 28, 2004) as an Unrestricted Subsidiary
if certain conditions described in the definition of Unrestricted Subsidiary
under "--Certain Definitions" are satisfied. Unrestricted Subsidiaries are not
subject to many of the restrictive covenants in the Indenture, and neither
Guarantee the Notes (unless such Unrestricted Subsidiary is also then
Guaranteeing any of our other Indebtedness) nor grant any Lien in their property
or assets to secure the repayment of the Notes.
Grey Wolf is currently designated as an Unrestricted Subsidiary and is not
permitted to become a Restricted Subsidiary until 91 days after all of the
Bridge Loan Obligations are repaid in full and the Bridge Loan is terminated.
Unless Grey Wolf subsequently becomes a Restricted Subsidiary or Guarantees any
of our other Indebtedness, Grey Wolf is not required to become a Subsidiary
Guarantor.
Principal, Maturity and Interest
The Notes:
o are limited in aggregate principal amount to $125.0 million;
o mature on December 1, 2009;
o were issued in denominations of $1,000 and integral multiples of
$1,000; and
o are represented by one or more registered notes in global form, but in
certain limited circumstances may be represented by notes in definitive
form (see "Book Entry; Delivery and Form").
Interest on the Notes:
o accrues at a per annum floating rate of Six-Month LIBOR plus 7.50%,
with an initial interest rate of 9.72% per annum;
o resets semiannually on June 1 and December 1 of each year, commencing
on June 1, 2005;
o is payable semiannually in arrears on June 1 and December 1 of each
year, commencing on June 1, 2005; provided, that, if any such day is
not a Business Day, such interest payment date will be the next
succeeding Business Day;
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o is payable to the holders of record on the 15th day of the month
immediately preceding the month in which the related interest payment
date occurs;
o accrues from and including the most recent date on which interest has
been paid or, if no interest has been paid, from and including the date
of issuance, until but excluding the date upon which the principal
thereof is paid or duly provided for in accordance with the Indenture;
and
o is computed on the basis of a 360-day year.
The interest rate on the Notes is subject to increase in certain
circumstances if Abraxas and the Subsidiary Guarantors do not file a
registration statement relating to a registered exchange offer for the Notes,
or, in lieu thereof, a resale shelf registration statement for the Notes, if
such registration statement is not declared effective on a timely basis or if
certain other conditions are not satisfied, all as further described under
"Exchange and Registration Rights Agreement."
All percentages resulting from any calculation on the Notes will be
rounded, if necessary, to the nearest one hundred-thousandth of a percentage
point with five one-millionths of a percentage point rounded upward (e.g.,
9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)), and all U.S.
dollar amounts used in or resulting from such calculation on the Notes will be
rounded to the nearest cent (with one-half cent being rounded upward).
Abraxas will pay principal of, and premium, if any, and interest on, the
Notes, and the Notes will be transferable, at the office or agency designated by
Abraxas within the City and State of New York. In addition, in the event a Note
is not in book-entry form, Abraxas may pay interest, at its option, by check
mailed to the registered holder of such Note at its registered address as set
forth in the Note Register. No service charge will be made for any transfer or
exchange of Notes, but Abraxas or the Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge that may be payable in
connection with such transfer or exchange.
Security
The payment of the Note Obligations, the Revolving Credit Facility
Obligations and the Bridge Loan Obligations, when due (whether on an interest
payment date, at maturity, by acceleration, repurchase, redemption or otherwise
and whether by Abraxas pursuant to the Notes, the Revolving Credit Facility or
the Bridge Loan or by any Guarantor pursuant to a Guarantee thereof), and the
performance of all other obligations of Abraxas, the Restricted Subsidiaries and
the Subsidiary Guarantors, are secured as provided in the Intercreditor
Agreement and other Collateral Documents.
Notwithstanding the time, order or method of attachment of the Collateral
Agent's Liens upon any Collateral, the time or order of filing or recording of
financing statements or other documents filed or recorded to perfect any Lien
upon any Collateral, the time of taking possession or control over any
Collateral or the rules for determining priority under the Uniform Commercial
Code or any other law governing relative priorities of secured creditors, as
among the Secured Parties, the holders of the Note Obligations, together with
the holders of the Revolving Credit Facility Obligations, will be entitled to be
paid first out of the proceeds, if any, of the Collateral, subject to Permitted
Liens and subject to and in accordance with the provisions of the Intercreditor
Agreement as described under "Intercreditor Agreement."
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Collateral Agent
Pursuant to the Intercreditor Agreement, Abraxas and the Trustee, together
with the Revolving Credit Facility Administrative Agent and the Bridge Loan
Administrative Agent, have appointed U.S. Bank National Association to serve as
the Collateral Agent for the benefit of the holders of the Secured Obligations,
including the Notes, from time to time. The Intercreditor Agreement provides
that the Collateral Agent may not be the same institution serving as either the
Revolving Credit Facility Administrative Agent or the Bridge Loan Administrative
Agent.
The Intercreditor Agreement provides that the Collateral Agent is subject
to such directions as may be given to it by the Control Party from time to time
as required or permitted by the Indenture, the Revolving Credit Facility and the
Bridge Loan, as applicable. The relative rights with respect to control of the
Collateral Agent are specified in the Intercreditor Agreement and are described
under "Intercreditor Agreement." Except as directed by the Control Party, the
Collateral Agent will not be obligated to act upon directions purported to be
delivered to it by any other Person, to foreclose upon or otherwise enforce any
Lien or to take any other action whatsoever with regard to any or all of the
Collateral Documents, the Liens created thereby or the Collateral. See
"Intercreditor Agreement."
Collateral; After-Acquired Property
In accordance with the Intercreditor Agreement and other Collateral
Documents, the Note Obligations, together with the Revolving Credit Facility
Obligations, are secured by a shared first priority perfected security interest
(to the extent attainable by filing, recordation or possession, and subject to
Permitted Prior Liens), and the Bridge Loan Obligations is secured by a second
priority perfected security interest (to the extent attainable by filing,
recordation or possession, and subject to Permitted Liens), in all material real
and personal property and assets of Abraxas and its Restricted Subsidiaries,
including, without limitation,
o all natural gas and crude oil properties of Abraxas and the Restricted
Subsidiaries (other than any such properties which, together with any
other such properties not securing the Secured Obligations, do not at
any time have either an aggregate PV-10 or an aggregate fair market
acreage value exceeding $250,000), and all additions and improvements
thereto and replacements thereof;
o all assets deposited or required to be deposited in a Collateral
Account;
o all of the Capital Stock in any company or other entity, including,
without limitation, in each of our existing and future Subsidiaries
other than Grey Wolf, that is owned by Abraxas and the Restricted
Subsidiaries; provided, that, in no event will more than 65% of the
outstanding Capital Stock of any Foreign Unrestricted Subsidiary be
required to be pledged as security for the Secured Obligations; and
o all proceeds of the foregoing.
The Bridge Loan Obligations (but not the Note Obligations or the Revolving
Credit Facility Obligations) are also secured by a first priority perfected
security interest in all of the Capital Stock of Grey Wolf owned by Abraxas and
its Subsidiaries.
Neither the Notes nor the Subsidiary Guarantees is secured by a Lien on any
property or asset of Grey Wolf (so long as Grey Wolf is not a Restricted
Subsidiary). The Indenture also permits Abraxas and the Restricted Subsidiaries
to create Permitted Liens.
The Indenture, the Intercreditor Agreement and other Collateral Documents
require that Abraxas and each of the Restricted Subsidiaries grant to the
Collateral Agent a shared first priority perfected security interest (subject to
Permitted Prior Liens) in all After-Acquired Property of the kinds included in
the Collateral for the benefit of the holders of the Note Obligations and the
holders of the Revolving Credit Facility Obligations and a second priority
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perfected security interest (subject to Permitted Prior Liens) in all
After-Acquired Property of the kinds included in the Collateral for the benefit
of the holders of the Bridge Loan Obligations. In addition, each future
Restricted Subsidiary, if any, will be required to similarly grant security
interests in its properties and assets of the kinds included in the Collateral.
If Abraxas or any Restricted Subsidiary at any time acquires or otherwise
owns any property or asset of the kind included in the Collateral that is not
subject to a valid and enforceable first priority perfected security interest
(subject to Permitted Prior Liens) in favor of the Collateral Agent as security
for the Note Obligations, then Abraxas will be required to, or will be required
to cause that Restricted Subsidiary to, as soon as practicable, but in any event
within 15 days with respect to clauses (1) and (2) below, and within 30 days
with respect to clauses (3) and (4) below, of the earlier of such acquisition or
of the day an officer of Abraxas or a Restricted Subsidiary has knowledge or
should have reasonably known of any such deficiency with respect to any such
property or asset:
(1) execute and deliver to the Collateral Agent one or more
joinder agreements to the applicable Collateral Documents and any other
security agreement, pledge agreement, stock power or other instrument
requested by the Collateral Agent, each in form and substance
reasonably satisfactory to the Collateral Agent, required to grant a
security interest in such Collateral in favor of the Collateral Agent
for the benefit of the holders of the Note Obligations;
(2) deliver to the Collateral Agent and the Trustee one or
more opinions of counsel reasonably satisfactory to the Collateral
Agent and the Trustee with respect to the matters set forth in clause
(1) above;
(3) cause the Liens granted in each Collateral Document to be
duly perfected first priority security interests (subject to Permitted
Prior Liens) in favor of the Collateral Agent, including by pledging
any Capital Stock constituting such Collateral as appropriate, and
cause each other Lien upon such Collateral to be (a) released, unless
it is a Permitted Prior Lien, or (b) subordinated, whether by agreement
or operation of law, to the Collateral Agent's Liens for the benefit of
holders of the Note Obligations if it is a Permitted Lien but not a
Permitted Prior Lien; and
(4) deliver to the Collateral Agent and the Trustee one or
more opinions of counsel reasonably satisfactory to the Collateral
Agent and the Trustee with respect to lien perfection matters set forth
in clause (3) above.
The Indenture permits the release of Collateral without the substitution of
additional Collateral under circumstances described under "--Possession, Use and
Release of Collateral," "--Disposition of Collateral Without Release,"
"--Repurchase at the Option of Holders Upon the Occurrence of Certain Asset
Sales" and "--Certain Covenants--Limitation on Asset Sales." Collateral of a
Subsidiary Guarantor will also be released as security for the Note Obligations
upon the release of such Subsidiary Guarantee under circumstances described
under "--Subsidiary Guarantee of the Notes," unless such Subsidiary Guarantor is
thereafter a Restricted Subsidiary.
Enforcement and Foreclosure
If a Default or Event of Default occurs under the Indenture, the Trustee,
on behalf of the holders of the Notes, in addition to any rights or remedies
available to it under the Indenture, will be entitled to take such actions as
the Trustee deems advisable to protect and enforce its rights in the Collateral
for the holders of the Note Obligations, including, without limitation,
instituting foreclosure proceedings in accordance with applicable law. However,
the rights and remedies available to the Trustee under the Indenture or
otherwise, and the actions permitted to be taken by it under the Indenture or
otherwise, are limited by the provisions of the Intercreditor Agreement and
other Collateral Documents. See "Risk Factors--Risks Related to the Notes--In
certain circumstances, lenders under Abraxas' bridge loan may be entitled to
direct certain asset sales and control certain rights and remedies with respect
to the collateral pledged to secure the notes and the subsidiary guarantees" and
"Intercreditor Agreement."
Subject to our ability to dispose of Collateral and cause Liens thereon to
be released in accordance with the Indenture, under the terms of the
Intercreditor Agreement and other Collateral Documents (see "--Possession, Use
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and Release of Collateral" and "--Disposition of Collateral Without Release"),
the Collateral Agent (upon the written instructions of the Control Party) will
determine the circumstances under and manner in which to dispose of the
Collateral, including, without limitation, the determination of whether to
release all or any portion of the Collateral from the Liens created by the
Collateral Documents and whether to foreclose on the Collateral following an
Event of Default. See "Intercreditor Agreement."
The rights of the Collateral Agent to repossess and dispose of Collateral
could be significantly impaired by restrictions under bankruptcy or other
applicable laws. See "Risk Factors--Risks Related to the Notes--Bankruptcy laws
may limit your ability to realize value from the collateral" and "--Certain
Bankruptcy Limitations." In addition, the Collateral Agent may need to evaluate
the impact of potential liabilities before determining to foreclose on the
Collateral. For example, a lender that purchases real property through a
foreclosure of its security interest in that real property may be held liable
under environmental laws for the costs of remediating or preventing release or
threatened release of hazardous substances at the secured property. In this
regard, the Collateral Agent may decline to foreclose on the secured property or
exercise remedies otherwise available if it does not receive indemnification to
its satisfaction from the holders of the Secured Obligations. Finally, the
Collateral Agent's ability to foreclose on the Collateral on behalf of the
holders of the Notes may be subject to lack of perfection, the consent of third
parties (including the holders of the other Secured Obligations), prior Liens
and practical problems associated with the realization of the Collateral Agent's
Lien on the Collateral. See "Intercreditor Agreement."
Priority of Distributions After an Event of Default
Subject to the terms of the Intercreditor Agreement, upon notice of an
Event of Default (or an "event of default" under either the Revolving Credit
Facility or the Bridge Loan) and for so long as that Event of Default (or that
"event of default") exists, all funds received by the Collateral Agent in
respect of the Secured Obligations will be distributed promptly by the
Collateral Agent in the order of priority described under "Intercreditor
Agreement--Priority of Distributions."
Abraxas cannot assure you that proceeds of any sale of the Collateral
pursuant to the Indenture and the related Collateral Documents following an
Event of Default will be sufficient to satisfy amounts due under the Notes. The
amounts realizable by the Collateral Agent in respect of the Collateral in the
event of a foreclosure or liquidation will depend upon market and economic
conditions at such time, the availability of buyers, certain existing Liens and
similar factors. In addition, the Collateral Agent will not have any Lien on any
of the properties or assets of Grey Wolf (so long as Grey Wolf is not a
Restricted Subsidiary). See "Risk Factors--Risks Related to the Notes--The
collateral pledged to secure the notes may be inadequate to satisfy all amounts
due and owing to the holders of our notes." If the proceeds of the Collateral
are not sufficient to repay all amounts due on the Notes, the holders of the
Notes (to the extent not repaid from the proceeds of the sale of the Collateral)
will have only an unsecured claim against the remaining assets, if any, of
Abraxas and the Subsidiary Guarantors.
Possession, Use and Release of Collateral
Subject to and in accordance with the terms of the Intercreditor Agreement
and other Collateral Documents, so long as the Collateral Agent has not
exercised its rights with respect to the Collateral during the existence of an
Event of Default, Abraxas and the Restricted Subsidiaries have the right to
remain in possession and retain exclusive control of the Collateral, to operate
the Collateral, to alter or repair the Collateral and to collect, invest and
dispose of any income therefrom.
Abraxas and the Restricted Subsidiaries have the right to obtain a release
of items of Collateral (including property and assets owned by a Restricted
Subsidiary of which the Capital Stock is being sold in compliance with the terms
of the Indenture and which following such sale will not be a Restricted
Subsidiary), other than certain Trust Monies, that are subject to an Asset Sale
or other disposition permitted by the terms of the Indenture (see "--Disposition
of Collateral Without Release"). See "Risk Factors--Risks Related to the
Notes--The terms of the notes permit, without the consent of holders of the
notes or the trustee under the indenture, releases of collateral pledged to
secure the notes in certain circumstances." In such event, the Collateral Agent
will release such Collateral from the Lien of the relevant Collateral Document
and reconvey such Collateral to Abraxas or the applicable Restricted Subsidiary,
as the case may be, so long as such release complies with the Trust Indenture
Act and is not otherwise restricted by the Intercreditor Agreement, upon
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delivery by Abraxas to the Collateral Agent, with a copy to the Trustee, of the
following:
(1) a notice from Abraxas requesting the release of specified
Collateral, which notice:
(a) specifically describes the Collateral requested
to be released;
(b) specifies the fair market value of such
Collateral (which, in the case of a sale of Capital Stock of a
Restricted Subsidiary resulting in it no longer being a Restricted
Subsidiary, means the fair market value of such Capital Stock) as of a
date within 60 days of such notice (as determined in good faith by the
Board of Directors of Abraxas and evidenced by a Board Resolution
delivered to the Collateral Agent and the Trustee or, solely with
respect to Collateral in an amount not exceeding $1.0 million, as
determined in good faith by the chief executive officer of Abraxas and
evidenced by an Officers' Certificate delivered to the Collateral Agent
and the Trustee);
(c) states (i) that the consideration to be received
in respect of such Collateral is at least equal to the fair market
value of such Collateral (which, in the case of a sale of Capital Stock
of a Restricted Subsidiary resulting in it no longer being a Restricted
Subsidiary, means the fair market value of such Capital Stock) or (ii)
with respect to an interest in Farmout Property to be conveyed to a
farmee under a Farmout Agreement, that such Farmout Agreement is a
Permitted Farmout Agreement;
(d) states that the release of such Collateral will
not materially and adversely impair the value of the remaining
Collateral, taken as a whole, or interfere with the Collateral Agent's
ability to realize such value and will not impair the maintenance and
operation of the remaining Collateral, taken as a whole;
(e) confirms that the sale or other disposition of,
or an agreement to sell or otherwise dispose of, the Collateral
requested to be released is a bona fide sale or other disposition to a
Person that is not an Affiliate of Abraxas or, in the event that such
sale or other disposition is to a Person that is an Affiliate of
Abraxas, confirming that such sale or other disposition is made in
compliance with the covenant described under "--Certain
Covenants--Limitation on Transactions with Affiliates;"
(f) certifies that the sale or other disposition of
the Collateral requested to be released complies with the terms and
conditions of the Indenture and the Intercreditor Agreement and other
Collateral Documents, including, without limitation, the covenant
described under "--Repurchase at the Option of Holders Upon the
Occurrence of Certain Asset Sales" or "--Certain Covenants--Limitations
on Asset Sales" if such sale or other disposition constitutes an Asset
Sale; and
(g) in the event there is to be a substitution of
property for such Collateral subject to the Asset Sale or other
disposition, specifies the property intended to be substituted for the
Collateral to be sold or otherwise disposed of and that such property
will be subject to the Liens under the Collateral Documents;
(2) an Officers' Certificate stating that:
(a) such sale or other disposition covers only
Collateral requested to be released or other property which is not
Collateral;
(b) all Net Cash Proceeds, if any, from the sale or
other disposition of any of such Collateral will be applied pursuant to
the provisions of the Indenture and the Intercreditor Agreement and
other Collateral Documents in respect of Asset Sales and other
dispositions of Collateral to the extent applicable thereto;
(c) there is no Default or Event of Default (and no
"default" or "event of default" under the Revolving Credit Facility or
the Bridge Loan) in effect on the date thereof;
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(d) the release of such Collateral will not result in
a Default or Event of Default (or a "default" or an "event of default"
under the Revolving Credit Facility or the Bridge Loan);
(e) the release complies with the Trust Indenture
Act; and
(f) all conditions precedent in the Indenture and the
Intercreditor Agreement and other Collateral Documents relating to the
release in question have been complied with;
(3) if the fair market value of such Collateral to be released
(which, in the case of a sale of Capital Stock of a Restricted
Subsidiary resulting in it no longer being a Restricted Subsidiary,
means the fair market value of such Capital Stock) exceeds $1.0 million
(as specified in the notice to be provided pursuant to clause (1)(b)
above), an opinion of counsel, in form and substance reasonably
satisfactory to the Collateral Agent and the Trustee, stating that such
release is permitted under and complies with the terms of the Indenture
and the Intercreditor Agreement and other Collateral Documents and all
conditions precedent thereunder to such release have been complied
with;
(4) if the fair market value of such Collateral to be released
(which, in the case of a sale of Capital Stock of a Restricted
Subsidiary resulting in it no longer being a Restricted Subsidiary,
means the fair market value of such Capital Stock) exceeds $5.0 million
(as specified in the notice to be provided pursuant to clause (1)(b)
above), an opinion or appraisal with respect to the determination of
such fair market value issued by an independent accounting or
investment banking firm which is nationally recognized in the United
States, or a reputable independent appraisal or petroleum engineering
firm which is reasonably satisfactory to the Collateral Agent and the
Trustee, as appropriate under the circumstances;
(5) if such Collateral to be released is an interest in
Farmout Property to be conveyed to a farmee under a Permitted Farmout
Agreement, such Officers' Certificates and Board Resolutions, if any,
required by the definitions of Farmout Property Value and Permitted
Farmout Agreement (see "--Certain Definitions"); and
(6) all documentation required by the Trust Indenture Act, if
any, prior to the release of the Collateral requested to be released by
the Collateral Agent and, in the event that there is to be a
substitution of property for such Collateral, all documentation
necessary to effect the substitution of such new Collateral and to
subject such new Collateral to valid and enforceable first priority
perfected security interests (subject to Permitted Prior Liens) granted
by the relevant Collateral Documents.
The Indenture and the Intercreditor Agreement and other Collateral Documents
also provide that:
(1) Abraxas and the Restricted Subsidiaries will be entitled,
subject to compliance with the conditions set forth therein, to obtain
the release of Collateral that has been taken by eminent domain,
condemnation or in similar circumstances; and
(2) Abraxas and the Restricted Subsidiaries will be entitled
to obtain a release of the Collateral:
(a) with respect to the Revolving Credit Facility
only, upon payment in full of all amounts outstanding under the
Revolving Credit Facility and all other Revolving Credit Facility
Obligations and the termination of the Revolving Credit Facility;
(b) with respect to the Notes only, (i) upon payment
in full of the Notes and all other Note Obligations, (ii) upon
satisfaction and discharge of the Indenture as described under
"--Satisfaction and Discharge" or (iii) upon a Legal Defeasance or
Covenant Defeasance as described under "--Legal Defeasance and Covenant
Defeasance;"
(c) with respect to the Bridge Loan only, upon
payment in full of the Bridge Loan and all other Bridge Loan
Obligations; and
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(d) in whole, upon satisfying each of clauses (a),
(b) and (c) of this paragraph.
Disposition of Collateral Without Release
Notwithstanding the provisions of the Intercreditor Agreement and other
Collateral Documents described under "Possession, Use and Release of
Collateral," so long as no Event of Default under the Indenture (or "event of
default" under each of the Revolving Credit Facility and the Bridge Loan) exists
or no Default or Event of Default under the Indenture (or "default" or "event of
default" under each of the Revolving Credit Facility and the Bridge Loan) would
result therefrom, and so long as such transaction would not violate the
Intercreditor Agreement and other Collateral Documents, Abraxas and the
Restricted Subsidiaries may, to the extent permitted by applicable law, without
any release or consent by the Collateral Agent, conduct ordinary course
activities with respect to their properties, including the following activities
so long as they are undertaken in the ordinary course of business, do not
constitute Asset Sales and otherwise comply with the terms of the Indenture, the
Intercreditor Agreement and other Collateral Documents and the Trust Indenture
Act: (1) disposing of equipment and other assets included in the Collateral that
has become worn out, defective or obsolete or not used or useful in the business
of Abraxas or any Restricted Subsidiary and which is, to the extent required by
the Intercreditor Agreement or other Collateral Documents, replaced by property
of substantially equivalent or greater value which becomes subject to the Lien
of any of the Collateral Documents; (2) selling, leasing or abandoning any
undeveloped oil and gas property subject to the Lien of any of the Collateral
Documents or any other oil and gas property subject to the Lien of any of the
Collateral Documents that is not capable of production in economic quantities;
(3) terminating, canceling, amending or otherwise modifying any contract subject
to the Lien of any of the Collateral Documents; (4) surrendering or modifying
any license or permit subject to the Lien of any of the Collateral Documents;
(5) altering, repairing, replacing, changing the location and position of and
adding to the structures, equipment, fixtures and appurtenances on any property
subject to the Lien of any of the Collateral Documents; or (6) selling
hydrocarbons or other mineral products for value.
Abraxas is obligated to deliver to the Collateral Agent, within 30 calendar
days following the end of each six-month period beginning on December 1, 2004,
an Officers' Certificate to the effect that all releases and withdrawals during
the preceding six-month period with respect to which no release or consent of
the Collateral Agent was obtained were in the ordinary course of the business of
Abraxas and the Restricted Subsidiaries and were permitted by the Indenture, the
Intercreditor Agreement and other Collateral Documents or the Trust Indenture
Act.
Certain Bankruptcy Limitations
Bankruptcy law could prevent the Collateral Agent from repossessing and
disposing, or otherwise exercising remedies in respect, of the Collateral upon
the occurrence of an Event of Default if a bankruptcy proceeding were to be
commenced by or against Abraxas or its Subsidiaries prior to the Collateral
Agent having repossessed and disposed, or otherwise exercised remedies in
respect, of the Collateral. Under the Bankruptcy Code, a secured creditor such
as the Collateral Agent is prohibited from repossessing its security from a
debtor in a bankruptcy case, or from disposing of security repossessed from such
debtor, without bankruptcy court approval. Moreover, the Bankruptcy Code permits
the debtor to continue to retain and use collateral even though the debtor is in
default under the applicable debt instruments; provided that the debtor may be
required to provide the secured creditor with "adequate protection." The meaning
of the term "adequate protection" may vary according to the circumstances, but
it is intended in general to protect the value of the secured creditor's
interest in the collateral. The court may find "adequate protection" if the
debtor pays cash or grants additional security, if and at such times as the
court in its discretion determines, for any diminution in the value of the
collateral during the pendency of the bankruptcy case. In view of the lack of a
precise definition of "adequate protection" and the broad discretionary powers
of a bankruptcy court, it is impossible to predict how long payments with
respect to the Secured Obligations could be delayed following commencement of a
bankruptcy case, whether or when the Collateral Agent could repossess or dispose
of the Collateral or whether or to what extent holders of the Secured
Obligations would be compensated for any delay in payment or loss of value of
the Collateral through the requirement of "adequate protection." See "Risk
Factors--Risks Related to the Notes--Bankruptcy laws may limit your ability to
realize value from the collateral."
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Subsidiary Guarantees of Notes
Each Subsidiary of Abraxas as of October 28, 2004, other than Grey Wolf (so
long as Grey Wolf is neither a Restricted Subsidiary nor a Guarantor of any of
our other Indebtedness), has unconditionally Guaranteed for so long as it
remains a Restricted Subsidiary or Guarantees any of our other Indebtedness,
jointly and severally, on a senior secured basis, the full and prompt
performance of Abraxas' obligations under the Indenture and the Notes, including
the payment of principal of, and premium and interest on, the Notes. Any future
Restricted Subsidiary and any other Affiliate of Abraxas, including, without
limitation, any future Subsidiary of Abraxas (whether it is a Restricted
Subsidiary or an Unrestricted Subsidiary), that Guarantees any of our other
Indebtedness will also be required to enter into a Subsidiary Guaranty of the
Notes as described below in this "--Subsidiary Guarantees of Notes."
The Subsidiary Guarantee of each Subsidiary Guarantor:
o is secured, together with the respective Subsidiary Guarantor's
Guarantee of the Revolving Credit Facility Obligations, by a shared
first priority security interest (subject to Permitted Prior Liens) in
all of such Subsidiary Guarantor's material property and assets,
including, without limitation, (1) substantially all of its natural gas
and crude oil properties and (2) all of the Capital Stock (or in the
case of a Foreign Unrestricted Subsidiary, up to 65% of the outstanding
Capital Stock) in any company or other entity, including, without
limitation, in each Subsidiary of such Subsidiary Guarantor, that is
owned by such Subsidiary Guarantor, as more fully described under
"--Security" and "Intercreditor Agreement;"
o ranks senior in right of payment to all existing and future
Subordinated Indebtedness of the respective Subsidiary Guarantor,
including, without limitation, its Guarantee of the Bridge Loan
Obligations; and
o ranks effectively senior in right of payment to all existing and future
unsecured Indebtedness of the respective Subsidiary Guarantor to the
extent of the value of the Collateral available to the holders of the
Notes.
The provisions of the Intercreditor Agreement provide for the Subsidiary
Guarantors to make payments in respect of the Secured Obligations to the
Collateral Agent during the existence of an Event of Default, or an "event of
default" under the Revolving Credit Facility or the Bridge Loan, of which notice
thereof has been given to the parties to the Intercreditor Agreement by the
Trustee, the Revolving Credit Facility Administrative Agent or the Bridge Loan
Administrative Agent. The Collateral Agent is required to apply such amounts
during the existence of such an Event of Default (or such an "event of
default"), together with amounts received from Abraxas and any proceeds from the
disposition of any Collateral,
o if a minimum collateral coverage ratio equal to three times the
outstanding Revolving Credit Facility Obligations is then met, (i) to
the payment of interest on the Notes only if and when all accrued and
unpaid interest on the Revolving Credit Facility Obligations has been
paid and (ii) to the payment of principal of the Notes only if and when
the outstanding principal of the Revolving Credit Facility has been
repaid; or
o if such minimum collateral coverage ratio is not then met, to the
payment of interest on and principal of the Notes only if and when all
outstanding interest on and principal of the Revolving Credit Facility
have been paid. See "Intercreditor Agreement--Priority of
Distributions."
A Default or Event of Default will entitle the Trustee to accelerate the
obligations of the Subsidiary Guarantors under the Subsidiary Guarantees in the
same manner and to the same extent as Abraxas' obligations under the Indenture
and the Notes may be accelerated, subject to and in accordance with the terms of
the Intercreditor Agreement. The obligations of each Subsidiary Guarantor are
limited to the maximum amount as will, after giving effect to all other
contingent and fixed liabilities of such Subsidiary Guarantor and after giving
effect to any collection from or payments made by or on behalf of any other
Subsidiary Guarantor in respect of the obligations of such other Subsidiary
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Guarantor under its Subsidiary Guarantee or pursuant to its contribution
obligations under the Indenture, result in the obligations of such Subsidiary
Guarantor under the Subsidiary Guarantee not constituting a fraudulent
conveyance or fraudulent transfer under Federal or state law. See "Risk
Factors--Risks Related to the Notes--The subsidiary guarantees could be voided
if they constitute fraudulent transfers under the bankruptcy code or similar
state laws, which would prevent the holders of the notes from relying on the
subsidiary guarantors to satisfy our payment obligations under the notes." Each
Subsidiary Guarantor that makes a payment or distribution under a Subsidiary
Guarantee will be entitled to a contribution from each other Subsidiary
Guarantor in a pro rata amount based on the Adjusted Net Assets of each
Subsidiary Guarantor.
Claims of creditors of any of our non-guarantor Subsidiaries, such as Grey
Wolf and any future Subsidiary that is not a Subsidiary Guarantor, generally
have priority with respect to the assets and earnings of those non-guarantor
Subsidiaries over the claims of the creditors of Abraxas, including holders of
the Notes. Accordingly, the Notes are structurally subordinated to creditors of
our non-guarantor Subsidiaries, which generally includes trade creditors,
secured creditors and creditors holding Indebtedness (including Guarantees)
issued by such non-guarantor Subsidiaries.
Each Subsidiary Guarantor may consolidate with, or merge into, or sell or
otherwise dispose of all or substantially all of its properties and assets to,
Abraxas or to another Subsidiary Guarantor without limitation, and each
Subsidiary Guarantor may consolidate with, or merge into, or sell all or
substantially all of its properties and assets to, a Person other than Abraxas
or another Subsidiary Guarantor (whether or not Affiliated with the Subsidiary
Guarantor), provided that any such transaction must comply with the covenant in
the Indenture described under "--Merger, Consolidation or Sale of Assets."
Upon the sale or other disposition (by merger or otherwise) of a Subsidiary
Guarantor (or of all or substantially all of its properties and assets) to a
Person other than Abraxas or another Subsidiary Guarantor and pursuant to a
transaction that is otherwise in compliance with the Indenture, such Subsidiary
Guarantor will be deemed released from its Subsidiary Guarantee and the related
obligations set forth in the Indenture. However, any such termination will only
be permitted to the extent that all obligations of such Subsidiary Guarantor
under all of its Guarantees (if any) of other Indebtedness of Abraxas or any
other Restricted Subsidiary, and under all Liens that secure such other
Indebtedness of Abraxas or any other Restricted Subsidiary, also terminate upon
such sale or other disposition of such Subsidiary Guarantor (or of all or
substantially all of its properties and assets). Each Subsidiary Guarantor that
is designated as an Unrestricted Subsidiary after the Closing Date in accordance
with the Indenture will be released from its Subsidiary Guarantee and related
obligations set forth in the Indenture for so long as it remains an Unrestricted
Subsidiary and does not Guarantee any of our other Indebtedness.
The Indenture provides that if Abraxas or any of its Restricted
Subsidiaries acquires or creates another Subsidiary after the Closing Date, then
that newly acquired or created Subsidiary will be required to become a
Subsidiary Guarantor, unless it is designated as an Unrestricted Subsidiary in
accordance with the terms of the Indenture (and does not Guarantee any of our
other Indebtedness), and unless it is so designated it will be required to
contemporaneously with such acquisition or creation:
o execute and deliver to the Trustee a supplemental indenture to the
Indenture, a joinder agreement to the Intercreditor Agreement and, if
the Registration Rights Agreement is then in effect, a joinder
agreement to the Registration Rights Agreement, each in form and
substance reasonably satisfactory to the Trustee and, with respect to
the joinder agreement to the Intercreditor Agreement, also to the
Collateral Agent, which provide that such Subsidiary shall become a
Subsidiary Guarantor under the Indenture and a party to the
Intercreditor Agreement and the Registration Rights Agreement,
respectively; and
o deliver an opinion of counsel, in form and substance reasonably
satisfactory to the Trustee and, with respect to the joinder agreement
to the Intercreditor Agreement, also to the Collateral Agent, to the
effect that such supplemental indenture and joinder agreement(s) have
been duly authorized, executed and delivered by such Subsidiary and
constitute legal, valid and binding obligations of such Subsidiary.
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The foregoing requirements of this paragraph will also apply to any Unrestricted
Subsidiary if (and at such time) it either becomes a Restricted Subsidiary or
Guarantees any of our other Indebtedness (whether or not it is a Subsidiary of
Abraxas on the Closing Date).
Optional Redemption
Except as described in the following paragraph, the Notes are not
redeemable at our option prior to April 29, 2007. Thereafter, the Notes are
subject to redemption at the option of Abraxas, in whole or in part, upon not
less than 30 nor more than 60 days' notice, at the redemption prices (expressed
as percentages of principal amount) set forth below plus accrued and unpaid
interest to the applicable redemption date:
Year Percentage
---- ----------
From April 29, 2007 to April 28, 2008............. 104.00%
From April 29, 2008 to April 28, 2009............. 102.00%
After April 28, 2009.............................. 100.00%
At any time prior to April 29, 2007, Abraxas may, at its option and subject
to the restrictions and other provisions relating thereto, if any, contained in
the Revolving Credit Facility (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Long-Term Indebtedness--Abraxas'
New $15 Million Senior Secured Revolving Credit Facility"), on any one or more
occasions redeem up to 35% of the original aggregate principal amount of the
Notes (i.e., $43,750,000) with the Net Cash Proceeds of one or more Qualified
Equity Offerings at a redemption price equal to the product of (x) the principal
amount of the Notes being so redeemed and (y) a redemption price factor of 1.00
plus the per annum interest rate on the Notes (expressed as a decimal) on the
applicable redemption date, plus accrued and unpaid interest to the applicable
redemption date, provided, that,
(1) at least 65% of the original aggregate principal amount of the Notes
(i.e., $81,250,000) remains outstanding after each such redemption; and
(2) any such redemption occurs within 90 days after the closing of the
Equity Offering to which such Net Cash Proceeds relate.
If less than all the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee on a pro rata basis, provided
that no Notes of $1,000 or less will be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note will state the portion of the principal amount thereof
to be redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon surrender of the
original Note. On and after the redemption date, interest will cease to accrue
on Notes or portions thereof called for redemption as long as Abraxas has
deposited with the Paying Agent funds in satisfaction of the applicable
redemption price.
If a redemption date is on or after a regular record date and on or
before the related Interest Payment Date, the accrued and unpaid interest and
premium, if any, on each Note being redeemed will be paid to the person in whose
name such Note is registered at the close of business on such regular record
date, and no other interest or premium will be payable to any other Person who
may become a holder of such Note after such time.
105
Repurchase at the Option of Holders Upon the Occurrence of Certain Asset Sales
The Bridge Loan provides that if there are any Bridge Loan Obligations
outstanding after June 28, 2006, then, at any time thereafter and for so long as
the Bridge Loan Obligations remain outstanding and there is not then an Event of
Default, the Bridge Loan Administrative Agent will have the right to require
Abraxas and the Restricted Subsidiaries to consummate one or more Asset Sales in
accordance with the terms described in this "--Repurchase at the Option of
Holders Upon the Occurrence of Certain Asset Sales" (and without regard to the
covenant in the Indenture described under "--Certain Covenants--Limitation on
Asset Sales").
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Long-Term Indebtedness--Abraxas' New $25 Million Second
Lien Increasing Rate Bridge Loan" for a description of the rights of the Bridge
Loan Administrative Agent, and the obligations of Abraxas and the Restricted
Subsidiaries, with respect to any Asset Sale required by the terms of the Bridge
Loan. The Indenture also provides that Abraxas will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, consummate any such Asset Sale
unless:
(1) the Bridge Loan Obligations are then outstanding and there
is not then an Event of Default;
(2) Abraxas or such Restricted Subsidiary, as the case may be,
receives aggregate consideration at the time of such Asset Sale at
least equal to the fair market value of the assets or Capital Stock
sold or otherwise disposed of pursuant to the Asset Sale (as determined
in good faith by the Board of Directors of Abraxas and evidenced by a
Board Resolution delivered to the Trustee or, solely with respect to
Asset Sales in an amount not exceeding $1.0 million, as determined in
good faith by the chief executive officer of Abraxas and evidenced by
an Officers' Certificate delivered to the Trustee);
(3) at least 80% of the consideration received by Abraxas or
the Restricted Subsidiary, as the case may be, in respect of such Asset
Sale (as determined in good faith by the Board of Directors of Abraxas
and evidenced by a Board Resolution delivered to the Trustee or, solely
with respect to Asset Sales in an amount not exceeding $1.0 million, as
determined in good faith by the chief executive officer of Abraxas and
evidenced by an Officers' Certificate delivered to the Trustee)
consists of cash or Cash Equivalents;
(4) in the case of a Sale of Collateral, the Collateral Agent
is immediately granted a perfected first priority security interest
(subject to Permitted Prior Liens) in the Net Cash Proceeds and other
consideration therefor received by Abraxas or the Restricted
Subsidiary, as the case may be, as additional Collateral under the
Collateral Documents to secure the Secured Obligations, and, in the
case of Net Cash Proceeds, such Net Cash Proceeds must, except as
otherwise provided in the Intercreditor Agreement, be deposited into
the Bridge Loan Asset Sale Proceeds Account, all on terms and pursuant
to arrangements reasonably satisfactory to the Collateral Agent in its
reasonable determination (which may include, at the Collateral Agent's
reasonable request, customary Officers' Certificates and legal
opinions), and the Intercreditor Agreement and other Collateral
Documents include release provisions requiring the Collateral Agent to
release deposits in the Bridge Loan Asset Sale Proceeds Account as
necessary to permit Abraxas or its Restricted Subsidiaries to apply
such Net Cash Proceeds in the manner described below, unless the
Collateral Agent has received written notice that a Default or Event of
Default has occurred and is continuing;
(5) if the Board of Directors of Abraxas determines in
accordance with either clause (2) or (3) of this paragraph that the
fair market value of the assets or Capital Stock, as the case may be,
to be sold or otherwise disposed of pursuant to the Asset Sale or the
fair market value of the aggregate consideration to be received by
Abraxas and the Restricted Subsidiaries in respect of the Asset Sale
exceeds $5.0 million, Abraxas delivers to the Trustee an opinion or
appraisal with respect to such determination issued by an independent
accounting or investment banking firm which is nationally recognized in
the United States, or a reputable independent appraisal or petroleum
engineering firm which is reasonably satisfactory to the Trustee, as
appropriate under the circumstances; and
106
(6) Abraxas delivers to the Trustee an Officers' Certificate
certifying that such Asset Sale is required by, and complies with, the
Bridge Loan and complies with the preceding clauses (1), (2), (3), (4)
and (5) of this paragraph.
The Net Cash Proceeds from each such Asset Sale (other than with respect to
any Capital Stock of Grey Wolf, which will be exclusively applied to repay
outstanding Bridge Loan Obligations) will be applied by Abraxas and the
Restricted Subsidiaries in the following order, to the extent available:
o first, to pay any interest then due and payable on the Revolving Credit
Facility;
o second, to pay any interest then due and payable on the Notes;
o third, to pay any accrued and unpaid interest on the Revolving Credit
Facility that was not paid under clause "first" of this paragraph;
o fourth, to pay any outstanding principal of the Revolving Credit
Facility;
o fifth, if the remaining aggregate amount of such Net Cash Proceeds,
together with any Net Cash Proceeds in the Bridge Loan Asset Sale
Proceeds Account from a previous Asset Sale consummated in accordance
with the provisions described in this "--Repurchase at the Option of
Holders Upon the Occurrence of Certain Asset Sales," exceeds $5.0
million, the entire amount in the Bridge Loan Asset Sale Proceeds
Account is to be used to make a Net Proceeds Offer to purchase Notes
from all holders of the Notes as if such Net Cash Proceeds remaining
after any payment made pursuant to clause "first," "second," "third" or
"fourth" of this paragraph, and any other Net Cash Proceeds in the
Bridge Loan Asset Sale Proceeds Account, are Excess Proceeds (see
"--Certain Covenants--Limitation on Asset Sales"); and
o sixth, after the payment of all amounts required by a Net Proceeds
Offer made in accordance with clause "fifth" of this paragraph, to
repay all outstanding Bridge Loan Obligations.
Any Net Cash Proceeds remaining in the Bridge Loan Asset Sale Proceeds Account
after clause "fourth" of this paragraph, but prior to the application of clause
"fifth" of this paragraph, will be required to be retained in the Bridge Loan
Asset Sale Proceeds Account until so applied in accordance with such clause
"fifth" (unless either (i) all of the Bridge Loan Obligations have been paid in
full, whereupon such remaining Net Cash Proceeds will be applied in the manner
described under "--Certain Covenants--Limitation on Asset Sales" or (ii) an
Event of Default exists, whereupon such remaining Net Cash Proceeds will be
applied in the manner provided for in the Intercreditor Agreement). To the
extent there exists any excess Net Cash Proceeds in the Bridge Loan Asset Sale
Proceeds Account following application of Net Cash Proceeds in accordance with
this clause "sixth" of this paragraph, such excess Net Cash Proceeds will be
treated as Net Cash Proceeds from an Asset Sale in the manner described under
"--Certain Covenants--Limitation on Asset Sales."
The lenders' commitment under the Revolving Credit Facility will be
permanently reduced by the amount of any Indebtedness repaid pursuant to clause
"fourth" of the foregoing paragraph.
Acquisition of Notes by Abraxas and its Affiliates
The Indenture provides that at any time Abraxas acquires a beneficial
interest in any Note, whether by redemption (see "--Optional Redemption"),
through the open market, by private sale or otherwise (see "--Repurchase at the
Option of Holders Upon the Occurrence of Certain Asset Sales" and "--Repurchase
at the Option of Holders Upon a Change of Control"), such Note will be cancelled
without any further action and the outstanding aggregate principal amount of the
Notes will be reduced by the principal amount of such cancelled Note. The
Indenture also provides that in determining whether the holders of the required
principal amount of Notes have concurred in any direction, waiver or consent,
Notes owned by Abraxas or any of its Affiliates will be considered as though not
outstanding, except that for the purposes of determining whether the Trustee
will be protected in relying on any such direction, waiver or consent, only
107
Notes that a responsible officer of the Trustee actually knows are so owned will
be so disregarded.
Sinking Fund
Abraxas is not required to make sinking fund payments with respect to the
Notes.
Repurchase at the Option of Holders Upon a Change of Control
Upon the occurrence of a Change of Control, each holder of Notes will have
the right to require Abraxas to repurchase all or any part (equal to $1,000 or
an integral multiple thereof) of such holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest (the "Change of Control Purchase Price") to the date of purchase (the
"Change of Control Payment Date"). Within 30 days following any Change of
Control, Abraxas will mail or cause to be mailed a notice to each holder, with a
copy to the Trustee, describing the transaction or transactions that constitute
the Change of Control and offering to repurchase Notes pursuant to the
procedures required by the Indenture and described in such notice. The Change of
Control Payment Date is required to be a Business Day not less than 30 days nor
more than 60 days after such notice is mailed. Abraxas will be required to
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 the Notes as a
result of a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with the provisions relating to the
Change of Control Offer, Abraxas will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations
described in this prospectus by virtue thereof.
On the Change of Control Payment Date, Abraxas will, to the extent lawful:
o accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
o deposit with the Paying Agent an amount equal to the Change of Control
Purchase Price in respect of all Notes or portions thereof so accepted;
and
o deliver or cause to be delivered to the Trustee the Notes so accepted
together with an Officers' Certificate stating the aggregate principal
amount of Notes or portions thereof being purchased by Abraxas.
The Paying Agent will promptly mail to each holder of Notes so accepted the
Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any. However, each such new Note must be in a principal amount
of $1,000 or an integral multiple thereof. Abraxas will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the holders of the Notes to
require that Abraxas repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring.
Other than for restrictions contained in the Intercreditor Agreement, the
Revolving Credit Facility and the Bridge Loan, Abraxas will not, and will not
permit any Restricted Subsidiary to, create any restriction that would
materially impair the ability of Abraxas to make a Change of Control Offer to
purchase the Notes, or if such Change of Control Offer is made to pay for the
Notes tendered for purchase. If a Change of Control Offer is made, there can be
no assurance that Abraxas will have available funds sufficient to pay the Change
of Control Purchase Price for all of the Notes that might be delivered by the
holders of Notes seeking to accept the Change of Control Offer. The Revolving
Credit Facility, the Bridge Loan and the Grey Wolf Term Loan provide that
certain change of control events with respect to us would constitute a default
thereunder (see "Management's Discussion and Analysis of Financial Condition and
108
Results of Operations--Long-Term Indebtedness"). Any future credit facility or
other agreement relating to Indebtedness to which Abraxas or a Subsidiary of
Abraxas becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when we are contractually prohibited
from purchasing Notes, we could seek the consent of our lenders to the purchase
of Notes or could attempt to refinance the borrowings that contain such
prohibition. If we do not obtain such a consent or repay such borrowings, we
will remain contractually prohibited from purchasing Notes. In such case, our
failure to purchase tendered Notes would constitute an Event of Default under
the Indenture that would, in turn, constitute a default under the Revolving
Credit Facility and the Bridge Loan and may also, in turn, constitute a default
under any credit facility or other agreement to which Abraxas or its
Subsidiaries become a party. See "Risk Factors--Risks Related to the
Notes--Abraxas may not be able to repurchase the notes upon a change of
control."
The definition of Change of Control includes an event by which Abraxas
sells, assigns, conveys, transfers or leases all or substantially all of its
properties and assets to any Person but does not include such events that are
permitted as described under "--Merger, Consolidation or Sale of Assets;" the
phrase "all or substantially all" is subject to applicable legal precedent and
as a result in the future there may be uncertainty as to whether a Change of
Control has occurred.
Abraxas is not required to make a Change of Control Offer upon a Change of
Control if a third party (i) makes an offer to the holders of the Notes to
purchase the Notes at the same or a higher purchase price, at the same times and
otherwise in substantial compliance with the requirements applicable to a Change
of Control Offer made by Abraxas and (ii) purchases all Notes validly tendered
and not withdrawn under such offer.
Certain Covenants
Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock
The Indenture provides that Abraxas will not, and will not permit any of
its Restricted Subsidiaries to, Incur any Indebtedness (including any Acquired
Indebtedness), other than Permitted Indebtedness, or issue any Disqualified
Stock, unless (1) at the time of such event and after giving effect thereto and
the receipt and application of the funds therefrom, the Consolidated Fixed
Charge Coverage Ratio for the four full fiscal quarters immediately preceding
such event, taken as one period, would have been at least equal to 3.00 to 1.00,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom) as if such additional Indebtedness had been incurred, or
such Disqualified Stock had been issued, as the case may be, at the beginning of
such four-quarter period, (2) no Default or Event of Default shall have occurred
and be continuing at the time such Indebtedness is incurred or such Disqualified
Stock is issued or would occur as a consequence of the incurrence of such
Indebtedness or the issuance of such Disqualified Stock and (3) with respect to
any such Restricted Subsidiary, it is then a Subsidiary Guarantor and its
Subsidiary Guarantee then constitutes a legal, valid and binding obligation of
such Subsidiary Guarantor.
