SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended December 31, 2000
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 0-19118
ABRAXAS PETROLEUM CORPORATION
------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 74-2584033
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
500 N. Loop 1604 East, Suite 100
San Antonio, Texas 78232
(Address of principal executive offices)
Registrant's telephone number,
including area code (210) 490-4788
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, par value $.01 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock (which consists solely
of shares of common stock) held by non-affiliates of the registrant as of March
22, 2001, based upon the closing per share price of $4.75, was approximately
$94,551,000 on such date.
The number of shares of the issuer's common stock, par value $.01 per
share, outstanding as of March 22, 2001 was 22,593,969 shares of which
19,905,411 shares were held by non-affiliates.
Documents Incorporated by Reference: Portions of the registrant's Proxy
Statement relating to the 2001 Annual Meeting of Shareholders to be held on May
24, 2001 have been incorporated by reference herein (Part III).
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ABRAXAS PETROLEUM CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I
Page
Item 1. Business. ...........................................................4
General ...........................................................4
Business Strategy ..................................................5
Markets and Customers...............................................6
Risk Factors........................................................6
Regulation of Crude Oil and Natural Gas Activities.................13
Canadian Royalty Matters...........................................16
Environmental Matters ............................................17
Title to properties................................................19
Employees..........................................................19
Item 2. Properties..........................................................20
Primary Operating Areas............................................20
Exploratory and Developmental Acreage..............................20
Productive Wells...................................................21
Reserves Information...............................................21
Crude Oil, Natural Gas Liquids and Natural Gas
Production and Sales Price ......................................23
Drilling Activities................................................24
Office Facilities..................................................24
Other Properties...................................................25
Item 3. Legal Proceedings...................................................25
Item 4. Submission of Matters to a Vote of
Security Holders.................................................25
Item 4a.Executive Officers of Abraxas........................................25
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters..................................26
Market Information.................................................26
Holders............................................................26
Dividends..........................................................26
Item 6. Selected Financial Data.............................................27
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................27
General............................................................27
Results of Operations..............................................27
Liquidity and Capital Resources....................................31
New Accounting Pronouncement......................................38
Item 7a. Quantitative and Qualitative Disclosures about Market Risk..........38
Item 8. Financial Statements and Supplementary Data.........................39
2
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................39
PART III
Item 10. Directors and Executive Officers of the Registrant ...............39
Item 11. Executive Compensation.............................................39
Item 12. Security Ownership of Certain Beneficial Owners
and Management...................................................39
Item 13. Certain Relationships and Related Transactions.....................39
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.........................................40
SIGNATURES........................................................44
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FORWARD-LOOKING INFORMATION
We make forward-looking statements throughout this document. Whenever you
read a statement that is not simply a statement of historical fact (such as when
we describe what we "believe," "expect" or "anticipate" will occur, and other
similar statements), you must remember that our expectations may not be correct,
even though we believe they are reasonable. The forward-looking information
contained in this annual report is generally located in the material set forth
under the headings "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," but may be found in other locations
as well. These forward-looking statements generally relate to our plans and
objectives for future operations and are based upon our management's reasonable
estimates of future results or trends. The factors that may affect our
expectations of our operations include, among others, the following:
o Our high debt level
o Our ability to raise capital
o Economic and business conditions
o Our success in completing acquisitions or in development
and exploration activities
o Prices for crude oil and natural gas; and
o Other factors discussed elsewhere in this document
PART I
Item 1. Business
General
Abraxas Petroleum Corporation is an independent energy company engaged
primarily in the acquisition, exploration, exploitation and production of crude
oil and natural gas. Since January 1, 1991, our principal means of growth has
been through the acquisition and subsequent development and exploitation of
producing properties and related assets. As a result of our historical
acquisition activities, we believe we have a substantial inventory of low risk
exploration and development opportunities, the development of which is critical
to the maintenance and growth of our current production levels. We seek to
complement our acquisition and development activities by selectively
participating in exploration projects with experienced industry partners.
Our principal areas of operation are Texas and western Canada. At December
31, 2000, we owned interests in 1,200,778 gross acres (835,445 net acres) and
operated properties accounting for 79% of our PV-10, affording us substantial
control over the timing and incurrence of operating and capital expenditures.
PV-10 means estimated future net revenue, discounted at a rate of 10% per annum,
before income taxes and with no price or cost escalation or de-escalation in
accordance with guidelines promulgated by the Securities and Exchange
Commission. An Mcf is one thousand cubic feet of natural gas. MMcf is used to
designate one million cubic feet of natural gas and Bcf refers to one billion
cubic feet of natural gas. Mcfe means thousands of cubic feet of natural gas
equivalents, using a conversion ratio of one barrel of crude oil to six Mcf of
natural gas. MMcfe means millions of cubic feet of natural gas equivalents and
Bcfe means billions of cubic feet of natural gas equivalents. Mmbtu means
million British Thermal Units. The term Bbl means one barrel of crude oil and
MBbls is used to designate one thousand barrels of crude oil.
At December 31, 2000, estimated total proved reserves of Abraxas, our
wholly-owned subsidiary, Canadian Abraxas Petroleum Limited, and our 49%-owned
subsidiary, Grey Wolf Exploration Inc., were 244.4 Bcfe with an aggregate PV-10
of $1.0 billion. As of December 31, 2000, we had net natural gas processing
capacity of 120 MMcf per day through our 13 natural gas processing plants and
compression facilities in Canada, giving us substantial control over our
Canadian production and marketing activities.