Other than to the extent provided in the Intercreditor Agreement, neither
Abraxas nor any Restricted Subsidiary is permitted to Incur any Indebtedness or
other obligation, including Permitted Indebtedness, that is contractually
subordinated in right of payment or security (other than Permitted Liens) to any
other Indebtedness of Abraxas or that Restricted Subsidiary, as applicable,
unless such Indebtedness is also expressly contractually subordinated in right
of payment and security (other than Permitted Liens) to the Notes or the
Subsidiary Guarantee of that Restricted Subsidiary, as applicable, on
substantially identical terms; provided, however, that no Indebtedness of
Abraxas or any Restricted Subsidiary will be deemed to be contractually
subordinated in right of payment or security to any other Indebtedness of
Abraxas or that Restricted Subsidiary solely by virtue of being unsecured, and
the provisions of this paragraph will not prohibit tranches of Indebtedness
under the Revolving Credit Facility being subordinated to other tranches of
Indebtedness thereunder.
Limitation on Asset Sales
The Indenture provides that Abraxas will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale
unless:
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(1) Abraxas or such Restricted Subsidiary, as the case may be, receives
aggregate consideration at the time of such Asset Sale at least equal to
the fair market value of the assets or Capital Stock sold or otherwise
disposed of pursuant to the Asset Sale (as determined in good faith by the
Board of Directors of Abraxas and evidenced by a Board Resolution delivered
to the Trustee or, solely with respect to Asset Sales in an amount not
exceeding $1.0 million, as determined in good faith by the chief executive
officer of Abraxas and evidenced by an Officers' Certificate delivered to
the Trustee);
(2) at least 80% of the fair market value of the consideration received
by Abraxas or the Restricted Subsidiary, as the case may be, in respect of
such Asset Sale (as determined in good faith by the Board of Directors of
Abraxas and evidenced by a Board Resolution delivered to the Trustee or,
solely with respect to Asset Sales in an amount not exceeding $1.0 million,
as determined in good faith by the chief executive officer of Abraxas and
evidenced by an Officers' Certificate delivered to the Trustee) consists of
cash, Cash Equivalents or properties used in the Oil and Gas Business of
Abraxas or its Restricted Subsidiaries;
(3) in the case of a Sale of Collateral, the Collateral Agent is
immediately granted a perfected first priority security interest (subject
to Permitted Prior Liens) in the Net Cash Proceeds and other consideration
therefor received by Abraxas or the Restricted Subsidiary, as the case may
be, as additional Collateral under the Collateral Documents to secure the
Secured Obligations, and, in the case of Net Cash Proceeds, such Net Cash
Proceeds must, except as otherwise provided in the Intercreditor Agreement,
be deposited into an Asset Sale Proceeds Account, all on terms and pursuant
to arrangements reasonably satisfactory to the Collateral Agent in its
reasonable determination (which may include, at the Collateral Agent's
reasonable request, customary Officers' Certificates and legal opinions),
and the Intercreditor Agreement and other Collateral Documents include
release provisions requiring the Collateral Agent to release deposits in an
Asset Sale Proceeds Account as necessary to permit Abraxas or its
Restricted Subsidiaries to apply such Net Cash Proceeds in the manner
described below, unless the Collateral Agent has received written notice
that a Default or Event of Default has occurred and is continuing;
(4) if the Board of Directors of Abraxas determines in accordance with
either clause (1) or (2) of this paragraph that the fair market value of
the assets or Capital Stock, as the case may be, to be sold or otherwise
disposed of pursuant to the Asset Sale or the fair market value of the
aggregate consideration to be received by Abraxas and the Restricted
Subsidiaries in respect of the Asset Sale exceeds $5.0 million, Abraxas
delivers to the Trustee an opinion or appraisal with respect to such
determination issued by an independent accounting or investment banking
firm which is nationally recognized in the United States, or a reputable
independent appraisal or petroleum engineering firm which is reasonably
satisfactory to the Trustee, as appropriate under the circumstances; and
(5) Abraxas delivers to the Trustee an Officers' Certificate certifying
that such Asset Sale complies with the preceding clauses (1), (2), (3) and
(4) of this paragraph;
provided, that (a) any Asset Sale pursuant to a condemnation, appropriation or
other similar taking, including by deed in lieu of condemnation, or pursuant to
the foreclosure or other enforcement of a Lien incurred not in violation of the
covenant described under "--Limitations on Liens" or exercise by the related
lienholder of rights with respect thereto, including by deed or assignment in
lieu of foreclosure, will not be required to satisfy the conditions set forth in
clauses (1), (2) and (4) of this paragraph (and the Officers' Certificate
described in clause (5) of this paragraph will not be required to certify as to
compliance with such clauses (1), (2) and (4)) and (b) any Asset Sale undertaken
by Abraxas or a Restricted Subsidiary at the direction of the Bridge Loan
Administrative Agent in accordance with the covenant described under
"--Repurchase at the Option of Holders Upon the Occurrence of Certain Asset
Sales" will not be required to satisfy any of the conditions of this paragraph,
but will instead be required to fulfill the conditions of such covenant.
The amount (without duplication) of any Unsubordinated Indebtedness of
Abraxas or any Restricted Subsidiary that is expressly assumed by the transferee
in an Asset Sale and with respect to which Abraxas or such Restricted
Subsidiary, as the case may be, is unconditionally discharged by the holder of
such Unsubordinated Indebtedness, shall be deemed to be Cash Equivalents for
purposes of clause (2) above and shall also be deemed to constitute a repayment
110
of, and a permanent reduction in, the amount of such Unsubordinated Indebtedness
for purposes of the following paragraph.
If Abraxas or any Restricted Subsidiary consummates an Asset Sale (other
than (i) any Asset Sale undertaken at the direction of the Bridge Loan
Administrative Agent in accordance with the covenant described under
"--Repurchase at the Option of Holders Upon the Occurrence of Certain Asset
Sales" or (ii) any Asset Sale with respect to Capital Stock of Grey Wolf, which,
so long as any of the Bridge Loan Obligations remain outstanding, will be
exclusively applied to repay such outstanding Bridge Loan Obligations pursuant
to the terms of the Bridge Loan) or there is any Event of Loss, Abraxas or such
Restricted Subsidiary may at its option either:
(1) no more than 365 days after such Asset Sale, or date upon which any
Net Loss Proceeds are received by Abraxas or a Restricted Subsidiary in
respect of such Event of Loss, as the case may be, apply all or any of the
Net Cash Proceeds or Net Loss Proceeds, respectively, therefrom to repay
Indebtedness outstanding under the Revolving Credit Facility (but not,
unless either Abraxas elects or as described in the following paragraph,
permanently reduce the lenders' commitment thereunder); provided, that,
Abraxas will be required to deliver an Officer's Certificate to the
Trustee, within 45 days after the end of any fiscal quarter in which any
such Net Cash Proceeds or Net Loss Proceeds are so applied, stating for
each such application the amount of Indebtedness repaid and the date of
such repayment;
(2) no more than 365 days before or after such Asset Sale, or date upon
which any Net Loss Proceeds are received by Abraxas or a Restricted
Subsidiary in respect of such Event of Loss, as the case may be, use all or
any part of the Net Cash Proceeds or Net Loss Proceeds, respectively,
therefrom to make capital expenditures or acquire properties that will be
used in the Oil and Gas Business of Abraxas or its Restricted Subsidiaries,
provided, however, that, if any such capital expenditure is made or
property is acquired prior to the occurrence of such Asset Sale or date
upon which such Net Loss Proceeds are so received, to the extent amounts
were drawn under the Revolving Credit Facility to pay for such acquisition,
contemporaneously with the consummation of the Asset Sale or receipt of
such Net Loss Proceeds, as the case may be, Abraxas will be required to use
the Net Cash Proceeds of such Asset Sale or the Net Loss Proceeds of such
Event of Loss, as the case may be, to repay (but not, unless Abraxas
elects, permanently reduce) the Revolving Credit Facility to the extent of
the amount so borrowed; or
(3) no more than 365 days after such Asset Sale, or date upon which any
Net Loss Proceeds are received by Abraxas or a Restricted Subsidiary in
respect of such Event of Loss, as the case may be, and at such time when no
Bridge Loan Obligations are outstanding and there is a ratio of our
consolidated PV-10 to Consolidated Indebtedness of at least 1.25 to 1.00,
use all or any part of the Net Cash Proceeds or Net Loss Proceeds,
respectively, therefrom to, on one Interest Payment Date (but not more than
one Interest Payment Date), pay interest on the Notes up to the amount of
the semi-annual interest scheduled to be paid on such Interest Payment Date
(without regard to any overdue or default interest that may owing as of
such Interest Payment Date).
Notwithstanding the foregoing, the Net Cash Proceeds received by Abraxas or any
Restricted Subsidiary in respect of any disposition by it of any Capital Stock
of Grey Wolf, whether or not such disposition constitutes an Asset Sale, will be
required to be applied first to the repayment of any Obligations then
outstanding under the Bridge Loan and then, if any Net Cash Proceeds remain
after such application, such excess Net Cash Proceeds (to the extent resulting
from an Asset Sale) will be subject to the terms described in this paragraph.
The amount of such Net Cash Proceeds and Net Loss Proceeds not applied or
invested as provided in this paragraph (after the period specified in this
paragraph) will constitute "Excess Proceeds."
The Revolving Credit Facility provides that if the Net Proceeds from an
Asset Sale or the Net Loss Proceeds from an Event of Loss are applied to repay
Indebtedness outstanding under the Revolving Credit Facility in accordance with
clause (1) of the immediately preceding paragraph and the amount of such
Indebtedness is not, within 365 days of such application, redrawn under the
Revolving Credit Facility to make capital expenditures or acquire properties
that will be used in the Oil and Gas Business of Abraxas or its Restricted
Subsidiaries (as certified in an Officers' Certificate delivered to the Trustee
prior to the end of such 365 day period), then, at the end of such 365 day
period, the lenders' commitment under the Revolving Credit Facility will be
permanently reduced on a dollar-for-dollar basis by the amount of such Net Cash
Proceeds or Net Loss Proceeds, as the case may be, which were not so redrawn
111
under the Revolving Credit Facility if the aggregate amount of the Net Cash
Proceeds from all other previous Asset Sales, together with the aggregate amount
of all Net Loss Proceeds from all other previous Events of Loss, which were
similarly applied in accordance with clause (1) of the immediately preceding
paragraph and not so redrawn under the Revolving Credit Facility within 365 days
of such application equals or exceeds $10 million. If as a result of any such
reduction in the lenders' commitment under the Revolving Credit Facility there
is then any Indebtedness outstanding thereunder in excess of such commitment,
the amount of such excess Indebtedness will become immediately due and payable
under the Revolving Credit Facility.
When the aggregate amount of Excess Proceeds equals or exceeds $5.0
million, Abraxas will be required to make an offer to purchase, from all holders
of the Notes, an aggregate principal amount of Notes equal to such Excess
Proceeds as follows:
o Abraxas will make an offer to purchase (a "Net Proceeds Offer") from
all holders of the Notes, in accordance with the procedures set forth
in the Indenture, the maximum principal amount (expressed as a multiple
of $1,000) of Notes that may be purchased using an amount (the "Payment
Amount") equal to such Excess Proceeds (subject to proration in the
event such Payment Amount is less than the aggregate Offered Price (as
defined in the next bullet point) of all Notes tendered);
o the offer price for the Notes will be payable in cash in an amount
equal to 100% of the aggregate principal amount of the Notes tendered
pursuant to a Net Proceeds Offer, plus accrued and unpaid interest to
the date such Net Proceeds Offer is consummated (the "Offered Price"),
in accordance with the procedures set forth in the Indenture. If the
aggregate Offered Price of Notes validly tendered and not withdrawn by
holders thereof exceeds the Payment Amount, Notes to be purchased will
be selected on a pro rata basis (with adjustments as appropriate so
that only Notes in denominations of $1,000 or multiples thereof will be
purchased). To the extent that the aggregate Offered Price of the Notes
tendered pursuant to a Net Proceeds Offer is less than the Payment
Amount relating thereto (such shortfall constituting a "Net Proceeds
Deficiency"), Abraxas may use such Net Proceeds Deficiency, or a
portion thereof, for general corporate purposes, subject to the
limitations of the covenant described under "--Limitation on Restricted
Payments;" and
o upon completion of such Net Proceeds Offer, the amount of Excess
Proceeds will be reset to zero.
Except for the Intercreditor Agreement, the Revolving Credit Facility and
the Bridge Loan, Abraxas will not, and will not permit any Restricted Subsidiary
to, enter into or suffer to exist any agreement that would place any restriction
of any kind (other than pursuant to law or regulation) on the right of Abraxas
to make a Net Proceeds Offer following any Asset Sale. Abraxas is required to
comply with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder, if applicable, in the event that an
Asset Sale occurs and Abraxas is required to purchase Notes as described above.
To the extent that the provisions of any securities laws or regulations conflict
with the provisions relating to the Net Proceeds Offer, Abraxas will comply with
the applicable securities laws and regulations and will not be deemed to have
breached its obligations described above by virtue thereof.
Limitation on Sale-Leaseback Transactions
Abraxas will not, and will not permit any Restricted Subsidiary to, enter
into any Sale-Leaseback Transaction involving any of its assets or properties,
whether now owned or hereafter acquired, unless
(1) Abraxas or such Restricted Subsidiary, as the case may be, would be
entitled to (a) Incur Indebtedness in an amount equal to the Attributable
Indebtedness relating to such Sale-Leaseback Transaction in compliance with
the covenant described under "--Limitation on Incurrence of Indebtedness
and Issuance of Disqualified Stock" and (b) create a Lien on the properties
and assets that are the subject of such Sale-Leaseback Transaction to
secure such Attributable Indebtedness pursuant to the covenant described
under "--Limitation on Liens;"
112
(2) the gross proceeds of such Sale-Leaseback Transaction are at least
equal to the fair market value of the properties and assets that are the
subject of such Sale-Leaseback Transaction (as determined in good faith by
the Board of Directors of Abraxas and evidenced by a Board Resolution
delivered to the Trustee or, solely with respect to a Sale-Leaseback
Transaction in an amount not exceeding $1.0 million, determined in good
faith by the chief executive officer of Abraxas and evidenced by an
Officers' Certificate delivered to the Trustee);
(3) if the fair market value of the properties and assets subject to
such Sale-Leaseback Transaction is determined in accordance with clause (2)
above to be in excess of $5.0 million, Abraxas delivers to the Trustee an
opinion or appraisal with respect to such determination issued by an
independent accounting or investment banking firm which is nationally
recognized in the United States, or a reputable independent appraisal or
petroleum engineering firm which is reasonably satisfactory to the Trustee,
as appropriate under the circumstances; and
(4) the transfer of such properties and assets in such Sale-Leaseback
Transaction is permitted by, and Abraxas or such Restricted Subsidiary, as
the case may be, applies the proceeds of such Sale-Leaseback Transaction in
compliance with, the covenant described under "--Limitation on Asset
Sales."
Limitation on Restricted Payments
(1) The Indenture provides that Abraxas will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, take the following
actions:
(a) declare or pay any dividend or make any other payment or
distribution (including, without limitation, any payment or
distribution in connection with any merger or consolidation involving
Abraxas or any Restricted Subsidiary) on account of the Capital Stock
of Abraxas or any Restricted Subsidiary or to the direct or indirect
holders of Capital Stock of Abraxas or any Restricted Subsidiary in
their capacity as such, in each case, other than dividends or
distributions (i) payable solely in shares of Qualified Capital Stock
of Abraxas or, if all of the Bridge Loan Obligations have then been
repaid in full, in shares of Capital Stock of Grey Wolf or (ii)
declared or paid to Abraxas or any Restricted Subsidiary;
(b) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving Abraxas or any Restricted Subsidiary) any
Capital Stock of Abraxas or any Affiliate thereof (other than any
Wholly-owned Restricted Subsidiary) in a transaction that does not
constitute a Permitted Investment;
(c) make any payment to purchase, redeem, defease or otherwise
acquire or retire for value any Subordinated Indebtedness, except (i)
for payment of principal and interest at its Stated Maturity, (ii) out
of a Net Proceeds Deficiency following a Net Proceeds Offer made in
accordance with the covenant described under "--Limitation on Asset
Sales," (iii) upon a Change of Control to the extent (and only to the
extent) required by the indenture or other agreement or instrument
pursuant to which such Subordinated Indebtedness was issued, provided
that Abraxas is then in compliance with the covenant described under
"Repurchase at Option of Holder Upon Change of Control," or (iv) for
the repayment of the Bridge Loan Obligations in accordance with the
provisions of the Indenture, the Bridge Loan and the Intercreditor
Agreement (including, without limitation, with proceeds from the sale
by Abraxas, any Restricted Subsidiary or Grey Wolf of existing or newly
issued shares of Capital Stock of Grey Wolf or from any other Asset
Sale) (see "--Repurchase at the Option of Holders Upon the Occurrence
of Certain Asset Sales," "--Certain Covenants--Limitation on Asset
Sales" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Long-Term Indebtedness--Abraxas' New $25
Million Second Lien Increasing Rate Bridge Loan");
(d) make any Investment (other than any Permitted Investment);
113
(such payments or other actions described in (but not excluded
from) clauses (a) through (d) are collectively referred to as
"Restricted Payments"), unless at the time of and after giving
effect to the proposed Restricted Payment:
(i) no Default or Event of Default shall
have occurred and be continuing (or would result
therefrom);
(ii) Abraxas could Incur $1.00 of additional
Indebtedness (excluding Permitted Indebtedness) in
compliance with the covenant described under
"--Limitation on Incurrence of Indebtedness and
Issuance of Disqualified Stock;" and
(iii) such Restricted Payment, together with
the aggregate amount of all other Restricted Payments
declared or made after the Closing Date, shall not
exceed the sum (without duplication) of the
following:
(A) 50% of the sum of (1)
Consolidated Net Income plus (2) non-cash
asset impairment charges determined pursuant
to GAAP (excluding any such non-cash charge
to the extent that it represents an accrual
of or reserve for cash expenses in any
future period), in each case, earned or
accrued during the period beginning on July
1, 2004 and ending on the last day of the
last fiscal quarter of Abraxas ending prior
to the date of such proposed Restricted
Payment for which internal financial
statements are available (or, if such
aggregate Consolidated Net Income shall be a
loss, minus 100% of such loss), plus
(B) 100% of the aggregate net cash
proceeds received after the Closing Date by
Abraxas as equity contributions to Abraxas
from a holder of the Capital Stock of
Abraxas, plus
(C) 100% of the aggregate net cash
proceeds received after the Closing Date by
Abraxas from the issuance or sale (other
than to any of its Restricted Subsidiaries)
of shares of Qualified Capital Stock of
Abraxas, including any options, warrants or
rights to purchase such shares of Qualified
Capital Stock of Abraxas (but excluding any
debt security that is convertible into, or
exchangeable for, Qualified Capital Stock of
Abraxas), plus
(D) 100% of the aggregate net cash
proceeds received after the Closing Date by
Abraxas (other than from any of its
Restricted Subsidiaries) upon the exercise
of any options, warrants or rights to
purchase shares of Qualified Capital Stock
of Abraxas, plus
(E) 100% of the aggregate net cash
proceeds received after the Closing Date by
Abraxas from the issuance or sale (other
than to any of its Restricted Subsidiaries)
of debt securities or shares of Disqualified
Stock that have been converted into or
exchanged for Qualified Capital Stock of
Abraxas, together with the aggregate net
cash received by Abraxas at the time of such
conversion or exchange, plus
(F) an amount equal to the sum of
(1) the aggregate amount returned in cash or
Cash Equivalents to Abraxas or its
Restricted Subsidiaries on or with respect
to any Investment (other than Permitted
Investments) made by Abraxas or its
Restricted Subsidiaries subsequent to the
Closing Date in any Person whether through
payments of interest, dividends, repayments
of loans or advances, or other transfers or
distributions of property, in an amount not
to exceed the book value of such Investment
previously made in such Person that was
treated as Restricted Payments, (2) the net
114
cash proceeds received by Abraxas or its
Restricted Subsidiaries from the disposition
of all or any portion of such Investment
(other than to a Subsidiary of Abraxas) in
an amount not to exceed the book value of
such Investment previously made in such
Person that was treated as Restricted
Payments and (3) upon the designation of any
Unrestricted Subsidiary as a Restricted
Subsidiary, in an amount not to exceed the
lesser of (x) the book value of such
Investment previously made in such
Unrestricted Subsidiary that was treated as
Restricted Payments and (y) the fair market
value of such Unrestricted Subsidiary and,
in each case of this clause (3), after
deducting any Indebtedness of the
Unrestricted Subsidiary so designated (and,
with respect to clauses (x) and (y), as
determined in good faith by the Board of
Directors of Abraxas as evidenced by a Board
Resolution delivered to the Trustee, unless
determined in good faith by the chief
executive officer of Abraxas to not exceed
$1.0 million and evidenced by an Officers'
Certificate delivered to the Trustee, and,
if so determined to be in excess of $5.0
million, based upon an opinion or appraisal
issued by an independent accounting or
investment banking firm which is nationally
recognized in the United States, or a
reputable independent appraisal or petroleum
engineering firm which is reasonably
satisfactory to the Trustee, as appropriate
under the circumstances), only to the extent
that the sum of clauses (1), (2) and (3)
above does not exceed the aggregate amount
of all such Investments made subsequent to
the Closing Date.
(2) Notwithstanding paragraph (1) above, Abraxas and its Restricted
Subsidiaries may take the following actions or make the following payments
(so long as in the case of clauses (b), (c), (d), (e) and (g) below no
Default or Event of Default shall have occurred and be continuing or occur
as a consequence of the actions or payments described below):
(a) pay any dividend on any Capital Stock of Abraxas
or any Restricted Subsidiary within 60 days after the date of
declaration thereof, if at such declaration date such
declaration complied with the provisions of paragraph (1)
above (and such payment will be deemed to have been paid on
such date of declaration for purposes of any calculation
required by the provisions of paragraph (1) above);
(b) repurchase, redeem, retire, defease or otherwise
acquire any shares of any class of Capital Stock of Abraxas or
any Restricted Subsidiary, in exchange for, or out of the
aggregate net cash proceeds of, a substantially concurrent
issue and sale (other than to a Restricted Subsidiary) of
shares of Qualified Capital Stock of Abraxas;
(c) repurchase, redeem, repay, defease or otherwise
acquire or retire for value any Subordinated Indebtedness in
exchange for, or out of the aggregate net cash proceeds of, a
substantially concurrent issue and sale (other than to a
Restricted Subsidiary) of (i) shares of Qualified Capital
Stock of Abraxas or (ii) Refinancing Indebtedness;
(d) repurchases by Abraxas of options to acquire
Capital Stock from one or more former officers, directors and
employees of Abraxas or any of its Subsidiaries (or any of
their authorized representatives) upon the death, disability
or termination of employment or directorship, as applicable,
provided that the amount paid by Abraxas with respect to all
such purchases (other than any purchase for which payment was
made in Qualified Capital Stock of Abraxas) from and after the
Closing Date does not exceed $500,000 in the aggregate for so
long as any Note remains outstanding and provided further
that, in the case of such options to acquire Capital Stock
(other than any such option being purchased with Qualified
Capital Stock of Abraxas), the market price of the Capital
Stock for which such options are exercisable is at least 40%
lower than the exercise price of such options;
(e) the repurchase or redemption of any Indebtedness
in the event of a change of control in accordance with
provisions similar to the covenant described under "Repurchase
115
at the Option of Holders Upon a Change of Control;" provided,
that, prior to or simultaneously with such repurchase, Abraxas
has made the Change of Control Offer as provided in such
covenant with respect to the Notes and has purchased all Notes
validly tendered for payment in connection with such Change of
Control Offer;
(f) as described under "Use of Proceeds," (i) defease
or otherwise acquire all of the outstanding 2003 Notes on the
Closing Date and (ii) redeem all of the outstanding 2003 Notes
on a date that is no later than 60 days after the Closing
Date, and pay related fees and expenses, with all the proceeds
from the issuance of the Notes; and
(g) other Restricted Payments in an aggregate amount
not to exceed $500,000 since the Closing Date.
The actions described in clause (a) of this paragraph (2) will be
Restricted Payments that will be permitted to be taken in accordance with this
paragraph (2) but which will reduce the amount that would otherwise be available
for Restricted Payments under clause (d)(iii) of paragraph (1) above when
declared (but not also when subsequently paid pursuant to such clause (a)). The
actions described in clauses (c), (d), (e) and (g) of this paragraph (2) will be
Restricted Payments that will be permitted to be taken in accordance with this
paragraph (2) but which will, except with respect to exchanges referred to in
such clause (c), reduce the amount that would otherwise be available for
Restricted Payments under clause (d)(iii) of paragraph (1) above. The actions
described in clause (b) of this paragraph (2), and clause (f) of this paragraph
(2) to the extent the actions described in such clause (f) constitute Restricted
Payments, will be Restricted Payments that will be permitted to be taken in
accordance with this paragraph (2) and will not reduce the amount that would
otherwise be available for Restricted Payments under clause (d)(iii) of
paragraph (1) above.
The amount of all Restricted Payments, other than cash, will be the fair
market value on the date of the Restricted Payment of the assets or securities
proposed to be transferred or issued by Abraxas or such Restricted Subsidiary,
as the case may be, pursuant to the Restricted Payment. The fair market value of
any assets or securities that are required to be so valued is to be determined
in good faith by the Board of Directors of Abraxas prior to the making of the
respective Restricted Payment and evidenced by a Board Resolution delivered to
the Trustee (or, solely with respect to assets and securities in an amount not
exceeding $1.0 million, as determined in good faith by the chief executive
officer of Abraxas and evidenced by an Officers' Certificate delivered to the
Trustee). If the fair market value so determined exceeds $5.0 million, the Board
of Directors' determination must be based upon an opinion or appraisal issued
prior to the making of the respective Restricted Payment by an independent
accounting or investment banking firm which is nationally recognized in the
United States, or a reputable independent appraisal or petroleum engineering
firm which is reasonably satisfactory to the Trustee, as appropriate under the
circumstances. Not later than (i) the date upon which we make a Restricted
Payment in excess of $1.0 million or upon which the last Restricted Payment of a
series of related Restricted Payments exceeding $1.0 million in the aggregate is
made by us or (ii) 45 days after the end of any fiscal quarter in which we make
Restricted Payments in excess of $1.0 million in the aggregate (excluding any
Restricted Payment for which an Officers' Certificate has previously been
delivered to the Trustee as contemplated by clause (i)), Abraxas will be
required to deliver to the Trustee an Officers' Certificate stating that each
such Restricted Payment is (or was) permitted and setting forth the basis upon
which the required calculations were computed, together with a copy of any such
required Board Resolution and/or fairness opinion or appraisal.
Limitation on Transactions with Affilia tes
The Indenture provides that Abraxas will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, enter into or suffer to
exist any transaction or series of related transactions (including, without
limitation, the sale, purchase, exchange or lease of assets, property or
services) with any Affiliate of Abraxas (other than Abraxas or a Restricted
Subsidiary) unless:
(1) such transaction or series of related transactions is on terms that
are no less favorable to Abraxas or such Restricted Subsidiary, as the case
may be, than would be available in a comparable transaction in arm's length
dealings with a Person that is not an Affiliate of Abraxas or such
Restricted Subsidiary;
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(2) with respect to a transaction or series of related transactions
involving payments in excess of $500,000 in the aggregate, Abraxas delivers
an Officers' Certificate to the Trustee certifying that such transaction or
series of related transactions complies with clause (1) above;
(3) without limiting clause (2) above, with respect to a transaction or
series of related transactions involving payments in excess of $1.0 million
in the aggregate, such transaction or series of related transactions shall
have been approved by the Board of Directors of Abraxas and at least
two-thirds of the independent directors of the Board of Directors of
Abraxas then in office and evidenced by a Board Resolution delivered to the
Trustee; and
(4) without limiting clause (2) or (3) above, with respect to a
transaction or series of related transactions involving payments of $5.0
million or more in the aggregate, Abraxas shall have delivered to the
Trustee the written opinion of an independent accounting or investment
banking firm which is nationally recognized in the United States, or a
reputable independent appraisal or petroleum engineering firm which is
reasonably satisfactory to the Trustee, as appropriate under the
circumstances, that such transaction or series of related transactions is
fair, from a financial point of view, to Abraxas or such Restricted
Subsidiary;
provided, however, that the foregoing restriction does not apply to:
(a) transactions exclusively between or among Abraxas and/or any of its
Restricted Subsidiaries;
(b) transactions consummated pursuant to any agreement existing on the
Closing Date (other than the corporate services agreement between Abraxas
and Grey Wolf), including any amendment to, or replacement of, such
existing agreement to the extent such amendment or replacement is not more
disadvantageous to the holders of the Notes in any material respect than
such existing agreement as in effect on the Closing Date;
(c) for so long as Grey Wolf is a Subsidiary of Abraxas, transactions
consummated pursuant to the corporate services agreement between Abraxas
and Grey Wolf, including any amendment to, or replacement of, such
agreement to the extent such amendment or replacement is not more
disadvantageous to the holders of the Notes in any material respect than
such agreement as in effect on the Closing Date;
(d) the payment of reasonable and customary regular fees to directors
of Abraxas or any of its Restricted Subsidiaries who are not employees of
Abraxas or any Affiliate thereof as determined in good faith by the Board
of Directors of Abraxas;
(e) payments made under the terms of employment agreements and employee
compensation and other benefit arrangements of Abraxas or any Restricted
Subsidiary in the ordinary course of business;
(f) indemnities of officers and directors of Abraxas or any Subsidiary
thereof consistent with such Person's charter, bylaws or other constituent
documents and applicable statutory provisions;
(g) Restricted Payments and Permitted Investments, in each case,
permitted by the provisions of the Indenture (see "--Limitation on
Restricted Payments");
(h) any Guarantee or assumption by Abraxas or any of its Restricted
Subsidiaries of Indebtedness of Abraxas or any of its Restricted
Subsidiaries Incurred in accordance with the terms of the Indenture; or
(i) the issuance of Qualified Capital Stock of Abraxas.
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Limitation on Liens
The Indenture provides that Abraxas will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, incur, assume or
suffer to exist, or become effective, any Lien of any kind whatsoever, except
for Permitted Liens, upon any of their respective assets or properties, whether
owned prior to or acquired after the Closing Date, or any income or profits
therefrom to secure any Indebtedness.
Limitation on Guarantees of Indebtedness by Subsidiaries and other
Affiliates
The Indenture provides that Abraxas will not permit any Subsidiary of
Abraxas that is not a Subsidiary Guarantor to Guarantee the payment of any
Indebtedness of Abraxas or the Restricted Subsidiaries other than the Notes
unless:
(1) such Subsidiary simultaneously (a) executes and delivers
to the Trustee a supplemental indenture to the Indenture and, if the
Registration Rights Agreement is then in effect, a joinder agreement to
the Registration Rights Agreement, each in form and substance
reasonably satisfactory to the Trustee, providing for such Subsidiary
to become a Subsidiary Guarantor under the Indenture and a party to the
Registration Rights Agreement and (b) delivers to the Trustee an
opinion of counsel, in form and substance reasonably satisfactory to
the Trustee, to the effect that such supplemental indenture and joinder
agreement have been duly authorized, executed and delivered by such
Subsidiary and constitute legal, valid and binding obligations of such
Subsidiary;
(2) if such Subsidiary is a Restricted Subsidiary, all
properties and assets of the kind constituting Collateral then owned by
such Subsidiary shall be subject to a valid, enforceable perfected
first priority security interest (subject to Permitted Prior Liens) in
favor of the Collateral Agent as security for the Note Obligations; and
(3) such Subsidiary waives and agrees not to claim or take the
benefit or advantage of, in any manner whatsoever, any rights of
reimbursement, indemnity or subrogation or any other rights against
Abraxas or any Restricted Subsidiary as a result of any payment by such
Subsidiary under its Subsidiary Guarantee until such time as the
obligations Guaranteed thereby are paid in full;
provided that this paragraph is not applicable to any Guarantee by any
Subsidiary of Abraxas that (a) existed at the time such Person became a
Subsidiary of Abraxas and (b) was not Incurred in connection with, or in
contemplation of, such Person becoming a Subsidiary of Abraxas. Any Subsidiary
Guarantee entered into by a Subsidiary of Abraxas will be deemed released upon
the release or discharge of each Guarantee that resulted in the creation of such
Subsidiary Guarantee of the Notes, except a discharge or release by or as a
result of payment under any such Guarantee.
The Indenture also provides that Abraxas will not permit any of its other
Affiliates to Guarantee the payment of any Indebtedness of Abraxas or the
Restricted Subsidiaries other than the Notes unless:
(1) such Affiliate simultaneously (a) executes and delivers to the Trustee
a supplemental indenture to the Indenture and, if the Registration Rights
Agreement is then in effect, a joinder agreement to the Registration Rights
Agreement, each in form and substance reasonably satisfactory to the Trustee,
providing for such Affiliate to become a guarantor of the Notes under the
Indenture and a party to the Registration Rights Agreement and (b) deliver to
the Trustee an opinion of counsel, in form and substance reasonably satisfactory
to the Trustee, to the effect that such supplemental indenture and joinder
agreement have been duly authorized, executed and delivered by such Affiliate
and constitute legal, valid and binding obligation of such Affiliate; and
(2) such Affiliate waives and agrees not to claim or take the benefit or
advantage of, in any manner whatsoever, any rights of reimbursement, indemnity
or subrogation or any other rights against Abraxas or any Restricted Subsidiary
as a result of any payment by such Affiliate under its Guarantee until such time
as the obligations Guaranteed thereby are paid in full.
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Any Guarantee of the Notes entered into by such an Affiliate will be deemed
released upon the release or discharge of each Guarantee that resulted in the
creation of such Guarantee of the Notes, except a discharge or release by or as
a result of payment under any such Guarantee.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Indenture provides that Abraxas will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create or otherwise cause or
suffer to exist, or become effective, any consensual encumbrance or restriction
of any kind on the ability of any Restricted Subsidiary to:
(1) pay dividends, in cash or otherwise, or make any other
distribution on or in respect of its Capital Stock to Abraxas or any
other Restricted Subsidiary;
(2) make loans or advances to Abraxas or any other Restricted
Subsidiary or to pay any Indebtedness owed to Abraxas or any other
Restricted Subsidiary;
(3) make an Investment in Abraxas or any other Restricted
Subsidiary; or
(4) transfer any of its properties or assets to Abraxas or any
other Restricted Subsidiary;
except in each instance for such encumbrances or restrictions pursuant to:
(a) applicable law;
(b) the Indenture, the Notes, the Collateral
Documents, the Revolving Credit Facility or the Bridge Loan;
(c) agreements in effect as of the Closing Date to
the extent and in the manner such encumbrances or restrictions
are in effect on such date;
(d) any agreement or other instrument governing
Acquired Indebtedness, which encumbrance or restriction is not
applicable to any other Person, or the properties or assets of
any other Person, other than the Person, or the property or
assets of the Person, so acquired;
(e) customary non-assignment restrictions in leases
and licenses relating solely to the property covered thereby
and entered into in the ordinary course of business;
(f) any agreement for the sale or other disposition
of a Restricted Subsidiary or its assets not otherwise
prohibited by the Indenture that restricts transactions by the
Restricted Subsidiary solely with respect to shares of Capital
Stock of the Restricted Subsidiary or such assets pending such
sale or other disposition, provided that any encumbrance or
restriction pursuant to such agreement by its terms lapses no
later than 180 days after the date of such agreement;
(g) customary non-assignment restrictions in joint
venture agreements, Permitted Farmout Agreements or other
similar agreements not otherwise prohibited by the Indenture
relating solely to the equity interests in the joint venture
or similar entity, or solely to the Farmout Property in the
case of a Permitted Farmout Agreement, and in each case
entered into in the ordinary course of business;
(h) provisions in an agreement or instrument
governing a Permitted Lien that limit the ability of Abraxas
or any Restricted Subsidiary to dispose of assets subject to
that Permitted Lien; or
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(i) any agreement governing Refinancing Indebtedness
that extends, renews, refinances or replaces Indebtedness
issued, assumed or incurred pursuant to any of the agreements
referred to in the foregoing clauses (b) through (h); provided
that the provisions relating to such encumbrance or
restriction contained in such agreement governing Refinancing
Indebtedness are no less favorable to the holders of the Notes
as determined by the Board of Directors of Abraxas in its
reasonable and good faith judgment (and evidenced by a Board
Resolution delivered to the Trustee) than those under or
pursuant to the applicable agreement referred to in the
foregoing clauses (b) through (h).
Limitation on Issuance, Sale and Ownership of Capital Stock of Restricted
Subsidiaries
The Indenture provides that Abraxas:
(1) will not permit any Restricted Subsidiary to issue any
Capital Stock (other than to Abraxas or a Wholly-owned Restricted
Subsidiary); and
(2) will not permit any Person (other than Abraxas or a
Wholly-owned Restricted Subsidiary) to own any Capital Stock of any
Restricted Subsidiary, except, in the case of either clause (1) or (2),
for:
(a) directors' qualifying shares;
(b) Capital Stock of a Restricted Subsidiary
organized in a jurisdiction other than the United States
required as a legal matter to be issued to, or owned by, the
government of such foreign jurisdiction or an individual or
corporate citizens of such foreign jurisdiction in order for
such Restricted Subsidiary to transact business in such
foreign jurisdiction;
(c) a sale of Capital Stock of a Restricted
Subsidiary effected in accordance with the covenants described
under "--Limitation on Incurrence of Indebtedness and Issuance
of Disqualified Stock," "--Limitation on Asset Sales" and
"--Limitation on Restricted Payments" and only if, immediately
after giving effect to such sale, such Restricted Subsidiary
would no longer constitute a Restricted Subsidiary and any
Investment in such Person remaining after giving effect to
such sale would have been permitted under the covenants
described under "--Limitation on Asset Sales" and
"--Limitation on Restricted Payments;"
(d) the issuance of Capital Stock by a Restricted
Subsidiary to a Person other than Abraxas or a Wholly-owned
Restricted Subsidiary, which issuance was made in accordance
with the covenants described under "--Limitation on Incurrence
of Indebtedness and Issuance of Disqualified Stock,"
"--Limitation on Asset Sales" and "--Limitation on Restricted
Payments" and only if, immediately after giving effect to such
issuance, such Restricted Subsidiary would no longer
constitute a Restricted Subsidiary and any Investment in such
Person remaining after giving effect to such issuance would
have been permitted under the covenants described under
"--Limitation on Asset Sales" and "--Limitation on Restricted
Payments;" and
(e) the ownership of shares of Capital Stock of a
Restricted Subsidiary owned by a Person at the time such
Restricted Subsidiary became a Restricted Subsidiary or
acquired by such Person in connection with the formation of
the Restricted Subsidiary;
provided, however, that any Capital Stock retained by Abraxas or a Restricted
Subsidiary in the case of clause (c), (d) or (e) will be treated as an
Investment for purposes of the covenant described under "--Limitation on
Restricted Payments," if the amount of such shares of Capital Stock represents
less than a majority of the Voting Stock of such Restricted Subsidiary.
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Merger, Consolidation or Sale of Assets
The Indenture provides that Abraxas will not, in any single transaction or
series of related transactions, consolidate or merge with or into any other
Person, or sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of the properties and assets of Abraxas and its Restricted
Subsidiaries on a consolidated basis to any other Person or group of Affiliated
Persons (other than Abraxas and its Wholly-owned Restricted Subsidiaries), and
Abraxas will not permit any of its Restricted Subsidiaries to enter into any
such transaction or series of transactions if such transaction or series of
transactions, in the aggregate, would result in a sale, assignment, conveyance,
transfer, lease or other disposition of all or substantially all of the
properties and assets of Abraxas and its Restricted Subsidiaries on a
consolidated basis to any other Person or group of Affiliated Persons (other
than Abraxas and its Wholly-owned Restricted Subsidiaries), unless at the time
and after giving effect thereto, either:
(A) (1) either (a) if the transaction is a merger or
consolidation, Abraxas shall be the surviving Person of such
merger or consolidation or (b) the Person (if other than
Abraxas) formed by such consolidation or into which Abraxas is
merged or to which the properties and assets of Abraxas or its
Restricted Subsidiaries, as the case may be, are sold,
assigned, conveyed, transferred, leased or otherwise disposed
of (any such surviving Person or transferee Person being the
"Surviving Entity") shall be a corporation organized and
existing under the laws of the United States of America, any
state thereof or the District of Columbia and shall, in either
case, (I) expressly assume by a supplemental indenture to the
Indenture and, if the Registration Rights Agreement is then in
effect, a joinder agreement to the Registration Rights
Agreement, each executed and delivered to the Trustee, in form
and substance reasonably satisfactory to the Trustee, all the
obligations of Abraxas under the Notes, the Indenture and, if
applicable, the Registration Rights Agreement and (II) take
such actions described under "--Security--Collateral;
After-Acquired Property; Permitted Liens," if applicable, such
that the transaction does not result in the surviving Entity
owning or having acquired Collateral that is not subject to a
valid and enforceable perfected first priority security
interest (subject to Permitted Prior Liens) in favor of the
Collateral Agent as security for the Note Obligations, and, in
the case of a transaction described under (a) or (b), the
Notes, the Indenture and, if applicable, the Registration
Rights Agreement shall remain in full force and effect;
(2) immediately before and immediately after giving
effect to such transaction or series of transactions on a pro
forma basis (and treating any Indebtedness not previously an
obligation of Abraxas or any of its Restricted Subsidiaries in
connection with or as a result of such transaction or
transactions as having been incurred at the time of such
transaction), no Default or Event of Default shall have
occurred and be continuing;
(3) except in the case of the consolidation or merger
of any Restricted Subsidiary with or into Abraxas, immediately
after giving effect to such transaction or transactions on a
pro forma basis, the Consolidated Fixed Charge Coverage Ratio
(or that of the surviving entity if Abraxas is not the
continuing obligor under the Indenture) is not less than the
Consolidated Fixed Charge Coverage Ratio immediately before
such transaction or transactions;
(4) except in the case of the consolidation or merger
of Abraxas with or into a Wholly-owned Restricted Subsidiary
or of any Restricted Subsidiary with or into Abraxas or any
Wholly-owned Restricted Subsidiary, immediately before and
immediately after giving effect to such transaction or
transactions on a pro forma basis (on the assumption that the
transaction or transactions occurred on the first day of the
period of four fiscal quarters for which financial statements
are available ending immediately prior to the consummation of
such transaction or transactions, with the appropriate
adjustments with respect to the transaction or transactions
being included in such pro forma calculation) Abraxas (or the
Surviving Entity if Abraxas is not the continuing obligor
under the Indenture) could Incur $1.00 of additional
Indebtedness (excluding Permitted Indebtedness) in compliance
with the covenant described under "--Limitation on Incurrence
of Indebtedness and Issuance of Disqualified Stock;"
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(5) if any of the properties or assets of Abraxas or
any of its Restricted Subsidiaries would upon such transaction
or series of related transactions become subject to any Lien
(other than a Permitted Lien), the creation and imposition of
such Lien shall have been in compliance with the covenant
described under "--Limitation on Liens;"
(6) if Abraxas is not the continuing obligor under
the Indenture, then any Subsidiary Guarantor, unless it is the
Surviving Entity, shall have by supplemental indenture to the
Indenture, in form and substance reasonably satisfactory to
the Trustee, confirmed that its Subsidiary Guarantee of the
Notes shall apply to the Surviving Entity's obligations under
the Indenture and the Notes; and
(7) Abraxas (or the Surviving Entity if Abraxas is
not the continuing obligor under the Indenture) shall have
delivered to the Trustee, in form and substance reasonably
satisfactory to the Trustee, (a) an Officers' Certificate
stating that such transaction or series of related
transactions and the supplemental indenture to the Indenture,
if any, in respect thereto comply with the requirements under
the Indenture and (b) an opinion of counsel stating that (I)
the requirements of clause (1) of this paragraph (A) have been
satisfied and (II) any supplemental indenture to the Indenture
or joinder agreement to the Registration Rights Agreement
delivered to the Trustee in accordance with the requirements
of this paragraph (A) has been duly authorized, executed and
delivered by the Surviving Entity or any Subsidiary Guarantor
a party thereto and constitutes a legal, valid and binding
obligation of the Surviving Entity and any such Subsidiary
Guarantor; or
(B) the transaction is effected in compliance with the
covenant described under "--Limitation on Asset Sales;" provided that
all of the Notes then outstanding are actually paid in full in
accordance with such covenant.
The Indenture expressly provides that so long as the fair market value of
the Capital Stock of Grey Wolf owned by Abraxas and its Subsidiaries does not
exceed 50% of the fair market value of all of the properties and assets of
Abraxas and its Subsidiaries on a consolidated basis (determined in good faith
by the Board of Directors of Abraxas and evidenced by a Board Resolution
delivered to the Trustee), then any disposition of all or a portion of such
Capital Stock by Abraxas and its Restricted Subsidiaries will not constitute a
sale of all or substantially all of the properties and assets of Abraxas and its
Restricted Subsidiaries on a consolidated basis for purposes of the covenants
described under this "--Merger, Consolidation or Sale of Assets" or for purposes
of clause (3) of the definition of Change of Control (see "--Certain
Definitions").
Upon any consolidation or merger or any sale, assignment, conveyance,
transfer, lease or other disposition of all or substantially all of the
properties and assets of Abraxas and its Restricted Subsidiaries on a
consolidated basis in accordance with the foregoing, in which Abraxas is not the
continuing corporation, the Surviving Entity shall succeed to, and be
substituted for, and may exercise every right and power of, Abraxas under the
Indenture with the same effect as if the Surviving Entity had been named as
Abraxas therein, and thereafter, in the case of any such sale, assignment,
conveyance, transfer or other disposition (but not a lease), Abraxas will be
discharged from all obligations and covenants under the Indenture and the Notes
and Abraxas may be dissolved and liquidated.
Abraxas will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or a series
of related transactions, all or substantially all of its properties and assets
to any Person unless:
(i) the resulting, surviving or transferee Person (if not such
Subsidiary Guarantor) shall be a Person organized and existing under
the laws of the jurisdiction under which such Subsidiary Guarantor was
organized or under the laws of the United States of America, any state
thereof or the District of Columbia, and such Person shall (I)
expressly assume by a supplemental indenture to the Indenture and, if
the Registration Rights Agreement is then in effect, a joinder
agreement to the Registration Rights Agreement, each executed and
delivered to the Trustee, in form and substance reasonably satisfactory
to the Trustee, all the obligations of such Subsidiary Guarantor under
its Subsidiary Guarantee and, if applicable, the Registration Rights
Agreement and (II) take such actions described under
"--Security--Collateral; After-Acquired Property; Permitted Liens," if
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applicable, such that the transaction does not result in either (x)
such Person owning or having acquired Collateral that is not subject to
a valid and enforceable perfected first priority security interest
(subject to Permitted Prior Liens) in favor of the Collateral Agent as
security for the Note Obligations or (y) all of the Capital Stock of
such Person owned directly or indirectly by Abraxas being duly pledged
as a first priority perfected security interest (subject to Permitted
Prior Liens) to the Collateral Agent for the benefit of the holders of
the Note Obligations;
(ii) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness which
becomes an obligation of the resulting, surviving or transferee Person
as a result of such transaction as having been issued by such Person at
the time of such transaction), no Default or Event of Default shall
have occurred and be continuing;
(iii) Abraxas would be permitted by virtue of its pro forma
Consolidated Fixed Charge Coverage Ratio, immediately after giving
effect to such transaction, to Incur at least $1.00 of additional
Indebtedness (excluding Permitted Indebtedness) in compliance with the
Consolidated Fixed Charge Coverage Ratio test set forth in the covenant
described under "Certain Covenants--Incurrence of Indebtedness and
Issuance of Disqualified Stock;" and
(iv) Abraxas delivers to the Trustee, in form and substance
reasonably satisfactory to the Trustee, (a) an Officers' Certificate
and an opinion of counsel stating that such consolidation, merger or
transfer and such supplemental indenture to the Indenture, if any, in
respect thereto comply with the requirements under the Indenture and
(b) an opinion of counsel stating that (I) the requirements of clause
(i) of this paragraph have been satisfied and (II) any supplemental
indenture to the Indenture or joinder agreement to the Registration
Rights Agreement delivered to the Trustee in accordance with the
requirements of this paragraph has been duly authorized, executed and
delivered by the resulting, surviving or transferee Person and
constitutes a legal, valid and binding obligation of such Person;
provided, however, that clauses (i), (iii) and (iv)(b) above will not apply if
such transaction or transactions comply with the covenant described under
"--Limitation on Asset Sales" and such resulting, surviving or transferee Person
is no longer a Subsidiary of Abraxas. See "--Subsidiary Guarantees of Notes."
Reports
So long as any Note is outstanding and Abraxas is required by the rules and
regulations of the SEC, it will file with the SEC via the Electronic Data
Gathering and Retrieval system ("EDGAR") for public availability (unless the SEC
will not accept such a filing), within the time periods specified in the SEC's
rules and regulations:
o all quarterly and annual reports that would be required to be filed
with the SEC on Forms 10-Q and 10-K if we were required to file such
reports; and
o all current reports that we would be required to file with the SEC on
Form 8-K if we were required to file such reports.
Abraxas will also concurrently post on its website each such report so
filed with the SEC. We will not take any action for the purpose of causing the
SEC not to accept any such filings via EDGAR or otherwise.
All such reports will be prepared in all material respects in accordance
with all of the rules and regulations applicable to such reports. Each annual
report on Form 10-K will include a report on our consolidated financial
statements by a firm of certified independent accountants.
If, at any time, Abraxas is no longer subject to the periodic reporting
requirements of the Exchange Act for any reason or is not otherwise required to
file with the SEC the reports specified in the first paragraph under this
covenant, Abraxas will instead furnish, or provide to the Trustee and cause the
Trustee to furnish, to the holders of the Notes the information required in each
such report within the time period specified in the SEC's rules and regulations
(as if Abraxas was required to file such report with the SEC); provided,
however, Abraxas will not be required to include any officer's certification
123
which would be required to be filed as an exhibit to such report had such report
been filed with the SEC.
Abraxas' quarterly and annual financial information required by the first
paragraph under this covenant will include, for any period during which at least
one of our Subsidiaries continues to be an Unrestricted Subsidiary, a reasonably
detailed presentation, either on the face of the financial statements or in the
footnotes thereto, of Abraxas' financial condition and results of operations and
those of its Restricted Subsidiaries separate from the financial condition and
results of operations of its Unrestricted Subsidiaries.
In addition, Abraxas will agree that, for so long as any Notes remain
outstanding, if at any time Abraxas is not required to file with the SEC the
reports specified in this first paragraph under this covenant, Abraxas will
furnish to the holders of Notes and to securities analysts and prospective
investors, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act.
Additional Covenants
Among other matters, the Indenture also contains covenants with respect to
the following: (i) payment of principal, premium and interest; (ii) maintenance
of an office or agency in The City of New York; and (iii) maintenance of
corporate existence.
Events of Default and Remedies
Each of the following constitutes an "Event of Default" under the
Indenture:
(1) default in the payment when due of interest on the Notes,
and such default continues for 30 days;
(2) default in the payment when due of the principal of or
premium on any Note, whether such payment is due at maturity, upon
redemption, upon repurchase pursuant to a Change of Control Offer or a
Net Proceeds Offer, upon declaration of acceleration or otherwise;
(3) default in the performance or breach of the provisions
described under "Repurchase at the Option of Holders Upon a Change of
Control" and "--Certain Covenants--Merger, Consolidation or Sale of
Assets;"
(4) failure by Abraxas or any Restricted Subsidiary to comply
with any other term, covenant or agreement contained in the Notes, any
Subsidiary Guarantee, any Collateral Document or the Indenture (other
than a default specified in clause (1), (2) or (3) above) for a period
of 60 days after written notice of such failure stating that it is a
"notice of default" under the Indenture and requiring Abraxas or such
Restricted Subsidiary, as the case may be, to remedy the same shall
have been given (a) to Abraxas by the Trustee or (b) to Abraxas and the
Trustee by the holders of at least 25% in aggregate principal amount of
the Notes then outstanding;
(5) the occurrence and continuation beyond any applicable
grace period of any default in the payment when due of the principal
of, or premium or interest on, any Indebtedness for borrowed money of
Abraxas (other than the Notes) or any Restricted Subsidiary or any
other default resulting in acceleration of any Indebtedness for
borrowed money of Abraxas or any Restricted Subsidiary, but only in the
event that the aggregate principal amount of such Indebtedness shall
exceed $2.0 million;
(6) without limiting clause (5) above, the occurrence and
continuation of an "event of default" under either the Revolving Credit
Facility or the Bridge Loan;
(7) any Subsidiary Guarantee shall for any reason cease to be,
or be asserted by Abraxas, any Subsidiary Guarantor, any of their
respective Affiliates or any Person acting on behalf of any of the
foregoing not to be, in full force and effect and enforceable in any
material respect in accordance with its terms (except pursuant to the
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release or termination of any such Subsidiary Guarantee in accordance
with the Indenture);
(8) any Collateral Document shall for any reason cease to be,
or be asserted by Abraxas, any Restricted Subsidiary, any of their
respective Affiliates or any Person acting on behalf of any of the
foregoing not to be, in full force and effect and enforceable in any
material respect in accordance with its terms or to not otherwise grant
a duly perfected first priority security interest in the Collateral in
favor of the holders of the Note Obligations (subject to Permitted
Prior Liens and except pursuant to a release or termination thereof
consummated in accordance with the Indenture and the Intercreditor
Agreement and other Collateral Documents) for a period of 30 days after
written notice thereof stating that it is a "notice of default" under
the Indenture and requiring Abraxas or the respective Restricted
Subsidiary, as the case may be, to remedy the same shall have been
given (a) to Abraxas by the Trustee or (b) to Abraxas and the Trustee
by the holders of at least 25% in aggregate principal amount of the
Notes then outstanding;
(9) final judgments or orders rendered against Abraxas or any
Restricted Subsidiary that are unsatisfied and that require the payment
in money, either individually or in an aggregate amount, that is more
than $2.0 million over the coverage under applicable insurance policies
and either (a) commencement by any creditor of an enforcement
proceeding upon such judgment (other than a judgment that is stayed by
reason of pending appeal or otherwise) or (b) the occurrence of a
60-day period during which a stay of such judgment or order, by reason
of pending appeal or otherwise, was not in effect;
(10) the entry of a decree or order by a court having
jurisdiction in the premises (a) for relief in respect of Abraxas or
any Subsidiary in an involuntary case or proceeding under any
applicable Federal or state bankruptcy, insolvency, reorganization or
other similar law or (b) adjudging Abraxas or any Subsidiary bankrupt
or insolvent, or approving a petition seeking reorganization,
arrangement, adjustment or composition of Abraxas or any Subsidiary
under any applicable Federal or state law, or appointing under any such
law a custodian, receiver, liquidator, assignee, trustee, sequestrator
or other similar official of Abraxas or any Subsidiary or of a
substantial part of its consolidated assets, or ordering the winding up
or liquidation of its affairs, and the continuance of any such decree
or order for relief or any such other decree or order unstayed and in
effect for a period of 60 consecutive days; and
(11) the commencement by Abraxas or any Subsidiary of a
voluntary case or proceeding under any applicable Federal or state
bankruptcy, insolvency, reorganization or other similar law or any
other case or proceeding to be adjudicated bankrupt or insolvent, or
the consent by Abraxas or any Subsidiary to the entry of a decree or
order for relief in respect thereof in an involuntary case or
proceeding under any applicable Federal or state bankruptcy,
insolvency, reorganization or other similar law or to the commencement
of any bankruptcy or insolvency case or proceeding against it, or the
filing by Abraxas or any Subsidiary of a petition or consent seeking
reorganization or relief under any applicable Federal or state law, or
the consent by it under any such law to the filing of any such petition
or to the appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee or sequestrator (or other similar
official) of any of Abraxas or any Subsidiary or of any substantial
part of its consolidated assets, or the making by it of an assignment
for the benefit of creditors under any such law, or the admission by it
in writing of its inability to pay its debts generally as they become
due or the taking of corporate action by Abraxas or any Subsidiary in
furtherance of any such action.
If any Event of Default (other than as specified in clause (10) or (11)
above) occurs and is continuing, the Trustee, by written notice to Abraxas, or
the holders of at least 25% in aggregate principal amount of the Notes then
outstanding, by notice to the Trustee and Abraxas, may, and the Trustee upon the
request of the holders of not less than 25% in aggregate principal amount of the
Notes then outstanding shall, declare the principal of, and premium, if any, and
accrued interest on, all of the Notes due and payable immediately, upon which
declaration all amounts payable in respect of the Notes shall be immediately due
and payable; if an Event of Default specified in clause (10) or (11) above
occurs and is continuing, then the principal of, and premium, if any, and
accrued interest on, all of the Notes shall automatically become and be
immediately due and payable without any declaration, notice or other act on the
part of the Trustee or any holder of the Notes.
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After a declaration of acceleration under the Indenture, but before a
judgment or decree for payment of the money due has been obtained by the Trustee
or holders of the Notes as permitted under the Indenture, the holders of a
majority in aggregate principal amount of the outstanding Notes, by written
notice to Abraxas, the Subsidiary Guarantors and the Trustee, may (i) rescind
such declaration and its consequences and (ii) on behalf of the holders of all
the Notes, waive any existing Event of Default and its consequences, except a
continuing Event of Default specified in clause (2) above, if:
(1) Abraxas or any Subsidiary Guarantor has paid or deposited
with the Trustee a sum sufficient to pay (a) all sums paid or advanced
by the Trustee under the Indenture and the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and
counsel, (b) all overdue interest on all outstanding Notes, (c) the
unpaid principal of (and premium, if any, on) any outstanding Notes
which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the Notes and
(d) to the extent that payment of such interest is lawful, interest
upon overdue interest and overdue principal at the rate borne by the
Notes (without duplication of any amount paid or deposited pursuant to
clause (b) or (c));
(2) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction as certified to the Trustee
by Abraxas; and
(3) all Defaults and Events of Default, other than the
nonpayment of principal of (or premium, if any, on) or interest on the
Notes that has become due solely by such declaration of acceleration,
have been cured or waived as provided in the Indenture.
No holder of any of the Notes has any right to institute any proceeding
with respect to the Indenture or any remedy thereunder, unless (i) such holder
has notified the Trustee in writing of a continuing Event of Default, (ii) the
holders of at least 25% in aggregate principal amount of the outstanding Notes
have made written request to institute such proceeding or pursue such remedy,
and offered reasonable indemnity, satisfactory to the Trustee against the costs,
expenses and liabilities to be incurred in compliance with the request, (iii)
the Trustee has failed to institute such proceeding within 60 days after receipt
of such notice and (iv) the Trustee, within such 60-day period, has not received
directions inconsistent, in the opinion of the Trustee, with such written
request by holders of a majority in aggregate principal amount of the
outstanding Notes. Such limitations do not apply, however, to a suit instituted
by a holder of a Note for the enforcement of the payment of the principal of (or
premium, if any, on) or interest on such Note on or after the respective due
dates expressed in such Note.
During the existence of an Event of Default, the Trustee will be 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 person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the Trustee
in case an Event of Default shall occur and be continuing, the Trustee will not
be under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders of Notes unless such
holders shall have offered to the Trustee reasonable security or indemnity
satisfactory to the Trustee. Subject to certain provisions concerning the rights
of the Trustee and to the terms and provisions of the Intercreditor Agreement
and other Collateral Documents, the holders of a majority in aggregate principal
amount of the 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. See
"Intercreditor Agreement."
If a Default or an Event of Default occurs and is continuing and is known
to the Trustee by virtue of having received written notice thereof, the Trustee
is required to mail to each holder of Notes notice of the Default or Event of
Default within 60 days after the occurrence thereof. Except in the case of a
Default or an Event of Default in payment of principal of (or premium, if any,
on) or interest on any Notes, the Trustee may withhold the notice to the holders
of Notes if the board of directors of the Trustee, a committee of its board of
directors or a committee of its Trust officers determines in good faith that
withholding the notice is in the interest of such holders.
Abraxas is required to deliver to the Trustee annual and quarterly
statements regarding compliance with the Indenture, and Abraxas is also be
required, upon becoming aware of any Default or Event of Default, to deliver to
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the Trustee, promptly after becoming aware of such Default or Event of Default,
a statement specifying such Default or Event of Default.
Legal Defeasance and Covenant Defeasance
Abraxas may, at its option and at any time after (1) the penultimate
Interest Reset Date preceding the final Stated Maturity of the Notes or (2) if
applicable, the penultimate Interest Reset Date preceding the redemption date
upon which all of the outstanding Notes have been called for redemption in
accordance with the terms of the Indenture, elect to have all of the obligations
of Abraxas and the Subsidiary Guarantors discharged with respect to the
outstanding notes ("Legal Defeasance"). Such Legal Defeasance means that Abraxas
and the Subsidiary Guarantors will be deemed to have paid and discharged the
entire Indebtedness represented by the outstanding Notes and to have been
discharged from all their other obligations with respect to such Notes and the
Subsidiary Guarantees, except for (a) the rights of holders of outstanding Notes
to receive payment from the trust referred to below in respect of the principal
of, and premium, if any, and interest on, such Notes when such payments are due,
(b) obligations of Abraxas to issue or replace any temporary Notes, register the
transfer or exchange of any Notes, replace mutilated, destroyed, lost or stolen
Notes and maintain an office or agency for payments in respect of the Notes, (c)
the rights, powers, trusts, duties and immunities of the Trustee and (d) the
Legal Defeasance provisions of the Indenture. In addition, Abraxas may, at its
option and at any time after (1) the penultimate Interest Reset Date preceding
the final Stated Maturity of the Notes or (2) if applicable, the penultimate
Interest Reset Date preceding the redemption date upon which all of the
outstanding Notes have been called for redemption in accordance with the terms
of the Indenture, elect to have the obligations of Abraxas and each Subsidiary
Guarantor released with respect to certain covenants that are described in the
Indenture, some of which are described under "--Certain Covenants," and
thereafter any omission to comply with such obligations shall not constitute a
Default or an Event of Default with respect to the Notes ("Covenant
Defeasance"). In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, insolvency and reorganization
events) described under "Events of Default and Remedies" will no longer
constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Abraxas must specify whether the Notes are being defeased
to their final Stated Maturity or to a particular redemption date;
(2) Abraxas or any Subsidiary Guarantor must irrevocably
deposit with the Trustee, as trust funds in trust, for the benefit of
the holders of the Notes, cash in United States dollars, U.S.
governmental obligations, or a combination thereof, in such aggregate
amount as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, and
premium, if any, and interest on, the outstanding Notes on their final
Stated Maturity or on an applicable redemption date for which a notice
of redemption has previously been mailed, as applicable; provided,
that, if the day on which such deposit is made is not after the
Interest Reset Date immediately preceding such final Stated Maturity or
redemption date, as the case may be, then the interest rate from and
after such Interest Reset Date used to calculate such amount to be so
deposited will be the interest rate on the Notes on the day immediately
preceding such Interest Reset Date plus the greater of (a) 2.00% and
(b) such other percent as may be requested by the Trustee in order to
provide reasonable assurance in the judgment of the Trustee that the
amount being so deposited will be sufficient to pay the principal of,
and premium, if any, and interest on, the outstanding Notes on such
final Stated Maturity or redemption date, as the case may be;
(3) Abraxas shall have delivered to the Trustee an opinion of
counsel, in form and substance reasonably satisfactory to the Trustee,
to the effect that the holders of the outstanding Notes will not
recognize income, gain or loss for United States Federal income tax
purposes as a result of such Legal Defeasance or Covenant Defeasance
and will be subject to United States 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 or Covenant Defeasance had not
occurred (in the case of Legal Defeasance, such opinion must refer to
and be based upon a published ruling of the Internal Revenue Service or
a change in applicable United States Federal income tax laws);
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(4) no Event of Default shall have occurred and be continuing
on the date of such deposit or insofar as clauses (10) and (11) under
the first paragraph under "Events of Default and Remedies" are
concerned, at any time during the period ending on the 91st day after
the date of deposit;
(5) Abraxas must deliver to the Trustee an opinion of counsel,
in form and substance reasonably satisfactory to the Trustee, to the
effect that after the 91st day following such deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(6) Abraxas must deliver to the Trustee an Officers'
Certificate stating that such deposit was not made by Abraxas with the
intent of hindering, delaying or defrauding, or making preferential
payments to the holders of Notes in lieu of payments to, creditors of
Abraxas or its Subsidiaries;
(7) such Legal Defeasance or Covenant Defeasance shall not
cause the Trustee to have a conflicting interest under the Indenture or
the Trust Indenture Act with respect to any securities of Abraxas or
any Subsidiary Guarantor;
(8) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under, any
material agreement or instrument to which Abraxas or any Subsidiary
Guarantor is a party or by which it is bound; and
(9) Abraxas shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel, in form and substance reasonably
satisfactory to the Trustee, each stating that all conditions precedent
under the Indenture to either Legal Defeasance or Covenant Defeasance,
as the case may be, have been satisfied.
Following the date upon which the entire principal of, and all premium, if
any, and interest on, all of the outstanding Notes is then due and payable, the
Trustee will unless there is then an Event of Default, upon request made to it
by Abraxas, be required to pay to Abraxas the difference, if any, of (x) the
aggregate amount of any money or U.S. governmental obligations deposited with
the Trustee in accordance with clause (2) of the immediately preceding paragraph
and (y) the aggregate amount of any principal of, and all premium, if any, and
interest on, the Notes which is then due and payable.
Satisfaction and Discharge
Upon a request by Abraxas, the Indenture, the Notes and the Subsidiary
Guarantees 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 and the
rights of the holders of the Notes to receive payment with respect to
Indebtedness under the Notes from the funds deposited with the Trustee described
below and as otherwise expressly provided for in the Indenture) as to all
outstanding Notes when:
(1) either (a) all the Notes theretofore authenticated and
delivered (except lost, stolen or destroyed Notes that have been
replaced or paid and Notes for whose payment money or certain United
States governmental obligations have theretofore been deposited in
trust or segregated and held in trust by Abraxas and thereafter repaid
to Abraxas or discharged from such trust) have been delivered to the
Trustee for cancellation or (b) all Notes not theretofore delivered to
the Trustee for cancellation (I) have become due and payable, (II) will
become due and payable at their final Stated Maturity within a period
of time that does not have more than one Interest Reset Date or (III)
have been or are to be called for redemption, within a period of time
that does not have more than one Interest Reset Date, under the terms
of the Indenture for the serving of notice of redemption by the Trustee
in the name, and at the expense, of Abraxas, and (in the case of clause
(b)) Abraxas has 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 (and premium, if any, on)
and interest on the Notes to the date of deposit (in the case of Notes
which have become due and payable) or to such final Stated Maturity or
redemption date, as the case may be, provided, that, if the day on
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which such deposit is made is not after the Interest Reset Date
immediately preceding such final Stated Maturity or redemption date, as
the case may be, the interest rate from and after such Interest Reset
Date used to calculate such amount to be so deposited will be the
interest rate on the Notes on the day immediately preceding such
Interest Reset Date plus the greater of (a) 2.00% and (b) such other
percent as may be requested by the Trustee in order to provide
reasonable assurance in the judgment of the Trustee that the amount
being so deposited will be sufficient to pay and discharge the
principal of, and premium, if any, and interest on, the outstanding
Notes on such final Stated Maturity or redemption date, as the case may
be, together with instructions from Abraxas irrevocably directing the
Trustee to apply such funds to the payment thereof at maturity or
redemption, as the case may be;
(2) Abraxas has paid all other sums then due and payable under
the Indenture by Abraxas; and
(3) Abraxas has delivered to the Trustee an Officers'
Certificate and an opinion of counsel, in form and substance reasonably
satisfactory to the Trustee, each stating that all conditions precedent
under the Indenture relating to the satisfaction and discharge of the
Indenture have been satisfied.
Following the date upon which the entire principal of, and all premium, if
any, and interest on, all of the outstanding Notes is then due and payable, the
Trustee will unless there is then an Event of Default, upon request made to it
by Abraxas, be required to pay to Abraxas the difference, if any, of (x) the
aggregate amount deposited with the Trustee in accordance with clause (1) of the
immediately preceding paragraph and (y) the aggregate amount of any principal
of, and all premium, if any, and interest on, the Notes which is then due and
payable.
Amendment; Supplement and Waiver
Except as provided in the next two succeeding paragraphs and as otherwise
limited by the Intercreditor Agreement or any other Collateral Document (see
"Intercreditor Agreement"), the Indenture, the Notes, the Subsidiary Guarantees,
the Registration Rights Agreement and the Intercreditor Agreement and other
Collateral Documents may be amended or supplemented with our consent and the
consent of the holders of at least a majority in aggregate principal amount of
the Notes then outstanding (including consents obtained in connection with a
tender offer or exchange offer for Notes), and any existing Default or Event of
Default, or compliance by us with any provision of the Indenture, the Notes, the
Subsidiary Guarantees, the Registration Rights Agreement or the Intercreditor
Agreement or other Collateral Documents, may be waived with the consent of the
holders of a majority in principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange offer
for Notes).
Without the consent of each holder of an outstanding Note affected thereby,
an amendment or waiver may not:
(1) reduce the principal amount of Notes whose holders must
consent to an amendment, supplement or waiver;
(2) reduce the principal of or change the final Stated
Maturity of any Note or reduce the premium payable upon the redemption
or repurchase of any Note or change the time stated in any Note or the
Indenture at which any Note may be redeemed or alter any other
provisions with respect to redemption of the Notes (other than
provisions relating to the covenants described under "Repurchase at the
Option of Holders Upon a Change of Control");
(3) reduce the rate of interest on any Note, or change the
time stated in any Note or the Indenture for payment of interest on any
Note;
(4) waive a Default or Event of Default in the payment of
principal of (or the premium on) or interest on the Notes (except a
rescission of acceleration of the Notes by the holders of at least a
majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration);
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(5) make any Note payable in money other than that stated in
the Notes;
(6) make any change in the provisions of the Indenture
relating to waivers of Defaults or Events of Default or protecting the
rights of holders of Notes to be paid the principal of, or premium, if
any, or interest on, the Notes or to bring suit to enforce such
payment;
(7) waive a redemption payment with respect to any Note (other
than a payment required by a covenant described above under the caption
"Repurchase at the Option of Holders Upon a Change of Control");
(8) modify any Subsidiary Guarantee in any manner that, except
in accordance with the terms of the Indenture and the Intercreditor
Agreement and other Collateral Documents, releases or otherwise impairs
or limits the unconditional obligation of the respective Subsidiary
Guarantor (or any other Person that has Guaranteed the Notes) to fully
and promptly perform Abraxas' obligations under the Indenture and the
Notes, including, without limitation, the payment of principal of, and
premium and interest on, the Notes, when due;
(9) make any change to any Note or Subsidiary Guarantee (or
any other Guarantee of the Notes) in a manner that causes such Note or
Subsidiary Guarantee (or other Guarantee) not to be senior indebtedness
that is at least pari passu (subject to the terms of the Intercreditor
Agreement) with all unsubordinated and unsecured Indebtedness of
Abraxas or the respective Subsidiary Guarantor (or other Person
providing such a Guarantee of the Notes), as the case may be;
(10) release any Collateral from the obligations created by
the Collateral Documents except as provided in the Indenture and the
Intercreditor Agreement and other Collateral Documents; or
(11) make any change in the foregoing amendment and waiver
provisions.
Notwithstanding the foregoing, without the consent of any holder of Notes,
we (together with the Trustee) may amend or supplement the Indenture, the Notes,
the Subsidiary Guarantees, the Registration Rights Agreement and the
Intercreditor Agreement and the other Collateral Documents to:
o cure any ambiguity, defect or inconsistency; provided, that, such
actions do not adversely affect the interests of holders of the Notes
in any material respect;
o provide for uncertificated Notes in addition to or in place of
certificated Notes, provided such uncertificated Notes are in
registered form for purposes of the Internal Revenue Code of 1986, as
amended;
o provide for the assumption of obligations of Abraxas to holders of
Notes in the case of a merger or consolidation or sale in accordance
with the terms of the Indenture;
o add or release any Subsidiary Guarantor in accordance with the terms of
the Indenture and the Intercreditor Agreement;
o make, complete or confirm any grant of a Lien on Collateral permitted
or required by the Collateral Documents or the Indenture or any release
of a Lien on Collateral that becomes effective in compliance with terms
and provisions of the Indenture and the Intercreditor Agreement and
other Collateral Documents;
o make any change that would provide any additional rights or benefits to
the holders of Notes and does not adversely affect the interests of any
such holder in any material respect;
o comply with requirements of the SEC in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act;
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o conform the text of the Indenture, the Notes, the Subsidiary
Guarantees, the Registration Rights Agreement or the Intercreditor
Agreement or other Collateral Documents to any provision of this
Prospectus (including this "Description of the Exchange Notes") to the
extent that such provision in this Prospectus (including this
"Description of the Exchange Notes") was intended to be a substantially
verbatim recitation of a provision of the Indenture, the Notes, the
Subsidiary Guarantees or the Intercreditor Agreement or other
Collateral Documents; or
o to add additional Events of Default;
o to evidence and provide for the acceptance of appointment under the
Indenture by a successor Trustee or the acceptance of appointment under
a Collateral Document by a successor Collateral Agent; or
o to secure the Notes.
In addition to the terms and provisions contained in the Indenture relating
to amendments, supplements and waivers (and described above in this
"--Amendment; Supplement and Waiver"), the Intercreditor Agreement and other
Collateral Documents contain additional terms and provisions (including
limitations) requiring the consent of other parties in interest (which may
include the Revolving Credit Facility Administrative Agent and/or the Bridge
Loan Administrative Agent) to amend or supplement the Intercreditor Agreement
and other Collateral Documents that secure or otherwise affect the Revolving
Credit Facility Obligations or the Bridge Loan Obligations. See "Intercreditor
Agreement."
Concerning the Trustee
U.S. Bank National Association is the current Trustee under the Indenture.
The Trustee maintains normal banking relationships with Abraxas and its
Subsidiaries and may perform certain services for and transact other business
with Abraxas or its Subsidiaries from time to time in the ordinary course of
business.
The Indenture (including the provisions of the Trust Indenture Act
incorporated by reference therein) contains limitations on the rights of the
Trustee thereunder, should it become a creditor of Abraxas or its Subsidiaries,
to obtain payment of claims in certain cases or to realize on certain property
received by it in respect of any such claims, as security or otherwise. The
Indenture permits the Trustee to engage in other transactions; provided,
however, that if the Trustee acquires any conflicting interest (as defined in
the Trust Indenture Act), the Trustee must eliminate such conflict or resign.
Governing Law
The Indenture, the Notes, the Registration Rights Agreement, the Subsidiary
Guarantees and the Intercreditor Agreement and other Collateral Documents are
governed by the laws of the State of New York.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person (a) assumed in
connection with an acquisition of properties or assets from such Person, which
assumption and acquisition shall not be in violation of the provisions of the
Indenture, or (b) outstanding at the time such Person becomes a Subsidiary of
any other Person (in either case other than any Indebtedness incurred in
connection with, or in contemplation of, such acquisition or such Person
becoming such a Subsidiary). Acquired Indebtedness shall be deemed to be
incurred on the date of the related acquisition of properties or assets from any
Person or the date the acquired Person becomes a Subsidiary.
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"Adjusted Net Assets" of a Subsidiary Guarantor means, on any date of
determination, the amount by which the fair value of the properties and assets
of such Subsidiary Guarantor exceeds the total amount of liabilities, including,
without limitation, contingent liabilities (after giving effect to all other
fixed and contingent liabilities incurred or assumed on such date), but
excluding liabilities under its Subsidiary Guarantee, of such Subsidiary
Guarantor.
"Affiliate" of any specified Person means (1) any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person or (2) any other Person who is a director or
executive officer of (a) such specified Person or (b) any Person described in
the preceding clause (1). For the purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with") as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"After-Acquired Property" means any and all assets or property acquired by
Abraxas or a Restricted Subsidiary after the Closing Date.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition by Abraxas or any Restricted Subsidiary (including, without
limitation, by way of merger or consolidation and by way of a sale and
leaseback) (collectively, for purposes of this definition, a "transfer") to any
Person other than Abraxas or any Restricted Subsidiary, directly or indirectly,
in one or a series of related transactions, of (1) any Capital Stock (other than
Disqualified Stock) of any Restricted Subsidiary held by Abraxas or any
Restricted Subsidiary, (2) all or substantially all of the properties and assets
of Abraxas or any Restricted Subsidiary or (3) any other properties or assets of
Abraxas or any Restricted Subsidiary (including Production Payments and Reserve
Sales), other than:
(a) a disposition for value of hydrocarbons or other mineral
products (other than Production Payments and Reserve Sales), inventory,
accounts receivable, cash, Cash Equivalents, Oil and Gas Hedging
Contracts, Currency Exchange Contracts or Interest Rate Protection
Obligations in the ordinary course of business;
(b) any lease, abandonment, disposition or relinquishment of
any undeveloped oil and gas property in the ordinary course of business
or any other oil and gas property that is not capable of production in
economic quantities;
(c) any Farmout of oil and gas property consummated in the
ordinary course of business pursuant to a Permitted Farmout Agreement,
including the transfer to the respective farmee(s) of an interest in
Farmout Property pursuant to the terms of such Permitted Farmout
Agreement;
(d) the liquidation of property or assets received in
settlement of debts owing to Abraxas or any Restricted Subsidiary as a
result of foreclosure, perfection or enforcement of any Lien or debt,
which debt were owing to Abraxas or any Restricted Subsidiary in the
ordinary course of business of Abraxas or such Restricted Subsidiary;
(e) any transfer of properties or assets that is governed by,
and made in accordance with, the provisions described under "--Merger,
Consolidation or Sale of Assets;"
(f) any transfer of properties or assets if permitted under
the covenant described under "--Certain Covenants--Limitation on
Restricted Payments;"
(g) any Production Payment and Reserve Sales created,
incurred, issued, assumed or Guaranteed in connection with the
financing of, and within 60 days after, the acquisition of the property
that is subject thereto, where the holder of such interest has recourse
solely to such production or proceeds of production, subject to the
obligation of the grantor or transferor to operate and maintain, or
cause to be operated and maintained, such property in a reasonably
prudent manner or other customary standard or subject to the obligation
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of the grantor or transferor to indemnify for environmental, title or
other matters customary in the Oil and Gas Business;
(h) any transfer of properties or assets to Abraxas or one or
more Wholly-owned Restricted Subsidiaries;
(i) any disposal in the ordinary course of business of
operating assets and equipment that has become worn out, defective or
obsolete or not used or useful in the business of Abraxas or any
Restricted Subsidiary and which is, to the extent required by the
Intercreditor Agreement or other Collateral Documents, replaced by
property of substantially equivalent or greater value which becomes
subject to the Lien of any of the Collateral Documents;
(j) any payment of money in satisfaction of Indebtedness
(including the Notes) Incurred in compliance with the terms of the
Indenture;
(k) an Event of Loss if the Collateral Agent is immediately
granted a perfected first priority security interest (subject to
Permitted Prior Liens) in the Net Loss Proceeds received by Abraxas or
the Restricted Subsidiary, as the case may be, as additional Collateral
under the Collateral Documents to secure the Secured Obligations, and
such Net Loss Proceeds are deposited into an Asset Sale Proceeds
Account, all on terms and pursuant to arrangements reasonably
satisfactory to the Collateral Agent in its reasonable determination
(which may include, at the Collateral Agent's reasonable request,
customary Officers' Certificates and legal opinions), and the
Intercreditor Agreement and other Collateral Documents include release
provisions requiring the Collateral Agent to release such deposit as
necessary to permit Abraxas or its Restricted Subsidiaries to apply
such Net Loss Proceeds in the manner described under "--Certain
Covenants--Limitation on Asset Sales," unless the Collateral Agent has
received written notice that a Default or Event of Default has occurred
and is continuing; and
(l) any transfer, in one or a series of related transactions,
of properties or assets in the ordinary course of business; provided
that all properties and assets transferred pursuant to this clause (l)
shall have an aggregate fair market value of less than $1.0 million, as
determined in good faith by the chief executive officer of Abraxas, in
any fiscal year.
"Asset Sale Proceeds Account" means a segregated account under the sole
control of the Collateral Agent that includes only proceeds from the Sale of
Collateral, Net Loss Proceeds and interest and investment income earned thereon.
"Attributable Indebtedness" in respect of a Sale-Leaseback Transaction
means, at the time of determination, the present value of such obligations
implicit in such transaction, determined in accordance with GAAP.
"Average Life" means, with respect to any Indebtedness or Preferred Stock,
as at any date of determination, the quotient obtained by dividing (1) the sum
of the products of (a) the number of years (and any portion thereof rounded up
to the nearest month) from the date of determination to the date or dates of
each successive scheduled principal payment (including, without limitation, any
sinking fund or mandatory redemption payment requirements) of such Indebtedness
or redemption or similar payment with respect to Preferred Stock multiplied by
(b) the amount of each such payment by (2) the sum of all such payments.
"Board of Directors" means the Board of Directors of Abraxas and any
committee of such Board of Directors duly authorized to act hereunder; provided
that as the term "Board of Directors" is used in the definition of "Continuing
Directors" it shall refer only to the Board of Directors of Abraxas and not to
any committee thereof.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of Abraxas to have been duly adopted by its Board of
Directors and to be in full force and effect on the date of such certification,
and delivered to the Trustee, and, with respect to a Subsidiary, a copy of a
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resolution certified by the Secretary or an Assistant Secretary of such
Subsidiary to have been duly adopted by its Board of Directors and to be in full
force and effect on the date of such certification, and delivered to the
Trustee.
"Bridge Loan" means that certain second lien increasing rate bridge loan
agreement, to be dated as of the Closing Date, with an initial aggregate
commitment of $25.0 million among Abraxas, certain Subsidiaries of Abraxas, the
Bridge Loan Administrative Agent and the lenders named therein, including any
related notes, Guarantees, Collateral Documents, instruments and agreements
executed in connection therewith, or any successor or replacement agreement
(together with any related successor or replacement notes, Guarantees,
Collateral Documents, instruments and agreements executed in connection
therewith), whether with the same or any other lender, group of lenders or
agent, in each case as the same may be amended (including any amendment and
restatement thereof), modified, supplemented, extended, restated, replaced,
renewed or refinanced (up to an aggregate commitment of $25.0 million) from time
to time in accordance with its terms and the applicable terms of the
Intercreditor Agreement.
"Bridge Loan Administrative Agent" means Guggenheim Corporate Funding, LLC,
as administrative agent under the Bridge Loan, together with its successors in
such capacity.
"Bridge Loan Asset Sale Proceeds Account" means an Asset Sale Proceeds
Account that includes only proceeds from the Sale of Collateral pursuant to an
Asset Sale consummated under the Bridge Loan in accordance with the provisions
described under "--Repurchase at the Option of the Holders Upon the Occurrence
of Certain Asset Sales," and interest and investment income earned on such
proceeds.
"Bridge Loan Obligations" means all Obligations under the Bridge Loan.
"Business Day" means any day other than a Saturday or Sunday, or a day on
which banking institutions in The City of New York are authorized or required by
law, regulation or executive order to remain closed.
"Calculation Agent" means initially U.S. Bank National Association and any
duly appointed successor, appointed by Abraxas, as its agent, pursuant to a
calculation agent agreement to determine the Six-Month LIBOR rate on each
Interest Determination Date in accordance with the terms of the Indenture.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in or other equivalents in the equity
interests (however designated) in such Person, and any rights (other than debt
securities convertible into an equity interest), warrants or options exercisable
for, exchangeable for or convertible into such an equity interest in such
Person.
"Capitalized Lease Obligation" means, with respect to any Person, any
obligation that is required to be classified and accounted for as a capital
lease obligation under GAAP, and, for the purpose of the Indenture, the amount
of such obligation at any date shall be the capitalized amount thereof at such
date, determined in accordance with GAAP; the stated maturity thereof shall be
the date of the last payment of any amount due under such obligation prior to
the first date upon which such obligation may be terminated by the obligee
without payment of penalty.
"Cash Equivalents" means:
(1) any evidence of Indebtedness with a maturity of 180 days
or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of
America is pledged in support thereof);
(2) demand and time deposits and certificates of deposit or
acceptances with a maturity of 180 days or less of any financial
institution that is a member of the Federal Reserve System having
combined capital and surplus and undivided profits of not less than
$500.0 million;
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(3) commercial paper with a maturity of 180 days or less
issued by a corporation that is not an Affiliate of Abraxas and is
organized under the laws of any state of the United States or the
District of Columbia and rated at least A-1 by S&P or at least P-1 by
Moody's;
(4) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clause (1)
above entered into with any commercial bank meeting the specifications
of clause (2) above;
(5) overnight bank deposits and bankers' acceptances at any
commercial bank meeting the qualifications specified in clause (2)
above;
(6) deposits available for withdrawal on demand with any
commercial bank not meeting the qualifications specified in clause (2)
above but which is organized under the laws of any country in which
Abraxas or any Restricted Subsidiary maintains an office or is engaged
in the Oil and Gas Business, provided that (a) all such deposits are
required to be made in such accounts in the ordinary course of
business, (b) such deposits do not at any one time exceed $2.5 million
in the aggregate and (c) no funds so deposited remain on deposit in
such bank for more than 30 days;
(7) deposits available for withdrawal on demand with any
commercial bank not meeting the qualifications specified in clause (2)
above but which is a lending bank under any credit facility of Abraxas
or any Restricted Subsidiary, provided that all such deposits do not
exceed $2.5 million in the aggregate at any one time; and
(8) investments in money market funds substantially all of
whose assets comprise securities of the types described in clauses (1)
through (5).
"Cash Pay Preferred Stock" means any Capital Stock that, by its terms, by
the terms of any security into which it is convertible or exchangeable, by
contract or otherwise, requires, or upon the happening of an event or passage of
time would require, the payment of dividends (other than dividends paid (1) in
Qualified Capital Stock and/or (2) from a segregated reserve account funded
solely out of amounts paid by the purchaser or purchasers of such Capital Stock
in connection with the issuance of such Capital Stock) prior to the date that is
91 days after the final Stated Maturity of the Notes.
"Change of Control" means the occurrence of any of the following events:
(1) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), becomes the "beneficial
owner" (as defined in Rule 13d-3 and 13d-5 under the Exchange Act),
directly or indirectly, of shares representing more than 35% of the
total voting power of our then outstanding Voting Stock other than by
means of a Qualified Equity Offering;
(2) Abraxas is merged with or into or consolidated with
another Person and, immediately after giving effect to the merger or
consolidation, (a) less than 65% of the total voting power of the
outstanding Voting Stock of the surviving or resulting Person is then
"beneficially owned" (within the meaning of Rule 13d-3 under the
Exchange Act) in the aggregate by the stockholders of Abraxas
immediately prior to such merger or consolidation and (b) any "person"
or "group" (as defined in Section 13(d)(3) or 14(d)(2) of the Exchange
Act) has become the direct or indirect "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act) of more than 35% of the total
voting power of the Voting Stock of the surviving or resulting Person;
(3) Abraxas, either individually or in conjunction with one or
more Restricted Subsidiaries, sells, assigns, conveys, transfers,
leases or otherwise disposes of, or one or more Restricted Subsidiaries
sells, assigns, conveys, transfers, leases or otherwise disposes of,
all or substantially all of the properties and assets of Abraxas and
the Restricted Subsidiaries, taken as a whole (either in one
transaction or a series of related transactions), including Capital
Stock of the Restricted Subsidiaries, to any "person" or "group" (as
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such terms are used in Section 13(d) and 14(d) of the Exchange Act)
(other than Abraxas or one or more Wholly-owned Restricted
Subsidiaries);
(4) during any consecutive two-year period, individuals who at
the beginning of such period constituted the Board of Directors of
Abraxas (together with any new directors whose election by such Board
of Directors or whose nomination for election by the stockholders of
Abraxas was approved by a vote of a majority of the directors then
still in office who were either directors at the beginning of such
period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors of Abraxas then in office; or
(5) the liquidation or dissolution of Abraxas.
"Change of Control Offer" means an offer to purchase upon the request of
any holder all or any part of the Notes of such holder at the Change of Control
Purchase Price on the Change of Control Payment Date within 30 days following
any Change of Control.
"Closing Date" means the date on which Notes are originally issued under
the Indenture.
"Collateral" means, collectively, all of the property and assets that are
from time to time subject to the Lien of the Collateral Documents, including the
Liens, if any, required to be granted pursuant to the Indenture.
"Collateral Account" means each collateral account established and
maintained by the Collateral Agent pursuant to the Intercreditor Agreement for
the receipt of Trust Monies, including an Asset Sale Proceeds Account.
"Collateral Agent" means U.S. Bank National Association, in its capacity as
collateral agent under the collateral agency agreement, together with its
successors in such capacity.
"Collateral Agent's Liens" means a Lien granted to the Collateral Agent as
security for Secured Obligations.
"Collateral Documents" means, collectively, the Intercreditor Agreement and
the security agreements, mortgages, deeds of trust, account control agreements
and other security documents applicable to the Collateral and given to secure
the Secured Obligations, each as may be amended, modified, supplemented,
restated or replaced from time to time in accordance with its terms.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding-up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Fixed Charge Coverage Ratio" means, for any period, the ratio
of (1) the sum of Consolidated Net Income, Consolidated Fixed Charges,
Consolidated Income Tax Expense and Consolidated Non-Cash Charges to the extent
deducted in computing Consolidated Net Income, in each case, for such period, of
Abraxas and its Restricted Subsidiaries on a consolidated basis decreased (to
the extent included in determining Consolidated Net Income for such period) by
the sum of (a) the amount of deferred revenues that are amortized during such
period and are attributable to reserves that are subject to Volumetric
Production Payments and (b) amounts recorded for such period in accordance with
GAAP as repayments of principal and interest pursuant to Dollar-Denominated
Production Payments, to (2) the Consolidated Fixed Charges for such period;
provided, however, that:
(a) the Consolidated Fixed Charge Coverage Ratio shall be
calculated on the assumption that (1) any Indebtedness to be incurred
(and all other Indebtedness incurred after the first day of such period
of four full fiscal quarters referred to in the covenant described
under "--Certain Covenants--Limitation on Incurrence of Indebtedness
and Issuance of Disqualified Stock" through and including the date of
determination) and (if applicable) the application of the net proceeds
therefrom (and from any other such Indebtedness), including to
refinance other Indebtedness, but excluding the Incurrence or repayment
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of Indebtedness in the ordinary business for working capital purposes
pursuant to working capital facilities, had been incurred on the first
day of such period and, in the case of Acquired Indebtedness or
Indebtedness to be Incurred in connection with an acquisition or other
transaction, on the assumption that the related transaction (whether by
means of purchase, merger or otherwise) also had occurred on such date
with the appropriate adjustments with respect to such acquisition being
included in such pro forma calculation and (2) any acquisition or
disposition by Abraxas or any Restricted Subsidiary of any properties
or assets outside the ordinary course of business, or any repayment of
any principal amount of any Indebtedness of Abraxas or any Restricted
Subsidiary prior to the Stated Maturity thereof, in either case since
the first day of such period through and including the date of
determination, had been consummated on such first day of such period;
(b) in making such computation, the Consolidated Fixed Charges
attributable to interest on any Indebtedness required to be computed on
a pro forma basis in accordance with the covenant described under
"--Certain Covenants--Limitation on Incurrence of Indebtedness and
Issuance of Disqualified Stock" and (1) bearing a floating interest
rate shall be computed as if the rate in effect on the date of
computation had been the applicable rate for the entire period and (2)
which was not outstanding during the period for which the computation
is being made but which bears, at the option of Abraxas, a fixed or
floating rate of interest, shall be computed by applying, at the option
of Abraxas, either the fixed or floating rate;
(c) in making such computation, the Consolidated Fixed Charges
attributable to interest on any Indebtedness under a revolving credit
facility required to be computed on a pro forma basis in accordance
with the covenant described under "Certain Covenants--Limitation on
Incurrence of Indebtedness and Issuance of Disqualified Stock" shall be
computed based upon the average daily balance of such Indebtedness
during the applicable period, provided that such average daily balance
shall be reduced by the amount of any repayment of Indebtedness under a
revolving credit facility during the applicable period, which repayment
permanently reduced the commitments or amounts available to be
reborrowed under such facility;
(d) notwithstanding clauses (b) and (c) of this proviso,
interest on Indebtedness determined on a fluctuating basis, to the
extent such interest is covered by agreements relating to Interest Rate
Protection Obligations, shall be deemed to have accrued at the rate per
annum resulting after giving effect to the operation of such
agreements;
(e) in making such calculation, Consolidated Fixed Charges
shall exclude interest attributable to Dollar-Denominated Production
Payments; and
(f) if after the first day of the period referred to in clause
(1) of this definition Abraxas has retired any Indebtedness out of the
net cash proceeds of the issue and sale of shares of Qualified Capital
Stock of Abraxas within 30 days of such issuance and sale, Consolidated
Fixed Charges shall be calculated on a pro forma basis as if such
Indebtedness had been retired on the first day of such period.
"Consolidated Fixed Charges" means, for any period, without duplication,
(1) the sum of
(a) the interest expense of Abraxas and its Restricted Subsidiaries for
such period as determined on a consolidated basis in accordance with GAAP,
including, without limitation,
(i) any amortization of original issue discount;
(ii) the net cost under Interest Rate Protection Obligations
(including any amortization of discounts);
(iii) the interest portion of any deferred payment obligation
constituting Indebtedness;
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(iv) all commissions, discounts and other fees and charges
owed with respect to letters of credit and bankers' acceptance
financing; and
(v) all accrued interest, in each case to the extent
attributable to such period;
(b) to the extent any Indebtedness of any Person (other than Abraxas or
a Restricted Subsidiary) is guaranteed by Abraxas or any Restricted
Subsidiary, the aggregate amount of interest paid (to the extent not
accrued in a prior period) or accrued by such other Person during such
period attributable to any such Indebtedness, in each case to the extent
attributable to that period;
(c) the aggregate amount of the interest component of Capitalized Lease
Obligations paid (to the extent not accrued in a prior period), accrued
and/or scheduled to be paid or accrued by Abraxas and its Restricted
Subsidiaries during such period as determined on a consolidated basis in
accordance with GAAP; and
(d) the aggregate amount of dividends paid (to the extent not accrued
in a prior period) or accrued on Disqualified Stock of Abraxas and its
Restricted Subsidiaries, to the extent such Disqualified Capital Stock is
owned by Persons other than Abraxas or its Restricted Subsidiaries, and to
the extent such dividends are not paid in Qualified Capital Stock;
less (2) to the extent included in (1) above, (A) amortization of capitalized
debt issuance costs of Abraxas and its Restricted Subsidiaries during such
period and (B) amounts paid, accrued and/or scheduled to be paid or accrued to
Abraxas or any of its Restricted Subsidiaries.
"Consolidated Income Tax Expense" means, for any period, the provision for
Federal, state, local and foreign income taxes (including any state franchise
taxes accounted for as income taxes in accordance with GAAP) of Abraxas and its
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Indebtedness" means, at any date, the consolidated
Indebtedness of Abraxas and its Restricted Subsidiaries on such date.
"Consolidated Net Income" means, for any period, the consolidated net
income (or loss) of Abraxas and its Restricted Subsidiaries for such period as
determined in accordance with GAAP, adjusted to the extent included in
calculating such net income (or loss) by excluding, without duplication:
(1) net after-tax extraordinary or non-recurring gains or
losses to the extent classified as such in accordance with GAAP;
(2) net after-tax gains or losses (less all fees and expenses
relating thereto) attributable to Asset Sales (or abandoned reserves
related thereto);
(3) the net income (or net loss) of any Person (other than
Abraxas or any of its Restricted Subsidiaries), in which Abraxas or any
of its Restricted Subsidiaries has an ownership interest, except that
the net income of such Person shall be included in Consolidated Net
Income to the extent of the amount of dividends or other distributions
or interest on indebtedness actually paid to Abraxas or any of its
Restricted Subsidiaries in cash by such other Person during such period
(regardless of whether such cash dividends, distributions or interest
on indebtedness is attributable to net income (or net loss) of such
Person during such period or during any prior period);
(4) the net income of any Subsidiary Guarantor to the extent
that the declaration or payment of dividends or similar distributions
by that Restricted Subsidiary is not at the date of determination
permitted, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted
Subsidiary or its stockholders;
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(5) the net income (or net loss) attributable to discontinued
operations (including, without limitation, operations disposed of
during such period whether or not such operations were classified as
discontinued); and
(6) in the case of a successor to Abraxas by consolidation or
merger or as transferee of Abraxas' assets, the net income of the
successor corporation prior to such consolidation, merger or transfer
of assets.
"Consolidated Non-Cash Charges" means, for any period, the aggregate
depreciation, depletion, amortization and other non-cash expenses of Abraxas and
its Restricted Subsidiaries reducing Consolidated Net Income for such period,
determined on a consolidated basis in accordance with GAAP (excluding any such
non-cash charge that requires an accrual of or reserve for cash charges for any
future period).
"Control Party" has the meaning given to such term in the Intercreditor
Agreement and as described under "Intercreditor Agreement."
"Currency Exchange Contract" means, with respect to Abraxas or its
Restricted Subsidiaries, any foreign exchange contract, currency swap agreement
or other similar agreement or arrangement that is entered into in the ordinary
course of business for the purpose of protecting itself against fluctuations in
currency values and not for the purpose of speculation.
"Default" means any event, act or condition which with the passage of time
or the giving of notice pursuant to the Indenture, or both, would be an Event of
Default as described under "--Events of Default and Remedies."
"Designated LIBOR Page" means the display on the Moneyline service (or such
other service or services as may be nominated by the British Bankers'
Association) for the purpose of displaying London interbank rates of major banks
for U.S. dollar deposits. If no such rate appears on an Interest Determination
Date, the Six-Month LIBOR rate on such Interest Determination Date will be
determined as described in clause (2) of the definition of "Six-Month LIBOR."
"Disqualified Stock" means Capital Stock that is either Cash Pay Preferred
Stock or Redeemable Capital Stock.
"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Event of Default" has the meaning set forth above under the caption
"Events of Default and Remedies."
"Event of Loss" means, with respect to any Collateral, any (1) loss,
destruction or damage of such Collateral, (2) condemnation, seizure or taking by
exercise of the power of eminent domain or otherwise of such Collateral, or
confiscation of such Collateral or the requisition of the use of such
Collateral, by any governmental or quasi-governmental entity or (3) settlement
in lieu of clause (2) above.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Senior Debt Facility" means the Loan and Security Agreement,
dated as of January 22, 2003, among Abraxas, as borrower, each of its
Subsidiaries, as a guarantor, the lenders named therein, Wells Fargo Foothill,
Inc., as the arranger and administrative agent, and Guggenheim Corporate
Funding, LLC, as the specified appointee, as previously amended and in existence
on the Closing Date.
"Farmout" means an arrangement whereby the owner(s) of one or more oil, gas
and/or mineral lease or other oil and natural gas working interest with respect
to Farmout Property (referred to as the "farmor") agrees to transfer or assign
an interest in such Farmout Property to one or more other Persons (referred to
as the "farmee") in exchange for the farmee (1) drilling, or participating in
the cost of the drilling of, one or more oil and/or natural gas wells, or
undertaking other exploration or development activity or participating in the
cost of such other activity, to attempt to obtain production of hydrocarbons
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from such Farmout Property, (2) agreeing to so drill or undertake such other
activity, or agreeing to participate in the cost of such drilling or such other
activity, with respect to such Farmout Property, or (3) obtaining production of
hydrocarbons from such Farmout Property, or participating in the costs of
obtaining such production.
"Farmout Agreement" means, with respect to a Farmout, the agreement or
agreements governing such Farmout.
"Farmout Property" means, with respect to a Farmout, the property from
which production of hydrocarbons is sought to be obtained through such Farmout.
The Farmout Property with respect to a Farmout may consist of only certain
specified depths, strata, zones or geological formations under one or more
tracts of land, but shall not include any depths, strata, zones or geological
formations under such tract(s) of land (i) that, at the time of such Farmout,
are being produced or developed by the farmor or any of its Affiliates in the
same field or area or (ii) that have been subject to production or development
activity by the farmor or any of its Affiliates in the same field or area and
such activity was discontinued with the desire or expectation of entering into a
Farmout.
"Farmout Property Value" means, with respect to a Farmout, the value of the
Farmout Property of Abraxas or its Restricted Subsidiaries at the time the
relevant Farmout Agreement is entered into determined as follows:
o with respect to Farmout Property with a value not exceeding $1.0
million, as determined in good faith by the chief executive officer of
Abraxas and evidenced by an Officers' Certificate delivered to the
Trustee;
o with respect to Farmout Property with a value exceeding $1.0 million
but not exceeding $5.0 million, as determined in good faith by the
Board of Directors of Abraxas and evidenced by a Board Resolution
delivered to the Trustee; and
o with respect to Farmout Property with a value exceeding $5.0 million,
as reflected in an opinion or appraisal issued by an independent
accounting or investment banking firm which is nationally recognized in
the United States, or by a reputable independent appraisal or petroleum
engineering firm, as appropriate under the circumstances, delivered to
the Trustee.
"Foreign Unrestricted Subsidiary" means any Unrestricted Subsidiary that is
a controlled foreign corporation (within the meaning of section 957(a) of the
Internal Revenue Code of 1986, as amended).
"GAAP" means generally accepted accounting principles, consistently
applied, that are 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 or in
such other statements by such other entity as may be approved by a significant
segment of the accounting profession of the United States of America, which were
effective as of the Closing Date.
"Grey Wolf Loan Administrative Agent" means Guggenheim Corporate Funding,
LLC, as administrative agent under the Grey Wolf Term Loan Agreement, together
with its successors in such capacity.
"Grey Wolf Term Loan" means that certain senior secured term loan
agreement, to be dated as of the Closing Date, with an initial aggregate
commitment of $35.0 million among Grey Wolf, the Grey Wolf Loan Administrative
Agent and the lenders named therein, including any related notes, Guarantees,
Collateral Documents, instruments and agreements executed in connection
therewith, or any successor or replacement agreement (together with any related
successor or replacement notes, Guarantees, Collateral Documents, instruments
and agreements executed in connection therewith), whether with the same or any
other lender, group of lenders, or agent, in each case as the same may be
amended (including any amendment and restatement thereof), modified,
supplemented, extended, restated, replaced, renewed or refinanced (up to an
aggregate commitment of $35.0 million) from time to time in accordance with its
terms and the applicable terms of the Intercreditor Agreement.
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"Guarantee" means any obligation, contingent or otherwise, of any
Person guaranteeing Indebtedness of another Person (including, without
limitation, obligations, agreements to purchase assets, securities or services,
to take-or-pay such Indebtedness of another Person or to maintain financial
statement conditions, or similar arrangements or agreements, in each case
entered into for the purpose of assuring the obligee of such Indebtedness of the
payment thereof, including, without limiting the foregoing, the payment of
amounts drawn down by letters of credit, or to protect such obligee against loss
in respect thereof, in whole or in part), but excluding (i) endorsements of
negotiable instruments for collection or deposit in the ordinary course of
business, and (ii) contingent obligations in connection with the sale or
discount of accounts receivable and similar paper; provided, however, that a
Guarantee by any Person shall not include a contractual commitment by one Person
to invest in another Person and provided, further, that such Investment is
otherwise permitted by the Indenture. When used as a verb, "Guarantee" shall
have a corresponding meaning.
"Incur" means to, create, incur, assume, Guarantee or otherwise become
directly or indirectly liable for the payment of any Indebtedness.
"Indebtedness" means, with respect to any Person, without duplication:
(1) all liabilities of such Person for borrowed money or for
the deferred purchase price of property or services (excluding any
trade accounts payable and other accrued current liabilities incurred
in the ordinary course of business), and all liabilities of such Person
incurred in connection with any letters of credit, bankers' acceptances
or other similar credit transactions, if, and to the extent, any of the
foregoing would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP;
(2) all obligations of such Person evidenced by bonds, notes,
debentures or other similar instruments, if, and to the extent, any of
the foregoing would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP;
(3) all indebtedness of such Person created or arising under
any conditional sale, title retention or similar agreement with respect
to property acquired by such Person (even if the rights and remedies of
the seller or lender under such agreement in the event of default are
limited to repossession or sale of such property), but excluding trade
accounts payable arising in the ordinary course of business;
(4) all Capitalized Lease Obligations of such Person;
(5) all obligations of such Person under or in respect of
Currency Exchange Contracts, Oil and Gas Hedging Contracts and Interest
Rate Protection Obligations;
(6) all indebtedness referred to in the preceding clauses of
other Persons and all dividends of other Persons, the payment of which
is secured by (or for which the holder of such Indebtedness has an
existing right to be secured by) any Lien upon property (including,
without limitation, accounts and contract rights) owned by such Person,
even though such Person has not assumed or become liable for the
payment of such Indebtedness (the amount of such obligation being
deemed to be the lesser of the value of such property or asset or the
amount of the obligation so secured);
(7) all Redeemable Capital Stock of such Person valued at the
greater of its voluntary or involuntary maximum fixed repurchase price
plus accrued dividends;
(8) all Guarantees by such Person of Indebtedness referred to
in this definition (including, with respect to any Production Payment
and Reserve Sales, any warranties or Guarantees of production or
payment by such Person with respect to such Production Payment and
Reserve Sales, but excluding other contractual obligations of such
Person with respect to such Production Payment and Reserve Sales); and
(9) all obligations of such Person under any agreement to
purchase, redeem, exchange, convert or otherwise acquire for value any
Capital Stock of such Person or any warrants, rights or options to
acquire such Capital Stock outstanding on the date of the Indenture or
thereafter if, and to the extent, such obligations would have caused
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such Capital Stock to have been Redeemable Capital Stock if such
obligations had been included in the terms of such Capital Stock.
For purposes hereof, the "maximum fixed repurchase price" of any Redeemable
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Redeemable Capital Stock as if such
Redeemable 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 Redeemable Capital
Stock, such fair market value shall be determined in good faith by the board of
directors of the issuer of such Redeemable Capital Stock; provided, however,
that if such Redeemable Capital Stock is not at the date of determination
permitted or required to be repurchased, the "maximum fixed repurchase price"
shall be the book value of such Redeemable Capital Stock. Subject to clause (8)
of the first sentence of this definition, neither Dollar-Denominated Production
Payments nor Volumetric Production Payments shall be deemed to be Indebtedness.
"Indenture" means that certain indenture entered into on October 28, 2004
among Abraxas, the initial Subsidiary Guarantors and the Trustee pursuant to
which the outstanding Notes were issued and the exchange notes will be issued,
as the same may be amended (including any amendment and restatement thereof),
modified or supplemented from time to time in accordance with its terms.
"Intercreditor Agreement" means that certain intercreditor agreement to be
entered into on the Closing Date among Abraxas, the initial Restricted
Subsidiaries, the Trustee, the Revolving Credit Facility Administrative Agent,
the Bridge Loan Administrative Agent and the Collateral Agent, as the same may
be amended (including any amendment and restatement thereof), modified or
supplemented from time to time in accordance with its terms.
"Interest Determination Date" means the second London Business Day
preceding each Interest Reset Date.
"Interest Payment Date" means the first day of June and December,
commencing on June 1, 2005; provided, that, if any such day is not a Business
Day, such Interest Payment Date shall be the next succeeding Business Day.
"Interest Rate Protection Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such 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 or arrangements designed to protect
against or manage such Person's and any of its Subsidiaries' exposure to
fluctuations in interest rates.
"Interest Reset Date" means the first day of June and December, commencing
on June 1, 2005.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan, Guarantee of Indebtedness or other extension of credit or capital
contribution to (by means of any transfer of cash or other property or assets to
others or any payment for property, assets or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities (including derivatives) or
evidences of Indebtedness issued by, any other Person. In addition:
o the fair market value as determined by the Board of Directors of
Abraxas in good faith of the net assets of any Restricted Subsidiary
(prorated for Abraxas' direct and indirect interest in the Capital
Stock of such Restricted Subsidiary if such Restricted Subsidiary is
not a Wholly-owned Restricted Subsidiary) at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary shall be
deemed to be an "Investment" made by Abraxas in such Unrestricted
Subsidiary at such time; and
o the fair market value as determined by the Board of Directors of
Abraxas in good faith of Capital Stock retained by Abraxas or a
Restricted Subsidiary in connection with the sale or issuance of
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Capital Stock of a Restricted Subsidiary in accordance with the
covenant described under "--Certain Covenants--Limitation on Issuance,
Sale and Ownership of Capital Stock of Restricted Subsidiaries" that,
as a result of such transaction, is no longer a Restricted Subsidiary
(prorated for Abraxas' direct and indirect interest in such Capital
Stock if such Restricted Subsidiary is not a Wholly-owned Restricted
Subsidiary immediately prior to such sale or issuance) shall be deemed
to be an "Investment" made at the time of such transaction.
"Investments" shall exclude:
o extensions of trade credit under a joint operating agreement or
otherwise in the ordinary course of business, workers' compensation,
utility, lease and similar deposits and prepaid expenses made in the
ordinary course of business;
o Interest Rate Protection Obligations entered into in the ordinary
course of business or as required by any Permitted Indebtedness or any
other Indebtedness incurred in compliance with the covenant described
under "--Certain Covenants--Limitation on Incurrence of Indebtedness
and Issuance of Disqualified Stock," but only to the extent that the
stated aggregate notional amounts of such Interest Rate Protection
Obligations do not exceed 105% of the aggregate principal amount of
such Indebtedness to which such Interest Rate Protection Obligations
relate;
o bonds, notes, debentures or other securities received in compliance
with the covenant described under "--Certain Covenants--Limitation on
Asset Sales;" and
o endorsements of negotiable instruments and documents for collection in
the ordinary course of business.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance or similar agreement or preferential
arrangement of any kind or nature whatsoever serving to provide security for an
obligation, whether or not filed, recorded or otherwise perfected under
applicable law (including, without limitation, any agreement to give or grant a
lien or any lease, conditional sale, title retention or similar agreement having
substantially the same economic effect as any of the foregoing) upon or with
respect to any property of any kind. A Person shall be deemed to own subject to
a Lien any property that such Person has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement.
"London Business Day" means any day on which dealings in U.S. dollars
generally are transacted in the London interbank market.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"NetCash Proceeds" means, with respect to any Asset Sale, sale, transfer or
other disposition by any Person, the aggregate proceeds thereof 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 (except to the
extent that such obligations are financed or sold with recourse to Abraxas or
any Restricted Subsidiary), pursuant to, or monetization of, a note or
installment receivable or otherwise, net of
o brokerage commissions and other fees and expenses (including, without
limitation, fees and expenses of legal counsel, accountants, petroleum
engineering firms and investment banks) incurred by such Person related
to such Asset Sale, sale, transfer or other disposition;
o the amount of any Indebtedness (including Redeemable Capital Stock or
Preferred Stock of a Subsidiary) that is required to be repaid by such
Person or its Affiliates in connection with such Asset Sale, sale,
transfer or other disposition;
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o provisions for all taxes, including income taxes, payable as a result
of such Asset Sale, sale, transfer or other disposition or attributable
to required prepayments or repayments of Indebtedness with the proceeds
of such Asset Sale, sale, transfer or other disposition;
o amounts required to be paid to any Person or its Affiliates (other than
Abraxas or any Restricted Subsidiary) owning a beneficial interest in
the assets subject to the Asset Sale, sale, transfer or other
disposition or to holders of minority interests in a Restricted
Subsidiary or other entity as a result of such Asset Sale, sale,
transfer or other disposition; and
o appropriate amounts to be provided by Abraxas or any Restricted
Subsidiary, as the case may be, as a reserve in accordance with GAAP
applied against post closing adjustments or any liabilities associated
with such Asset Sale, sale, transfer or other disposition and retained
by Abraxas or any Restricted Subsidiary, as the case may be, after such
Asset Sale, sale, transfer or other disposition, including, without
limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, sale,
transfer or other disposition, all as reflected in an Officers'
Certificate delivered to the Trustee; provided, however, that any
amounts remaining after adjustments, revaluations or liquidations of
such reserves shall constitute Net Cash Proceeds.
"Net Loss Proceeds" means, with respect to any Event of Loss, the proceeds
in the form of cash or Cash Equivalents received by Abraxas or any of its
Restricted Subsidiaries from such Event of Loss net of:
o reasonable out-of-pocket expenses and fees relating to such Event of
Loss (including, without limitation, fees and expenses of legal
counsel, accountants, petroleum engineering firms and investment
banks);
o provisions for all taxes, including income taxes, payable as a result
of such Event of Loss after taking into account any reduction in
consolidated tax liability due to available tax credits or deductions
and any tax sharing arrangements; and
o repayment of Indebtedness that is secured by, or directly related to,
the property or assets that are the subject of such Event of Loss.
"Note Documents" means the Indenture, the Notes (including all additional
notes and all exchange notes therefor), the Subsidiary Guarantees and the
Collateral Documents to the extent the Collateral Documents secure obligations
under the Indenture, the Notes or the Subsidiary Guarantees.
"Note Obligations" means all Obligations under the Note Documents.
"Note Register" means the register maintained by or for Abraxas in which
Abraxas shall provide for the registration of the Notes and of transfer of the
Notes.
"Notes" means the Floating Rate Senior Secured Notes due 2009, Series A of
Abraxas and the Floating Rate Senior Secured Notes due 2009, Series B offered by
Abraxas in exchange for the Series A outstanding notes pursuant to the Series
A/B exchange offer described in this prospectus.
"Obligations" means any principal, premium (if any), interest (including
additional or special interest), if any, and interest accruing on or after the
filing of any petition in bankruptcy or for reorganization relating to Abraxas
or its Restricted Subsidiaries whether or not a claim for post-filing interest
is allowed in such proceeding), penalties, fees, charges, expenses,
indemnifications, reimbursement obligations, damages (including additional or
special interest), Guarantees (including the Subsidiary Guarantees) and other
liabilities or amounts payable under the documentation governing any
Indebtedness or in respect thereof.
"Officers' Certificate" means a certificate signed by two Authorized
Officers of Abraxas.
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"Oil and Gas Business" means:
(1) the acquisition, exploration, development, operation and
disposition of interests in oil, gas and other hydrocarbon properties;
(2) the gathering, marketing, treating, processing, storage,
selling and transporting of any production from such interests or
properties;
(3) any business relating to or arising from exploration for
or development, production, treatment, processing, storage,
transportation or marketing of oil, gas, hydrocarbons and other
minerals and products produced in association therewith;
(4) any business relating to oil field sales and service; and
(5) any activity necessary, appropriate or incidental to the
activities described in the foregoing clauses (1) through (4) of this
definition.
"Oil and Gas Hedging Contracts" means, with respect to Abraxas or its
Restricted Subsidiaries, any agreement or arrangement, or any combination
thereof, relating to hydrocarbon prices, transportation or basis costs or
differentials or other similar financial factors, that is customary in the Oil
and Gas Business and is entered into in the ordinary course of business for the
purpose of limiting or managing risks associated with fluctuations in such
prices, costs, differentials or similar factors and not for the purpose of
speculation.
"Permitted Farmout Agreement" means any Farmout Agreement entered into by
Abraxas and/or any Restricted Subsidiary, as the farmor, in the ordinary course
of business, (a) covering Farmout Property of Abraxas and/or one or more
Restricted Subsidiaries that does not include proved oil or natural gas
properties (other than those (i) proved by the efforts to obtain production
taken pursuant to such Farmout Agreement or (ii) that are not then otherwise
included in our PV-10 or as a proved reserve in any reserve or other report
prepared by or on behalf of us in amount which exceeds either $150,000 with
respect to any individual property subject to such Farmout Agreement or $500,000
when aggregated with any other proved oil or natural gas property then subject
to such Farmout Agreement or any other Farmout Agreement) and (b) that, as
determined in good faith by the Board of Directors of Abraxas and evidenced by a
Board Resolution delivered to the Trustee (or, solely with respect to any
Farmout with a Farmout Property Value not exceeding $1.0 million, as determined
in good faith by the chief executive officer of Abraxas and evidenced by an
Officers' Certificate delivered to the Trustee), is in the best interests of the
holders of the Notes and does not adversely affect the ability of Abraxas, the
Restricted Subsidiaries and the Subsidiary Guarantors to perform their
respective obligations under the Notes, the Indenture and the Subsidiary
Guarantees, as applicable.
"Permitted Indebtedness" means any of the following:
(1) Indebtedness under the Revolving Credit Facility (but if Incurred
under any renewal, substitution, refinancing or replacement thereof, only
to the extent permitted by clause (9) of this definition) in an aggregate
principal amount at any one time outstanding not to exceed $15.0 million
(less the aggregate amount of permanent reductions of the lenders'
commitment under the Revolving Credit Facility made pursuant to the
covenants described under the "--Repurchase at the Option of Holders Upon
the Occurrence of Certain Asset Sales" and "--Certain Covenants--Limitation
on Asset Sales"), any Guarantee of any such Indebtedness (including by any
Subsidiary of Abraxas) and any interest, fees, premiums, expenses
(including costs of collection), indemnities and other amounts payable in
connection with such Indebtedness, including, without limitation, Related
Revolving Indebtedness; provided, that, the aggregate amount of all
permanent reductions of the lenders' commitment under the Revolving Credit
Facility made pursuant to the covenants described under "--Repurchase at
the Option of Holders Upon the Occurrence of Certain Asset Sales" and
"--Certain Covenants--Limitation on Asset Sales" can be established by
Abraxas at any time by providing the Trustee with an Officers' Certificate
stating such amount;
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(2) Indebtedness under the Notes (including any Notes issued pursuant
to an exchange offer made in accordance with the Registration Rights
Agreement), the Subsidiary Guarantees (including any Subsidiary Guarantees
issued pursuant to an exchange offer made in accordance with the
Registration Rights Agreement) and the Collateral Documents to the extent
they secure the Notes or the Subsidiary Guarantees;
(3) Indebtedness under the Bridge Loan (but if Incurred under any
renewal, substitution, refinancing or replacement thereof, only to the
extent permitted by clause (10) of this definition) in an aggregate
principal amount at any one time outstanding not to exceed $25.0 million,
any Guarantee of any such Indebtedness (including by any Subsidiary of
Abraxas) and any interest, fees, premiums, expenses (including costs of
collection), indemnities and other amounts payable in connection with such
Indebtedness;
(4) (a) Indebtedness outstanding on the date of the Indenture and not
repaid or defeased with the proceeds of the Notes, the Bridge Loan or the
Grey Wolf Term Loan (but if Incurred under any renewal, substitution,
refinancing or replacement thereof, only to the extent permitted by clause
(10) of this definition), (b) the 2003 Notes and (c) the Existing Senior
Debt Facility; provided that the 2003 Notes and the Existing Senior Debt
Facility are repaid and defeased, respectively, with the proceeds of the
Notes, the Bridge Loan and/or the Grey Wolf Term Loan on the Closing Date
and that the 2003 Notes are redeemed on or prior to the date that is 90
days after the Closing Date;
(5) Indebtedness of Abraxas or a Restricted Subsidiary pursuant to (i)
Interest Rate Protection Obligations, but only to the extent that the
stated aggregate notional amounts of such obligations do not exceed 105% of
the aggregate principal amount of the Indebtedness covered by such Interest
Rate Protection Obligations, (ii) Currency Exchange Contracts and (iii)
obligations under Oil and Gas Hedging Contracts, in each case, entered into
in the ordinary course of business and not for speculative purposes;
(6) Indebtedness of Abraxas owed to a Wholly-owned Restricted
Subsidiary and Indebtedness of a Restricted Subsidiary owed to Abraxas or a
Wholly-owned Restricted Subsidiary; provided, however, that such
Indebtedness is owned beneficially by Abraxas or such Restricted Subsidiary
and constitutes Subordinated Indebtedness; provided further, that the
incurrence of such Indebtedness does not violate the covenant described
under "--Certain Covenants--Limitation on Restricted Payments;" and
provided further, that upon any subsequent issuance or transfer of any
Capital Stock or any other event which results in any such Wholly-owned
Restricted Subsidiary ceasing to be a Wholly-owned Restricted Subsidiary or
any other subsequent transfer of any such Indebtedness (except to Abraxas
or a Wholly-owned Restricted Subsidiary), such Indebtedness shall be
deemed, in each case, to be incurred and shall be treated as an incurrence
for purposes of the covenants described under "--Certain
Covenants--Limitation on Incurrence of Indebtedness and Issuance of
Disqualified Stock" and "--Limitation on Restricted Payments" covenant at
the time the Wholly-owned Restricted Subsidiary in question ceased to be a
Wholly-owned Restricted Subsidiary;
(7) Indebtedness in respect of bid, performance or surety bonds issued
for the account of Abraxas or any Restricted Subsidiary in the ordinary
course of business, including Guarantees and letters of credit supporting
such bid, performance or surety obligations (in each case other than for an
obligation for money borrowed);
(8) any Guarantee of Indebtedness incurred in compliance with the
"Limitation on Incurrence of Indebtedness and Issuance of Disqualified
Stock" covenant, by a Restricted Subsidiary or Abraxas;
(9) Indebtedness under any renewal, substitution, refinancing or
replacement (each, for purposes of this clause, a "refinancing") by Abraxas
or a Restricted Subsidiary of any Indebtedness incurred pursuant to clause
(1) of this definition (or any refinancing thereof under this paragraph
(9)), including any successive refinancings by Abraxas or such Restricted
Subsidiary not incurred in violation of the Indenture, so long as (a) any
such refinancing shall be in a principal amount that does not exceed the
aggregate amount of Indebtedness then permitted to be Incurred under clause
(1) of this definition, (b) in the case such Indebtedness being refinanced
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is secured, the Liens securing such new Indebtedness (i) are not materially
less favorable to the holders of the Notes and are not materially more
favorable to the lienholders with respect to such Liens than the Liens in
respect of the Indebtedness being refinanced and (ii) are limited to all or
part of the same property that was or would have been encumbered by the
original Lien under the terms of the documents governing the original
Indebtedness; provided, that, if the terms of the Intercreditor Agreement
apply to the Liens securing such new Indebtedness, then such Liens will be
considered to have satisfied the conditions of this clause (b), (c) such
new Indebtedness has a final Stated Maturity not earlier than the final
Stated Maturity of the Indebtedness being refinanced and (d) such new
Indebtedness is incurred by either Abraxas or a Restricted Subsidiary who
is the obligor of the Indebtedness being refinanced;
(10) Indebtedness under any renewal, substitution, refinancing or
replacement (each, for purposes of this clause, a "refinancing") by Abraxas
or a Restricted Subsidiary of any Indebtedness incurred pursuant to clause
(3) or (4) of this definition (or any refinancing thereof under this
paragraph (10)) or Indebtedness (excluding Permitted Indebtedness) incurred
after the Closing Date in compliance with the covenant described under
"--Limitation on Incurrence of Indebtedness and Issuance of Disqualified
Stock," including any successive refinancings by Abraxas or such Restricted
Subsidiary not incurred in violation of the Indenture, so long as (a) any
such refinancing shall be in a principal amount that does not exceed the
principal amount (or, if such Indebtedness being refinanced provides for an
amount less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, such lesser amount as of the date of
determination) so refinanced plus the amount of accrued interest thereon
plus the amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of the Indebtedness refinanced or the
amount of any premium reasonably determined by Abraxas or such Restricted
Subsidiary as necessary to accomplish such refinancing, plus the amount of
expenses of Abraxas or such Restricted Subsidiary incurred in connection
with such refinancing (all of which amounts are included as Permitted
Indebtedness under this clause (10)), (b) in the case of any refinancing of
Indebtedness of Abraxas that is Subordinated Indebtedness, such new
Indebtedness shall be subordinated in right of payment to the Notes on
terms at least as favorable to the holders of the Notes as those contained
in the documentation governing the Indebtedness being refinanced, (c) in
the case of any refinancing of Indebtedness that is secured, the Liens
securing such new Indebtedness (i) are not materially less favorable to the
holders of the Notes and are not materially more favorable to the
lienholders with respect to such Liens than the Liens in respect of the
Indebtedness being refinanced and (ii) are limited to all or part of the
same property that was or would have been encumbered by the original Lien
under the terms of the documents governing the original Indebtedness, (d)
such new Indebtedness has an Average Life equal to or greater than the
Average Life of the Indebtedness being refinanced and a final Stated
Maturity not earlier than the final Stated Maturity of the Indebtedness
being refinanced and (e) such new Indebtedness is incurred by either
Abraxas or a Restricted Subsidiary who is the obligor of the Indebtedness
being refinanced;
(11) any Indebtedness incurred to finance unpaid insurance premiums,
provided, however, that recourse with respect to such Indebtedness is
limited to the insurance policies with respect to which premiums have been
financed;
(12) 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;
(13) Indebtedness of Abraxas or any of its Restricted Subsidiaries
represented by letters of credit for the account of Abraxas or any of its
Restricted Subsidiaries, 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;
and
(14) additional Indebtedness of Abraxas or any of its Restricted
Subsidiaries, other than Indebtedness Incurred under the Revolving Credit
Facility, in an aggregate principal amount at any time outstanding not to
exceed $500,000 under this clause (14).
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"Permitted Investments" means any of the following:
(1) Investments in Cash Equivalents;
(2) Investments in Abraxas or any of its Restricted
Subsidiaries;
(3) Investments by Abraxas or any of its Restricted
Subsidiaries in another Person, if as a result of such Investment (a)
such other Person becomes a Restricted Subsidiary or (b) such other
Person is merged or consolidated with or into, or transfers or conveys
all or substantially all of its properties and assets to, Abraxas or a
Restricted Subsidiary;
(4) Investments and expenditures made in the ordinary course
of, and of a nature that is or shall have become customary in, the Oil
and Gas Business as a means of actively exploiting, exploring for,
acquiring, developing, processing, gathering, marketing or transporting
oil and gas through agreements, transactions, interests or arrangements
which permit a Person to share risks or costs, comply with regulatory
requirements regarding local ownership or satisfy other objectives
customarily achieved through the conduct of Oil and Gas Business
jointly with third parties, including, without limitation, (a)
ownership interests in oil and gas properties or gathering systems and
(b) Investments and expenditures in the form of or pursuant to
operating agreements, processing agreements, Farmout Agreements,
development agreements, area of mutual interest agreements, unitization
agreements, pooling arrangements, joint bidding agreements, service
contracts, joint venture agreements, partnership agreements (whether
general or limited), limited liability company agreements, subscription
agreements, stock purchase agreements and other similar agreements with
third parties (including Unrestricted Subsidiaries);
(5) Investments arising in connection with Oil and Gas Hedging
Contracts entered into in the ordinary course of business solely for
the purpose of protecting the production of Abraxas or any Restricted
Subsidiary against fluctuations in oil or natural gas prices;
(6) Investments arising in connection with Interest Rate
Protection Obligations or Currency Exchange Contracts, in each case
Incurred in the ordinary course of business and not for speculative
purposes;
(7) Investments in stock, obligations or securities received
in settlement of debts owing to Abraxas or a Restricted Subsidiary as a
result of bankruptcy or insolvency proceedings or upon the foreclosure,
perfection or enforcement of any Lien in favor of Abraxas or a
Restricted Subsidiary, in each case as to debt owing to Abraxas or a
Restricted Subsidiary that arose in the ordinary course of business of
Abraxas or any such Restricted Subsidiary;
(8) any Investment received in settlement of debts, claims or
disputes owed to Abraxas or any Restricted Subsidiary that arose out of
transactions in the ordinary course of business;
(9) Investments in the form of intercompany Indebtedness or
Guarantees of Indebtedness of a Restricted Subsidiary permitted under
the covenant described under "--Certain Covenants--Limitations on the
Incurrence of Indebtedness and Issuance of Disqualified Stock;"
(10) any security or other Investment received or Investment
made as a result of the receipt of non-cash consideration from an Asset
Sale that was made pursuant to and in compliance with the covenant
described above under "Certain Covenants--Limitation on Asset Sales;"
(11) advances and extensions of credit in the nature of
accounts receivable arising from the sale or lease of goods or services
in the ordinary course of business;
(12) Investments in the form of, or pursuant to, working
interests, royalty interests, mineral leases, Farmout Agreements or
contracts for the sale of oil and natural gas, in each case, made or
entered into the ordinary course of the business, excluding, however,
investments in other Persons;
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(13) so long as Grey Wolf is a Subsidiary of Abraxas, up to an
aggregate principal amount of $1.0 million of intercompany loans made
to Grey Wolf for use by Grey Wolf solely for its working capital
purposes in a manner consistent with its operations on the Closing
Date; and
(14) other Investments by Abraxas or any Restricted Subsidiary
in any Person having an aggregate fair market value (determined in good
faith by the chief executive officer of Abraxas and measured as of the
date each such Investment is made and without giving effect to
subsequent changes in value), when taken together with all other
Investments made pursuant to this clause (14) (net of returns of
capital, dividends and interest paid on Investments and sales,
liquidations and redemptions of Investments), not in excess of
$500,000.
"Permitted Liens" means any and all of the following:
(1) Liens existing as of the Closing Date;
(2) Liens securing the Notes, the Subsidiary Guarantees and
other obligations arising under the Indenture;
(3) Liens securing the Revolving Credit Facility Obligations;
(4) Liens securing the Bridge Loan Obligations;
(5) any Liens existing on any property of a Person at the time
such Person is merged or consolidated with or into Abraxas or a
Subsidiary Guarantor or becomes a Restricted Subsidiary that is a
Subsidiary Guarantor (and not incurred in anticipation of such
transaction), provided that such Liens are not extended to other
property of Abraxas or the Subsidiary Guarantors;
(6) any Lien existing on any property or assets at the time of
the acquisition thereof (and not incurred in anticipation of such
transaction), provided that such Liens are not extended to other
property or assets of Abraxas or the Subsidiary Guarantors;
(7) Liens on cash and Cash Equivalents securing the
performance of Oil and Gas Hedging Contracts, Currency Exchange
Contracts and Interest Rate Protection Obligations permitted by the
terms of the Indenture;
(8) Liens with respect to amounts payable as reimbursement of
premiums in favor of Persons financing unpaid insurance premiums,
provided, however, such Liens are limited to insurance policies with
respect to which premiums are financed;
(9) Liens securing any permitted extension, renewal,
refinancing, refunding or exchange (or successive extensions, renewals,
refinancings, refundings or exchanges), in whole or in part, of or for
any Indebtedness secured by Liens referred to in clauses (1), (2), (4),
(5) and (6) above and this clause (9); provided, however, that (a) such
new Lien shall be limited to all or part of the same property that was
or would have been encumbered by the original Lien under the terms of
the documents governing the original Indebtedness, and (b) the
Indebtedness secured by such Lien at the time of such extension,
renewal, refinancing, refunding or exchange (and such successive
extension, renewal, refinancing, refunding or exchange) is not
increased to any amount greater than the sum of (i) the outstanding
principal amount of the Indebtedness secured by such original Lien
immediately prior to such extension, renewal, refinancing, refunding or
exchange and accrued interest thereon and (ii) an amount necessary to
pay any fees and expenses, including premiums, related to such
refinancing, refunding, extension, renewal or replacement;
(10) Liens securing Indebtedness Incurred under clause (9) of
the definition of Permitted Indebtedness;
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(11) Liens in favor of Abraxas or a Subsidiary Guarantor;
(12) Liens for taxes, assessments or governmental charges or
claims either (a) not yet delinquent or (b) contested in good faith by
appropriate proceedings and as to which Abraxas or a Restricted
Subsidiary, as the case may be, shall have set aside on its books such
reserves as may be required pursuant to GAAP;
(13) statutory and contractual Liens of (a) landlords arising
in the ordinary course of business to secure rent not yet delinquent,
but only to the extent such Liens relate only to the tangible property
of the lessee which is located on such property and (b) carriers,
warehousemen, mechanics, builders, suppliers, materialmen, repairmen
and other similar Liens incurred in the ordinary course of business for
sums not yet delinquent or being contested in good faith by appropriate
proceedings, in each case, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(14) Liens incurred on deposits made in the ordinary course of
business (a) in connection with workers' compensation, unemployment
insurance and other types of social security, including any Lien
securing letters of credit issued in the ordinary course of business
consistent with past practice in connection therewith, or (b) to secure
performance bonds, 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);
(15) easements, rights-of-way, zoning restrictions,
restrictive covenants, minor imperfections in title and other similar
charges or encumbrances in respect of real property that, individually
or in the aggregate, are not interfering in any material respect with
the ordinary conduct of the business of Abraxas or any Restricted
Subsidiary;
(16) any interest or title of a lessor under any Capitalized
Lease Obligation permitted by the terms of the Indenture; provided that
such Liens do not extend to any property which is not the leased
property subject to such Capitalized Lease Obligation;
(17) Liens securing reimbursement obligations, not to exceed
$100,000 in the aggregate at any time outstanding, with respect to
commercial letters of credit which encumber documents and other
property relating to such letters of credit and products and proceeds
thereof;
(18) Liens encumbering deposits made to secure obligations
arising from statutory, regulatory, contractual or warranty
requirements of Abraxas or any Restricted Subsidiary, including rights
of offset and setoff;
(19) statutory Liens on pipeline or pipeline facilities,
hydrocarbons or properties and assets of Abraxas or any Restricted
Subsidiary which arise out of operation of law and are not voluntarily
granted;
(20) royalties, overriding royalties, net profit interests,
reversionary interests, operating agreements and other similar
interests, properties, arrangements and agreements, all as ordinarily
exist with respect to properties of Abraxas and its Restricted
Subsidiaries or otherwise as are customary in the Oil and Gas Business
and all as relate to mineral leases and mineral interests of Abraxas
and its Restricted Subsidiaries;
(21) Liens pursuant to documents governing Permitted Farmout
Agreements;
(22) any (a) interest or title of a lessor or sublessor under
any mineral lease or operating lease, (b) restriction or encumbrance
that the interest or title of such lessor or sublessor may be subject
to (including, without limitation, ground leases or other prior leases
of the demised premises, mortgages, mechanics' Liens, builders' Liens,
tax Liens, and easements) that, individually or in the aggregate, are
not interfering in any material respect with the ordinary course of the
business of Abraxas or any Restricted Subsidiary or (c) subordination
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of the interest of the lessee or sublessee under such lease to any
restrictions or encumbrance referred to in the preceding clause (b);
(23) Liens in favor of collecting or payor banks having a
right of setoff, revocation, refund or chargeback, subject to an
account control agreement constituting a Collateral Document, with
respect to money or instruments of Abraxas or any Restricted Subsidiary
on deposit with or in possession of such bank;
(24) judgment and attachment Liens not giving rise to an Event
of Default;
(25) Liens incurred in the ordinary course of business of
Abraxas or any Restricted Subsidiary securing Indebtedness of Abraxas
or such Restricted Subsidiary permitted by the terms of the Indenture
in an aggregate principal amount at any time outstanding not exceeding
the sum of $250,000 in the aggregate; and
(26) Liens pursuant to the documents governing Production
Payments and Reserved Sales on the property to which such Production
Payments and Reserved Sales relate and with respect to which the Liens
of the Collateral Documents have been released in compliance with the
terms of the Indenture or the Intercreditor Agreement.
"Permitted Prior Lien" means (a) Liens described in clauses (1), (3), (5),
(6), (7) (to the extent securing obligations of not more than $250,000 in the
aggregate), (8) (to the extent securing obligations of not more than $200,000 in
the aggregate), (9), (10), (14) (to the extent securing obligations of not more
than $250,000 in the aggregate), (16), (18) (to the extent securing obligations
of not more than $50,000 in the aggregate), (23) and (25) of the definition of
Permitted Liens and (b) Liens which arise by operation of law and are not
consensually granted, to the extent entitled by law to priority over the
security interests created by the Collateral Documents.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"Production Payments and Reserve Sales" means the grant and transfer to any
Person of a Dollar-Denominated Production Payment, Volumetric Production
Payment, royalty, overriding royalty, net profits interest, master limited
partnership interest or other similar interest in oil and natural gas
properties, reserves or the right to receive all or a portion of the production
or the proceeds from the sale of production attributable to such properties.
"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 SEC.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Disqualified Stock.
"Qualified Equity Offering" means a public or private sale for cash by us
of Qualified Capital Stock of Abraxas other than public offerings with respect
to our common stock, options, warrants or rights registered on Form S-4 or S-8.
"Redeemable Capital Stock" means any Capital Stock that, either by its
terms, by the terms of any security into which it is convertible or exchangeable
or by contract or otherwise, is, or upon the happening of an event or passage of
time would be, required to be redeemed (other than for shares of Qualified
151
Capital Stock) prior to the date that is 91 days after the final Stated Maturity
of the Notes or is redeemable (other than for shares of Qualified Capital Stock)
at the option of the holder thereof, in whole or in part, at any time prior to
such date, or at any time prior to such date is convertible into or exchangeable
for anything other than Qualified Capital Stock or securities or instruments
evidencing Indebtedness that is permitted to be Incurred by the terms of the
Indenture.
"Refinancing Indebtedness" means Indebtedness under any renewals,
substitutions, refinancings or replacements Incurred in compliance with clause
(9) or (10) of the definition of Permitted Indebtedness.
"Related Revolving Indebtedness" means (i) Indebtedness related to any fees
and expenses incurred by Abraxas or any of its Subsidiaries (including, but not
limited to, those owed to any Person not an Affiliate of Abraxas or any of its
Subsidiaries) in connection with any amendment (including any amendment and
restatement thereof), supplement, replacement, restatement, substitution,
renewal or other modification from time to time, including any agreements (and
related instruments and documents) extending the maturity of, refinancing,
replacing, substituting, renewing or other restructuring of all or any portion
of the Indebtedness under the Revolving Credit Facility or any successor or
replacement agreements (and related instruments and documents) and (ii) any
capitalized interest, fees, or other expenses incurred by Abraxas or any of its
Subsidiaries whether or not charged to a loan account or any similar account
created under the Revolving Credit Facility.
"Restricted Subsidiary" means any Subsidiary of Abraxas, whether existing
on or after the date of the Indenture, unless such Subsidiary of Abraxas is an
Unrestricted Subsidiary or is designated as an Unrestricted Subsidiary pursuant
to the terms of the Indenture.
"Revolving Credit Facility" means that certain senior secured revolving
credit facility, to be dated as of the Closing Date, with an initial aggregate
commitment of $15.0 million among Abraxas, certain Subsidiaries of Abraxas, the
Revolving Credit Facility Agent and the lenders named therein, including any
related notes, Guarantees, Collateral Documents, instruments and agreements
executed in connection therewith, or any successor or replacement agreement
(together with any related notes, Guarantees, Collateral Documents, instruments
and agreements executed in connection therewith), whether with the same or any
other lender, group of lenders or agent, in each case as the same may be amended
(including any amendment and restatement thereof), modified, supplemented,
extended, restated, substituted, replaced, renewed or refinanced (up to an
aggregate amount of Indebtedness then permitted to be Incurred under clause (1)
of the definition of Permitted Indebtedness) from time to time in accordance
with its terms and the applicable terms of the Intercreditor Agreement.
"Revolving Credit Facility Administrative Agent" means Wells Fargo
Foothill, Inc., as administrative agent under the Revolving Credit Facility,
together with its successors in such capacity.
"Revolving Credit Facility Obligations" means all Obligations, including,
without limitation, Related Revolving Indebtedness, under the Revolving Credit
Facility.
"S&P" means Standard and Poor's Ratings Service, a division of McGraw-Hill,
Inc., and its successors.
"Sale-Leaseback Transaction" means any transaction or series of related
transactions whereby Abraxas or a Restricted Subsidiary sells or transfers any
of its assets or properties (the "Sold Assets") and, as part of such transaction
or series of related transactions, either (1) leases (as lessee or sublessee)
back such assets or properties (or any part thereof) or (2) leases (as lessee or
sublessee) any other assets or properties (or any part thereof) (the "Leased
Assets") from the same Person (or group of Persons) or from an Affiliate of the
same Person (or group of Persons) to whom the Sold Assets are sold and which
Leased Assets are intended to be used by Abraxas and the Restricted Subsidiaries
for substantially the same purpose or purposes as the Sold Assets were used by
Abraxas and the Restricted Subsidiaries (and in the case of mineral leases, such
mineral leases constituting Leased Assets are in substantially the same
geographic location as the mineral leases constituting Sold Assets).
"Sale of Collateral" means any Asset Sale to the extent involving assets,
rights or other property that constitutes Collateral under the Collateral
Documents.
"Secured Obligations" means, collectively, the Revolving Credit Facility
Obligations, the Note Obligations and the Bridge Loan Obligations.
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"Six-Month LIBOR" means the rate determined in accordance with the
following provisions:
(1) On each Interest Determination Date, the Calculation Agent
will determine the Six-Month LIBOR rate, which shall be the rate for
deposits in the London interbank market in U.S. dollars having a
six-month maturity commencing on the succeeding Interest Reset Date
immediately following such Interest Determination Date which appears on
the Designated LIBOR Page as of 11:00 a.m., London time, on such
Floating Determination Date.
(2) With respect to an Interest Determination Date for which
no such rate appears, the Calculation Agent will request the principal
London offices of each of four major reference banks in the London
interbank market, as selected by the Calculation Agent (after
consultation with Abraxas), to provide the Calculation Agent with its
offered quotation for deposits in U.S. dollars having a six-month
maturity commencing on the Interest Reset Date immediately following
such Interest Determination Date to prime banks in the London interbank
market at approximately 11:00 a.m., London time, on such Interest
Determination Date and in a principal amount not less than $1.0 million
that is representative for a single transaction in U.S. dollars in such
market at such time. If at least two such quotations are provided, the
Six-Month LIBOR rate on such Interest Determination Date will be the
arithmetic mean of such quotations. If fewer than two quotations are
provided, the Six-Month LIBOR rate determined on such Interest
Determination Date will be the arithmetic mean of the rates quoted at
approximately 11:00 a.m., New York City time, on such Interest
Determination Date by three major banks in The City of New York
selected by the Calculation Agent (after consultation with Abraxas) for
loans in U.S. dollars to leading European banks, having a six-month
maturity and in a principal amount not less than $1.0 million that is
representative for a single transaction in U.S. dollars in such market
at such time. However, if the banks so selected by the Calculation
Agent are not quoting as mentioned above, the Six-Month LIBOR rate with
respect to such Interest Determination Date will be the Six-Month LIBOR
rate in effect immediately prior to such Interest Determination Date.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable, and, when used with respect to any other Indebtedness or any
installment of interest thereon, means the date specified in the instrument
evidencing or governing such Indebtedness as the fixed date on which the
principal of such Indebtedness or such installment of interest is due and
payable.
"Subordinated Indebtedness" means Indebtedness of Abraxas or a Restricted
Subsidiary which is expressly subordinated in right of payment or security to
the Notes or a Subsidiary Guarantee.
"Subsidiary" means, with respect to any Person, (1) a corporation a
majority of whose Voting Stock is at the time, directly or indirectly, owned by
such Person, by one or more Subsidiaries of such Person or by such Person and
one or more Subsidiaries thereof or (2) any other Person (other than a
corporation) including, without limitation, a joint venture, in which such
Person, one or more Subsidiaries thereof or such Person and one or more
Subsidiaries thereof, directly or indirectly, at the date of determination
thereof, have at least majority ownership interest entitled to vote in the
election of directors, managers or trustees thereof (or other Persons performing
similar functions).
"Subsidiary Guarantee" means any Guarantee of the Notes by any Subsidiary
Guarantor in accordance with the provisions set forth in "--Subsidiary
Guarantees of Notes."
"Subsidiary Guarantor" means (1) initially the several Restricted
Subsidiaries named in the Indenture as a party thereto, (2) each of the other
Restricted Subsidiaries, if any, executing a supplemental indenture to the
Indenture in compliance with the provisions described under "--Subsidiary
Guarantees of Notes" and (3) any Person that becomes a successor guarantor of
the Notes in compliance with the provisions described under "--Subsidiary
Guarantees of Notes."
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
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"Trust Monies" means, subject to the Intercreditor Agreement, all cash and
Cash Equivalents received by the Collateral Agent:
(1) upon the release of Collateral from the Collateral Agent's
Liens;
(2) pursuant to the Collateral Documents;
(3) as proceeds of any sale or other disposition of all or any
part of the Collateral by or on behalf of the Collateral Agent or any
collection, recovery, receipt, appropriation or other realization of or
from all or any part of the Collateral pursuant to the Indenture or any
of the Collateral Documents or otherwise; or
(4) for application as provided in the relevant provisions of
the Indenture or any Collateral Document for which disposition is not
otherwise specifically provided for in the Indenture or in the
Intercreditor Agreement or any other Collateral Document;
provided, however, that Trust Monies shall in no event include any property
deposited with the Trustee for any redemption, Legal Defeasance or Covenant
Defeasance of the Notes, for the satisfaction and discharge of the Indenture or
to pay the purchase price of Notes pursuant to a Change of Control Offer.
"Unrestricted Subsidiary" means:
o Grey Wolf Exploration Inc., an Alberta corporation, and each of its
Subsidiaries (whether or not existing on the Closing Date) unless
otherwise designated as a Restricted Subsidiary in compliance with the
provisions of this definition;
o any Subsidiary of Abraxas that at the time of determination is
designated an Unrestricted Subsidiary by the Board of Directors of
Abraxas as provided below; and
o any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors of Abraxas may designate any Subsidiary of Abraxas
as an Unrestricted Subsidiary so long as:
(a) neither Abraxas nor any Restricted Subsidiary is directly
or indirectly liable pursuant to the terms of any Indebtedness of such
Subsidiary;
(b) no default with respect to any Indebtedness of such
Subsidiary would permit (upon notice, lapse of time or otherwise) any
holder of any other Indebtedness of Abraxas or any Restricted
Subsidiary to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its Stated
Maturity;
(c) neither Abraxas nor any Restricted Subsidiary has made an
Investment in such Subsidiary (other than Investments made in such
Subsidiary by Abraxas and any Restricted Subsidiary (i) in an aggregate
amount that would be permitted to be made on the date of such
designation pursuant to, and in accordance with, the covenant described
under "--Certain Covenants--Limitation on Restricted Payments" or (ii)
in the ordinary course of the Oil and Gas Business as described in
clause (4) of the definition of Permitted Investments); and
(d) such designation shall not result in the creation or
imposition of any Lien on any of the properties or assets of Abraxas or
any Restricted Subsidiary (other than any Permitted Lien or any Lien
the creation or imposition of which is in compliance with the covenant
described under "Limitation on Liens");
provided, however, that with respect to clause (a), Abraxas or a
Restricted Subsidiary may be liable for Indebtedness of an Unrestricted
Subsidiary if (x) such liability constituted a Permitted Investment or
154
a Restricted Payment permitted by the covenant described under
"--Certain Covenants--Limitation on Restricted Payments," in each case
at the time of incurrence, or (y) the liability would be a Permitted
Investment at the time of designation of such Subsidiary as an
Unrestricted Subsidiary. Any such designation by the Board of Directors
of Abraxas shall be evidenced to the Trustee by delivery of a Board
Resolution to the Trustee giving effect to such designation.
The Board of Directors of Abraxas may designate any Unrestricted
Subsidiary as a Restricted Subsidiary if, immediately after giving effect to
such designation, (1) no Default or Event of Default shall have occurred and be
continuing, (2) Abraxas could Incur $1.00 of additional Indebtedness (excluding
Permitted Indebtedness) in compliance with the covenant described under
"--Certain Covenants--Limitation on Incurrence of Indebtedness and Issuance of
Disqualified Stock", (3) if any of the properties or assets of Abraxas or any of
its Restricted Subsidiaries would upon such designation become subject to any
Lien (other than a Permitted Lien), the creation or imposition of such Lien
shall have been in compliance with the covenant described under "--Certain
Covenants--Limitation on Liens," (4) it takes such actions described under
"--Subsidiary Guarantees of Notes" in respect of an Unrestricted Subsidiary
becoming a Restricted Subsidiary and (5) such Restricted Subsidiary takes such
actions described under "--Security--Collateral; After-Acquired Property;
Permitted Liens," if applicable, as are necessary to cause a valid and
enforceable perfected first priority security interest (subject to Permitted
Prior Liens) in the Collateral owned by such Restricted Subsidiary to be created
in favor of the Collateral Agent as security for the Note Obligations. Without
limiting the foregoing sentence, Grey Wolf is not permitted to become a
Restricted Subsidiary until 91 days after all of the Bridge Loan Obligations are
repaid in full and the Bridge Loan is terminated.
"Unsubordinated Indebtedness" means any Indebtedness of Abraxas or a
Restricted Subsidiary which is not Subordinated Indebtedness.
"Volumetric Production Payments" means production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any Person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have, voting power by reason of
the happening of any contingency).
"Wholly-owned Restricted Subsidiary" means any Restricted Subsidiary to
the extent (1) all of the Capital Stock or other ownership interests in such
Restricted Subsidiary, other than any directors' qualifying shares mandated by
applicable law, is owned directly or indirectly by Abraxas or (2) such
Restricted Subsidiary is organized in a foreign jurisdiction and is required by
the applicable law and regulations of such foreign jurisdiction to be partially
owned by the government of such foreign jurisdiction or individual or corporate
citizens of such foreign jurisdiction in order for such Restricted Subsidiary to
transact business in such foreign jurisdiction, provided that Abraxas, directly
or indirectly, owns the remaining Capital Stock or ownership interest in such
Restricted Subsidiary and, by contract or otherwise, controls the management and
business of such Restricted Subsidiary and derives the economic benefits of
ownership of such Restricted Subsidiary to substantially the same extent as if
such Restricted Subsidiary were a wholly-owned Subsidiary.
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EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
Abraxas, the initial subsidiary guarantors and the initial purchaser
entered into an exchange and registration rights agreement, referred to as the
registration rights agreement, concurrently with the issuance of the outstanding
notes. Under that agreement, Abraxas and such subsidiary guarantors have agreed
to:
o file with the SEC no later than December 27, 2004, a registration
statement on an appropriate form under the Securities Act,
referred to as the Series A/B exchange offer registration
statement, relating to a registered offer, referred to as the
Series A/B exchange offer, to exchange the outstanding notes and
guarantees thereof for the exchange notes and guarantees thereof;
o use reasonable best efforts to cause the Series A/B exchange offer
registration statement to be declared effective under the
Securities Act no later than April 26, 2005;
o as soon as practicable after the effectiveness of the Series A/B
exchange offer registration statement, offer to holders of
transfer restricted securities, as defined below, who are not
prohibited by any law or policy of the SEC from participating in
the Series A/B exchange offer, the opportunity to exchange their
transfer restricted securities for the exchange notes; and
o use reasonable best efforts to complete the Series A/B exchange
offer by June 6, 2005 and to keep the Series A/B exchange offer
open for not less than 30 days, or longer if required by
applicable law, after the date on which notice of the Series A/B
exchange offer is mailed to the holders of the notes.
If:
o Abraxas is not permitted to effect the Series A/B exchange offer
as contemplated by this prospectus because of any change in law or
applicable interpretations of the law by the staff of the SEC;
o for any other reason the Series A/B exchange offer is not
consummated by June 6, 2005;
o the initial purchaser so requests with respect to notes held by
the initial purchaser that are not eligible to be exchanged for
exchange notes in the Series A/B exchange offer;
o any applicable law or interpretation does not permit any holder of
notes to participate in the Series A/B exchange offer; or
o any holder of notes that participates in the Series A/B exchange
offer does not receive freely transferable exchange notes in
exchange for tendered notes,
then Abraxas will file with the SEC as promptly as practicable, but in no event
more than the later of 60 days after so required or requested no later than
April 26, 2005, which is referred to as the shelf filing date, a shelf
registration statement to cover resales of transfer restricted securities by
those holders who satisfy various conditions relating to the provision of
information in connection with the shelf registration statement.
For purposes of the above, "transfer restricted securities" means each
note, until the earliest to occur of:
o the date on which that note has been exchanged for a freely
transferable exchange note in the Series A/B exchange offer;
o the date on which the resale of that note has been effectively
registered under the Securities Act and disposed of in accordance
with the shelf registration statement; or
o the date on which that note is distributed to the public pursuant
to Rule 144 under the Securities Act or may be sold under Rule
144(k) under the Securities Act.
Abraxas will use its reasonable best efforts to have the Series A/B
exchange offer registration statement or, if applicable, the shelf registration
statement declared effective by the SEC as promptly as practicable after it is
filed. Unless the Series A/B exchange offer would not be permitted by policy of
the SEC, Abraxas will use its reasonable best efforts to commence the Series A/B
exchange offer and will consummate the Series A/B exchange offer as promptly as
156
practicable, and in any event no later than June 6, 2005. If applicable, Abraxas
will use its reasonable efforts to keep the shelf registration statement
effective for a period ending on the earlier of two years after the date of
issuance of the notes or the date all transfer restricted securities become
eligible for resale without volume restrictions under Rule 144 under the
Securities Act.
If any of the following events occur, each of which is referred to as a
registration default:
o the Series A/B exchange offer registration statement is not filed with
the SEC by December 27, 2004 or the shelf registration statement is not
filed with the SEC on or before the shelf filing date;
o the Series A/B exchange offer registration statement is not declared
effective by April 26, 2005 or the shelf registration statement is not
declared effective within 60 days after the shelf filing date; or
o the Series A/B exchange offer is not consummated by June 6, 2005,
then the interest rate borne by the notes that are affected by the registration
default will be increased by an additional 0.5% per annum upon the occurrence
and during the continuation of such registration default. The amount of
additional interest will increase by an additional 0.5% per annum following each
90-day period, during which a registration default is continuing, until all
registration defaults have been cured; provided, that the maximum aggregate
increase in the interest rate pursuant to this paragraph will in no event exceed
1.5% per annum.
Upon
o the filing of the Series A/B exchange offer registration statement
after December 27, 2004;
o the effectiveness of the Series A/B exchange offer registration
statement after April 26, 2005;
o the consummation of the Series A/B exchange offer after June 6, 2005;
o the effectiveness of the shelf registration statement; or
o the date on which all exchange notes are saleable pursuant to Rule
144(k) under the Securities Act or any successor provision,
the interest rate on the notes will be reduced to the interest rate that would
then be in effect if a registration default had not occurred. If after any such
reduction in interest rate, a different event specified above occurs, the
interest rate will again be increased pursuant to the foregoing provisions.
If the shelf registration statement is unusable by the holders for any
reason for more than 30 days, then the interest rate borne by the notes will be
increased by 0.5% per annum for the first 90-day period (or portion thereof)
beginning on the 31st day that the shelf registration statement ceased to be
usable. This interest rate will be increased by an additional 0.5% per annum at
the beginning of each subsequent 90-day period; provided that the maximum
aggregate increase in the interest rate pursuant to this paragraph will in no
event exceed 1.5% per annum. Any amount payable under this paragraph will also
be deemed "additional interest" for purposes of the registration rights
agreement. Upon the shelf registration statement once again becoming usable and
Abraxas and the subsidiary guarantors otherwise being in compliance with the
terms of the registration rights agreement, the interest rate borne by the notes
will be reduced to the interest rate that would then be in effect if the shelf
registration statement had not become unusable.
Additional interest will be computed based on the actual number of days
elapsed in each 90-day period in which a registration default exists or the
shelf registration statement is unusable, as the case may be.
The exchange and registration rights agreement also provides that Abraxas:
o make available, for a period of 180 days after the] consummation of the
Series A/B exchange offer, a prospectus meeting the requirements of the
Securities Act to any broker-dealer for use in connection with any
resale of any exchange notes; and
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o pay all expenses incident to the Series A/B exchange offer, including
the expense of one counsel to the holders of the notes, and will
indemnify certain holders of the notes, including any broker-dealer,
against some liabilities, including liabilities under the Securities
Act.
A broker-dealer that delivers a prospectus to purchasers in connection with
resales of the exchange notes will be subject to certain of the civil liability
provisions under the Securities Act and will be bound by the provisions of the
registration rights agreement, including indemnification rights and obligations.
Each holder of notes who wishes to exchange its notes for exchange notes in
the Series A/B exchange offer is required to make representations, including
representations that:
o any exchange note to be received by it will be acquired in the ordinary
course of its business;
o it has no arrangement or understanding with any person to participate
in the distribution of the exchange notes; and
o it is not an "affiliate," as defined in Rule 405 under the Securities
Act, of ours, or if it is an affiliate, that it will comply with the
registration and prospectus delivery requirements of the Securities Act
to the extent applicable.
If the holder is not a broker-dealer, it is required to represent that it
is not engaged in, and does not intend to engage in, the distribution of the
exchange notes. If the holder is a broker-dealer that will receive exchange
notes for its own account in exchange for notes that were acquired as a result
of market-making activities or other trading activities, it is required to
acknowledge that it will deliver a prospectus in connection with any resale of
its exchange notes.
Holders of the notes are required to make representations to Abraxas, as
described above, to participate in the Series A/B exchange offer. They are also
required to deliver information to be used in connection with the shelf
registration statement in order to have their notes included in the shelf
registration statement and benefit from the provisions regarding additional
interest set forth in the preceding paragraphs. A holder who sells notes
pursuant to the shelf registration statement generally will be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with these sales and will be
bound by the provisions of the registration rights agreement that are applicable
to such a holder, including rights and indemnification obligations.
For so long as the notes are outstanding, Abraxas and the subsidiary
guarantors are required to continue to provide to holders of the notes and to
prospective purchasers of the notes the information required by Rule 144A(d)(4)
under the Securities Act.
The above description of the registration rights agreement is a summary
only. It is not complete and does not describe all of the provisions of the
registration rights agreement.
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BOOK-ENTRY; DELIVERY AND FORM
Holders of certificated outstanding notes participating in the Series A/B
Exchange Offer will be issued exchange notes in fully registered and
certificated form, to be delivered to each tendering noteholder and registered
in the name of such noteholder in accordance with such noteholder's written
instructions in the letter of transmittal. Principal and cash interest payments
made on certificated exchange notes and any additional notes issued in lieu of
cash interest payments will be made by Abraxas or through a paying agent
directly to the registered holders of such notes. Under the terms of the
indenture for the notes, Abraxas and the trustee will treat the persons in whose
names the notes and any additional notes issued in lieu of cash interest
payments are registered as the owners of such notes for the purpose of receiving
payments of principal and interest and any additional notes issued in lieu of
cash interest on such notes and for all other purposes whatsoever.
The exchange notes issued to tendering noteholders who held their
outstanding notes in book-entry form through DTC will be issued only in the form
of a global certificate deposited with, or on behalf of, the depositary, and
registered in the name of Cede & Co., as the depositary's nominee.
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.
Book-Entry Procedures for the Global Notes
The descriptions of the operations and procedures of DTC, Euroclear and
Clearstream set forth below are provided solely as a matter of convenience.
These operations and procedures are solely within the control of these
settlement systems and are subject to change by them from time to time. Neither
we nor the initial purchaser take any responsibility for these operations or
procedures, and investors are urged to contact the relevant system or its
participants directly to discuss these matters.
DTC has advised us that it is:
o a limited purpose trust company organized under the laws of the State
of New York;
o a "banking organization" within the meaning of the New York Banking
Law;
o a member of the Federal Reserve System;
o a "clearing corporation" within the meaning of the Uniform Commercial
Code, as amended; and
o a "clearing agency" registered under Section 17A of the Securities
Exchange Act of 1934.
DTC was created to hold securities for its participants and facilitates the
clearance and settlement of securities transactions between its participants
through electronic book-entry changes to the accounts of its participants, which
eliminates the need for physical transfer and delivery of certificates. DTC's
participants include securities brokers and dealers; banks and trust companies;
clearing corporations and some other organizations. Indirect access to DTC's
system is also available to other entities such as banks, brokers, dealers and
trust companies; these indirect participants clear through or maintain a
custodial relationship with a participant in DTC, either directly or indirectly.
Investors who are not DTC participants may beneficially own securities held by
or on behalf of DTC only through participants or indirect participants in DTC.
Abraxas expects that pursuant to procedures established by DTC:
o upon deposit of a global note, DTC will credit the accounts of
participants in DTC designated by the initial purchaser with an
interest in the global note; and
o ownership of the notes will be shown on, and the transfer of ownership
of the notes will be effected only through, records maintained by DTC,
with respect to the interests of participants in DTC, and the records
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of participants and indirect participants, with respect to the
interests of persons other than participants in DTC.
The laws of some jurisdictions may require that some purchasers of
securities take physical delivery of the securities in definitive form.
Accordingly, the ability to transfer interests in the notes represented by a
global note to these persons may be limited. In addition, because DTC can act
only on behalf of its participants, who in turn act on behalf of persons who
hold interests through participants, the ability of a person having an interest
in notes represented by a global note to pledge or transfer that interest to
persons or entities that do not participate in DTC's system, or to otherwise
take actions in respect of that interest, may be affected by the lack of a
physical definitive security in respect of the interest.
So long as DTC or its nominee is the registered owner of a global note, DTC
or the nominee, as the case may be, will be considered the sole owner or holder
of the notes represented by the global note for all purposes under the
indenture. Except as provided below, owners of beneficial interests in a global
note:
o will not be entitled to have notes represented by the global note
registered in their names;
o will not receive or be entitled to receive physical delivery of
certificated notes; and
o will not be considered the owners or holders of the notes under the
indenture for any purpose, including with respect to the giving of any
direction, instruction or approval to the trustee under the indenture.
Accordingly, each holder owning a beneficial interest in a global note must
rely on the procedures of DTC and, if the holder is not a participant or an
indirect participant in DTC, on the procedures of the DTC participant through
which the holder owns its interest, to exercise any rights of a holder of notes
under the indenture or the global note. Abraxas understands that under existing
industry practice, if Abraxas requests any action of holders of notes, or a
holder that is an owner of a beneficial interest in a global note desires to
take any action that DTC, as the holder of the global note, is entitled to take,
then DTC would authorize its participants to take the action and the
participants would authorize holders owning through participants to take the
action, or would otherwise act upon the instruction of such holders. Neither we
nor the trustee will have any responsibility or liability for any aspect of the
records relating to or payments made on account of notes by DTC, or for
maintaining, supervising or reviewing any records of DTC relating to the notes.
Payments with respect to the principal of, and premium, if any, and
interest on, any notes represented by a global note registered in the name of
DTC or its nominee on the applicable record date will be payable by the trustee
to or at the direction of DTC or its nominee in its capacity as the registered
holder of the global note representing those notes under the indenture. Under
the terms of the indenture, Abraxas and the trustee may treat the persons in
whose names the notes, including the global notes, are registered as the owners
of the notes for the purpose of receiving payment on the notes and for any and
all other purposes whatsoever. Accordingly, neither we nor the trustee has or
will have any responsibility or liability for the payment of amounts to owners
of beneficial interests in a global note, including principal, premium, if any,
and interest. Payments by the participants and the indirect participants in DTC
to the owners of beneficial interests in a global note will be governed by
standing instructions and customary industry practice and will be the
responsibility of the participants or the indirect participants and DTC.
Transfers between participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear or Clearstream will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Although DTC, Euroclear and Clearstream have agreed to the above procedures
to facilitate transfers of interests in the global notes among participants in
DTC, Euroclear and Clearstream, they are under no obligation to perform or to
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continue to perform the procedures, and the procedures may be discontinued at
any time. Neither we nor the trustee will have any responsibility for the
performance by DTC, Euroclear or Clearstream or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
Certificated Notes
If:
o DTC notifies us that DTC is at any time unwilling or unable to
continue as a depositary or DTC ceases to be registered as a
clearing agency under the Exchange Act and a successor depositary
is not appointed within 90 days of such notice or cessation;
o Abraxas, at its option, notifies the trustee in writing that it
elects to cause the issuance of notes in definitive form under
the indenture; or
o upon the occurrence of some other events as provided in the
indenture,
then, upon surrender by DTC of the global notes, certificated notes will be
issued to each person that DTC identifies as the beneficial owner of the notes
represented by the global notes. Upon the issuance of certificated notes, the
trustee is required to register the certificated notes in the name of that
person or persons, or their nominee, and cause the certificated notes to be
delivered thereto.
Neither we nor the trustee will be liable for any delay by DTC or any
participant or indirect participant in DTC in identifying the beneficial owners
of the related notes and each of those persons may conclusively rely on, and
will be protected in relying on, instructions from DTC for all purposes,
including with respect to the registration and delivery, and the respective
principal amounts, of the notes to be issued.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion generally describes the material U.S. federal
income tax consequences of the Series A/B Exchange Offer of the outstanding
notes for the exchange notes, but of which are referred to collectively as the
notes. This discussion is based on the Internal Revenue Code of 1986 ("Code"),
as amended, applicable Treasury regulations, administrative interpretations and
court decisions as of the date of this prospectus all of which might change,
possibly with retroactive effect.
This discussion addresses only persons who hold their notes as capital
assets within the meaning of Section 1221 of the Code. It does not address all
relevant aspects of the U.S. federal income taxation in light of a holder's
particular circumstance or to a holder of notes subject to special rules, such
as:
o Financial Institutions or Insurance Companies;
o Tax-exempt Organizations;
o Dealers or Brokers in securities or currencies;
o Individual Retirement or other Tax-Deferred Accounts;
o A note holder that holds its notes as part of a hedge, appreciated
financial position, straddle, constructive sale, conversion
transaction, or integrated transaction;
o A note holder who acquired notes as compensation;
o Persons liable for alternative minimum tax;
o United States Holders (as defined below) whose "functional currency" is
not the U.S. dollar; and
o Traders in securities that elect to use a mark-to-market method of
accounting for their securities holdings.
Importantly, the following summary does not address state, local or non-United
States tax consequences or United States federal tax consequences (e.g., estate
or gift tax) other than those pertaining to the income tax.
Furthermore, the following discussion is a summary of certain U.S. federal
income tax consequences of the purchase of the notes that may be relevant to a
U.S. Holder. It does not consider all of the possible U.S. federal income tax
consequences. For purposes of this summary, the term "U.S. Holder" means a
beneficial owner of a note that is:
(i) a citizen or resident of the United States for U.S.
federal income tax purposes,
(ii) a corporation (or other entity treated as a
corporation for U.S. federal income tax purposes)
created or organized under the laws of the United
States, any state thereof or the District of
Columbia,
(iii) an estate, the income of which is subject to U.S.
federal income tax without regard to its source or
(iv) a trust, if (a) a court within the United States is
able to exercise primary supervision over the
administration of the trust and one or more U.S.
persons have the authority to control all substantial
decisions of the trust or (b) the trust has a valid
election in effect under the applicable U.S. Treasury
regulations to be treated as a U.S. person.
A "Non-U.S. Holder" is any beneficial owner of a note that it not a U.S. Holder.
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We have not sought nor will we seek any ruling from the Internal Revenue
Service (the "IRS") with respect to statements or conclusions made in this
discussion. Although the following represents our best judgment, it does not in
any way bind the IRS or the courts or in any way constitute an assurance that
the U.S. federal income tax consequences will be accepted by the IRS or any
court.
ACCORDINGLY, EACH HOLDER SHOULD CONSULT ITS OWN TAX ADVISOR WITH REGARD TO
THE PROSPECTUS AND THE APPLICATION OF UNITED STATES FEDERAL INCOME TAX LAWS, AS
WELL AS THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTIONS, TO ITS
PARTICULAR SITUATION.
Federal Income Tax Consequences to U.S. Holders
Tax Consequences of the Series A/B Exchange Offer. In general, the Series
A/B exchange offer will not constitute an exchange for U.S. federal income tax
purposes because the outstanding notes do not differ materially in kind or
extent from the exchange notes. Instead, the exchange notes will be treated as a
continuation of the outstanding notes.
As a result:
(1) the beneficial owner would not recognize taxable
income on the Series A/B exchange offer,
(2) the holding period of the exchange notes will include
the holding period of the outstanding notes exchanged
for the exchange notes, and
(3) the adjusted tax bases of the exchange notes will be
the same as the adjusted tax bases it wielded before
the Series A/B exchange offer, of the outstanding
notes exchanged for the exchange notes.
EACH EXCHANGING HOLDER SHOULD CONSULT WITH HIS OR HER INDIVIDUAL TAX
ADVISOR CONCERNING ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF THE SERIES
A/B EXCHANGE OFFER AS WELL AS TO THE EFFECT OF HIS OR HER PARTICULAR FACTS AND
CIRCUMSTANCES ON THE MATTERS DISCUSSED HEREIN.
Payment of Interest. Interest on a note generally will be includable in
your income as ordinary income at the time the interest is received or accrued,
in accordance with your regular method of accounting for United States federal
income tax purposes.
We are obligated to pay additional interest on the notes under certain
circumstances described in "Exchange and Registration Rights Agreement."
Although the matter is not free from doubt, the additional interest should be
taxable as ordinary income at the time it is received or accrued in accordance
with your regular method of accounting for United States federal income tax
purposes. It is possible, however, that the IRS might take a different position
from that described above, in which case the timing and amount of income
inclusion may be different from that described above. You should consult your
own tax advisor about payments of additional interest.
Disposition of the Notes. Upon the sale, exchange, redemption, retirement
or other taxable disposition of a note, you generally will recognize capital
gain or loss equal to the difference between:
(1) the sum of the amount of cash proceeds and the fair market
value of any property received on the sale, exchange, redemption or
retirement (except to the extent this amount is attributable to accrued
interest income, which is taxable as ordinary income); and
(2) your adjusted tax basis in the note.
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Your adjusted tax basis in a note generally will equal the amount you paid
for the note, less any principal payments received by you. The gain or loss will
be long-term capital gain or loss if you held the note for more than one year.
Long-term capital gains of individuals, estates, and trusts are generally taxed
at a maximum rate of 15%. The deductibility of capital losses is subject to
certain limitations.
Backup Withholding and Information Reporting. A U.S. Holder may be subject
to backup withholding at the rate of 28% with respect to "reportable payments,"
which include payments in respect of interest or accrued original issue
discount, and the proceeds of a sale, exchange or redemption of the notes.
Abraxas will be required to deduct and withhold the prescribed amount if:
(a) the U.S. Holder fails to furnish a taxpayer
identification number ("TIN") to Abraxas in the
manner required,
(b) the IRS notifies Abraxas that the TIN furnished by
the U.S. Holder is incorrect,
(c) there has been a failure of the U.S. Holder to
certify under penalty of perjury that the U.S. Holder
is not subject to withholding under Section
3406(a)(1)(C) of the Code, or
(d) the U.S. Holder is notified by the IRS that he or she
failed to report properly payments of interest and
dividends and the IRS has notified Abraxas that he or
she is subject to backup withholding.
Amounts paid as backup withholding do not constitute an additional tax and
will be credited against the U.S. Holder's U.S. federal income tax liabilities,
so long as the required information is provided to the IRS. Abraxas will report
to U.S. Holders and to the IRS the amount of any "reportable payments" for each
calendar year and the amount of tax withheld, if any, with respect to payments
on such notes to any noncorporate U.S. Holder other than an "exempt recipient."
THE FEDERAL TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR
SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
Federal Income Tax Consequences to Non-U.S. Holders
Non-U.S. Holders. As used in this tax discussion, a Non-U.S. Holder means
any beneficial owner of a note that is not a U.S. Holder. The rules governing
the United States federal income taxation of a Non-U.S. Holder are complex, and
no attempt will be made herein to provide more than a general summary of those
rules. Special rules may apply to a Non-U.S. Holder that is a controlled foreign
corporation, passive foreign investment company or foreign personal holding
company and therefore subject to special treatment under the Code.
NON-U.S. HOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE NOTES, INCLUDING ANY REPORTING REQUIREMENTS.
Payment of Interest. Generally, subject to the following discussion in this
prospectus under "--Information Reporting and Backup Withholding Tax," payments
of interest on a note will qualify for the "portfolio interest" exemption and,
therefore, will not be subject to United States federal income tax or
withholding tax, provided that this interest income is not effectively connected
with a United States trade or business conducted by you and provided that:
164
o you do not actually or constructively own 10% or more of the
combined voting power of all classes of our stock entitled to
vote;
o you are not, for United States federal income tax purposes, a
controlled foreign corporation related to us through stock
ownership;
o you are not a bank receiving interest on a loan entered into in
the ordinary course of your business within the meaning of Section
881(c)(3)(A) of the Code; and
o you appropriately certify as to your foreign status.
You can generally meet the certification requirement by providing a
properly executed IRS Form W-8BEN or appropriate substitute form to us, or our
paying agent. If you hold the notes through a financial institution or other
agent acting on your behalf, you may be required to provide appropriate
certifications to the agent. Your agent will then generally be required to
provide appropriate certifications to us or our paying agent, either directly or
through other intermediaries. Special rules apply to foreign partnerships,
estates and trusts, and in certain circumstances, certifications as to the
foreign status of partners, trust owners or beneficiaries may have to be
provided to us or our paying agent. In addition, special rules apply to
qualified intermediaries that enter into withholding agreements with the IRS.
Except to the extent that an applicable treaty otherwise provides, a
Non-U.S. Holder generally will be taxed in the same manner as a U.S. Holder with
respect to interest if the interest income is effectively connected with a
United States trade or business (or in the case of an applicable treaty, a
permanent establishment) of the Non-U.S. Holder. Effectively connected interest
received by a corporate non-United States Holder may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate
(or, if applicable, a lower treaty rate). Even though this effectively connected
interest is subject to income tax, and may be subject to the branch profits tax,
it is not subject to withholding tax (unless derived through certain
partnerships) if the non-United States Holder delivers IRS Form W-8ECI (or
successor form) to us or our agent.
Interest income of a Non-U.S. Holder that is not effectively connected with
a United States trade or business (or in the case of an applicable treaty, a
permanent establishment) and that does not qualify for the portfolio interest
exemption described above will generally be subject to a withholding tax at a
28% rate (or, if applicable, a lower treaty rate).
Disposition of the Notes. You will generally not be subject to United
States federal income tax or withholding tax on any gain realized on the sale,
exchange, redemption, retirement or other disposition of a note unless:
o the gain is effectively connected with your conduct of a United
States trade or business or in the case of an applicable tax
treaty, attributable to your permanent establishment in the United
States;
o you are an individual who has been present in the United States
for a period or periods aggregating 183 days or more during the
taxable year of the disposition, and certain other requirements
are met; or
o you are subject to tax pursuant to the provisions of the Code
applicable to certain United States expatriates.
Information Reporting and Backup Withholding Tax. Payments of interest on a
note, and amounts withheld from such payments, if any, generally will be
required to be reported to the IRS and to you. United States backup withholding
tax generally will not apply to payments of interest and principal on a note to
a Non-U.S. Holder if the statement described in "--Payment of Interest" is duly
provided by the holder (e.g., the Non-U.S. Holder provides an IRS Form W-8BEN)
or the holder otherwise establishes an exemption, provided that we do not have
actual knowledge or reason to know that the holder is a United States person or
does not qualify for the portfolio interest exemption.
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Information reporting requirements and backup withholding tax generally
will not apply to the payment of the proceeds of the sale of a note effected
outside the United States by a foreign office of a foreign broker. However,
information reporting requirements (but not backup withholding, unless we have
actual knowledge or reason to know that you are a United States person) will
apply to the payment of the proceeds of a sale of a note effected outside the
United States by a foreign office of a broker, if the broker:
o is a United States person,
o derives 50% or more of its gross income from all sources for
certain periods from the conduct of a United States trade or
business,
o is a controlled foreign corporation for United States federal
income tax purposes, or
o is a foreign partnership in which one or more United States
persons, in the aggregate, own more than 50% of the income or
capital interests or is a foreign partnership that is engaged in a
trade or business in the United States,
unless in any such case the broker has documentary evidence in its records that
the beneficial owner is a Non-U.S. Holder and certain other conditions are met,
or the beneficial owner otherwise establishes an exemption.
Payment of the proceeds of a sale of a note by a United States office of a
broker will be subject to both information reporting and backup withholding
requirements, unless the beneficial owner of the note provides the statement
described in "--Payment of Interest" (e.g., on an IRS Form W-8BEN) and the
broker does not have actual knowledge or reason to know that the payee is a
United States person, or otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules may be credited
against the Non-U.S. Holder's United States federal income tax liability and any
excess may be refundable, provided that the required information is provided to
the IRS.
THE FEDERAL TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION
ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION.
HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES
TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE
TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
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PLAN OF DISTRIBUTION
Based on interpretations by the staff of the SEC set forth in no-action letters
issued to third parties in similar transactions, we believe that the exchange
notes issued in the Series A/B Exchange Offer in exchange for the outstanding
notes may be offered for resale, resold and otherwise transferred by holders
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that the exchange notes are acquired in the
ordinary course of such holders' business and the holders are not engaged in,
and do not intend to engage in, and have no arrangement or understanding with
any person to participate in, a distribution of exchange notes. This position
does not apply to any holder that is (1) an "affiliate" of Abraxas within the
meaning of Rule 405 under the Securities Act, (2) a broker-dealer who acquired
exchange notes directly from Abraxas or (3) broker-dealers who acquired exchange
notes as a result of market-making or other trading activities. Any
broker-dealers or participating broker-dealers receiving exchange notes in the
Series A/B Exchange Offer are subject to a prospectus delivery requirement with
respect to resales of the exchange notes. To date, the SEC has taken the
position that participating broker-dealers may, for a limited period, fulfill
their prospectus delivery requirements with respect to transactions involving an
exchange of securities such as the exchange notes pursuant to the Series A/B
Exchange Offer with this prospectus.
Each broker-dealer that receives exchange notes for its own account pursuant to
the Series A/B 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 broker-dealer in
connection with resales of exchange notes received in exchange for outstanding
notes where such outstanding notes were acquired as a result of market-making
activities or other trading activities. Abraxas has agreed that, for a period of
180 days after the expiration of the Series A/B exchange offer, it will make
this prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until _______________,
2005, all dealers effecting transactions in the exchange notes may be required
to deliver a prospectus.
Abraxas will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the Series A/B exchange offer may be sold from time to time in one
or more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the exchange notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer or the purchasers of any such exchange notes. Any
broker-dealer that resells exchange notes that were received by it for its own
account pursuant to the Series A/B 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 commission 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 broker- dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the expiration of the Series A/B exchange offer,
Abraxas will promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. Abraxas has agreed to pay all
expenses incident to the Series A/B exchange offer (including the expenses of
one counsel for the holders of the outstanding notes) other than commissions or
concessions of any broker-dealers and will indemnify the holders of the
outstanding notes (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
167
LEGAL MATTERS
Certain legal matters related to the exchange notes will be passed upon for
Abraxas by Cox Smith Matthews Incorporated, San Antonio, Texas.
EXPERTS
The consolidated financial statements of Abraxas as of December 31, 2003
and for the year ended December 31, 2003, included in this prospectus have been
audited by BDO Seidman, LLP, independent registered public accounting firm, as
stated in their report appearing herein (which report expresses an unqualified
opinion and includes a paragraph referring to a change in accounting method),
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The consolidated financial statements of Abraxas as of December 31, 2002,
and for each of the two years in the period ended December 31, 2002, included in
this prospectus have been audited by Deloitte & Touche LLP, independent
registered public accounting firm, as stated in their report dated March 10,
2003, July 18, 2003 as to Note 19 and the first paragraph of "New Accounting
Pronouncements" in Note 1, appearing herein (which report expresses an
unqualified opinion and includes two explanatory paragraphs referring to
subsequent events described in Note 2 and the restatement described in Note 19),
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The historical reserve information prepared by DeGolyer and MacNaughton and
McDaniel and Associates Consultants Ltd. included in this prospectus has been
included herein in reliance upon the authority of such firm as experts with
respect to matters contained in such reserve reports.
WHERE YOU CAN FIND MORE INFORMATION
Abraxas and the guarantors of the notes have filed the registration
statement regarding the exchange notes with the SEC. This prospectus does not
contain all of the information included in the registration statement. Any
statement made in this prospectus concerning the contents of any other document
is not necessarily complete. If we have filed any other document as an exhibit
to the registration statement, you should read the exhibit for a more complete
understanding of the document or matter. Each statement regarding any other
document does not necessarily contain all of the information important to you.
Abraxas files annual, quarterly and special reports, proxy statements and
other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC's website at http://www.sec.gov. You may also read and
copy any document Abraxas files at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the SEC's public reference room in Washington, D.C. by calling the
SEC at 1-800-SEC-0330.
168
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.
Terms used to describe quantities of natural gas and crude oil
"Bbl" -- barrel or barrels.
"Bcf" -- billion cubic feet.
"Bcfe" -- billion cubic feet equivalent.
"BoE" -- barrels of
"MBbl" -- thousand barrels.
"Mcf" -- thousand cubic feet.
"Mcfe" -- thousand cubic feet equivalent.
"MMBbls" -- million barrels.
"MMBTU" -- million British Thermal Units.
"MMcf" -- million cubic feet.
"MMcfe" -- million cubic feet equivalent.
"MMcfpd" -- million cubic feet per day.
Terms used to describe our interests in wells and acreage
"Developed acreage" means acreage which consists of acres
spaced or assignable to productive wells.
"Gross" natural gas and crude oil wells or "gross" wells or
acres is the number of wells or acres in which we have an interest.
"Net" natural gas and crude oil wells or "net" acres are
determined by multiplying "gross" wells or acres by our working
interest in such wells or acres.
"Productive" well means an exploratory or a development well
that is not a dry hole.
"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 natural gas and crude oil,
regardless whether or not such acreage contains proved reserves.
Terms used to assign a present value to or to classify our reserves
"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 SEC.
"Proved reserves" or "reserves" means natural gas and crude
oil, condensate and NGLs on a net revenue interest basis, found to be
commercially recoverable.
169
"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.
Terms used to describe costs
"DD&A" means depletion, depreciation and amortization.
"LOE" means lease operating expenses and production taxes.
Terms used to describe types of wells
"Development well" means a well drilled within the proved area
of a natural gas or crude oil reservoir to the depth of stratigraphic
horizon (rock layer or formation) known to be productive for the
purpose of extraction of proved natural gas or crude oil 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 natural gas or crude oil well.
"Exploratory well" means a well drilled to find and produce
natural gas or crude oil in an unproved area, to find a new reservoir
in a field previously found to be producing natural gas or crude oil in
another reservoir, or to extend a known reservoir.
"Productive wells" mean producing wells and wells capable of
production.
"Service Well" is a well used for water injection in secondary
recovery projects or for the disposal of produced water.
Other terms
"Charge" means an encumbrance, lien, claim or other interest
in property securing payment or performance of an obligation.
"EBITDA" means earnings from before income taxes, interest
expense, DD&A and other non-cash charges.
"NGL" means natural gas liquid.
"NYMEX" means the New York Mercantile Exchange.
170
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of BDO Seidman, LLP, Independent Registered Public Accounting Firm..............................F-2
Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.........................F-3
Consolidated Balance Sheets,
December 31, 2002 and 2003....................................................................F-4
Consolidated Statements of Operations,
Years Ended December 31, 2001, 2002 and 2003..................................................F-6
Consolidated Statements of Stockholders' Deficit,
Years Ended December 31, 2001, 2002 and 2003 .................................................F-7
Consolidated Statements of Cash Flows,
Years Ended December 31, 2001, 2002 and 2003..................................................F-9
Consolidated Statements of Other Comprehensive Income (loss),
Years Ended December 31, 2001, 2002 and 2003.................................................F-11
Notes to Consolidated Financial Statements............................................................F-12
Condensed Consolidated Balance Sheets,
September 30, 2004 and December 31, 2003.....................................................F-50
Condensed Consolidated Statements of Operations,
Three and Nine Months Ended September 30, 2004 and 2003......................................F-52
Condensed Consolidated Statements of Cash Flows,
Nine Months Ended September 30, 2004 and 2003................................................F-53
Notes to Condensed Consolidated Financial Statements..................................................F-54
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Abraxas Petroleum Corporation
We have audited the accompanying consolidated balance sheet of Abraxas Petroleum
Corporation (the "Company") as of December 31, 2003, and the related
consolidated statements of operations, stockholders' deficit, and cash flows and
other comprehensive income for the year ended December 31, 2003. 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 audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States of America). 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
audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Abraxas Petroleum Corporation at
December 31, 2003, and the results of its operations and its cash flows for the
year ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, as of January
1, 2003, the Company changed its method of accounting for asset retirement
obligations.
/s/BDO Seidman, LLP
Dallas, Texas
February 13, 2004
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Abraxas Petroleum Corporation
We have audited the accompanying consolidated balance sheet of Abraxas Petroleum
Corporation and Subsidiaries (the "Company") as of December 31, 2002, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows and other comprehensive income for each of the two years in the period
ended December 31, 2002. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2002,
and the results of its operations and its cash flows for each of the two years
in the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2 to the financial statements, on January 23, 2003, the
Company sold all of the outstanding common stock of two wholly-owned
subsidiaries, Canadian Abraxas Petroleum Limited and Grey Wolf Exploration,
Inc., repaid certain debt, and also entered into an agreement to exchange cash,
new debt and common stock of the Company for certain other debt.
As discussed in Note 19 to the financial statements, the accompanying 2001 and
2002 financial statements have been restated.
/s/DELOITTE & TOUCHE LLP
San Antonio, Texas
March 10, 2003 (July 18, 2003, as to Note 19 and the first paragraph of "New
Accounting Pronouncements" in Note 1)
F-3
ABRAXAS PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
--------------------------------------
2002 2003
------------------ -------------------
(Dollars in thousands)
Current assets:
Cash ................................................... $ 4,882 $ 493
Accounts receivable:
Joint owners ....................................... 2,215 1,360
Oil and gas production sales ....................... 7,466 5,873
Other .............................................. 364 1,090
------------------ -------------------
10,045 8,323
Equipment inventory .................................... 1,014 782
Other current assets ................................... 1,240 572
------------------ -------------------
Total current assets.................................. 17,181 10,170
Property and equipment:
Oil and gas properties, full cost method of accounting:
Proved ............................................. 521,995 325,222
Unproved, not subject to amortization .............. 7,052 4,304
Other property and equipment ......................... 44,189 4,540
------------------ -------------------
Total .......................................... 573,236 334,066
Less accumulated depreciation, depletion, and
amortization ....................................... 422,842 222,503
------------------ -------------------
Total property and equipment - net ................. 150,394 111,563
Deferred financing fees net ............................... 5,671 4,410
Deferred income taxes...................................... 7,820 -
Other assets .............................................. 359 294
------------------ -------------------
Total assets ........................................... $ 181,425 $ 126,437
================== ===================
See accompanying notes to consolidated financial statements
F-4
ABRAXAS PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
December 31
--------------------------------------
2002 2003
------------------ -------------------
(Dollars in thousands)
Current liabilities:
Accounts payable .......................................... $ 9,687 $ 6,756
Joint interest oil and gas production payable ............. 2,432 2,290
Accrued interest .......................................... 6,009 2,340
Other accrued expenses .................................... 1,162 1,228
Current maturities of long-term debt ...................... 63,500 -
------------------ -------------------
Total current liabilities................................ 82,790 12,614
Long-term debt ............................................... 236,943 184,649
Future site restoration ..................................... 3,946 1,377
Stockholders' equity (deficit):
Common stock, par value $.01 per share - authorized
200,000,000 shares; issued 30,145,280 and 36,024,308
at December 31, 2002 and 2003 respectively............ 301 360
Additional paid-in capital ................................ 136,830 141,835
Receivables from stock sale................................ (97) (97)
Accumulated deficit ...................................... (269,621) (213,701)
Treasury stock, at cost, 165,883 shares.................... (964) (964)
Accumulated other comprehensive income (loss).............. (8,703) 364
------------------ -------------------
Total stockholders' deficit................................... (142,254) (72,203)
------------------ -------------------
Total liabilities and stockholders' deficit................ $ 181,425 $ 126,437
================== ===================
See accompanying notes to consolidated financial statements
F-5
ABRAXAS PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
----------------------------------------------------------
2001 2002 2003
----------------------------------------------------------
(In thousands except per share data)
Revenues:
Oil and gas production revenues ......................... $ 73,201 $ 50,862 $ 38,105
Gas processing revenues.................................. 2,438 2,420 133
Rig revenues ............................................ 756 635 663
Other .................................................. 848 403 118
--------------------------------------------------------
77,243 54,320 39,019
Operating costs and expenses:
Lease operating and production taxes .................... 18,616 15,240 9,599
Depreciation, depletion, and amortization ............... 32,484 26,539 10,803
Proved property impairment .............................. 2,638 115,993 -
Rig operations .......................................... 702 567 609
General and administrative .............................. 6,445 6,884 5,360
Stock-based compensation................................. (2,767) - 1,106
--------------------------------------------------------
58,118 165,223 27,477
--------------------------------------------------------
Operating income (loss)..................................... 19,125 (110,903) 11,542
Other (income) expense:
Interest income ......................................... (78) (92) (30)
Amortization of deferred financing fees ................. 2,268 2,095 1,678
Interest expense ........................................ 31,523 34,150 16,955
Financing costs.......................................... - 967 4,406
Loss on sale of equity investment ....................... 845 - -
Gain on sale of foreign subsidiaries..................... - - (68,933)
Other ................................................... 207 201 774
--------------------------------------------------------
34,765 37,321 (45,150)
--------------------------------------------------------
Income (loss) before cumulative effect of accounting change
and taxes................................................ (15,640) (148,224) 56,692
Income tax expense (benefit):
Current ................................................. 505 - -
Deferred ................................................ 1,897 (29,697) 377
Minority interest in income of foreign subsidiary (2001
prior to purchase)....................................... 1,676 - -
Cumulative effect of accounting change...................... - - 395
--------------------------------------------------------
Net income (loss)........................................ $ (19,718) $ (118,527) $ 55,920
========================================================
Basic earnings (loss)per common share:
Net earnings (loss)................................... $ (0.76) $ (3.95) $ 1.59
Cumulative effect of accounting change................ - - (0.01)
--------------------------------------------------------
Net income (loss) per common share - basic .............. $ (0.76) $ (3.95) $ 1.58
========================================================
Diluted earnings (loss) per common share:
Net earnings (loss)................................... $ (0.76) $ (3.95) $ 1.56
Cumulative effect of accounting change................ - - (0.01)
--------------------------------------------------------
Net income (loss) per common share - diluted............ $ (0.76) $ (3.95) $ 1.55
========================================================
See accompanying notes to consolidated financial statements
F-6
ABRAXAS PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(In thousands except share amounts)
Common Stock Treasury Stock Additional
-------------------------------------------- Paid-In
Shares Amount Shares Amount Capital
----------- -------------------------------------------------
Balance at December 31, 2000 . 22,759,852 $ 227 165,883 $ (964) $ 130,409
Comprehensive income (loss)
Net loss .................... -- -- -- -- --
Other comprehensive
income:
Hedge loss .............. -- -- -- -- --
Foreign currency
translation adjustment. -- -- -- -- --
adjustment
Comprehensive income
(loss)....................
Stock-based compensation
expense .................. -- -- -- -- (2,767)
Issuance of common stock
for contingent value
rights ................... 3,383,488 34 -- -- (34)
Issuance of common stock
and stock options for
acquisition of
minority interest in ....
Old Grey Wolf
Exploration, Inc. ....... 3,990,565 40 -- -- 9,206
Stock options exercised ... 8,375 -- -- -- 16
---------- --------- --------- ----------- ------------
Balance at December 31, 2001 . 30,145,280 $ 301 165,883 $ (964) $ 136,830
Comprehensive income
(loss):
Net loss .................. -- -- -- -- --
Other comprehensive
income:
Hedge income .......... -- -- -- -- --
Foreign currency
translation ......... -- -- -- -- --
adjustment
Comprehensive income (loss)
---------- ------- --------- ----------- ------------
Balance at December 31, 2002.. 30,145,280 $ 301 165,883 $ (964) $ 136,830
Accumulated
Other Recivables
Accumuated Comprehensive From
Deficit Income (loss) Stock Sale Total
------------- -------------- ------------- ----------
Balance at December 31, 2000 . $ (131,376) $ (4,799) $ (97) $(6,600)
Comprehensive income (loss):
Net loss .................... (19,718) -- -- (19,718)
Other comprehensive
income:
Hedge loss .............. -- (566) -- (566)
Foreign currency
translation adjustment. -- (8,196) -- (8,196)
adjustment
---------
Comprehensive income (loss).. (24,480)
Stock-based compensation
expense ................. -- -- -- (2,767)
Issuance of common stock
for contingent value
rights .................. -- -- -- --
Issuance of common stock
and stock options for
acquisition of
minority interest in
Old Grey Wolf
Exploration, Inc. ........ -- -- -- 9,246
Stock options exercised ... -- -- -- 16
------------- -------------- ------------- ----------
Balance at December 31, 2001 . $(151,094) $ (13,561) $ (97) $ (28,585)
Comprehensive income
(loss):
Net loss ................. . (118,527) -- -- (118,527)
Other comprehensive
income:
Hedge income .......... -- 566 -- 566
Foreign currency
translation .........
adjustment -- 4,292 -- 4,292
-----------
Comprehensive income (loss) (113,669)
------------- -------------- ------------- ----------
Balance at December 31, 2002. . $(269,621) $ (8,703) $ (97) $(142,254)
F-7
ABRAXAS PETROLEUM CORPORATIONRIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (continued)
(In thousands except share amounts)
Common Stock Treasury Stock Additional
-------------------------------------------- Paid-In
Shares Amount Shares Amount Capital
----------- --------- ---------- ----------- -----------------
Balance at December 31, 2002.. 30,145,280 $ 301 165,883 $ (964) $136,830
Comprehensive income
(loss):
Net income ............. -- -- -- -- --
Other comprehensive
income (loss):
Foreign currency
translation
adjustment ........ -- -- -- -- --
Comprehensive income ....
Stock-based compensation
expense ............... -- -- -- -- 1,106
Stock options exercised . 129,352 1 -- -- 84
Stock issued for
acquisition of Wind ...
River Resources
Stock issued in 106,977 1 -- -- 91
connection with
exchange offer 5,642,699 57 -- -- 3,724
----------- --------- ---------- ----------- -----------------
Balance at December 31, 2003. $36,024,308 $ 360 165,883 $ (964) $ 141,835
=========== ========= ========== =========== =================
Accumulated
Other Recivables
Accumuated Comprehensive From
Deficit Income (loss) Stock Sale Total
------------- -------------- ------------- ----------
Balance at December 31, 2002. $ (269,621) $ (8,703) $ (97) $ (142,254)
Comprehensive income
(loss):
Net income .......... 55,920 -- -- 55,920
Other comprehensive
income (loss):
Foreign currency
translation
adjustment ........ -- 9,067 -- 9,067
----------
Comprehensive income .... 64,987
Stock-based compensation
expense ............... -- -- -- 1,106
Stock options exercised . -- -- -- 85
Stock issued for
acquisition of Wind ...
River Resources -- -- -- 92
Stock issued in
connection with
exchange offer......... -- -- -- 3,781
------------- -------------- ------------- ----------
Balance at December 31, 2003 $ (213,701) $ 364 $(97) $ (72,203)
============= ============== ============= ==========
See accompanying notes to consolidated financial statements.
F-8
Abraxas Petroleum Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
----------------------------------------------------------------
2001 2002 2003
----------------------------------------------------------------
(In thousands)
Operating Activities
Net income (loss) ................................... $ (19,718) $ (118,527) $ 55,920
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Minority interest in income of foreign subsidiary 1,676 - -
Loss on sale of equity investment................ 845 - -
(Gain) on sale of foreign subsidiaries........... - - (68,933)
Depreciation, depletion, and
amortization ................................ 32,484 26,539 10,803
Non-cash interest and financing cost............ - - 16,422
Proved property impairment ..................... 2,638 115,993 -
Deferred income tax expense (benefit)........... 1,897 (29,697) 377
Amortization of deferred financing fees......... 2,268 2,095 1,678
Stock-based compensation ....................... (2,767) - 1,106
Changes in operating assets and liabilities:
Accounts receivable ......................... 12,693 (2,247) (1,446)
Equipment inventory ......................... (76) 201 78
Other ...................................... (106) 126 295
Accounts payable ............................ (14,848) (2,775) 3,417
Accrued expenses ............................ (723) (44) 4,133
------------------ ------------------ ------------------
Net cash provided by (used) in operations............ 16,263 (8,336) 23,850
Investing Activities
Capital expenditures, including purchases
and development of properties .................... (57,056) (38,912) (18,349)
Proceeds from sale of oil and gas
properties........................................ 28,938 33,876 -
Acquisition of minority interest..................... (2,679) - -
Proceeds from sale of foreign subsidiaries.......... - - 85,810
------------------ ------------------ ------------------
Net cash provided by (used ) in investing activities. (30,797) (5,036) 67,461
F-9
ABRAXAS PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31
----------------------------------------------------------------
2001 2002 2003
----------------------------------------------------------------
(In thousands)
Financing Activities
Proceeds from issuance of common stock............... 16 - 177
Proceeds from long-term borrowings .................. 29,995 20,551 43,342
Payments on long-term borrowings .................... (9,326) (8,176) (138,544)
Deferred financing fees ............................. - (1,539) (597)
------------------ ------------------ ------------------
Net cash (used in) provided by financing activities.. 20,685 10,836 (95,622)
------------------ ------------------ ------------------
Increase (decrease) in cash ......................... 6,151 (2,536) (4,311)
Effect of exchange rate changes on cash.............. (550) (187) (78)
------------------ ------------------ ------------------
Increase (decrease) in cash ......................... 5,601 (2,723) (4,389)
Cash at beginning of year ........................... 2,004 7,605 4,882
------------------ ------------------ ------------------
Cash at end of year.................................. $ 7,605 $ 4,882 $ 493
================== ================== ==================
Supplemental Disclosures
Supplemental disclosures of cash flow information:
Interest paid .......................... $ 31,752 $ 34,154 $ 4,279
================== ================== ==================
Taxes paid.............................. $ 505 $ - $ -
================== ================== ==================
Supplemental schedule of non-cash investing and
financing activities:
In May 2001 the Company issued 3,386,488 shares of common stock upon the
expiration of the CVRs issued in connection with the December 1999
exchange.
In September 2001 the Company issued 3,990,565
shares of common stock and options and paid
$2,679,000 million in cash in connection with the
acquisition of the minority interest in Old Grey
Wolf. (See Note 4.)
Decrease in oil and gas properties and other assets.. $ (2,925)
Decrease in deferred income tax liability............ $ 1,091
==================
Increase in stockholders equity...................... $ (9,246)
==================
Decrease in minority interest in foreign subsidiary.. $ 13,759
==================
See accompanying notes to consolidated financial statements.
F-10
ABRAXAS PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
Years Ended December 31,
2001 2002 2003
---------------------------------------------------------
(In thousands)
Net income (loss)............................................ $ (19,718) $ (118,527) $ 55,920
Other Comprehensive income (loss):
Hedging derivatives (net of tax) - See Note 16 (566) - -
Reclassification adjustment for settled hedge contracts,
net of taxes................................................ - 2,556 -
Change in fair market value of outstanding hedge positions
net of taxes ............................................... - (1,990) -
------------------- ------------------ ------------------
(566) 566 -
Foreign currency translation adjustment
Reclassification of foreign currency translation adjustment
relating to the sale of foreign subsidiaries.............. (8,196) 4,292 4,632
Effect of change in exchange rate........................... - - 4,435
------------------- ------------------ ------------------
Other comprehensive income (loss)................................ (8,762) 4,858 9,067
------------------- ------------------ ------------------
Comprehensive income (loss)...................................... $ (28,480) $ (113,669) $ 64,987
=================== ================== ==================
See accompanying notes to consolidated financial statements.
F-11
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 western Canada.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation.
The consolidated financial statements include the accounts of the Company
and its wholly-owned foreign subsidiary, Grey Wolf Exploration Inc. ("New Grey
Wolf"). In January 2003, the Company sold all of the common stock of its
wholly-owned foreign subsidiaries, Canadian Abraxas Petroleum Limited ("Canadian
Abraxas") and Grey Wolf Exploration Inc. ("Old Grey Wolf"). Certain oil and gas
properties were retained and transferred into New Grey Wolf which was
incorporated in January 2003. The operations of Canadian Abraxas and Old Grey
Wolf are included in the consolidated financial statements through January 23,
2003.
New Grey Wolf's assets and liabilities are translated to U.S. dollars at
period-end exchange rates. Income and expense items are translated at average
rates of exchange prevailing during the period. Translation adjustments are
accumulated as a separate component of shareholders' equity.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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 consolidated 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 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.
Cash and Equivalents
Cash and cash equivalents includes cash on hand, demand deposits and
short-term investments with original maturities of three months or less.
Accounts Receivable
Accounts receivable are reported net of an allowance for doubtful accounts
of approximately $77,000 and $11,000 at December 31, 2002 and 2003,
respectively. The allowance for doubtful accounts is determined based on the
Company's historical losses, as well as a review of certain accounts. Accounts
are charged off when collection efforts have failed and the account is deemed
uncollectible.
F-12
Equipment Inventory
Equipment inventory principally consists of casing, tubing, and compression
equipment and is carried at cost.
Oil and Gas Properties
The Company follows the full cost method of accounting for crude oil and
natural gas properties. Under this method, all direct costs and certain indirect
costs associated with acquisition of properties and successful as well as
unsuccessful exploration and development activities are capitalized.
Depreciation, depletion, and amortization of capitalized crude oil and natural
gas properties and estimated future development costs, excluding unproved
properties, are based on the unit-of-production method based on proved reserves.
Net capitalized costs of crude oil and natural gas properties, as adjusted for
asset retirement obligations, less related deferred taxes, are limited, by
country, to the lower of unamortized cost or the cost ceiling, defined as the
sum of the present value of estimated future net revenues from proved reserves
based on unescalated prices discounted at 10 percent, plus the cost of
properties not being amortized, if any, plus the lower of cost or estimated fair
value of unproved properties included in the costs being amortized, if any, less
related income taxes. Excess costs are charged to proved property impairment
expense. No gain or loss is recognized upon sale or disposition of crude oil and
natural gas properties, except in unusual circumstances.
Unproved properties represent costs associated with properties on which the
Company is performing exploration activities or intends to commence such
activities. These costs are reviewed periodically for possible impairments or
reduction in value based on geological and geophysical data. If a reduction in
value has occurred, costs being amortized are increased. The Company believes
that the unproved properties will be substantially evaluated in six to
thirty-six months and it will begin to amortize these costs at such time. During
2001, 2002 and 2003 the Company capitalized $164,000, $152,000 and $49,000 of
interest expense respectively, based on the cost of major development projects
in progress.
Other Property and Equipment
Other property and equipment are recorded on the basis of cost.
Depreciation of 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 agreements to hedge the risk of future
crude oil and natural gas price fluctuations. Such agreements are primarily in
the form of price floors and collars, which limit the impact of price
fluctuations with respect to the Company's sale of crude oil and natural gas.
The Company does not enter into speculative hedges. Gains and losses on such
hedging activities are recognized in oil and gas production revenues when hedged
production is sold. The net cash flows related to any recognized gains or losses
associated with these hedges are reported as cash flows from operations. If the
hedge is terminated prior to expected maturity, gains or losses are deferred and
included in income in the same period as the physical production required by the
contract is delivered.
Statement of Financial Accounting Standards, ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," was effective for the
Company on January 1, 2001. SFAS 133, as amended and interpreted, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
All derivatives, whether designated in hedging relationships or not, will be
required to be recorded on the balance sheet at fair value. If the derivative is
designated a fair-value hedge, the changes in the fair value of the derivative
and the hedged item will be recognized in earnings. If the derivative is
designated a cash-flow hedge, changes in the fair value of the derivative will
be recorded in other comprehensive income (OCI) and will be recognized in the
income statement when the hedged item affects earnings. SFAS 133 defines new
F-13
requirements for designation and documentation of hedging relationships as well
as ongoing effectiveness assessments in order to use hedge accounting. For a
derivative that does not qualify as a hedge, changes in fair value will be
recognized in earnings.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," (APB No. 25) 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.
Effective July 1, 2000, the Financial Accounting Standards Board ("FASB")
issued FIN 44, "Accounting for Certain Transactions Involving Stock
Compensation," an interpretation of APB No. 25. Under the interpretation,
certain modifications to fixed stock option awards which were made subsequent to
December 15, 1998, and were not exercised prior to July 1, 2000, require that
the awards be accounted for as variable until they are exercised, forfeited, or
expired. In March 1999, the Company amended the exercise price to $2.06 on all
options with an existing exercise price greater than $2.06. The Company
recognized a credit of $2.8 million during 2001 as stock-based compensation. The
credit for the year ended December 31, 2001 was due to a decline in the
Company's common stock price. There was no stock based compensation for the year
ended December 31, 2002. In January 2003, in connection with the restructuring
(see note 2), the Company amended the exercise price to $0.66 on certain options
with an existing exercise price greater than $0.66. The Company recognized
stock-based compensation expense of approximately $1.1 million during 2003.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS 123, "Accounting for Stock-Based Compensation, (SFAS
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,
1995 under the fair value method prescribed by SFAS No. 123. 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 2001, 2002 and
2003, risk-free interest rates of 3.5%, 1.50% and 1.5%, respectively; dividend
yields of -0-%; volatility factors of the expected market price of the Company's
common stock of .35, and a weighted-average expected life of the option of ten
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
Year Ended December 31
----------------------------------------------------------------
2001 2002 2003
------------------- ----------------- -----------------
Net income (loss) as reported $ (19,718) $ (118,527) $ 55,920
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects (2,767) - 1,106
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (1,284) (670) (228)
------------------- ----------------- -----------------
Pro forma net income (loss) $ (23,769) $ (119,197) $ 56,798
=================== ================= =================
F-14
Earnings (loss) per share:
Basic - as reported $ (0.76) $ (3.95) $ 1.58
=================== ================= =================
Basic - pro forma $ (0.92) $ (3.98) $ 1.61
=================== ================= =================
Diluted - as reported $ (0.76) $ (3.95) $ 1.55
=================== ================= =================
Diluted - pro forma $ (0.92) $ (3.98) $ 1.57
=================== ================= =================
Foreign Currency Translation
The functional currency for Canadian Abraxas and Grey Wolf (Old and New) is
the Canadian dollar ($CDN). The Company translates the functional currency into
U.S. dollars ($US) based on the current exchange rate at the end of the period
for the balance sheet and a weighted average rate for the period on the
statement of operations. Translation adjustments are reflected as accumulated
other comprehensive income (loss) in the consolidated financial statement of
stockholders' deficit.
Fair Value of Financial Instruments
The Company includes fair value information in the notes to consolidated
financial statements when the fair value of its financial instruments is
materially different from the book value. The Company assumes the book value of
those financial instruments that are classified as current approximates fair
value because of the short maturity of these instruments. For noncurrent
financial instruments, the Company uses quoted market prices or, to the extent
that there are no available quoted market prices, market prices for similar
instruments.
Restoration, Removal and Environmental Liabilities
The Company is subject to extensive Federal, state and local environmental
laws and regulations. These laws regulate the discharge of materials into the
environment and may require the Company to remove or mitigate the environmental
effects of the disposal or release of petroleum substances at various sites.
Environmental expenditures are expensed or capitalized depending on their future
economic benefit. Expenditures that relate to an existing condition caused by
past operations and that have no future economic benefit are expensed.
Liabilities for expenditures of a noncapital nature are recorded when
environmental assessments and/or remediation is probable, and the costs can be
reasonably estimated. Such liabilities are generally undiscounted unless the
timing of cash payments for the liability or component are fixed or reliably
determinable.
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. The Company utilizes the sales method to
account for gas production volume imbalances. Under this method, income is
recorded based on the Company's net revenue interest in production taken for
delivery. The Company had no material gas imbalances at December 31, 2003.
Deferred Financing Fees
Deferred financing fees are being amortized on a level yield basis over the
term of the related debt arrangements.
Income Taxes
The Company records deferred income taxes using the liability method. Under
this method, deferred tax assets and liabilities are determined based on
F-15
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
New Accounting Pronouncements
A reporting issue has arisen regarding the application of certain
provisions of SFAS No. 141 and SFAS No. 142 to companies in the extractive
industries, including oil and gas companies. The issue is whether SFAS No. 142
requires registrants to classify the costs of mineral rights held under lease or
other contractual arrangement associated with extracting oil and gas as
intangible assets in the balance sheet, apart from other capitalized oil and gas
property costs, and provide specific footnote disclosures. Historically, the
Company has included the costs of such mineral rights associated with extracting
oil and gas as a component of oil and gas properties. If it is ultimately
determined that SFAS No. 142 requires oil and gas companies to classify costs of
mineral rights held under lease or other contractual arrangement associated with
extracting oil and gas as a separate intangible assets line item on the balance
sheet, the Company would be required to reclassify approximately $3.1 million
and $4.2 million at December 31, 2002 and December 31, 2003, respectively, out
of oil and gas properties and into a separate intangible assets line item. The
Company's cash flows and results of operations would not be affected since such
intangible assets would continue to be depleted and assessed for impairment in
accordance with full-cost accounting rules.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143). SFAS 143 addresses accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS 143 is effective for us January 1,
2003. SFAS 143 requires that the fair value of a liability for an asset's
retirement obligation be recorded in the period in which it is incurred and the
corresponding cost capitalized by increasing the carrying amount of the related
long-lived asset. The liability is accreted to its then present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. If the liability is settled for an amount other than the recorded
amount, a gain or loss is recognized. For all periods presented, we have
included estimated future costs of abandonment and dismantlement in our full
cost amortization base and amortize these costs as a component of our depletion
expense in the accompanying consolidated financial statements.
The Company adopted SFAS 143 effective January 1, 2003. For the year ended
December 31, 2003 the Company recorded a charge of $395,341 for the cumulative
effect of the change in accounting principle and a liability of $1.3 million.
During 2003, the Company charged approximately $379,000 to expense related to
the accretion of the liability. The impact on each of the prior periods was not
material.
The following table summarizes the Company's asset retirement obligation
transactions during the following years:
2003 2002 2001
----------------------- ------------------- ---------------------
Beginning asset retirement obligation................ $ 3,946 $ 4,056 $ 4,305
Additions related to new properties.................. 973 196 -
Deletions related to property disposals.............. (3,921) (306) (249)
Accretion expense.................................... 379 - -
----------------------- ------------------- ---------------------
Ending asset retirement obligation................... $ 1,377 $ 3,946 $ 4,056
======================= =================== =====================
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). Effective January 1,
2002, the Company adopted SFAS 144. SFAS 144 retains the requirement to
recognize an impairment loss only where the carrying value of a long-lived asset
is not recoverable from its undiscounted cash flows and to measure such loss as
the difference between the carrying amount and fair value of the asset. SFAS
144, among other things, changes the criteria that have to be met to classify an
asset as held-for-sale and requires that operating losses from discontinued
operations be recognized in the period that the losses are incurred rather than
as of the measurement date. This new standard had no impact on the Company's
consolidated financial statements for the year ended December 31, 2003.
F-16
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires costs
associated with exit of disposal activities to be recognized when they are
incurred rather than at the date of commitment to an exit or disposal plan. The
Company is currently evaluating the impact the standard will have on its results
of operations and financial condition. The effective date of this standard has
not been determined by the FASB.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 149, among other things, clarifies the
circumstances under which a contract with an initial net investment meets the
characteristic of a derivative and amends the definition of an "underlying" to
conform it to language used in FIN 45. SFAS 149 is effective for contracts
entered into or modified after June 30, 2003. The Company adopted this statement
effective July 1, 2003. Implementation of this new standard did not have an
effect on the Company's consolidated financial position or results of
operations.
In November 2002 the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued, including loan
guarantees such as standby letters of credit. It also requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligations it has undertaken in issuing the guarantee. The Interpretation
does not specify the subsequent measurement of the guarantor's recognized
liability over the term of the related guarantee. The guidance in FIN 45 does
not apply to certain guarantee contracts, such as those issued by insurance
companies or for a lessee's residual value guarantee embedded in a capital
lease. The provisions related to recognizing a liability at inception of the
guarantee for the fair value of the guarantor's obligations would not apply to
product warranties or to guarantees accounted for as derivatives. The initial
recognition and initial measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002, regardless of the
guarantor's fiscal year-end. FIN 45 specifies additional disclosures effective
for financial statements of interim or annual periods ending after December 15,
2002. This new standard did not have an effect on the Company's consolidated
financial position or results of operations.
In January 2003 the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable-Interest Entities (VIEs".) FIN 46 establishes the
definition of VIEs to encompass a broader group of entities than those
previously considered special-purpose entities (SPEs). FIN 46 specifies the
criteria under which it is appropriate for an investor to consolidate VIEs; in
order for an investor to consolidate a VIE, the entity must fall within the
definition of VIE and the investor must fall within the definition of primary
beneficiary, both newly defined terms under this interpretation. The revised
effective date of FIN 46 for public companies with VIEs meeting certain
conditions will be the end of the first interim or annual period ending after
December 15, 2003. In December 2003 the FASB issued FASB Interpretation no.
46(R), which expanded and clarified the guidelines of FIN 46. This new standard
did not have an effect on the Company's consolidated financial position or
results of operations.
In May 2003, the FASB issued SFAS No. 150, entitled "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS
150). This statement is effective for financial instruments entered into or
modified after May 31, 2003, and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. The Company has no financial
instruments affected by SFAS 150, therefore adoption by the Company as of July
1, 2003 will not impact the Company's financial statements.
2. Restructuring transactions
In January 2003, the Company completed the following restructuring
transactions:
o The closing of the sale of the capital stock of Canadian Abraxas
Petroleum and Old Grey Wolf, to a Canadian royalty trust for
approximately $138 million.
F-17
o The closing of a new senior credit agreement consisting of a term
loan facility of $4.2 million and a revolving credit facility of up
to $50 million with an initial borrowing base of $49.9 million, of
which $42.5 million was used to fund the Series A/B exchange offer
described below and the remaining availability will be used to fund
the continued development of our existing crude oil and natural gas
properties.
o The closing of an exchange offer, pursuant to which Abraxas paid
$264 in cash and issued $610 principal amount of new 11 1/2 %
Secured Notes due 2007, Series A, referred to herein as New Notes,
and 31.36 shares of Abraxas common stock for each $1,000 in
principal amount of the outstanding 11 1/2 % Senior Secured Notes
due 2004, Series A, and 11 1/2 % Senior Notes due 2004, Series D,
issued by Abraxas and Canadian Abraxas, which were tendered and
accepted in the Series A/B exchange offer. An aggregate of
approximately $179.9 million in principal amount of the notes were
tendered in the exchange offer and the remaining $11.1 million of
notes not tendered were redeemed.
o The repayment of Abraxas' 12 7/8 % Senior Secured Notes due 2003,
principal amount of $63.5 million, plus accrued interest.
o The repayment of Old Grey Wolf's senior secured credit facility with
Mirant Canada Energy Capital Ltd. (Mirant Canada Facility) in the
amount of approximately $46.3 million.
On February 23, 2004, the Company entered into an amendment to our existing
senior credit agreement providing for two revolving credit facilities and a new
non-revolving credit facility as described below. Subject to earlier termination
on the occurrence of events of default or other events, the stated maturity date
for these credit facilities is February 1, 2007. In the event of an early
termination, we will be required to pay a prepayment premium, except in the
limited circumstances described in the amended senior credit agreement.
First Revolving Credit Facility
Lenders under the amended senior credit agreement have provided Abraxas a
revolving credit facility with a maximum borrowing base of up to $20 million.
The Company's current borrowing base under this revolving credit facility is the
full $20.0 million, subject to adjustments based on periodic calculations and
mandatory prepayments under the senior credit agreement. The Company has
borrowed $6.6 million under this revolving credit facility, which was used to
refinance principal and interest on advances under it's preexisting revolving
credit facility under the senior credit agreement, and to pay certain fees and
expenses relating to the transaction. Outstanding amounts under this revolving
credit facility bear interest at the prime rate announced by Wells Fargo Bank,
N.A. plus 1.125%.
Second Revolving Credit Facility
Lenders under the amended senior credit agreement have provided a second
revolving credit facility, with a maximum borrowing of up to $30 million. This
revolving credit facility is not subject to a borrowing base. The Company has
borrowed $30.0 million under this revolving credit facility, which was used to
refinance principal and interest on advances under our preexisting revolving
credit facility, and to pay certain transaction fees and expenses. Outstanding
amounts under this revolving credit facility bear interest at the prime rate
announced by Wells Fargo Bank, N.A. plus 3.00%.
Non-Revolving Credit Facility
The Company has borrowed $15.0 million pursuant to a non-revolving credit
facility, which was used to repay the preexisting term loan under it's senior
credit agreement, to refinance principal and interest on advances under the
preexisting revolving credit facility, and to pay certain transaction fees and
expenses. This non-revolving credit facility is not subject to a borrowing base.
Outstanding amounts under this credit facility bear interest at the prime rate
announced by Wells Fargo Bank, N.A. plus 8.00%.
F-18
Covenants
Under the amended senior credit agreement, we are subject to customary
covenants and reporting requirements. Certain financial covenants require us to
maintain minimum ratios of consolidated EBITDA (as defined in the amended senior
credit agreement) to adjusted fixed charges (which includes certain capital
expenditures), minimum ratios of consolidated EBITDA to cash interest expense, a
minimum level of unrestricted cash and revolving credit availability, minimum
hydrocarbon production volumes and minimum proved developed hydrocarbon
reserves. In addition, if on the day before the end of each fiscal quarter the
aggregate amount of our cash and cash equivalents exceeds $2.0 million, we are
required to repay the loans under the amended senior credit agreement in an
amount equal to such excess. The amended senior credit agreement also requires
us to enter into hedging agreements on not less than 40% or more than 75% of our
projected oil and gas production. We are also required to establish deposit
accounts at financial institutions acceptable to the lenders and we are required
to direct our customers to make all payments into these accounts. The amounts in
these accounts will be transferred to the lenders upon the occurrence and during
the continuance of an event of default under the amended senior credit
agreement.
In addition to the foregoing and other customary covenants, the amended
senior credit agreement contains a number of covenants that, among other things,
restrict our ability to:
o incur additional indebtedness;
o create or permit to be created liens on any of our properties;
o enter into change of control transactions;
o dispose of our assets;
o change our name or the nature of our business;
o make guarantees with respect to the obligations of third parties;
o enter into forward sales contracts;
o make payments in connection with distributions, dividends or
redemptions relating to our outstanding securities, or
o make investments or incur liabilities.
Security
The obligations of Abraxas under the amended senior credit agreement
continue to be secured by a first lien security interest in substantially all of
Abraxas' assets, including all atural gas and crude oil properties.
Guarantees
The obligations of Abraxas under the amended senior credit agreement
continue to be guaranteed by Abraxas' subsidiaries, Sandia Oil & Gas, Sandia
Operating, Wamsutter, Grey Wolf, Western Associated Energy and Eastside Coal.
The guarantees under the amended senior credit agreement continue to be secured
by a first lien security interest in substantially all of the guarantors'
assets, including all natural gas and crude oil properties.
Events of Default
The amended senior credit agreement contains customary events of default,
including nonpayment of principal or interest, violations of covenants,
F-19
inaccuracy of representations or warranties in any material respect, cross
default and cross acceleration to certain other indebtedness, bankruptcy,
material judgments and liabilities, change of control and any material adverse
change in our financial condition.
The following presents the summarized results of operations for the years
ended December 31, 2001, 2002, and for the period ended January 23, 2003, for
the Canadian properties which were not retained after the transaction in January
2003.
Year ended December 31,
2001 2002 2003
-------- -------- --------
Total revenue ................................. $ 41,468 $ 32,013 $ 3,275
======== ======== ========
Income (loss) from operations before income tax (102) (87,378) 1,250
Income tax expense (benefit) .................. 1,897 (29,697) 377
Minority interest in income ................... (1,676) -- --
-------- -------- --------
Income (loss) from operations ................. $ (3,675) $(57,681) $ 873
======== ======== ========
Assets and liabilities related to the Canadian properties which were
not retained after the January 2003 transaction:
December 31,
2002
--------
Assets:
Cash............................................ $ 4,325
Accounts receivable............................. 4,016
Net property and equipment...................... 54,468
Other........................................... 11,438
--------
$ 74,247
--------
Liabilities:
Accounts payable and accrued liabilities........ $ 7,320
Long-tern debt.................................. 45,964
Other........................................... 3,413
--------
$ 56,697
--------
Included in the loss from operations shown above is interest expense of
$7.6 million and $9.5 million, and general and administrative expense of $1.5
million and $1.7 million for the years ended December 31, 2001 and 2002,
respectively. The interest expense represents the amounts relating to an Old
Grey Wolf senior credit facility which was repaid in conjunction with the
transactions described above and the amounts related to the balance of certain
notes (approximately $52.6 million) which had historically been reflected by
Canadian Abraxas.
3. Long-Term Debt
As described in Note 2, the First Lien Notes were redeemed in January 2003.
The Old Notes and the Second Lien Notes were either redeemed or exchanged for
cash, common stock and New Notes in January 2003. Additionally, the 9.5% Mirant
Canada Energy Capital, Ltd. credit facility, with a balance outstanding at
December 31, 2002 of $45.9 million, was repaid in connection with the sale of
the common stock of Old Grey Wolf in January 2003.
F-20
The following is a brief description of the Company's debt as of December 31,
2002 and 2003, respectively:
December 31
--------------------------------
2002 2003
--------------------------------
(in thousands)
11.5% Senior Notes due 2004 ("Old Notes") ......................... $ 801 $ -
12.875% Senior Secured Notes due 2003 ("First Lien Notes") ........ 63,500 -
11.5% Second Lien Notes due 2004 ("Second Lien Notes")............. 190,178 -
9.5% Senior Credit Facility ("Grey Wolf Facility") providing for
borrowings up to approximately US $96 million (CDN $150
million). Secured by the assets of Old Grey Wolf and
non-recourse to Abraxas....................................... 45,964 -
11.5% Secured Notes due 2007 ("New Notes")......................... - 137,258 (a)
Senior Credit Agreement ........................................... - 47,391
---------------------------------
300,443 184,649
Less current maturities ........................................... 63,500 -
---------------------------------
$ 236,943 $ 184,649
=================================
(a) After the transactions described in Note 2, for financial reporting
purposes, the New Notes were reflected at the carrying value of the Second Lien
Notes and Old Notes prior to the exchange of $191.0 million, net of the cash
offered in the exchange of $47.5 million and net of the fair market value
related to equity of $3.8 million offered in the exchange transaction. The face
amount of the New Notes is $120.5 million at December 31, 2003 including $10.8
million in new notes issued for interest.
Old Notes
Interest on the Old Notes was payable semi-annually in arrears on May 1 and
November 1 of each year at the rate of 11.5% per annum. The Old Notes were
redeemable, in whole or in part, at the option of the Company.
First Lien Notes
Interest on the First Lien Notes was payable semi-annually in arrears on
March 15 and September 15 of each year at the rate of 12.875% per annum.
Second Lien Notes
Interest on the Second Lien Notes was payable semi-annually in arrears on
May 1 and November 1, commencing May 1, 2000 at the rate of 11.5% per annum.
New Notes - 11 1/2% Secured Notes.
The New Notes accrue interest from the date of issuance, at a fixed annual
rate of 11 1/2%, payable in cash semi-annually on each May 1 and November 1,
commencing May 1, 2003, provided that, if we fail, or are not permitted pursuant
to our new senior secured credit agreement or the intercreditor agreement
between the trustee under the indenture for the New Notes and the lenders under
the new senior secured credit agreement, to make such cash interest payments in
full, we will pay such unpaid interest in kind by the issuance of additional New
Notes with a principal amount equal to the amount of accrued and unpaid cash
interest on the New Notes plus an additional 1% accrued interest for the
applicable period. Upon an event of default, the New Notes accrue interest at an
annual rate of 16.5%.
The New Notes are secured by a second lien or charge on all of our current
and future assets, including, but not limited to, all of our crude oil and
natural gas properties. All of Abraxas' current subsidiaries, Sandia Oil & Gas,
Sandia Operating (a wholly-owned subsidiary of Sandia Oil & Gas), Wamsutter, New
Grey Wolf, Western Associated Energy and Eastside Coal, are guarantors of the
New Notes, and all of Abraxas' future subsidiaries will guarantee the New Notes.
F-21
If Abraxas cannot make payments on the New Notes when they are due, the
guarantors must make them instead.
The New Notes and related guarantees
o are subordinated to the indebtedness under the senior credit
agreement;
o rank equally with all of Abraxas' current and future senior
indebtedness; and
o rank senior to all of Abraxas' current and future subordinated
indebtedness, in each case, if any.
The New Notes are subordinated to amounts outstanding under the new senior
secured credit agreement both in right of payment and with respect to lien
priority and are subject to an intercreditor agreement.
Abraxas may redeem the New Notes, at its option, in whole at any time or in
part from time to time, at redemption prices expressed as percentages of the
principal amount set forth below. If Abraxas redeems all or any New Notes, it
must also pay all interest accrued and unpaid to the applicable redemption date.
The redemption prices for the New Notes during the indicated time periods are as
follows:
Period Percentage
From January 24, 2004 to June 23, 2004................................97.1674%
From June 24, 2004 to January 23, 2005................................98.5837%
Thereafter...........................................................100.0000%
Under the indenture, we are subject to customary covenants which, among
other things, restrict our ability to:
o borrow money or issue preferred stock;
o pay dividends on stock or purchase stock;
o make other asset transfers;
o transact business with affiliates;
o sell stock of subsidiaries;
o engage in any new line of business;
o impair the security interest in any collateral for the notes;
o use assets as security in other transactions; and
o sell certain assets or merge with or into other companies.
In addition, we are subject to certain financial covenants including
covenants limiting our selling, general and administrative expenses and capital
expenditures, a covenant requiring Abraxas to maintain a specified ratio of
consolidated EBITDA, as defined in the agreements, to cash interest and a
covenant requiring Abraxas to permanently, to the extent permitted, pay down
debt under the new senior secured credit agreement and, to the extent permitted
by the new senior secured credit agreement, the New Notes or, if not permitted,
paying indebtedness under the new senior secured credit agreement.
The indenture contains customary events of default, including nonpayment of
principal or interest, violations 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,
change of control and any material adverse change in our financial condition.
F-22
Senior Credit Agreement
In connection with the financial restructuring, Abraxas entered into a new
senior credit agreement providing a term loan facility and a revolving credit
facility which was amended in February 2004. A summary description of the senior
credit agreement as amended, is set forth in Note 2.
4. Acquisitions and Divestitures
Acquisition of Minority Interest in Old Grey Wolf
In September 2001, the Company completed a tender offer for the minority
interest in Old Grey Wolf, acquiring the approximately 52% of capital stock that
was not previously owned by the Company. The Company issued 3,990,565 common
shares and 588,916 stock options, valued together at approximately $9.2 million.
Additionally, the Company incurred direct costs of approximately $2.7 million
related to the acquisition. The elimination of the minority interest through an
acquisition at a purchase price less than Old Grey Wolf's book value in the
Company's consolidated financial statements had the effect of reducing the
property and other assets balances by $2.9 million and deferred income taxes by
$1.1 million.
5. Property and Equipment
The major components of property and equipment, at cost, are as follows:
Estimated December 31
----------------------------------
Useful Life 2002 2003
----------------- ---------------- -----------------
Years (In thousands)
Land, buildings, and improvements .............. 15 $ 331 $ 331
Crude oil and natural gas properties ........... - 529,047 329,526
Natural Gas Processing.......................... 18 38,735 -
Equipment and other ............................ 7 5,123 4,209
---------------- -----------------
$ 573,236 $ 334,066
================ =================
6. Stockholders' Equity
Common Stock
In 1994, the Board of Directors adopted a Stockholders' Rights Plan and
declared a dividend of one Common Stock Purchase Right ("Rights") for each share
of common stock. The Rights are not initially exercisable. Subject to the Board
of Directors' option to extend the period, the Rights will become exercisable
and will detach from the common stock ten days after any person has become a
beneficial owner of 20% or more of the common stock of the Company or has made a
tender offer or Exchange Offer (other than certain qualifying offers) for 20% or
more of the common stock of the Company.
Once the Rights become exercisable, each Right entitles the holder, other
than the acquiring person, to purchase for $40 a number of shares of the
Company's common stock having a market value of two times the purchase price.
The Company may redeem the Rights at any time for $.01 per Right prior to a
specified period of time after a tender or Exchange Offer. The Rights will
expire in November 2004, unless earlier exchanged or redeemed.
Treasury Stock
In March 1996, the Board of Directors authorized the purchase in the open
market of up to 500,000 shares of the Company's outstanding common stock, the
aggregate purchase price not to exceed $3,500,000. During the year ended
December 31, 2000, 38,800 shares with an aggregate cost of $78,000 were
purchased. During the years ended December 31, 2001, 2002 and 2003, the Company
did not purchase any shares of its common stock for treasury stock.
F-23
7. Stock Option Plans and Warrants
Stock Options
The Company grants options to its officers, directors, and other employees
under various stock option and incentive plans.
During 2001, the Company's stockholders approved an amendment to the
Abraxas Petroleum Corporation 1994 Long Term Incentive Plan to increase the
number of shares of Abraxas common stock reserved for issuance under the plan to
5,000,000 shares. The additional shares were necessary to accommodate the grant
of Abraxas options to Old Grey Wolf option holders in connection with the
acquisition of the minority interest in Old Grey Wolf in September 2001 (see
Note 4), and for the re-issuance of outstanding options granted under the
Abraxas Petroleum Corporation 2000 Long Term Incentive Plan, which was
terminated in 2001. The options were re-issued at the same exercise price and
term as the original issuances.
The Company's various stock option plans have authorized the grant of
options to management, employees and directors for up to approximately 5.7
million shares of the Company's common stock. All options granted have ten year
terms and vest and become fully exercisable over three to four years of
continued service at 25% to 33% on each anniversary date. At December 31, 2003
approximately 2.3 million options remain available for grant.
A summary of the Company's stock option activity, and related
information for the three years ended December 31, follows:
2001 2002 2003
----------------------------- ----------------------------- -----------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
(000s) (000s) (1) (000s)
---------- ------------------ ---------- ------------------ --------- ------------------
Outstanding-beginning of
year ................... 4,042 $ 3.37 4,942 $ 3.28 3,305 $ 1.85
Granted ................... 918 2.81 521 0.68 360 0.68
Exercised ................. (8) 1.95 - - (129) 0.66
Forfeited/Expired ......... (10) 1.79 (2,158) 4.84 (172) 1.61
---------- ---------- ---------
Outstanding-end of year ... 4,942 $ 3.28 3,305 $ 1.85 3,364 $ 0.90
========== ========== =========
Exercisable at end of year 2,259 $ 2.65 2,136 $ 1.91 2,331 $ 0.95
========== ========== =========
Weighted-average fair
value of options
granted during the year $ 1.19 $ 0.63 $ 0.38
------------------
(1) In September 2001, the Abraxas Petroleum Corporation 2000 Long Term
Incentive Plan was terminated, and options granted under the plan were
reissued under the Abraxas Petroleum Corporation 1994 Long Term
Incentive Plan at the same option price and term.
F-24
The following table represents the range of option prices and the weighted
average remaining life of outstanding options as of December 31, 2003:
Options outstanding Exercisable
----------------------------------------------- --------------------------------------
Weighted Weighted
average average
Number remaining exercise Number Weighted average
Exercise price outstanding life price exercisable exercise price
--------------------- ------------------ --------------- ------------ ---------------- ---------------------
$0.50 - 0.97 2,761,160 6.0 $ 0.71 1,886,043 $ 0.69
$1.01 - 1.63 259,900 7.8 1.22 123,050 1.40
$2.06 - 2.21 311,958 2.1 2.07 305,979 2.06
$3.39 - 4.83 31,407 6.9 4.77 16,406 4.71
In January 2003, in connection with the financial restructuring discussed
in Note 2, approximately 1.9 million options with a strike price greater that
$0.66 were re-priced to $0.66.
Stock Awards
In addition to stock options granted under the plans described above, the
1994 Long-Term Incentive Plan also provides for the right to receive
compensation in cash, awards of common stock, or a combination thereof. There
were no awards in 2001, 2002 or 2003.
The Company also has adopted the Restricted Share Plan for Directors which
provides for awards of common stock to non-employee 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.
There were no direct awards of common stock in 2001, 2002 or 2003.
Stock Warrants
In 2000, the Company issued 950,000 warrants in conjunction with a
consulting agreement. Each is exercisable for one share of common stock at an
exercise price of $3.50 per share. These warrants have a four-year term
beginning July 1, 2000. The Company paid cash compensation of $191,000 during
2001 under the consulting agreement.
At December 31, 2003, the Company has approximately 3.3 million shares
reserved for future issuance for conversion of its stock options, warrants, and
incentive plans for the Company's directors, employees and consultants.
8. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
December 31
---------------------------
2002 2003
------------- -------------
(In thousands)
Deferred tax liabilities:
U.S. full cost pool ..................................................... $ - $ 4,835
------------- -------------
Total deferred tax liabilities ............................................ - 4,835
Deferred tax assets:
U.S. full cost pool...................................................... 2,168 -
Capital loss carryforward................................................ - 12,895
Original issue discount on certain debt obligations...................... - 22,453
Canadian full cost pool.................................................. 9,787 2,971
F-25
Depletion ............................................................... 2,778 4,856
Net operating losses ("NOL")............................................ 58,811 35,218
Investment in foreign subsidiaries....................................... 32,038 -
Other ................................................................... 1,364 2,575
------------- -------------
Total deferred tax assets ................................................. 106,946 80,968
Valuation allowance for deferred tax assets ............................... (99,126) (76,133)
------------- -------------
Net deferred tax assets ................................................... 7,820 4,835
------------- -------------
Net deferred tax liabilities (assets) ..................................... $ (7,820) $ -
============= =============
Significant components of the provision (benefit) for income taxes are
as follows:
2001 2002 2003
-----------------------------------------
Current:
Federal.......................................................... $ 505 $ - $ -
Foreign ......................................................... - - -
----------------------------------------
$ 505 $ - $ -
=========================================
Deferred:
Federal ......................................................... $ - $ - $ -
Foreign ......................................................... 1,897 26,697 377
-----------------------------------------
$ 1,97 $ 26,697 $ 377
=========================================
At December 31, 2003 the Company had, subject to the limitation discussed
below, $100.6 million of net operating loss carryforwards for U.S. tax purposes.
These loss carryforwards will expire from 2003 through 2022 if not utilized. In
connection with the January 2003 transactions described in Note 2, certain of
the loss carryforward may be utilized.
At December 31, 2002, the Company was no longer permanently reinvested with
respect to its foreign subsidiaries, see Note 2. As a result, the Company
recorded net deferred tax assets of $32.0 million related to its investment in
foreign subsidiaries, offset by an equivalent valuation allowance due to
uncertainties as to the future utilization of these amounts.
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 $99.1 million and $71.3 million for deferred tax assets
at December 31, 2002 and 2003, respectively.
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
December 31
---------------------------------------------------------------------
2001 2002 2003
-------------------------------------------- ------------------------
(In thousands)
Tax (expense) benefit at U.S.
statutory rates (35%) .............. $ 5,318 $ 51,878 $ (19,842)
(Increase) decrease in deferred tax
asset valuation allowance .......... (4,907) (59,456) 22,993
Write-down of non-tax basis assets.... (2,194) (7,009) -
Higher effective rate of foreign
operations.......................... (136) 7,349 (2,835)
Percentage depletion ................. 596 683 -
Investment in foreign subsidiaries .. - 35,604 -
Other ................................ (1,079) 648 (693)
-------------------------------------------- ------------------------
$ (2,402) $ 29,697 $ (377)
============================================ ========================
F-26
9. Related Party Transactions
Accounts receivable - Other includes approximately $51,211 and $35,558 as
of December 31, 2002 and 2003, respectively, representing amounts due from
officers relating to advances made to employees.
On July 29, 2003 the Company acquired all of the shares of the capital
stock of Wind River Resources Corporation which owned an airplane. The sole
shareholder of Wind River was the Company's President. The consideration for the
purchase was 106,977 shares of Abraxas common stock and $35,000 in cash.
Simultaneously with this transaction, the airplane was sold. The airplane had
previously been made available to Abraxas' employees for business use.
The Company paid Wind River a total of $314,000, $345,000 and $132,000 in
2001, 2002 and 2003, through July 29, respectively, for Wind River's operating
cost associated with the Company's use of the plane.
10. Commitments and Contingencies
Operating Leases
During the years ended December 31, 2001, 2002 and 2003 the Company
incurred rent expense related to leasing office facilities of approximately
$519,000, $236,000 and $464,000 respectively. Future minimum rental payments are
as follows at December 31, 2003.
2004............................................. $ 416,000
2005............................................. 412,000
2006............................................. 223,000
2007............................................. 161,000
Thereafter....................................... 161,000
------------------
$ 1,373,000
==================
Litigation and Contingencies
In 2001 the Company and a partnership were named in a lawsuit filed in U.S.
District Court in the District of Wyoming. The claim asserts breach of contract,
fraud and negligent misrepresentation by the Company related to the
responsibility for year 2000 ad valorem taxes on crude oil and natural gas
properties sold by the Company and the Partnership. In February 2002, a summary
judgment was granted to the plaintiff in this matter and a final judgment in the
amount of $1.3 million was entered. The Company has filed an appeal. The Company
believes these charges are without merit. The Company has established a reserve
in the amount of $845,000, which represents the Company's interest in the
judgment. In 2002 the Company recorded $201,000 in other expense representing
its share of the ongoing legal cost related to this matter.
In 2003, Abraxas and Leam Drilling Systems each filed suit against the
other relating to certain drilling services that Leam contracted to provide
Abraxas. Abraxas believes that the services were provided in a grossly negligent
manner and that Leam committed fraud. Leam has asserted that Abraxas failed to
pay approximately $639,000 for services rendered. The cases are pending in Bexar
County and Ward County, Texas.
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, 2003, 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-27
11. Earnings per Share
Basic earnings (loss) per share excludes any dilutive effects of options,
warrants and convertible securities and is computed by dividing income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share are computed
similar to basic, however diluted earnings per share reflects the assumed
conversion of all potentially dilutive securities.
The following table sets forth the computation of basic and diluted earnings
per share:
2001 2002 2003
--------------------------------------------------------
Numerator:
Net income (loss) before effect of accounting
change ......................................... $ (19,718,000) $ (118,527,000) $ 56,315,000
Cumulative effect of accounting change........... - - (395,000)
--------------------------------------------------------
$ (19,718,000) $ (118,527,000) 55,920,000
Denominator:
Denominator for basic earnings per share -
weighted-average shares ........................ 25,788,571 29,979,397 35,364,363
Effect of dilutive securities:
Stock options and warrants..................... - - 711,928
--------------------------------------------------------
Dilutive potential common shares
Denominator for diluted earnings per share
- adjusted weighted-average shares and assumed
conversions..................................... 25,788,571 29,979,397 36,076,291
========================================================
Basic earnings (loss) per share:
Net income (loss) before cumulative effect of
accounting change............................... $ (0.76) $ (3.95) $ 1.59
Cumulative effect of accounting change.......... - - (0.01)
--------------------------------------------------------
Net income (loss) per common share................ $ (0.76) $ (3.95) $ 1.58
========================================================
Diluted earnings (loss) per share:
Net income (loss) before cumulative effect of
accounting change................................ $ (0.76) $ (3.95) $ 1.56
Cumulative effect of accounting change.......... - - (0.01)
--------------------------------------------------------
Net income (loss) per common share - diluted. $ (0.76) $ (3.95) $ 1.55
========================================================
For the year ended December 31, 2001 and 2002, 4.3 million shares and 5.9
million shares respectively, were excluded from the calculation of diluted
earnings per share since their inclusion would have been anti-dilutive.
F-28
12. Quarterly Results of Operations (Unaudited)
Selected results of operations for each of the fiscal quarters during the
years ended December 31, 2002 and 2003 are as follows:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
---------------- ---------------- --------------- ----------------
(In thousands, except per share data)
Year Ended December 31, 2002
Net revenue........................... $ 11,807 $ 14,235 $ 11,061 $ 17,217
Operating income (loss)............... (735) (115,879) 490 5,221
Net income (loss)..................... (8,699) (95,690) (8,438) (5,700)
Net income (loss) per common share -
basic and diluted................... $ (0.29) $ (3.19) $ (0.28) $ (0.19)
Year Ended December 31, 2003
Net revenue........................... $ 13,111 $ 8,430 $ 8,430 $ 9,048
Operating income (loss)............... 5,646 1,927 2,694 1,275
Net income (loss)..................... 62,702 (2,346) (2,702) (1,734)
Net income (loss) per common share -
basic............................... $ 1.83 $ (0.07) $ (0.08) $ (0.05)
Net income (loss) per common share -
diluted............................. $ 1.82 $ (0.07) $ (0.08) $ (0.05)
During the second quarter of 2002, the Company incurred a ceiling
limitation write-down of approximately $116.0 million.
13. Benefit Plans
The Company has a defined contribution plan (401(k)) covering all eligible
employees of the Company. The Company did not contribute to the plan in 2002 or
2003. The employee contribution limitations are determined by formulas, which
limit the upper one-third of the plan members from contributing amounts that
would cause the plan to be top-heavy. The employee contribution is limited to
the lesser of 20% of the employee's annual compensation or $11,000 in 2002 and
$12,000 in 2003.
14. Guarantor Condensed Consolidation Financial Statements
The following table presents condensed consolidating balance sheets of
Abraxas, as a parent company, and its significant subsidiaries, Canadian Abraxas
and Old Grey Wolf, as of December 31, 2002 and 2003 and the related
consolidating statements of operations and cash flows for the years ended
December 31, 2001, 2002 and 2003. Canadian Abraxas was a guarantor of the First
Lien Notes ($63.5 million) and jointly and severally liable with Abraxas for the
Second Lien Notes ($190.2 million) and the Old Notes ($801,000). Old Grey Wolf
was a non-guarantor with respect to the First Lien Notes and the Old Notes.
The First Lien Notes and the Second Lien Notes were retired in connection
with the financial restructuring transactions which occurred in January 2003.
New Grey Wolf is a guarantor of the New Notes, there are no non-guarantor
subsidiaries, accordingly, condensed consolidating balance sheets of Abraxas, as
parent and its subsidiary New Grey Wolf are presented as of December 31, 2003
and the related consolidating statements of operations and cash flows for the
year ended December 31, 2003.
F-29
Condensed Consolidating Parent Company and Subsidiaries Balance Sheet
December 31, 2003
(In thousands)
Abraxas Abraxas
Petroleum Reclassifi- Petroleum
Corporation Subsidiary cations Corporation
Inc. Parent (New Grey and and
Company(1) Wolf) eliminations Subsidiaries
----------------------------------------------------------------
Assets:
Cash .................................... $ - $ 493 $ - $ 493
Accounts receivable, less allowance for
doubtful accounts...................... 14,101 903 (6,681) 8,323
Equipment inventory ..................... 782 - - 782
Other current assets .................... 418 154 - 572
-----------------------------------------------------------------
Total current assets.............. 15,301 1,550 (6,681) 10,170
Property and equipment - net................ 76,021 35,542 - 111,563
Deferred financing fees, net .............. 4,410 - - 4,410
Deferred income taxes and other assets ..... 27,551 - (27,257) 294
-----------------------------------------------------------------
Total assets ............................ $ 123,283 $ 37,092 $ (33,938) $ 126,437
=================================================================
Liabilities and Stockholders' deficit:
Current liabilities:
Accounts payable ............................. $ 7,075 $ 8,652 $ (6,681) $ 9,046
Accrued interest ............................. 2,340 - - 2,340
Other accrued expenses ....................... 1,228 - - 1,228
-----------------------------------------------------------------
Total current liabilities................... 10,643 8,652 (6,681) 12,614
Long-term debt .................................. 184,649 - - 184,649
Future site restoration ........................ 776 601 - 1,377
-----------------------------------------------------------------
196,068 9,253 (6,681) 198,640
Stockholders' equity (deficit)................... (72,785) 27,839 (27,257) (72,203)
-----------------------------------------------------------------
Total liabilities and stockholders' equity
(deficit)........................................ $ 123,283 $ 37,092 $ (33,938) $ 126,437
=================================================================
(1) Includes amounts for insignificant U.S. subsidiaries, Sandia Oil
and Gas, Sandia Operating, Western Energy Associates, East Side
Coal and Wamsutter, which are guarantors of the New Notes.
F-30
Condensed Consolidating Parent Company, Restricted Subsidiaries and Non-Guarantor Balance Sheet
December 31, 2002
(In thousands)
Abraxas Non- Abraxas
Petroleum Restricted Guarantor Reclassifi- Petroleum
Corporation Subsidiary Subsidiary cations Corporation
Inc. Parent (Canadian (Old Grey and and
Company(2) Abraxas) Wolf) eliminations Subsidiaries
-----------------------------------------------------------------------------
Assets:
Current assets:
Cash .................................... $ 557 $ 2,188 $ 2,137 $ - $ 4,882
Accounts receivable, less allowance for
doubtful accounts...................... 4,482 4,782 11,938 (11,157) 10,045
Equipment inventory ..................... 860 142 12 - 1,014
Other current assets .................... 316 682 242 - 1,240
-----------------------------------------------------------------------------
Total current assets.............. 6,215 7,794 14,329 (11,157) 17,181
Property and equipment - net................ 74,435 38,858 37,101 - 150,394
Deferred financing fees, net .............. 2,970 688 2,013 - 5,671
Deferred income taxes and other assets ..... 108,558 - 7,820 (108,199) 8,179
-----------------------------------------------------------------------------
Total assets ............................ $ 192,178 $47,340 $ 61,263 $ (119,356) $ 181,425
=============================================================================
Liabilities and Stockholders' deficit:
Current liabilities:
Accounts payable ............................. $ 15,928 $ 766 $ 6,398 $ (10,973) $ 12,119
Accrued interest ............................. 5,000 1,009 - - 6,009
Other accrued expenses ....................... 1,162 - - - 1,162
Current maturities of long-term debt ......... 63,500 - - - 63,500
-----------------------------------------------------------------------------
Total current liabilities................... 85,590 1,775 6,398 (10,973) 82,790
Long-term debt .................................. 138,350 52,629 45,964 - 236,943
Future site restoration ........................ - 3,171 775 - 3,946
-----------------------------------------------------------------------------
223,940 57,575 53,137 (10,973) 323,679
Stockholders' equity (deficit)................... (31,762) (10,235) 8,126 (108,383) (142,254)
-----------------------------------------------------------------------------
Total liabilities and stockholders' equity
(deficit)........................................ $ 192,178 $ 47,340 $ 61,263 $ (119,356) $ 181,425
=============================================================================
(2) Includes amounts for insignificant U.S. subsidiaries, Sandia
Oil and Gas, Sandia Operating, Western Energy Associates, East
Side Coal and Wamsutter, which are guarantors of the First and
Second Lien Notes. Sandia is also a guarantor of the Old
Notes. Additionally, these subsidiaries are designated as
Restricted Subsidiaries along with Canadian Abraxas.
F-31
Condensed Consolidating Parent Company and Subsidiary Statement of Operations
For the year ended December 31, 2003
(In thousands)
Abraxas Abraxas
Petroleum Reclassifi- Petroleum
Corporation Subsidiary cation Corporation
Inc. Parent (New Grey and and
Company(1) Wolf) eliminations Subsidiaries
------------------------------ ------------------------------
Revenues:
Oil and gas production revenues ............... $ 29,710 $ 8,395 $ - $ 38,105
Gas processing revenues........................ - 133 - 133
Rig revenues .................................. 663 - - 663
Other ........................................ 7 111 - 118
------------------------------ ------------------------------
30,380 8,639 - 39,019
Operating costs and expenses:
Lease operating and production taxes .......... 8,342 1,257 - 9,599
Depreciation, depletion, and amortization ..... 7,608 3,195 - 10,803
Rig operations ................................ 609 - - 609
General and administrative .................... 3,995 1,365 - 5,360
Stock-based compensation....................... 1,106 - - 1,106
------------------------------ -------- ----------------------
21,660 5,817 - 27,477
------------------------------ ------------------------------
Operating income (loss)........................... 8,720 2,822 - 11,542
Other (income) expense:
Interest income ............................... (30) - - (30)
Amortization of deferred financing fees........ 1,630 48 - 1,678
Interest expense............................... 16,323 632 - 16,955
Financing costs................................ 4,406 - - 4,406
Gain on sale of foreign subsidiaries........... (68,933) - - (68,933)
Other ......................................... 100 674 - 774
------------------------------ -----------------------------
(46,504) 1,354 - (45,150)
------------------------------ ------------------------------
Income (loss) before income tax and cumulative -
effect of accounting change.................... 55,224 1,468 56,692
Income tax expense (benefit)...................... - 377 - 377
Cumulative effect of accounting change............ 395 - - 395
------------------------------ ------------------------------
Net income (loss)................................ $ 54,829 $ 1,091 $ - $ 55,920
============================== ==============================
F-32
Condensed Consolidating Parent Company, Restricted Subsidiary and Non-Guarantor Statement of Operations
For the year ended December 31, 2002
(In thousands)
Abraxas Non- Abraxas
Petroleum Restricted Guarantor Reclassifi- Petroleum
Corporation Subsidiary Subsidiary cations Corporation
Inc. Parent (Canadian (Old Grey and and
Company(2) Abraxas) Wolf) eliminations Subsidiaries
-----------------------------------------------------------------------------
Revenues:
Oil and gas production revenues ............... $ 20,835 $ 14,726 $ 15,301 $ - $ 50,862
Gas processing revenues........................ - 1,955 465 2,420
Rig revenues .................................. 635 - - - 635
Other ........................................ 71 152 180 - 403
---------------------------------------------------------------------------
21,541 16,833 15,946 - 54,320
Operating costs and expenses:
Lease operating and production taxes .......... 7,639 3,751 3,850 - 15,240
Depreciation, depletion, and amortization ..... 9,194 10,633 6,712 - 26,539
Proved property impairment .................... 28,178 60,501 27,314 - 115,993
Rig operations ................................ 567 - - - 567
General and administrative ................... 4,045 1,312 1,527 - 6,884
---------------------------------------------------------------------------
49,623 76,197 39,403 - 165,223
---------------------------------------------------------------------------
Operating income (loss)........................... (28,082) (59,364) (23,457) - (110,903)
Other (income) expense:
Interest income ............................... (92) - - - (92)
Amortization of deferred financing fees........ 1,325 366 404 - 2,095
Interest expense............................... 24,689 6,665 2,796 - 34,150
Other ......................................... 1,168 - - - 1,168
---------------------------------------------------------------------------
27,090 7,031 3,200 - 37,321
---------------------------------------------------------------------------
Income (loss) before income tax .................. (55,172) (66,395) (26,657) - (148,224)
Income tax expense (benefit)...................... - (18,522) (11,175) - (29,697)
------------------------------ --------------------------------------------
Net income (loss)................................ $ (55,172) $ (47,873 $ (15,482) $ - $ (118,527)
===========================================================================
F-33
Condensed Consolidating Parent Company, Restricted Subsidiary and Non-Guarantor Statement of Operations
For the year ended December 31, 2001
(In thousands)
Abraxas Non- Abraxas
Petroleum Restricted Guarantor Reclassifi- Petroleum
Corporation Subsidiary Subsidiary cations Corporation
Inc. Parent (Canadian (Old Grey and and
Company(2) Abraxas) Wolf) eliminations Subsidiaries
-----------------------------------------------------------------------------
Revenues:
Oil and gas production revenues ............... $ 34,934 $ 24,308 $ 13,959 $ - $ 73,201
Gas processing revenues ....................... - 2,008 430 - 2,438
Rig revenues .................................. 756 - - - 756
Other ........................................ 85 471 292 - 848
---------------------------------------------------------------------------
35,775 26,787 14,681 - 77,243
Operating costs and expenses:
Lease operating and production taxes .......... 9,302 6,836 2,478 - 18,616
Depreciation, depletion, and amortization ..... 12,336 14,707 5,441 - 32,484
Proved property impairment..................... - 2,638 - - 2,638
Rig operations ................................ 702 - - - 702
General and administrative .................... 3,742 1,720 983 - 6,445
General and administrative (Stock-based
Compensation)................................ (2,767) - - - (2,767)
---------------------------------------------------------------------------
23,315 25,901 8,902 - 58,118
---------------------------------------------------------------------------
Operating income (loss)........................... 12,460 886 5,779 - 19,125
Other (income) expense:
Interest income ............................... (1,242) - - 1,164 (78)
Amortization of deferred financing fees........ 1,907 361 - - 2,268
Interest expense............................... 25,086 7,117 484 (1,164) 31,523
Other ......................................... 1,052 - - - 1,052
---------------------------------------------------------------------------
26,803 7,478 484 - 34,765
------------------------------ --------------------------------------------
Income (loss) before income tax .................. (14,343) (6,592) 5,295 - (15,640)
Income tax expense (benefit)...................... 505 (80) 1,977 - 2,402
Minority interest in income of consolidated
foreign subsidiary............................. - - 1,676 - 1,676
------------------------------ --------------------------------------------
Net income (loss)................................ $ (14,848) $ (6,512) $ 1,642 $ - $(19,718)
============================== ============================================
F-34
Condensed Consolidating Parent and Subsidiary Statement of Cash Flow
For the year ended December 31, 2003
(In thousands)
Abraxas
Petroleum Reclassifi Abraxas
Corporation Subsidiary -cations Petroleum
Inc. Parent (New Grey and Corporation and
Company(1) Wolf) eliminations Subsidiaries
----------------------------------------------------------------
Operating Activities
Net income (loss) ........................... $ 54,829 $ 1,091 $ - $ 55,920
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Gain on sale of foreign subsidiaries.... (68,933) - - (68,933)
Depreciation, depletion, and
amortization ......................... 7,608 3,195 - 10,803
Non-cash interest and financing costs... 16,422 - - 16,422
Deferred income tax (benefit) expense... - 377 - 377
Amortization of deferred financing fees. 1,630 48 - 1,678
Stock-based compensation................ 1,106 - - 1,106
Changes in operating assets and
liabilities:
Accounts receivable ................ (7,850) 394 6,010 (1,446)
Equipment inventory ................ 78 - - 78
Other ............................. 295 - - 295
Accounts payables and accrued
expenses ......................... 6,294 7,266 (6,010) 7,550
-----------------------------------------------------------------
Net cash provided by (used in)operations..... 11,479 12,371 - 23,850
Investing Activities
Capital expenditures, including purchases
and development of properties ............ (9,194) (9,155) - (18,349)
Proceeds from sale of foreign subsidiaries... 85,810 - - 85,810
-----------------------------------------------------------------
Net cash provided (used) by investing
activities................................ 76,616 (9,155) - 67,461
Financing Activities
Proceeds from issuance of common stock....... 177 - - 177
Proceeds from long-term borrowings........... 43,051 291 - 43,342
Payments on long-term borrowings ............ (131,283) (7,261) - (138,544)
Deferred financing fees...................... (597) - - (597)
-----------------------------------------------------------------
Net cash provided (used) by financing
activities................................ (88,652) (6,970) - (95,622)
Effect of exchange rate changes on cash ..... - (78) - (78)
-----------------------------------------------------------------
Increase (decrease) in cash ................. (557) (3,832) - (4,389)
Cash at beginning of year ................... 557 4,325 - 4,882
----------------------------------------------------------------
Cash at end of year.......................... $ - $ 493 $ - $ 493
============================== ==================================
F-35
Condensed Consolidating Parent, Restricted Subsidiary and Non-Guarantor Statement of Cash Flow
For the year ended December 31, 2002
(In thousands)
Abraxas Non- Abraxas
Petroleum Restricted Guarantor Reclassifi- Petroleum
Corporation Subsidiary Subsidiary cations Corporation
Inc. Parent (Canadian (Old Grey and and
Company(2) Abraxas) Wolf) eliminations Subsidiaries
-----------------------------------------------------------------------------
Operating Activities
Net income (loss) ........................... $ (55,172) $ (47,873) $ (15,482) $ - $ (118,527)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation, depletion, and
amortization ......................... 9,194 10,633 6,712 - 26,539
Proved property impairment ............. 28,178 60,501 27,314 - 115,993
Deferred income tax (benefit) expense... - (18,522) (11,175) - (29,697)
Amortization of deferred financing fees. 1,325 366 404 - 2,095
Changes in operating assets and
liabilities:
Accounts receivable ................ 18,088 (3,187) 1,114 (18,262) (2,247)
Equipment inventory ................ 201 - - - 201
Other ............................. 381 (177) (78) - 126
Accounts payables and accrued
expenses ......................... (47) 479 (3,251) - (2,819)
------------------------------------------------------------------------------
Net cash provided by (used in)operations..... 2,148 2,220 5,555 (18,262) (8,336)
Investing Activities
Capital expenditures, including purchases
and development of properties ............ (5,070) (4,926) (28,916) - (38,912)
Proceeds from sale of oil and gas
properties................................ 9,725 21,789 2,362 - 33,876
------------------------------------------------------------------------------
Net cash provided (used) by investing
activities................................ 4,655 16,863 (26,554) - (5,036)
Financing Activities
Proceeds from long-term borrowings........... - - 20,551 - 20,551
Payments on long-term borrowings ............ (8,176) (18,262) - 18,262 (8,176)
Deferred financing fees...................... (1,663) 146 (22) - (1,539)
------------------------------------------------------------------------------
Net cash provided (used) by financing
activities................................ (9,839) (18,116) 20,529 18,262 10,836
------------------------------------------------------------------------------
Effect of exchange rate changes on cash ..... - (24) (163) - (187)
------------------------------------------------------------------------------
Increase (decrease) in cash ................. (3,036) 943 (630) - (2,723)
Cash at beginning of year ................... 3,593 1,245 2,767 - 7,605
------------------------------------------------------------------------------
Cash at end of year.......................... $ 557 $ 2,188 $ 2,137 $ - $ 4,882
==============================================================================
F-36
Condensed Consolidating Parent, Restricted Subsidiary and Non-Guarantor Statement of Cash Flow
For the year ended December 31, 2001
(In thousands)
Abraxas Non- Abraxas
Petroleum Restricted Guarantor Reclassifi- Petroleum
Corporation Subsidiary Subsidiary cations Corporation
Inc. Parent (Canadian (Old Grey and and
Company(2) Abraxas) Wolf) eliminations Subsidiaries
-----------------------------------------------------------------------------
Operating Activities
Net income (loss) ........................... $ (14,848) $ (6,512) $ 1,642 $ - $ (19,718)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Minority interest in income of foreign
subsidiary............................ - - 1,676 - 1,676
Loss on sale of equity investment....... 845 - - - 845
Depreciation, depletion, and
amortization ......................... 12,336 14,707 5,441 - 32,484
Proved property impairment.............. - 2,638 - 2,638
Deferred income tax (benefit) expense... - (80) 1,977 - 1,897
Amortization of deferred financing fees. 1,907 361 - - 2,268
Stock-based compensation ............... (2,767) - - - (2,767)
Changes in operating assets and
liabilities:
Accounts receivable ................ 28,804 (9,721) (6,390) - 12,693
Equipment inventory ................ (76) - - - (76)
Other ............................. (281) - 175 - (106)
Accounts payables and accrued
expenses ......................... (12,915) (2,254) (402) - (15,571)
------------------------------------------------------------------------------
Net cash provided (used) by operating
activities ............................... 13,005 (861) 4,119 - 16,263
Investing Activities
Capital expenditures, including purchases
and development of properties ............ (19,126) (15,313) (22,617) - (57,056)
Proceeds from sale of oil and gas
properties................................ 9,677 15,882 3,379 - 28,938
Acquisition of minority interest ............ (2,679) - - - (2,679)
------------------------------------------------------------------------------
Net cash provided (used) by investing
activities................................ (12,128) 569 (19,238) - (30,797)
------------------------------------------------------------------------------
Financing Activities
Proceeds form issuance of common stock....... 16 - - - 16
Proceeds from long-term borrowings .......... 11,700 - 18,295 - 29,995
Payments on long-term borrowings ............ (9,326) - - - (9,326)
------------------------------------------------------------------------------
Net cash provided (used) by financing
activities 2,390 - 18,295 - 20,685
------------------------------------------------------------------------------
3,267 (292) 3,176 - 6,151
Effect of exchange rate changes on cash ..... - (141) (409) - (550)
------------------------------------------------------------------------------
Increase (decrease) in cash ................. 3,267 (433) 2,767 - 5,601
Cash at beginning of year ................... 326 1,678 - - 2,004
------------------------------------------------------------------------------
Cash at end of year.......................... $ 3,593 $ 1,245 $ 2,767 $ - $ 7,605
==============================================================================
F-37
15. Business Segments
The Company conducts its operations through two geographic segments, the
United States and Canada, and is engaged in the acquisition, development, and
production of crude oil and natural gas in each country. The Company's
significant operations are located in the Texas Gulf Coast, the Permian Basin of
western Texas, and Canada. Identifiable assets are those assets used in the
operations of the segment. Corporate assets consist primarily of deferred
financing fees and other property and equipment. The Company's revenues are
derived primarily from the sale of crude oil, condensate, natural gas liquids,
and natural gas to marketers and refiners and from processing fees from the
custom processing of natural gas. As a general policy, collateral is not
required for receivables; however, the credit of the Company's customers is
regularly assessed. The Company is not aware of any significant credit risk
relating to its customers and has not experienced significant credit losses
associated with such receivables.
In 2003, three customers accounted for approximately 67% of consolidated
oil and natural gas production revenue. Three customers accounted for
approximately 80% of United States revenue and three customer accounted for
approximately 91% of revenue in Canada. In 2002, four customers accounted for
approximately 79% of consolidated oil and natural gas production revenue. Three
customers accounted for approximately 77% of United States revenue and one
customer accounted for approximately 80% of revenue in Canada. In 2001, three
customers accounted for approximately 41% of oil and natural gas production
revenues. Three customers accounted for approximately 76% of United States
revenue and five customers accounted for approximately 76% of revenue in Canada.
Business segment information about the Company's 2001 operations in different
geographic areas is as follows:
U.S. Canada Total
------------------ ------------------ -------------------
(In thousands)
Revenues ................................... $ 35,775 $ 41,468 $ 77,243
================== ================== ===================
Operating profit............................ $ 13,795 $ 6,665 $ 20,460
================== ==================
General corporate ............................................................... (1,335)
Net interest expense and amortization of
deferred financing fees ...................................................... (33,713)
Other expense.................................................................... (1,052)
-------------------
Loss before income taxes......................................................... $ (15,640)
===================
Identifiable assets at December 31, 2001 ... $ 124,993 $ 174,063 $ 299,056
================== ==================
Corporate assets ........................... 4,560
-------------------
Total assets ............................ $ 303,616
===================
F-38
Business segment information about the Company's 2002 operations in different
geographic areas is as follows:
U.S. Canada Total
------------------ ------------------ -------------------
(In thousands)
Revenues ................................... $ 21,541 $ 32,779 $ 54,320
================== ================== ===================
Operating loss.............................. $ (23,677) $ (82,821) $ (106,498)
================== ==================
General corporate ............................................................... (4,405)
Net interest expense and amortization of
deferred financing fees ...................................................... (36,153)
Other expense.................................................................... (1,168)
-------------------
Loss before income taxes......................................................... $ (148,224)
===================
Identifiable assets at December 31, 2002.... $ 81,025 $ 94,059 $ 175,084
================== ==================
Corporate assets ........................... 6,341
-------------------
Total assets ............................ $ 181,425
===================
Business segment information about the Company's 2003 operations in different
geographic areas is as follows:
U.S. Canada Total
------------------ ------------------ -------------------
(In thousands)
Revenues ................................... $ 30,380 $ 8,639 $ 39,019
================== ================== ===================
Operating income............................ $ 14,001 $ 2,822 $ 16,823
================== ==================
General corporate ............................................................... (5,281)
Net interest expense, financing cost and
amortization of deferred financing fees ...................................... (23,009)
Gain on sale of foreign subsidiaries............................................. 68,933
Other income (expense) - net..................................................... (774)
Cumulative effect of accounting change........................................... (395)
-------------------
Income before income taxes....................................................... $ 56,297
===================
Identifiable assets at December 31, 2003.... $ 84,228 $ 37,092 $ 121,320
================== ==================
Corporate assets ........................... 5,117
-------------------
Total assets ............................ $ 126,437
===================
16. Hedging Program and Derivatives
On January 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" SFAS 133 as amended by SFAS 137 "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB 133" and SFAS 138 "Accounting for Certain Derivative Instruments
and Certain Hedging Activities. Gains and losses on hedging instruments related
to accumulated Other Comprehensive Income (Loss) and adjustments to carrying
amounts on hedged production are included in natural gas or crude oil production
revenue in the period that the related production is delivered. The Company has
not elected hedge accounting for the floors that are in place as of December 31,
2003, accordingly, adjustments to the carrying value of the instruments are
recognized in oil and gas income in the current period.
Under the terms of the Company's senior credit agreement, the Company is
required to maintain hedging agreements with respect to not less than 25% nor
more than 75% of it crude oil and natural gas production for a rolling six month
period. The credit agreement was amended in February 2004, see Note 2,
F-39
increasing the minimum hedged position to 40% of our estimated production. As of
December 31, 2003 the Company's hedging positions were as follows:
Time Period Notional Quantities Price
--------------------------------- ---------------------------- ----------------
March 1, 2003 - February 29, 5,000 MMBtu of natural gas Floor of $4.50
2004 production per day
March 1, 2004 - April 30, 2004 2,000 MMBtu of natural gas Floor of $4.00
production per day
March 1, 2004 - April 30, 2004 500 Bbl of crude oil Floor of $22.00
production per day
May 2004 2,000 MMbtu of natural gas Floor of $4.00
production per day
May 2004 500 Bbls of crude oil Floor of $22.00
production per day
June 2004 800 Bbls of crude oil Floor of $22.00
production per day
July 2004 2,000 MMbtu of natural gas Floor of $4.00
production per day
July 2004 500 Bbl of crude oil Floor of $22.00
production per day
All hedge transactions are subject to the Company's risk management policy,
approved by the Board of Directors. The Company formally documents all
relationships between hedging instruments and hedged items, as well as its risk
management objectives and strategy for undertaking the hedge. This process
includes specific identification of the hedging instrument and the hedged
transaction, the nature of the risk being hedged and how the hedging
instrument's effectiveness will be assessed. Both at the inception of the hedge
and on an ongoing basis, the Company assesses whether the derivatives that are
used in hedging transactions are effective in offsetting changes in cash flows
of hedged items.
The fair value of the hedging instrument was determined based on the base
price of the hedged item and NYMEX forward price quotes. As of December 31,
2003, a commodity price increase of 10% would have resulted in an unfavorable
change in the fair market value of approximately $2,000 and a commodity price
decrease of 10% would have resulted in a favorable change in fair market value
of approximately $2,000.
17. Proved Property Impairment
In accordance with SEC requirements, the estimated discounted future net
cash flows from proved reserves are generally based on prices and costs as of
the end of the year, or alternatively, if prices subsequent to that date have
increased, a price near the periodic filing date of the Company's financial
statements. As of December 31, 2001, the Company's net capitalized costs of oil
and gas properties exceeded the present value of its estimated proved reserves
by $71.3 million ($38.9 million on the U.S. properties and $32.4 million on the
Canadian properties). These amounts were calculated considering 2001 year-end
prices of $19.84 per barrel for oil and $2.57 per Mcf for gas as adjusted to
reflect the expected realized prices for each of the full cost pools. The
Company did not adjust its capitalized costs for its U.S. properties because
subsequent to December 31, 2001, oil and gas prices increased such that
capitalized costs for its U.S. properties did not exceed the present value of
the estimated proved oil and gas reserves for its U.S. properties as determined
using increased realized prices on March 22, 2002 of $24.16 per Bbl for oil and
$2.89 per Mcf for gas. During the second quarter of 2002, the Company had a
ceiling limitation write-down of approximately $116.0 million. At December 31,
2003, the net capitalized cost of crude oil and natural gas properties did not
exceed the present value of our estimated reserves, as such, no write-down was
recorded.
F-40
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 Statement of Financial
Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities." Capitalized costs relating to oil and gas producing activities are
as follows:
Years Ended December 31
-----------------------------------------------------------------------------------------
2002 2003
-----------------------------------------------------------------------------------------
Total U.S. Canada Total U.S. Canada
-----------------------------------------------------------------------------------------
(In thousands)
Proved crude oil and natural
gas properties ............ $ 521,995 $ 279,401 $ 242,594 $ 325,222 $ 288,559 $ 36,663
Unproved properties ......... 7,052 - 7,052 4,304 - 4,304
------------- ------------- --------------- -------------- -------------- -------------
Total........................... 529,047 279,401 249,646 329,526 288,559 40,967
Accumulated depreciation,
depletion, and
amortization, and
impairment ................ (420,344) (205,181) (215,163) (219,404) (212,609) (6,795)
-------------- -------------- ------------- ------------- -------------- ------------
Net capitalized costs ... $ 108,703 $ 74,220 $ 34,483 $ 110,122 $ 75,950 $ 34,172
============= ============= =============== ============== ============== =============
F-41
Cost incurred in oil and gas property acquisitions, exploration and
development activities are as follows:
Years Ended December 31
---------------------------------------------------------------------------------------------------
2001 2002 2003
-------------------------------- -------------------------------- ----------------------------
Total U.S. Canada Total U.S. Canada (1) Total U.S. Canada
--------- -------- -------- -------- --------- --------- --------- -------- ------
(In thousands)
Property acquisition costs:
Proved ................... $ - $ - $ - $ - $ - $ - $ - $ - $ -
Unproved ................. - - - - - - - - -
--------- -------- -------- -------- --------- --------- --------- -------- ------
$ - $ - $ - $ - $ - $ - $ - $ - $ -
========= ======== ======== ======== ========= ========= ========= ======== ======
Property development and
exploration costs ........ $ 56,694 $ 18,867 $ 37,827 $ 38,560 $ 4,944 $ 33,616 $ 18,313 $ 9,158 $ 9,155
========= ======== ======== ======== ========= ========= ========= ======== ======
(1) Canadian costs in 2002 were primarily for exploratory purposes.
F-42
The results of operations for oil and gas producing activities for the
three years ending December 31, 2001, 2002 and 2003, respectively are as
follows:
Years Ended December 31
---------------------------------------------------------------------------------------------------
2001 2002 2003
-------------------------------- -------------------------------- ----------------------------
Total U.S. Canada Total U.S. Canada (1) Total U.S. Canada
--------- -------- -------- -------- --------- --------- --------- -------- ------
(In thousands)
Revenues ................... $ 73,201 $ 34,934 $ 38,267 $ 50,862 $ 20,835 $ 30,027 $ 38,105 $ 29,710 $ 8,395
Production costs ........... (18,616) (9,302) (9,314) (15,240) (7,639) (7,601) (9,599) (8,342) (1,257)
Depreciation, depletion,
and amortization ......... (32,124) (11,976) (20,148) (26,224) (8,879) (17,345) (9,410) (7,428) (1,982)
Proved property impairment . (2,638) - (2,638) (115,993) (28,178) (87,815) - - -
General and administrative . (1,565) (1,073) (492) (1,836) (1,011) (825) (1,339) (998) (341)
Income taxes (expense)
benefit................... (2,419) - (2,419) - - - (377) - (377)
--------- -------- -------- -------- --------- --------- --------- -------- ------
Results of operations from oil
and gas producing activities
(excluding corporate overhead
and interest costs) ......... $ 15,839 $ 12,583 $ 3,256 $ (108,431) $(24,872) $ (83,559) $ 17,380 $ 12,942 $ 4,438
========== ======== ========= ========== ========= =========- ========= ========= =======
Depletion rate per barrel
of oil equivalent, before
impact of impairment ..... $ 8.81 $ 6.96 $ 10.45 $ 8.52 $ 7.55 $ 8.94 $ 7.13 $ 7.24 $ 6.74
========== ======== ========= ========== ========= =========- ========= ========= =======
F-43
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, 2001, 2002, and 2003. 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.
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:
Balance at January 1, 2001................... 8,844 191,327 6,081 114,908 2,763 76,419
Revisions of previous estimates ........... (628) 2,944 (688) 3,318 60 (374)
Extensions and discoveries ................ 1,064 26,329 354 4,886 710 21,443
Production ................................ (732) (17,495) (416) (7,823) (316) (9,672)
Sale of minerals in place ................. (1,746) (14,348) (924) (6,821) (822) (7,527)
-----------------------------------------------------------------------------
Balance at December 31, 2001................. 6,802 188,757 4,407 108,468 2,395 80,289
Revisions of previous estimates ........... (798) (29,701) (63) (15,248) (735) (14,453)
Extensions and discoveries ................ 522 19,166 - - 522 19,166
Production ................................ (534) (15,453) (264) (5,472) (270) (9,981)
Sale of minerals in place ................. (1,387) (23,937) (843) (9,553) (544) (14,384)
------------------------------------------------------------------------------
Balance at December 31, 2002 ................ 4,605 138,832 3,237 78,195 1,368 60,637
Revisions of previous estimates ........... 310 5,564 268 6,760 42 (1,196)
Extensions and discoveries ................ 654 4,474 44 28 610 4,446
Production ................................ (288) (6,190) (229) (4,781) (59) (1,409)
Sale of minerals in place ................. (1,146) (46,396) - - (1,146) (46,396)
------------------------------------------------------------------------------
Balance at December 31, 2003................. 4,135 96,284 3,320 80,202 815 16,082
==============================================================================
F-44
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)
Proved developed reserves:
December 31, 2001 ........................... 5,047 111,243 2,892 40,514 2,155 70,729
==============================================================================
December 31, 2002............................ 3,004 90,374 1,754 34,776 1,250 55,598
==============================================================================
December 31, 2003............................ 2,314 52,398 1,887 39,371 427 13,027
==============================================================================
F-45
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 are presented in accordance
with SFAS 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, 2003 adjusted for fixed and
determinable escalations, to the estimated future production of year-end proved
reserves. Future cash inflows were reduced by estimated future production and
development costs based on year-end costs to determine pre-tax cash inflows.
Future income taxes were computed by applying the statutory tax rate to the
excess of pre-tax cash inflows over the tax basis of the properties. Operating
loss carryforwards, tax credits, and permanent differences to the extent
estimated to be available in the future were also considered in the future
income tax calculations, thereby reducing the expected tax expense.
Future net cash inflows after income taxes were discounted using a 10%
annual discount rate to arrive at the Standardized Measure.
Set forth below is the Standardized Measure relating to proved oil and gas
reserves for the three years ending December 31, 2001, 2002 and 2003.
Years Ended December 31
----------------------------------------------------------------------------------------------------
2001 2002 2003
-----------------------------------------------------------------------------------------------------
Total U.S. Canada Total U.S. Canada Total U.S. Canada
-----------------------------------------------------------------------------------------------------
(In thousands)
Future cash inflows ..... $ 607,375 $ 313,640 $ 293,735 $ 686,055 $ 389,061 $296,994 $ 621,290 $ 512,797 $108,493
Future production and
development costs ..... (220,613) (138,296) (82,317) (225,068) (158,507) (66,561) (204,537) (179,036) (25,498)
Future income tax expense - - - - - - - - -
------------------------------------------------------------------------------------------------------
Future net cash flows ... 386,762 175,344 211,418 460,987 230,554 230,433 416,756 333,761 82,995
Discount ................ (177,096) (98,157) (78,939) (206,134) (120,238) (85,896) (199,933) (172,177) (27,756)
------------------------------------------------------------------------------------------------------
Standardized Measure of
discounted future net
cash relating to proved
reserves .............. $ 209,666 $ 77,187 $ 132,479 $ 254,853 $ 110,316 $144,537 $ 216,823 $ 161,584 $ 55,239
======================================================================================================
F-46
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
------------------------------------
2001 2002 2003
--------- --------- ---------
(In thousands)
Standardized Measure, beginning
of year ............................................ $ 775,534 $ 209,666 $ 254,853
Sales and transfers of oil and gas
produced, net of production costs .................. (54,585) (35,622) (28,506)
Net changes in prices and development
and production costs from prior year ............... (613,325) 111,087 62,074
Extensions, discoveries, and improved
recovery, less related costs ....................... 39,982 46,803 21,819
Sales of minerals in place ........................... (96,096) (33,808) (120,150)
Revision of previous quantity estimates .............. (2,474) (36,007) 9,061
Change in future income tax expense .................. 230,987 -- --
Other ................................................ (147,910) (28,232) (7,813)
Accretion of discount ................................ 77,553 20,966 25,485
--------- --------- ---------
Standardized Measure, end of year .................. $ 209,666 $ 254,853 $ 216,823
========= ========= =========
19. Restatement
In January 2003, the Company sold its wholly owned Canadian subsidiaries,
Old Grey Wolf and Canadian Abraxas as part of a series of transactions related
to a financial restructuring - see Note 2 for additional information regarding
an exchange offer, redemption of certain notes and a new credit agreement.
Subsequent to the issuance of its consolidated financial statements for the year
ended December 31, 2002, the Company's management determined that the wholly
owned Canadian subsidiaries should not have been presented as discontinued
operations. As a result, the accompanying consolidated balance sheets as of
December 31, 2002, and the related consolidated statements of operations, and
cash flows for each of the two years in the period ended December 31, 2002 have
been restated to present the assets and liabilities, results of operations, and
cash flows as components of continuing operations.
F-47
A summary of the significant effects of the restatement is as follows (In
thousands):
For the years ended December 31,
--------------------------------------------------------------------
2001 2002
---------------------------------- ---------------------------------
As Previously As Restated As Previously As Restated
Reported Reported
------------------- -------------- ---------------- ----------------
Revenues:
Oil and gas production revenue $ 34,934 $ 73,201 $ 21,601 $ 50,862
Gas processing revenue - 2,438 - 2,420
Rig revenue 756 756 635 635
Other 85 848 71 403
------------- ------------ ------------- -------------
35,775 77,243 22,307 54,320
Operating costs and expenses:
Lease operating and
production taxes 9,302 18,616 7,910 15,240
Depreciation, depletion and
amortization 12,336 32,484 9,654 26,539
Proved property impairment - 2,638 32,850 115,993
Rig operations 702 702 567 567
General and administrative 4,937 6,445 5,082 6,884
General and administrative
(Stock-based compensation) (2,767) (2,767) - -
------------- ------------ ------------- -------------
24,510 58,118 56,063 165,223
------------- ------------ ------------- -------------
Operating income (loss) 11,265 19,125 (33,756) (110,903)
Other (income) expense:
Interest income (78) (78) (92) (92)
Amortization of deferred
financing fees 1,907 2,268 1,325 2,095
Interest expense 23,922 31,523 24,689 34,150
Financing costs - - 967 967
(Gain) loss on sale of equity
investment 845 845 - -
Other 207 207 201 201
------------- ------------ ------------- -------------
26,803 34,765 27,090 37,321
------------- ------------ ------------- -------------
Income (loss) before income tax (15,538) (15,640) (60,846) (148,224)
Income tax expense (benefit):
Current 505 505 - -
Deferred - 1,897 - (29,697)
Minority interest in income of
consolidated foreign
subsidiary - 1,676 - -
Loss from discontinued operations (3,675) - (57,681) -
------------- ------------ ------------- -------------
Net income (loss) $ (19,718) $ (19,718) $ (118,527) $ (118,527)
============= ============ ============= =============
F-48
December 31, 2002
----------------------------------
As Previously As Restated
Reported
----------------- ------------
Current Assets:
Cash $ 557 $ 4,882
Accounts receivable:
Joint owners 516 2,215
Oil and gas production sales 5,292 7,466
Other 221 364
----------------- ------------
6,029 10,045
Equipment inventory 1,021 1,014
Other current assets 316 1,240
----------------- ------------
7,923 17,181
Assets held for sale 74,247 -
----------------- ------------
Total current assets 82,170 17,181
Property and equipment:
Oil and gas properties:
Proved 298,972 521,995
Unproved 7,052 7,052
Other property and equipment 2,713 44,189
----------------- ------------
Total 308,737 573,236
Less accumulated depreciation, depletion
and amortization 212,811 422,842
----------------- ------------
Total property and equipment - net 95,926 150,394
Deferred financing fees 2,970 5,671
Deferred income taxes - 7,820
Other 359 359
----------------- ------------
Total assets $ 181,425 $ 181,425
================= ============
Current Liabilities:
Accounts payable $ 4,171 $ 9,687
Joint interest oil and gas production payable 1,637 2,432
Accrued interest 5,000 6,009
Other accrued expenses 1,162 1,162
Hedge liability - -
Current maturities of long-term debt 63,500 63,500
----------------- ------------
75,470 82,790
Liabilities related to assets held for sale 56,697 -
----------------- ------------
Total current liabilities 132,167 82,790
Long-term debt 190,979 236,943
Deferred income taxes - -
Future site restoration 533 3,946
Stockholders' equity (deficit) (142,254) (142,254)
----------------- ------------
Total liabilities and stockholders' deficit $ 181,425 $ 181,425
================= ============
F-49
Abraxas Petroleum Corporation
Condensed Consolidated Balance Sheets
September 30,
2004 December 31,
(Unaudited) 2003
---------------- ----------------
(in thousands)
Assets:
Current assets:
Cash............................................ $ 3,601 $ 493
Accounts receivable, less allowances for
doubtful accounts:
Joint owners................................ 463 1,360
Oil and gas production...................... 3,951 5,873
Other....................................... 390 1,090
--------------- ----------------
4,804 8,323
Equipment inventory 694 782
Other current assets............................ 588 572
--------------- ----------------
Total current assets......................... 9,687 10,170
Property and equipment:
Oil and gas properties, full cost method of accounting:
Proved........................................ 340,793 325,222
Unproved, not subject to amortization......... 2,715 4,304
Other property and equipment.................... 3,024 4,540
--------------- ----------------
Total...................................... 346,532 334,066
Less accumulated depreciation, depletion, and
amortization.................................. 232,299 222,503
--------------- ----------------
Total property and equipment--net............. 114,233 111,563
Deferred financing fees, net....................... 4,853 4,410
Other assets....................................... 294 294
--------------- ----------------
Total assets.................................. $ 129,067 $ 126,437
=============== ================
See accompanying notes to condensed consolidated financial statements
F-50
Abraxas Petroleum Corporation
Condensed Consolidated Balance Sheets (continued)
September 30, December 31,
2004
(unaudited) 2003
----------------- -----------------
(in thousands)
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable........................................... $ 3,557 $ 6,756
Oil and gas production payable............................. 2,263 2,290
Accrued interest........................................... 5,492 2,340
Other accrued expenses..................................... 1,862 1,228
----------------- -----------------
Total current liabilities............................. 13,174 12,614
Long-term debt............................................. 190,516 184,649
Future site restoration.................................... 1,764 1,377
----------------- -----------------
Total liabilities..................................... 205,454 198,640
----------------- -----------------
Stockholders' equity (deficit):
Common Stock, par value $.01 per share-
Authorized 200,000,000 shares; issued, 36,378,816 and
36,024,308 at September 30, 2004 and December 31,
2003 respectively..................................... 364 360
Additional paid-in capital.............................. 143,076 141,835
Accumulated deficit..................................... (220,527) (213,701)
Receivables from stock sales............................ - (97)
Treasury stock, at cost, 105,989 and 165,883 shares at
September 30, 2004 and December 31, 2003 respectively.
(549) (964)
Accumulated other comprehensive loss.................... 1,249 364
----------------- -----------------
Total stockholders' deficit........................... (76,387) (72,203)
----------------- -----------------
Total liabilities and stockholders' equity (deficit)....... $ 129,067 $ 126,437
================= =================
See accompanying notes to condensed consolidated financial statements
F-51
Abraxas Petroleum Corporation
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
2004 2003 2004 2003
--------------- ------------- ---------------- --------------
(in thousands, except per share data)
Revenue:
Oil and gas production revenues............. $ 11,478 $ 8,244 $ 34,249 $ 29,277
Gas processing revenues..................... - - - 132
Rig revenues................................ 214 156 518 495
Other....................................... 91 30 218 67
--------------- -------------- ---------------- --------------
11,783 8,430 34,985 29,971
Operating costs and expenses:
Lease operating and production taxes........ 2,646 2,372 9,318 7,164
Depreciation, depletion, and amortization... 3,141 2,418 9,398 7,861
Rig operations.............................. 174 129 442 443
General and administrative.................. 1,245 1,143 4,813 3,769
Stock-based compensation.................... 1,375 (326) 1,122 467
--------------- -------------- ---------------- --------------
8,581 5,736 25,093 19,704
--------------- -------------- ---------------- --------------
Operating income .............................. 3,202 2,694 9,892 10,267
Other (income) expense:
Interest income............................. (4) (5) (12) (22)
Interest expense............................ 4,313 3,911 13,700 12,921
Amortization of deferred financing fees..... 468 433 1,380 1,244
Financing cost.............................. 68 581 1,641 4,182
Gain on sale of foreign subsidiaries........ - (298) - (67,258)
Other expense............................... - 774 11 774
--------------- -------------- ---------------- --------------
4,845 5,396 16,720 (48,159)
--------------- -------------- ---------------- --------------
Earnings (loss) before cumulative effect of
accounting change and taxes................. (1,643) (2,702) (6,828) 58,426
Cumulative effect of accounting change......... - - - (395)
Income tax expense ............................ - - - (377)
--------------- -------------- ---------------- --------------
Net earnings (loss)............................ $ (1,643) $ (2,702) $ (6,828) $ 57,654
=============== ============== ================ ==============
Basic earnings (loss) per common share:
Net earnings (loss)......................... (0.05) (0.08) (0.19) 1.64
Cumulative effect of accounting change...... - - - (0.01)
--------------- -------------- ---------------- --------------
Net earnings (loss) per common share--basic..... $ (0.05) $ (0.08) $ (0.19) $ 1.63
=============== ============== ================ ==============
Diluted earnings (loss) per common share:
Net earnings (loss)......................... (0.05) (0.08) (0.19) 1.61
Cumulative effect of accounting change...... - - - (0.01)
--------------- -------------- ---------------- --------------
Net earnings (loss) per common share--diluted... $ (0.05) $ (0.08) $ (0.19) $ 1.60
=============== ============== ================ ==============
See accompanying notes to condensed consolidated financial statements
F-52
Abraxas Petroleum Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
----------------------------------
2004 2003
------------- --------------
(in thousands)
Operating Activities
Net income (loss)......................................... $ (6,828) $ 57,654
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation, depletion, and amortization................. 9,398 7,861
Deferred income tax (benefit) expense..................... - 377
Accretion of future site restoration...................... 387 -
Amortization of deferred financing fees................... 1,380 1,244
Non-cash interest and financing cost...................... 9,114 7,989
Stock-based compensation.................................. 1,122 467
Gain on sale of foreign subsidiaries...................... - (67,258)
Changes in operating assets and liabilities:
Accounts receivable.................................. 3,499 954
Equipment inventory.................................. 88 130
Other................................................ (150) 681
Accounts payable and accrued expenses................ (2,704) (512)
-------------- --------------
Net cash provided by operating activities................. 15,306 9,587
-------------- --------------
Investing Activities
Capital expenditures, including purchases and development
of properties.......................................... (10,985) (16,327)
Proceeds from sale of foreign subsidiaries................ - 86,851
-------------- --------------
Net cash provided by (used in) investing activities....... (10,985) 70,524
-------------- --------------
Financing Activities
Proceeds from long-term borrowings........................ 6,500 52,688
Payments on long-term borrowings.......................... (6,600) (133,344)
Proceeds from stock sale receivable....................... 98 -
Issuance of stock for compensation........................ 328
Deferred financing fees................................... (1,823) (2,458)
Exercise of stock options................................. 209 48
Other..................................................... - 92
-------------- --------------
Net cash used in financing activities..................... (1,288) (82,974)
-------------- --------------
Effect of exchange rate changes on cash................... 75 409
-------------- --------------
(Decrease) increase in cash............................... 3,108 (2,454)
Cash, at beginning of period.............................. 493 4,882
-------------- --------------
Cash, at end of period.................................... $ 3,601 $ 2,428
============== ==============
Supplemental disclosures of cash flow information:
Cash interest paid........................................ $ 3,714 $ 3,298
============== ==============
Non-cash items:
Future site restoration................................... $ 244 $ (3,065)
============== ==============
See accompanying notes to condensed consolidated financial statements
F-53
Abraxas Petroleum Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(tabular amounts in thousands, except per share data)
Note 1. Basis of Presentation
Theaccounting policies followed by Abraxas Petroleum Corporation and its
subsidiaries (the "Company" or "Abraxas") are set forth in the notes to the
Company's audited financial statements in the Annual Report on Form 10-K filed
for the year ended December 31, 2003. Such policies have been continued without
change. Also, refer to the notes to those financial statements for additional
details of the Company's financial condition, results of operations, and cash
flows. All the material items included in those notes have not changed except as
a result of normal transactions in the interim, or as disclosed within this
report. The accompanying interim consolidated financial statements have not been
audited by independent accountants, but in the opinion of management, reflect
all adjustments necessary for a fair presentation of the financial position and
results of operations. Any and all adjustments are of a normal and recurring
nature. The results of operations for the three and nine months ended September
30, 2004 are not necessarily indicative of results to be expected for the full
year.
The consolidated financial statements include the accounts of the
Company and its wholly-owned foreign subsidiary, Grey Wolf Exploration Inc.
("Grey Wolf"). In January 2003, the Company sold all of the common stock of its
wholly-owned foreign subsidiaries, Canadian Abraxas Petroleum Limited ("Canadian
Abraxas") and Grey Wolf Exploration Inc. ("Old Grey Wolf"). Certain oil and gas
properties were retained and transferred into New Grey Wolf which was
incorporated in January 2003. The operations of Canadian Abraxas and Old Grey
Wolf are included in the consolidated financial statements through January 23,
2003. This restructuring is sometimes referred to herein as the January 2003
financial restructuring.
Grey Wolf's assets and liabilities are translated to U.S. dollars at
period-end exchange rates. Income and expense items are translated at average
rates of exchange prevailing during the period. Translation adjustments are
accumulated as a separate component of shareholders' equity.
Stock-based Compensation:
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion ("APB") 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.
Effective July 1, 2000, the Financial Accounting Standards Board
("FASB") issued FIN 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of APB No. 25. Under the interpretation,
certain modifications to fixed stock option awards which were made subsequent to
December 15, 1998, and were not exercised prior to July 1, 2000, require that
the awards be accounted for as variable until they are exercised, forfeited, or
expired. In January 2003, the Company amended the exercise price to $0.66 on
certain options with an existing exercise price greater than $0.66. The Company
recognized expense of approximately $326,000 and a credit of approximately
$467,000 during the quarter and nine months ended September 30, 2003,
respectively, as stock-based compensation expense in the accompanying
consolidated financial statements. For the quarter and nine months ended
September 30, 2004 the Company recognized Stock-based compensation expense of
approximately $1.4 million and $1.1 million, respectively, due to an increase in
the price of its common stock during the period.
Pro forma information regarding net income (loss) and earnings (loss)
per share is required by SFAS 123, "Accounting for Stock-Based Compensation"
(SFAS 123), which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
F-54
December 31, 1995 under the fair value method prescribed by SFAS 123. 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 the
quarter and nine months ended September 30, 2004 and 2003, risk-free interest
rates of 1.5%; dividend yields of -0-%; volatility factor of the expected market
price of the Company's common stock of 0.35; and a weighted-average expected
life of the option of ten years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
In October 2002, the FASB issued Statement No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure", (SFAS No. 148), providing
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure requirement of SFAS No. 123, "Accounting for Stock-Based
Compensation" to include prominent disclosures in annual and interim financial
statements about the method of accounting for stock-based compensation and the
effect of the method used on reported results. The Company adopted the
disclosure provisions of SFAS No. 148 on December 31, 2002.
Had the Company determined stock-based compensation costs based on the
estimated fair value at the grant date for its stock options, the Company's net
income (loss) per share for the three and nine months ended September 30, 2004
and 2003 would have been:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ----------------------------
2004 2003 2004 2003
--------- --------- ---------- -----------
Net income (loss) as reported $ (1,643) $ (2,702) $ (6,828) $ 57,654
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects 1,375 (326) 1,122 467
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects (30) (68) (101) (206)
--------- --------- ---------- -----------
Pro forma net income (loss) $ (298) $ (3,096) $ (5,807) $ 57,915
========= ========= ========== ===========
Earnings (loss) per share:
Basic--as reported $ (0.05) $ (0.08) $ (0.19) $ 1.64
========= ========= ========== ===========
Basic--pro forma $ (0.01) $ (0.09) $ (0.16) $ 1.65
========= ========= ========== ===========
Diluted--as reported $ (0.05) $ (0.08) $ (0.19) $ 1.61
========= ========= ========== ===========
Diluted--pro forma $ (0.01) $ (0.09) $ (0.16) $ 1.62
========= ========= ========== ===========
Certain prior year balances have been reclassified for comparative
purposes.
Note 2. Income Taxes
The Company records income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax base 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.
F-55
For the period ended September 30, 2004, there is no current or deferred
income tax expense or benefit due to losses or loss carryforwards and valuation
allowance which has been recorded against such benefits.
Note 3. Recent Events
On October 21, 2004, the Company, its subsidiaries Eastside Coal
Company, Inc., Sandia Oil & Gas Corporation, Sandia Operating Corp., Wamsutter
Holdings, Inc. and Western Associated Energy Corporation (collectively, the
"Subsidiary Guarantors") and Guggenheim Capital Markets, LLC (the "Initial
Purchaser"), entered into a Purchase Agreement to issue and sell in a private
placement, for resale under Rule 144A, Rule 501(a) and Regulation S of the
Securities Act of 1933, as amended (the "Securities Act"), $125 million
aggregate principal amount of floating rate senior secured notes due 2009 of the
Company (the "New Notes"). Consummation of the transactions contemplated under
the Purchase Agreement occurred on October 28, 2004.
The New Notes. The New Notes will mature on December 1, 2009 and began
accruing interest from the date of issuance, October 28, 2004 at a per annum
floating rate of 6-month LIBOR plus 7.50%. The initial interest rate on the New
Notes is 9.72% per annum. The interest will be reset semi-annually on each June
1 and December 1, commencing on June 1, 2005. Interest is payable semi-annually
in arrears on June 1 and December 1 of each year, commencing on June 1, 2005.
The New Notes rank equally among themselves and with all of the
Company's unsubordinated and unsecured indebtedness, including the New Credit
Facility (as defined below) and senior in right of payment to the Company's
existing and future subordinated indebtedness, including the Bridge Loan (as
defined below).
Each of the Subsidiary Guarantors has unconditionally guaranteed,
jointly and severally, the payment of the principal, premium and interest
(including any additional interest) on, the New Notes on a senior secured basis.
In addition, any other subsidiary or affiliate of the Company, including the
Company's wholly-owned Canadian subsidiary, Grey Wolf Exploration Inc., that in
the future guarantees any other indebtedness with the Company, or its restricted
subsidiaries, will also be required to guarantee the New Notes. Except under
limited circumstances, the New Notes are not guaranteed by Grey Wolf, and are
structurally subordinated in right to payment to all of its obligations,
including Grey Wolf's new $35 million senior secured term loan and trade
payables and other debt of Grey Wolf.
The New Notes and the Subsidiary Guarantors' guarantees thereof,
together with the New Credit Facility and the Subsidiary Guarantors' guarantees
thereof, are secured by shared first priority perfected security interests,
subject to certain permitted encumbrances, in all of the Company's and each of
its restricted subsidiaries' material property and assets, including
substantially all of their natural gas and crude oil properties and all of the
capital stock (or in the case of an unrestricted subsidiary that is a controlled
foreign corporation, up to 65% of the outstanding capital stock) of any entity,
other than Grey Wolf, owned by the Company and its restricted subsidiaries
(collectively, the "Collateral"). The New Notes are not secured by any of the
property or assets of Grey Wolf (unless it becomes a restricted subsidiary). The
shares of capital stock of Grey Wolf owned by the Company do not constitute a
part of the Collateral.
After April 28, 2007, the Company may redeem all or a portion of the New
Notes at the redemption prices set forth in the Indenture, plus accrued and
unpaid interest to the date of redemption. Prior to that date, the Company may
redeem up to 35% of the aggregate original principal amount of the New Notes
using the net proceeds of one or more equity offerings, in each case at the
redemption price equal to the product of (i) the principal amount of the New
Notes being so redeemed and (ii) a redemption price factor of 1.00 plus the per
annum interest rate on the New Notes (expressed as a decimal) on the applicable
redemption date plus accrued and unpaid interest to the applicable redemption
date, provided certain conditions are also met.
F-56
If the Company experiences specific kinds of change of control events,
each holder of New Notes may require the Company to repurchase all or any
portion of such holder's New Notes at a purchase price equal to 101% of the
principal amount of the New Notes, plus accrued and unpaid interest to the date
of repurchase.
The Indenture governing the New Notes contains covenants that, among
other things, limit the Company's ability to:
o incur or guarantee additional indebtedness and issue certain
types of preferred stock or redeemable stock;
o transfer or sell assets;
o create liens on assets;
o pay dividends or make other distributions on capital stock or
make other restricted payments, including repurchasing, redeeming
or retiring capital stock or subordinated debt or making certain
investments or acquisitions;
o engage in transactions with affiliates;
o guarantee other indebtedness;
o permit restrictions on the ability of its subsidiaries to
distribute or lend money to the Company;
o cause a restricted subsidiary to issue or sell its capital stock;
and
o consolidate, merge or transfer all or substantially all of the
consolidated assets of the Company and its restricted
subsidiaries.
The Indenture also contains customary events of default, including
nonpayment of principal or interest, violations of covenants, cross default and
cross acceleration to certain other indebtedness, including the New Credit
Facility (as defined below) and Bridge Loan (as defined below), bankruptcy, and
material judgments and liabilities.
New Credit Facility. On October 28, 2004, the Company and the
Subsidiary Guarantors entered into a new senior secured revolving credit
facility with Wells Fargo Foothill, Inc., as arranger and administrative agent
and the lenders signatory thereto (the "New Credit Facility").
The New Credit Facility has a maximum commitment of $15 million, which
includes an available $2.5 million subfacility for letters of credit.
Availability under the New Credit Facility is subject to a borrowing base
consistent with normal and customary natural gas and crude oil lending
transactions. Outstanding amounts under the New Credit Facility bear interest at
the prime rate announced by Wells Fargo Bank, National Association plus 1.00%.
Subject to earlier termination rights and events of default, the New Credit
Facility's stated maturity date is October 28, 2008. The Company is permitted to
terminate the New Credit Facility, and under certain circumstances, may be
required, from time to time, to permanently reduce the lenders' aggregate
commitment under the New Credit Facility. Such termination and each such
reduction is subject to a premium equal to the percentage listed below
multiplied by the lenders' aggregate commitment under the New Credit Facility,
or, in the case of a partial reduction, the amount of such reduction.
Year % Premium
------------ -------------------
1 1.5
2 1.0
3 0.5
4 0.0
F-57
Each of the Subsidiary Guarantors has guaranteed, and each of the
Company's future restricted subsidiaries will guarantee, the Company's
obligations under the New Credit Facility on a senior secured basis. In
addition, any other subsidiary or affiliate of the Company, including Grey Wolf,
that in the future guarantees any other indebtedness of the Company or of its
restricted subsidiaries will be required to guarantee the Company's obligations
under the New Credit Facility. Obligations under the New Credit Facility are
secured, together with the New Notes, by a shared first priority perfected
security interest, subject to certain permitted encumbrances, in all of the
Company's and each of its restricted subsidiaries' material property and assets,
including the Collateral.
Under the New Credit Facility, the Company is subject to customary
covenants, including certain financial covenants and reporting requirements. The
New Credit Facility requires the Company to maintain a minimum net cash interest
coverage ratio and also requires the Company to enter into hedging agreements of
not less than 25% or more than 75% of the Company's projected natural gas and
crude oil production.
In addition to the foregoing and other customary covenants, the New
Credit Facility contains a number of covenants that, among other things,
restrict the Company's ability to:
o incur or guarantee additional indebtedness and issue certain
types of preferred stock or redeemable stock;
o transfer or sell assets;
o create liens on assets;
o pay dividends or make other distributions on capital stock or
make other restricted payments, including repurchasing, redeeming
or retiring capital stock or subordinated debt or making certain
investments or acquisitions;
o engage in transactions with affiliates;
o guarantee other indebtedness;
o make any change in the principal nature of its business;
o prepay, redeem, purchase or otherwise acquire any of its or its
restricted subsidiaries' indebtedness;
o permit a change of control;
o directly or indirectly make or acquire any investment;
o cause a restricted subsidiary to issue or sell its capital stock;
and
o consolidate, merge or transfer all or substantially all of the
consolidated assets of the Company and its restricted
subsidiaries.
The New Credit Facility also contains customary events of default,
including nonpayment of principal or interest, violations of covenants, cross
default and cross acceleration to certain other indebtedness, bankruptcy and
material judgments and liabilities, and is subject to an Intercreditor, Security
and Collateral Agency Agreement (the "Intercreditor Agreement") which specifies
the rights of the parties thereto to proceeds from the Collateral.
Bridge Loan. On October 28, 2004, the Company borrowed $25 million
under a $25 million second lien increasing rate bridge loan with Guggenheim
Corporate Funding, LLC, as arranger and administrative agent and the lenders
signatory thereto (the "Bridge Loan"). Interest on the Bridge Loan currently
accrues at a rate of 12% per annum until October 28, 2005, and is payable
monthly in cash. Interest on the Bridge Loan will thereafter accrue at a rate of
15% per annum, and will be payable in-kind. Subject to earlier termination
F-58
rights and events of default, the Bridge Loan's stated maturity date is October
28, 2010. The Company's obligations under the Bridge Loan are guaranteed by the
Subsidiary Guarantors and each of the Company's future restricted subsidiaries.
Obligations under the Bridge Loan are secured by a second priority perfected
security interest, subject to certain permitted encumbrances, and all of the
Company's and each of its restricted subsidiaries' material property assets,
including the Collateral.
The Bridge Loan is also secured by a first priority perfected security
interest in all of the stock of Grey Wolf owned by the Company and its
restricted subsidiaries. The Bridge Loan provides for the release of such
security interest in connection with a sale of such stock by the Company as
permitted by the terms of the Bridge Loan, but not a distribution thereof to the
Company's shareholders. Except under limited circumstances, the Bridge Loan is
not directly secured by any of the property or assets of Grey Wolf (unless it
becomes a restricted subsidiary).
Any prepayment of principal on the Bridge Loan will be repaid with an
additional amount equal to the principal amount being so paid multiplied by a
repayment factor. The repayment factor is currently equal to 1.025 and,
following July 28, 2005, will increase monthly by 0.03.
If the Bridge Loan is not fully repaid by January 28, 2006, so long as
an event of default does not exist thereunder or under the New Credit Facility
or the New Notes, the Bridge Loan lenders will have the right to require the
Company and its restricted subsidiaries to consummate one or more asset sales.
Each such asset sold will be required to be at a fair market value and to
generate at least 80% of the proceeds in cash or cash equivalence. Net cash
proceeds from each such asset sale (other than with respect to any stock of Grey
Wolf, which will be exclusively applied to repay the Bridge Loan) will be
applied by the Company and its restricted subsidiaries in the following order,
to the extent available to:
first, pay any interest then due and payable under the New Credit
Facility;
second, pay any interest then due and payable on the New Notes;
third, pay any accrued and unpaid interest on the New Credit Facility
that was not paid under clause "first" of this paragraph;
fourth, to pay any outstanding principal of the New Credit Facility;
fifth, if the remaining aggregate amount of such net cash proceeds,
together with any net cash proceeds in the Bridge Loan asset
sale proceeds account from a previous asset sale consummated in
accordance with the provisions described in the Indenture
exceeds $5.0 million, the entire amount in the Bridge Loan
asset sale proceeds account is to be used to make a net
proceeds offer to purchase New Notes from all holders of the
New Notes as if such net cash proceeds remaining after any
payment made pursuant to clause "first," "second," "third" or
"fourth" above, and any other net cash proceeds in the Bridge
Loan asset sale proceeds account, are excess proceeds; and
sixth, after the payment of all amounts required by a net proceeds
offer made in accordance with clause "fifth" above to repay all
amounts outstanding under the Bridge Loan.
Under the Bridge Loan, the Company is subject to substantially the same
covenants and reporting requirements, and substantially the same events of
default, as are set forth in the New Credit Facility.
Intercreditor Agreement. The holders of the New Notes, together with
the lenders under the Company's New Credit Facility and Bridge Loan, are subject
to the Intercreditor Agreement. The Intercreditor Agreement, among other things,
(i) creates security interests in the Collateral in favor of a collateral agent
for the benefit of the holders of the New Notes, the New Credit Facility lenders
F-59
and the Bridge Loan lenders and (ii) governs the priority of payments among such
parties upon notice of an event of default under the Indenture, the New Credit
Facility or the Bridge Loan.
So long as no such event of default exists, the collateral agent will
not collect payments under the New Credit Facility documents, the indenture
governing the New Notes (the "Indenture") and other New Note documents or the
Bridge Loan documents (collectively, the "Secured Documents"), and all payments
will be made directly to the respective creditor under the applicable Secured
Document. Upon notice of such an event of default and for so long as an event of
default exists, payments to each New Credit Facility lender, holder of the New
Notes and Bridge Loan lender from the Company and the Subsidiary Guarantors, and
proceeds from any disposition of any collateral, will, subject to limited
exceptions, be collected by the collateral agent for deposit into a collateral
account and then distributed as provided in the following paragraph, provided,
that, any payment made with proceeds from the sale or other disposition of Grey
Wolf stock will be applied exclusively to pay amounts with respect to the Bridge
Loan, and no such proceeds will be deposited into the collateral account or will
be subject to the payment priority described in the following paragraph.
Upon notice of any such event of default and so long as an event of
default exists, funds in the collateral account will be distributed by the
collateral agent generally in the following order of priority:
first, to reimburse the collateral agent for expenses incurred in
protecting and realizing upon the value of the Collateral;
second, to reimburse the New Credit Facility administrative agent,
the trustee and the Bridge Loan administrative agent, on a
pro rata basis, for expenses incurred in protecting and
realizing upon the value of the Collateral while any of
these parties was acting on behalf of the Control Party (as
defined below);
third, to reimburse the New Credit Facility administrative agent,
the trustee and the Bridge Loan administrative agent, on a
pro rata basis, for expenses incurred in protecting and
realizing upon the value of the Collateral while any of
these parties was not acting on behalf of the Control Party;
fourth, to pay all accrued and unpaid interest (and then any unpaid
commitment fees) under the New Credit Facility;
fifth, if, the collateral coverage value of three times the
outstanding obligations under the New Credit Facility would
be met after giving effect to any payment under this clause
"fifth," to pay all accrued and unpaid interest on the New
Notes;
sixth, to pay all outstanding principal of (and then any other
unpaid amounts, including, without limitation, any fees,
expenses, premiums and reimbursement obligations) the New
Credit Facility;
seventh, to pay all accrued and unpaid interest on the New Notes (if
not paid under clause "fifth");
eighth, to pay all outstanding principal of (and then any other
unpaid amounts, including, without limitation, any premium
with respect to) the New Notes;
ninth, to pay the Bridge Loan lenders all accrued and unpaid
interest under the Bridge Loan;
tenth, to pay all outstanding principal of (and then any other
unpaid amounts, including, without limitation, any premium
with respect to) the Bridge Loan; and
F-60
eleventh, to pay each New Credit Facility lender, holder of the New
Notes, Bridge Loan lender and other secured party, on a pro
rata basis, all other amounts outstanding under the New
Credit Facility, the New Notes and the Bridge Loan.
To the extent there exists any excess monies or property in the
collateral account after all obligations of the Company and the Subsidiary
Guarantors under the New Credit Facility, the Indenture and the New Notes and
the Bridge Loan are paid in full, the collateral agent will be required to
return such excess to the Company.
The collateral agent will act in accordance with the Intercreditor
Agreement and as directed by the "Control Party". Prior to the occurrence of any
such event of default, the "Control Party" will be the holders of the New Notes
and the New Credit Facility lenders, acting as a single class, by vote of the
holders of a majority of the aggregate principal amount of outstanding
obligations under the New Notes and the New Credit Facility. Upon notice of any
such event of default, the Bridge Loan lenders will be the Control Party for 240
days following such notice. If a stay under the Bankruptcy Code occurs during
such 240-day period, that period will be extended by the number of days during
which that stay was effective. If the New Credit Facility lenders and holders of
the New Notes have not been paid in full by the end of such specified period,
they will become the Control Party, acting as a single class, by vote of the
holders of a majority of the aggregate principal amount of outstanding
obligations under the New Notes and the New Credit Facility.
The Intercreditor Agreement provides that the lien on the assets
constituting part of the Collateral that is sold or otherwise disposed of in
accordance with the terms of each Secured Document may be released if (i) no
default or event of default exists under any of the Secured Documents, (ii) the
Company has delivered an officers' certificate to each of the collateral agent,
the trustee, the New Credit Facility administrative agent and the Bridge Loan
administrative agent, certifying that the proposed sale or other disposition of
assets is either permitted or required by, and is in accordance with the
provisions of, the applicable Secured Documents and (iii) the collateral agent
has acknowledged such certificate.
The Intercreditor Agreement provides for the termination of security
interests on the date that all obligations under the Secured Documents are paid
in full.
Grey Wolf Loan. On October 28, 2004, Grey Wolf entered into an
agreement with Guggenheim Corporate Funding, LLC for a $35 million senior
secured term loan. Interest on the Grey Wolf term loan currently accrues at the
prime rate announced by the administrative agent plus 6.25% and will increase by
0.75% at the end of each six-month period during which the Grey Wolf term loan
is outstanding. Such interest is payable quarterly in cash with the first
interest payment to be made on January 1, 2005. If the Grey Wolf term loan is
still outstanding at the end of the first year, an amortization schedule will
require Grey Wolf to repay at least 5% of the initial principal amount of the
loan at the end of each of the first three years and 10% of the initial
principal amount of the loan at the end of the fourth year, with the balance of
the loan due at maturity. Subject to early termination rights and events of
default, the Grey Wolf term loan will mature on October 29, 2009.
Grey Wolf's obligations under its term loan will be guaranteed by each
of Grey Wolf's future subsidiaries. Obligations under the Grey Wolf term loan
are secured by a first priority perfected security interest, subject to certain
permitted encumbrances, in all of Grey Wolf's and each of its subsidiaries'
material property and assets, including substantially all of their natural gas
and crude oil properties and all the capital stock in any entity owned by Grey
Wolf and its subsidiaries.
The Grey Wolf term loan is pre-payable, in whole or in part, on not
less than 10 days' written notice, at Grey Wolf's option at any time at a price
of 100% of the principal amount of the loan being prepaid, plus accrued and
unpaid interest to the date of prepayment.
Under the Grey Wolf term loan, Grey Wolf is subject to substantially
the same covenants and reporting requirements, and substantially the same events
of default, as are set forth in the Bridge Loan.
F-61
Note 4. Long-Term Debt
In October 2004, Abraxas refinanced its long-term debt by redeeming its
11 1/2% secured notes due 2007 and terminating its previous senior credit
facility with proceeds from:
o the issuance of $125.0 million aggregate principal amount of
the notes being offered hereby;
o the proceeds of its new $25.0 million bridge loan; and
o the payment to Abraxas by Grey Wolf of $35.0 million from the
proceeds of Grey Wolf's new $35.0 million term loan.
This refinancing is described in Note 3, above.
Prior to the October 2004 refinancing, long-term debt as of September
30, 2004 consisted of the following:
September 30, December 31,
2004 2003
------------------- ----------------
11 1/2% Secured Notes due 2007............. $ 143,154 $ 137,258
Senior Credit Agreement..................... 47,362 47,391
------------------- ----------------
190,516 184,649
Less current maturities..................... - -
------------------- ----------------
$ 190,516 $ 184,649
=================== ================
11 1/2% Notes due 2007. In connection with the financial restructuring
completed in January 2003, Abraxas issued $109.7 million in principal amount of
it's 11 1/2% Secured Notes due 2007, Series A, or 11 1/2% notes due 2007, in
exchange for our 11 1/2% Senior Notes due 2004 tendered in the exchange offer.
The 11 1/2% notes due 2007 were issued under an indenture with U.S. Bank, N. A.
In accordance with SFAS 15, the basis of the 11 1/2% notes due 2007 at issue
date exceeded the face amount of the 11 1/2% notes due 2007 by approximately
$19.0 million. Were it not for the refinancing described in Note 3, such amount
would have been amortized over the term of the 11 1/2% notes due 2007 as an
adjustment to the yield of the 11 1/2% notes due 2007.
The 11 1/2% notes due 2007 accrued interest from the date of issuance,
at a fixed annual rate of 11 1/2%, payable in cash semi-annually on each May 1
and November 1, commencing May 1, 2003, provided that, if we failed, or were not
permitted pursuant to our then current senior credit agreement or the
intercreditor agreement between the trustee under the indenture for the 11 1/2%
notes due 2007 and the lenders under the then current senior credit agreement,
to make such cash interest payments in full, we paid interest in kind by the
issuance of additional 11 1/2% notes with a principal amount equal to the amount
of accrued and unpaid cash interest on the 11 1/2% notes due 2007 plus an
additional 1% accrued interest for the applicable period.
On October 28, 2004, Abraxas gave notice to the trustee that it was
redeeming all of the 11 1/2% notes due 2007 at a redemption price of 98.5837%
plus interest accrued and unpaid to the applicable redemption date. The
redemption will take place on November 27, 2004.
Senior Credit Agreement. In connection with the January 2003 financial
restructuring, Abraxas entered into a new senior credit agreement providing a
term loan facility and a revolving credit facility. On February 23, 2004, the
Company entered into an amendment to that agreement providing for two revolving
credit facilities and a non-revolving credit facility as described below.
Subject to earlier termination on the occurrence of events of default or other
events, the stated maturity date for these credit facilities was February 1,
F-62
2007. As described in Note 3 above, amounts outstanding under these three credit
facilities were repaid and the credit facilities were terminated as of October
28, 2004.
Note 5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2004 2003 2004 2003
------------- ------------- ------------- --------------
Numerator:
Net income (loss) before cumulative effect
of accounting change $ (1,643) $ (2,702) $ (6,828) $ 58,049
Cumulative effect of accounting change (1) - - - (395)
$ (1,643) $ (2,702) $ (6,828) $ 57,654
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 36,251,323 35,781,625 36,164,268 35,205,111
Effect of dilutive securities:
Stock options, warrants and CVR's - - - 653,053
Dilutive potential common shares
Denominator for diluted earnings per
share -
adjusted weighted-average shares and assumed
Conversions 36,251,323 35,781,625 36,164,268 35,858,164
Basic earnings (loss) per share:
Net income (loss before cumulative
effect of accounting change $ (0.05) $ (0.08) $ (0.19) $ 1.64
Cumulative effect of accounting change - - - (0.01)
------------- ------------- ------------- --------------
Net earnings (loss) per common share - basic $ (0.05) $ (0.08) $ (0.19) $ 1.63
============= ============= ============= ==============
Diluted earnings (loss) per share: $ (0.05) (0.08) $ (0.19) 1.61
Cumulative effect of accounting change - - - (0.01)
------------- ------------- ------------- --------------
Net earnings (loss) per common share--diluted $ (0.05) $ (0.08) $ (0.19) $ 1.60
============= ============= ============= ==============
(1) The Company adopted SFAS 143, "Accounting for Asset Retirement Obligations"
effective January 1, 2003. For the nine months period ended September 30, 2003
the Company recorded a charge of $395,341 for the cumulative effect of the
change in accounting principle.
For the three months ended September 30, 2003, and for the three and
nine months ended September 30, 2004 none of the shares issuable in connection
with stock options or warrants are included in diluted shares. Inclusion of
these shares would be antidilutive due to losses incurred in the period. Had
there not been losses in these periods, dilutive shares would have been 834,354
shares, 1,420,879 shares and 1,689,884 shares for the three months ended
September 30, 2003 and the three and nine months ended September 30, 2004,
respectively.
Note 6. Hedging Program and Derivatives
On January 1, 2001, the Company adopted SFAS 133 "Accounting for
Derivative Instruments and Hedging Activities" SFAS 133 as amended by SFAS 137
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
F-63
Effective Date of FASB 133" and SFAS 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities. Gains and losses on hedging
instruments related to accumulated Other Comprehensive Income (Loss) and
adjustments to carrying amounts on hedged production are included in natural gas
or crude oil production revenue in the period that the related production is
delivered.
Under the terms of our previous senior credit agreement we were
required to maintain hedging agreements with respect to not less than 40% nor
more than 75% of it crude oil and natural gas production for a rolling six month
period. Under the terms of our new revolving credit facility we are required to
maintain hedging agreements with respect to not less than 25% nor more than 75%
of it crude oil and natural gas production for a rolling six month period.
The following table sets forth the Company's current hedge position:
Time Period Notional Quantities Price
---------------------------------------------------------------------------------------
November 2004 7,100 MMbtu of production per day Floor of $4.25
400 Bbl of crude oil production per day Floor of $24.00
December 2004 7,100 MMbtu of production per day Floor of $4.50
400 Bbl of crude oil production per day Floor of $25.00
January 2005 7,100 MMbtu of production per day Floor of $4.50
400 Bbl of crude oil production per day Floor of $25.00
February 2005 7,100 MMbtu of production per day Floor of $4.50
400 Bbl of crude oil production per day Floor of $25.00
March 2005 7,100 MMbtu of production per day Floor of $4.50
400 Bbl of crude oil production per day Floor of $25.00
April 2005 7,100 MMbtu of production per day Floor of $4.50
400 Bbl of crude oil production per day Floor of $25.00
May - December 2005 9,500 MMbtu of production per day Floor of $5.00
Note 7. Contingencies - Litigation
In 2001, the Company and a limited partnership, of which Wamsutter
Holdings, Inc. is the general partner (the "Partnership"), were named in a
lawsuit filed in U.S. District Court in the District of Wyoming. The claim
asserts breach of contract, fraud and negligent misrepresentation by the Company
and the Partnership related to the responsibility for year 2000 ad valorem taxes
on crude oil and natural gas properties sold by the Company and the Partnership.
In February 2002, a summary judgment was granted to the plaintiff in this matter
and a final judgment in the amount of $1.3 million was entered. The Company and
the Partnership appealed the District Court's judgment and on November 3, 2004,
the U.S. Court of Appeals for the 10th Circuit affirmed the District Court's
decision. The Company is currently considering whether to file further appeals
or pay the judgment. The Company has established a reserve in the amount of
$845,000, which represents the Company's share of the judgment. The Company
continues to believe that these charges are without merit.
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 September 30, 2004, 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.
Note 8. Comprehensive Income
Comprehensive income includes net income, losses and certain items
recorded directly to Stockholder's Equity and classified as Other Comprehensive
Income.
F-64
The following table illustrates the calculation of comprehensive income
(loss) for the three and nine months ended September 30, 2004 and 2003:
Three Months Ended Nine Months Ended September
September 30, 30,
------------------------------ -----------------------------
2004 2003 2004 2003
----------- ----------- ------------- ------------
Net income (loss).................................. $ (1,643) $ (2,702) $ (6,828) $ 57,654
Other Comprehensive loss:
Change in fair market value of outstanding hedge
positions.......................................... - 34 - (15)
Foreign currency translation adjustment.......... 2,236 (50) 885 7,763
----------- ----------- ------------- ------------
Other comprehensive income (loss).................. $ 593 $ (2,718) $ (5,943) $ 65,402
=========== =========== ============= ============
Note 9. Business Segments
Business segment information for the three months and nine months ended
September 30, 2004 and 2003 in different geographic areas is as follows:
Three Months Ended September 30, 2004
--------------------------------------------------------------
U.S. Canada Total
------------------- ----------------- -------------------
Revenues................................ $ 8,237 $ 3,546 $ 11,783
=================== ================ ===================
Operating income........................ $ 4,210 $ 1,365 $ 5,575
=================== ================
General Corporate.................................................................. (2,373)
Interest expense and amortization of
deferred financing fees......................................................... (4,845)
Other income (expense)-net......................................................... -
-------------------
Loss before income taxes........................................................... $ (1,643)
===================
Three Months Ended September 30, 2003
--------------------------------------------------------------
U.S. Canada Total
------------------- ----------------- -------------------
Revenues................................ $ 7,176 $ 1,254 $ 8,430
=================== ================ ===================
Operating income........................ $ 2,973 $ 279 $ 3,252
=================== ================
General Corporate.................................................................. (558)
Interest expense and amortization of
deferred financing fees......................................................... (4,920)
Gain on sale of foreign subsidiaries............................................... 298
Other income (expense)-net......................................................... (774)
-------------------
Loss before income taxes........................................................... $ (2,702)
===================
F-65
Nine Months Ended September 30, 2004
--------------------------------------------------------------
U.S. Canada Total
------------------- ----------------- -------------------
Revenues................................ $ 24,701 $ 10,284 $ 34,985
=================== ================= ===================
Operating income........................ $ 12,165 $ 2,632 $ 14,797
=================== =================
General Corporate (4,905)
Interest expense, financing cost and amortization of
deferred financing fees............................................................ (16,709)
Other income (expense)-net............................................................ (11)
-------------------
Income before income taxes......................................................... $ (6,828)
===================
Nine Months Ended September 30, 2003
--------------------------------------------------------------
U.S. Canada Total
------------------- ----------------- -------------------
Revenues................................ $ 23,193 $ 6,778 $ 29,971
=================== ================= ===================
Operating income........................ $ 11,044 $ 2,810 $ 13,854
=================== =================
General Corporate.................................................................. (3,587)
Interest expense, financing cost and amortization of
deferred financing fees............................................................ (18,325)
Gain on sale of foreign subsidiaries............................................... 67,258
Other income (expense)-net......................................................... (774)
Cumulative effect of accounting change............................................. (395)
-------------------
Income before income taxes......................................................... $ 58,031
===================
At September 30, 2004
--------------------------------------------------------------
U.S. Canada Total
------------------- ----------------- -------------------
Identifiable assets..................... $ 83,028 $ 40,521 $ 123,549
=================== =================
Corporate assets................................................................... 5,518
-------------------
Total assets....................................................................... $ 129,067
===================
Note 10. New Accounting Standards
In March 2004, the Emerging Issues Task Force ("EITF") reached a
consensus that mineral rights, as defined in EITF Issue No. 04-2, "Whether
Mineral Rights Are Tangible or Intangible Assets," are tangible assets and that
they should be removed as examples of intangible assets in SFAS No. 141,
"Business Combinations" and No. 142, "Goodwill and Other Intangible Assets". The
FASB has recently ratified this consensus and directed the FASB staff to amend
SFAS Nos. 141 and 142 through the issuance of FASB Staff Position FAS Nos. 141-1
and 142-1. Historically, the Company has included the costs of such mineral
rights as tangible assets, which is consistent with the EITF's consensus. As
such, EITF 04-02 has not affected the Company's consolidated financial
statements.
In March 2004, the FASB issued an exposure draft entitled "Share-Based
Payment, an Amendment of FASB Statements No. 123 and 95." This proposed
statement addresses the accounting for share-based payment transactions in which
an enterprise receives employee services in exchange for: (1) equity instruments
of the enterprise or (2) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of such
equity instruments. The proposed statement would eliminate the ability to
account for share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and generally would require instead
that such transactions be accounted for using a fair value-based method. As
proposed, this statement would be effective for the Company on January 1, 2005.
F-66
The Company is currently unable to determine what effect this statement will
have on the Company's financial position or results of operations."
Note 11. Accounting Change
The Company adopted SFAS 143, "Accounting for Asset Retirement
Obligations", effective January 1, 2003. For the nine months ended September 30,
2003 the Company recorded a charge of approximately $395,000 for the cumulative
effect of the change in accounting principle and an additional liability of
approximately $712,000. During the period ended September 30, 2004 the Company
recorded an additional liability of approximately $387,000.
F-67
ABRAXAS PETROLEUM CORPORATION
Offer to Exchange up to
$125,000,000 Principal Amount floating rate senior Secured Notes due 2009,
Series B and guarantees thereof
For Any And All Outstanding
$125,000,000 Principal Amount floating rate senior Secured Notes due 2009,
Series A and guarantees thereof
THE SERIES A/B EXCHANGE OFFER WILL EXPIRE AT midnight, NEW YORK CITY TIME,
ON __________, 2005, UNLESS EXTENDED.
Each broker-dealer that receives exchange notes for its own account
pursuant to the Series A/B exchange offer 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
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 broker-dealer in connection
with resales of exchange notes received in exchange for Securities where such
Securities were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date (as defined herein), it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution".
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Abraxas' Articles of Incorporation contain a provision that eliminates the
personal monetary liability of directors and officers to Abraxas and its
stockholders for a breach of fiduciary duties to the extent currently allowed
under the Nevada General Corporation Law (the "Nevada Statute"). If a director
or officer of Abraxas were to breach his fiduciary duties, neither Abraxas nor
its stockholders could recover monetary damages, and the only course of action
available to Abraxas' stockholders would be equitable remedies, such as an
action to enjoin or rescind a transaction involving a breach of fiduciary duty.
To the extent certain claims against directors or officers are limited to
equitable remedies, this provision of Abraxas' Articles of Incorporation may
reduce the likelihood of derivative litigation and may discourage stockholders
or management from initiating litigation against directors or officers for
breach of their duty of care. Additionally, equitable remedies may not be
effective in many situations. If a stockholder's only remedy is to enjoin the
completion of the Board of Director's action, this remedy would be ineffective
if the stockholder did not become aware of a transaction or event until after it
had been completed. In such a situation, it is possible that the stockholders
and Abraxas would have no effective remedy against the directors or officers.
Liability for monetary damages has not been eliminated for acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law or payment of an improper dividend in violation of section 78.300 of the
Nevada Statute. The limitation of liability also does not eliminate or limit
director liability arising in connection with causes of action brought under the
Federal securities laws.
The Nevada Statute permits a corporation to indemnify certain persons,
including officers and directors, who are (or are threatened to be made) parties
against all expenses (including attorneys' fees) actually and reasonably
incurred by, or imposed upon, him in connection with the defense by reason of
his being or having been a director or officer if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful, except
where he has been adjudged by a court of competent jurisdiction (and after
exhaustion of all appeals) to be liable for gross negligence or willful
misconduct in the performance of his 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. Alberta
Business Corporation Act corporations are permitted to obtain such insurance
also, except for liability relating to the failure to act honestly and in good
faith with a view to the best interests of the corporation. Abraxas currently
has a directors' and officers' liability insurance policy in effect providing
$5.0 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.
II-1
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
The following Exhibits have previously been filed by the Registrant or
are included following the Index to Exhibits:
Exhibit Description
Number
3.1 Articles of Incorporation of Abraxas. (Filed as Exhibit 3.1 to Abraxas'
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 Abraxas' Registration Statement
on Form S-3, No. 333-00398 (the "S-3 Registration Statement")).
3.5 Articles of Amendment to the Articles of Incorporation of Abraxas dated
as of August 12, 2000 (Filed as Exhibit 3.5 to Abraxas' Annual Report
of Form 10-K filed April 2, 2001).
3.6 Amended and Restated Bylaws of Abraxas. (Filed as Exhibit 3.6 to
Abraxas' Annual Report on Form 10-K filed April 5, 2002).
4.1 Specimen Common Stock Certificate of Abraxas. (Filed as Exhibit 4.1 to
the S-4 Registration Statement).
4.2 Specimen Preferred Stock Certificate of Abraxas. (Filed as Exhibit 4.2
to Abraxas' Annual Report on Form 10-K filed on March 31, 1995).
4.3 Indenture dated October 28, 2004, by and among Abraxas, as Issuer; the
Subsidiary Guarantors party thereto and U.S. Bank National Association,
as Trustee, relating to Abraxas' Floating Rate Senior Secured Notes Due
2009. (filed as Exhibit 4.1 to Abraxas' Current Report on Form 8-K
filed on November 3, 2004).
4.4 Form of Rule 144A Global Note for Floating Rate Senior Secured Notes
due 2009. (Filed as Exhibit A-1 to Exhibit 4.1 to Abraxas' Current
Report on Form 8-K filed on November 3, 2004).
4.5 Form of Regulation S Global Note for Floating Rate Senior Secured Notes
due 2009. (Filed as Exhibit A-2 to Exhibit 4.1 to Abraxas' Current
Report on Form 8-K filed on November 3, 2004).
4.6 Form of Accredited Investor Certificated Note for Floating Rate Senior
Secured Notes due 2009. (Filed as Exhibit A-3 to Exhibit 4.1 to
Abraxas' Current Report on Form 8-K filed on November 3, 2004).
**4.7 Form of Letter of Transmittal.
**4.8 Form of Notice of Guaranteed Delivery.
**5.1 Opinion of Cox Smith Matthews Incorporated.
*10.1 Abraxas Petroleum Corporation 401(k) Profit Sharing Plan. (Filed as
Exhibit 10.4 to Abraxas' Registration Statement on Form S-4, No.
333-18673, (the "1996 Exchange Offer Registration Statement")).
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*10.2 Abraxas Petroleum Corporation Director Stock Option Plan. (Filed as
Exhibit 10.5 to the 1996 Exchange Offer Registration Statement).
*10.3 Abraxas Petroleum Corporation Restricted Share Plan for Directors.
(Filed as Exhibit 10.20 to Abraxas' Annual Report on Form 10-K filed on
April 12, 1994).
10.4 Abraxas Petroleum Corporation Amended and Restated 1994 Long Term
Incentive Plan. (Filed herewith).
*10.5 Abraxas Petroleum Corporation Incentive Performance Bonus Plan. (Filed
as Exhibit 10.24 to Abraxas' Annual Report on Form 10-K filed on April
12, 1994).
*10.6 Form of Indemnity Agreement between Abraxas and each of its directors
and officers. (Filed as Exhibit 10.30 to the 1993 S-1).
10.7 Farmout Agreement between Grey Wolf Exploration Limited and PrimeWest
Energy, Inc. (Filed as Exhibit 10.2 to Abraxas' Current Report on Form
8-K/A filed on December 9, 2002).
10.8 Purchase Agreement dated as of October 21, 2004 by and among Abraxas
Petroleum Corporation, the Subsidiary Guarantors signatory thereto and
Guggenheim Capital Markets, LLC. (Filed as Exhibit 10.1 to Abraxas'
Current Report on Form 8-K filed November 3, 2004).
10.9 Loan Agreement dated as of October 28, 2004 by and among Abraxas
Petroleum Corporation, the Subsidiary Guarantors party thereto, Wells
Fargo Foothill, Inc., as Arranger and Administrative Agent and the
Lenders signatory thereto. (Filed as Exhibit 10.2 to Abraxas' Current
Report on Form 8-K filed November 3, 2004).
10.10 Loan Agreement dated as of October 28, 2004 by and among Abraxas
Petroleum Corporation, the Subsidiary Guarantors party thereto,
Guggenheim Corporate Funding, LLC, as Arranger and Administrative Agent
and the Lenders signatory thereto. (Filed as Exhibit 10.3 to Abraxas'
Current Report on Form 8-K filed November 3, 2004).
10.11 Loan Agreement dated October 28, 2004 by and among Grey Wolf
Exploration Inc., Guggenheim Corporate Funding, LLC as Arranger and
Administrative Agent and the Lenders signatory thereto. (Filed as
Exhibit 10.4 to Abraxas' Current Report on Form 8-K filed November 3,
2004).
10.12 Intercreditor, Security and Collateral Agency Agreement dated as of
October 28, 2004 by and among Abraxas Petroleum Corporation, the
Subsidiary Guarantors party thereto, Wells Fargo Foothill, Inc.,
Guggenheim Corporate Funding, LLC and U.S. Bank National Association.
(Filed as Exhibit 10.5 to Abraxas' Current Report on Form 8-K filed
November 3, 2004).
10.13 Warrant issued to Guggenheim Corporate Funding, LLC dated October 28,
2004. (Filed as Exhibit 10.6 to Abraxas' Current Report on Form 8-K
filed November 3, 2004).
10.14 Exchange and Registration Rights Agreement dated October 28, 2004, by
and among Abraxas Petroleum Corporation, the Subsidiary Guarantors
signatory thereto, and Guggenheim Capital Markets, LLC. (Filed as
Exhibit 10.1 to Abraxas' Quarterly Report on Form 10-Q filed November
12, 2004).
16.1 Letter addressing change in certifying accountant (Filed on Abraxas'
Form 8-K filed on August 22, 2001).
21.1 Subsidiaries of Abraxas. (Filed as Exhibit 21.1 to Abraxas, Grey Wolf
Exploration Inc., Sandia Oil & Gas Corporation, Sandia Operating Corp.,
Wamsutter Holdings, Inc., Western Associated Energy Corporation and
Eastside Coal Company, Inc.'s Registration Statement on Form S-1, No.
333-103027).
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23.1 Consent of BDO Seidman, LLP. (Filed herewith).
23.2 Consent of Deloitte & Touche LLP. (Filed herewith).
**23.3 Consent of DeGolyer and MacNaughton.
**23.4 Consent of McDaniel & Associates Consultants, Ltd.
**23.5 Consent of Cox Smith Matthews Incorporated. (Filed with Exhibit 5.1)
**24.1 Power of Attorney of Craig S. Bartlett, Jr.
**24.2 Power of Attorney of Franklin A. Burke.
**24.3 Power of Attorney of Harold D. Carter.
**24.4 Power of Attorney of Ralph F. Cox.
**24.5 Power of Attorney of Barry J. Galt.
**24.6 Power of Attorney of Dennis E. Logue.
**24.7 Power of Attorney of James C. Phelps.
**24.8 Power of Attorney of Joseph A. Wagda.
**25.1 Statement of Eligibility of Trustee for the Indenture.
* Management Compensatory Plan or Agreement.
** Previously filed.
II-4
Item 22. Undertakings
The undersigned registrants hereby undertake:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
i. To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
ii. To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume
and price represent no more than 20% change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement; and
iii. To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
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 proceeding) 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.
The undersigned registrants hereby undertake 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.
II-5
The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Antonio, Texas, on January 12, 2005.
ABRAXAS PETROLEUM CORPORATION
By: /s/ Robert L.G. Watson
--------------------------------------
Chairman of the Board, Chief Executive
Officer and President
II-7
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to 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, President, Chief Executive January 12, 2005
---------------------------
Robert L.G. Watson Officer (Principal Executive Officer) and Director
of Abraxas
/s/ Chris E. Williford Executive Vice President, Treasurer, and Chief January 12, 2005
---------------------------
Chris E. Williford Financial Officer (Principal Financial and
Accounting Officer) of Abraxas
/s/ Robert W. Carington, Jr. Executive Vice President of Abraxas January 12, 2005
----------------------------
Robert W. Carington, Jr.
* Director of Abraxas January 12, 2005
---------------------------
Craig S. Bartlett, Jr.
* Director of Abraxas January 12, 2005
---------------------------
Franklin A. Burke
* Director of Abraxas January 12, 2005
---------------------------
Harold D. Carter
* Director of Abraxas January 12, 2005
---------------------------
Ralph F. Cox
* Director of Abraxas January 12, 2005
---------------------------
Barry J. Galt
* Director of Abraxas January 12, 2005
---------------------------
Dennis E. Logue
* Director of Abraxas January 12, 2005
---------------------------
James C. Phelps
* Director of Abraxas January 12, 2005
---------------------------
Joseph A. Wagda
*By: /s/ Chris E. Williford
-------------------------
Chris E. Williford
Attorney-in-Fact
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Antonio, Texas, on January 12, 2005.
SANDIA OIL & GAS CORPORATION
By: /s/ Robert L.G. Watson
-----------------------------------
President
II-9
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
Signature Name and Title Date
--------- -------------- ----
/s/ Robert L.G. Watson President (Principal Executive Officer) and January 12, 2005
---------------------------
Robert L.G. Watson Director of Sandia Oil & Gas Corporation
/s/ Chris E. Williford Vice President (Principal Financial and January 12, 2005
---------------------------
Chris E. Williford Accounting Officer) and Director of Sandia Oil &
Gas Corporation
/s/ Robert W. Carington, Jr. Vice President and Director of Sandia Oil & Gas January 12, 2005
----------------------------
Robert W. Carington, Jr. Corporation
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Antonio, Texas, on January 12, 2005.
SANDIA OPERATING CORP.
By: /s/ Robert L.G. Watson
---------------------------------------
President
II-11
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
Signature Name and Title Date
--------- -------------- ----
/s/ Robert L.G. Watson President (Principal
---------------------------- Executive Officer)
Robert L.G. Watson and Director of January 12, 2005
Sandia Operating Corp.
/s/ Chris E. Williford Vice President (Principal January 12, 2005
---------------------------- Financial and Accounting
Chris E. Williford Officer) and Director of
Sandia Operating Corp.
/s/ Robert W. Carington, Jr. Vice President and Director January 12, 2005
---------------------------- of Sandia Operating Corp.
Robert W. Carington, Jr.
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Antonio, Texas, on January 12, 2005.
WAMSUTTER HOLDINGS, INC.
By: /s/ Robert L.G. Watson
---------------------------------------
President
II-13
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
Signature Name and Title Date
--------- -------------- ----
/s/ Robert L.G. Watson President (Principal Executive
----------------------------- Officer) and Director of
Robert L.G. Watson Wamsutter January 12, 2005
/s/ Chris E. Williford Vice President (Principal January 12, 2005
----------------------------- Financial and Accounting
Chris E. Williford Officer) and Director
of Wamsutter
/s/ Robert W. Carington, Jr. Vice President and Director January 12, 2005
----------------------------- of Wamsutter
Robert W. Carington, Jr.
II-14
SIGNATURES
Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Antonio, Texas, on January 12, 2005.
WESTERN ASSOCIATED ENERGY CORPORATION
By: /s/ Robert L.G. Watson
---------------------------------------
President
II-15
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
Signature Name and Title Date
--------- -------------- ----
/s/ Robert L.G. Watson President (Principal Executive January 12, 2005
---------------------------- Officer) and Director of
Robert L.G. Watson Western Associated Energy
Corporation
/s/ Chris E. Williford Vice President (Principal January 12, 2005
---------------------------- Accounting Officer) and
Chris E. Williford Director of Western Associated
Energy Corporation
/s/ Robert W. Carington, Jr. Vice President and January 12, 2005
---------------------------- Director of Western
Robert W. Carington, Jr. Associated Energy Corporation
II-16
SIGNATURES
Pursuant to the requirements of the Securities Act, the undersigned
registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Antonio, Texas, on January 12, 2005.
EASTSIDE COAL COMPANY, INC.
By: /s/ Robert L.G. Watson
---------------------------------------
President
II-17
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
Signature Name and Title Date
--------- -------------- ----
/s/ Robert L.G. Watson President (Principal Executive January 12, 2005
---------------------------- Officer) and Director of
Robert L.G. Watson Eastside Coal Company, Inc.
/s/ Chris E. Williford Vice President (Principal January 12, 2005
---------------------------- Accounting Officer) and
Chris E. Williford Director of Eastside Coal
Company, Inc.
/s/ Robert W. Carington, Jr. Vice President and January 12, 2005
---------------------------- Director of Eastside Coal
Robert W. Carington, Jr. Company, Inc.
II-18
EXHIBIT INDEX
Exhibit Number:
23.1 Consent of BDO Seidman, LLP
23.2 Consent of Deloitte & Touche LLP