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Business Strategy
Our primary business objectives are to increase reserves, production
and cash flow through the following:
o Improved Liquidity. Since January 1999, we have sought to improve our
liquidity in order to allow us to meet our debt service requirements and to
maintain and increase existing production.
o Our sale in March 1999 of 12.875% Senior Secured Notes due 2003
(the "First Lien Notes") allowed us to refinance our bank debt,
meet our near-term debt service requirements and make limited
crude oil and natural gas capital expenditures.
o In October 1999, we sold a dollar denominated production payment
for $4.0 million relating to existing natural gas wells in the
Edwards Trend in South Texas to a unit of Southern Energy, Inc.
which is now known as Mirant Americas Energy Capital, L.P. and in
2000, we sold additional production payments for $6.4 million
relating to additional natural gas wells in the Edwards Trend to
Mirant. We have the ability to sell up to $50 million to Mirant
for drilling opportunities in the Edwards Trend.
o In December 1999, Abraxas and our wholly-owned Canadian
subsidiary, Canadian Abraxas Petroleum Limited, completed an
Exchange Offer whereby we exchanged our new 11.5% Senior Secured
Notes due 2004, Series A (the "Second Lien Notes"), common stock
and contingent value rights for approximately 98.43% of our
outstanding 11.5% Senior Notes due 2004, Series D (the "Old
Notes"). The Exchange Offer reduced our long-term debt by
approximately $76 million after expenses.
o We are continuing to rationalize our significant non-core Canadian
assets to allow us to continue to grow while reducing our debt. We
may sell non-core assets or seek partners to fund a portion of the
exploration costs of undeveloped acreage and are considering other
potential strategic alternatives.
o In March 2000, we sold our interest in certain crude oil and
natural gas properties that we owned and operated in Wyoming.
Simultaneously, a limited partnership of which one of our
subsidiaries was the general partner, which we accounted for on
the equity method of accounting, sold its interest in crude oil
and natural gas properties in the same area. Our net proceeds from
these transactions were approximately $34.0 million.
o In March 2001, we announced that we had engaged Credit Lyonnais
Securities (USA) Inc. and CIBC World Markets Corp. to assist us in
a review of alternative financial strategies. Under the terms of
this engagement, we may restructure, refinance or recapitalize
some or all of our existing debt and/or issue equity securities.
o Low Cost Operations. We seek to maintain low operating and G&A expenses per
Mcfe by operating a majority of our producing properties and related assets
and by maintaining a high rate of production on a per well basis. As a
result of this strategy, we have achieved per unit operating and G&A
expenses that compare favorably with similar companies.
o Exploitation of Existing Properties. We will allocate a portion of our
operating cash flow to the exploitation of our producing properties. We
believe that the proximity of our undeveloped reserves to existing
production makes development of these properties less risky and more
cost-effective than other drilling opportunities available to us. Given our
high degree of operating control, the timing and incurrence of operating
and capital expenditures is largely within our discretion. Our capital
expenditure budget for 2001 for existing leaseholds is approximately $42.0
million including approximately $13.5 million for our horizontal drilling
exploitation program. We currently have horizontal drilling or completion
operations in West Texas, South Texas and Wyoming. We focus our horizontal
drilling activities in deep wells containing known columns of hydrocarbons.
We believe that this drilling method provides increased production at low
incremental costs and very high rates of return.
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o Producing Property Acquisitions. As cash flow permits, we intend to
continue to acquire producing crude oil and natural gas properties that can
increase cash flow, production and reserves through operational
improvements and additional development. In January 2001, we announced that
we were in discussions with our 49%-owned subsidiary, Grey Wolf Exploration
Inc., concerning a stock for stock acquisition of the remaining 51%
ownership of Grey Wolf. If we complete this acquisition as contemplated, we
expect that the impact on us will include the streamlining of our Canadian
operations, an increase in net asset values for our stockholders, and an
accretive impact to stockholders on an earnings basis.
o Focused Exploration Activity. We may allocate a portion of our capital
budget to the drilling of exploratory wells that have high reserve
potential. We believe that by devoting a relatively small amount of capital
to high impact, high risk projects while reserving the majority of our
available capital for development projects, we can reduce drilling risks
while still benefiting from the potential for significant reserve
additions.
Markets and Customers
The revenue generated by our operations is highly dependent upon the prices
of, and demand for, crude oil and natural gas. Historically, the markets for
crude oil and natural gas have been volatile and are likely to continue to be
volatile in the future. The prices we receive for our crude oil and natural gas
production and the level of such production are subject to wide fluctuations and
depend on numerous factors beyond our control including seasonality, the
condition of the United States economy (particularly the manufacturing sector),
foreign imports, political conditions in other 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 crude oil and natural gas have had, and could have in the future, an
adverse effect on the carrying value of our proved reserves and our revenue,
profitability and cash flow from operations.
In order to manage our exposure to price risks in the marketing of our crude
oil and natural gas, from time to time we have entered into fixed price delivery
contracts, financial swaps and crude oil and natural gas futures contracts as
hedging devices. To ensure a fixed price for future production, we may sell a
futures contract and thereafter either (i) make physical delivery of crude oil
or natural gas to comply with such contract or (ii) buy a matching futures
contract to unwind our futures position and sell our production to a customer.
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 crude oil or
natural gas, or a sudden, unexpected event materially impacts crude oil or
natural gas prices. These contracts may also restrict our ability to benefit
from unexpected increases in crude oil and natural gas 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 hedging activities.
Substantially all of our crude oil and natural gas is sold at current market
prices under short-term contracts, as is customary in the industry. During the
year ended December 31, 2000, two purchasers accounted for approximately 26% of
our crude oil and natural gas sales. We believe that there are numerous other
companies available to purchase our crude oil and natural gas and that the loss
of one or both of these purchasers would not materially affect our ability to
sell crude oil and natural gas. The prices we receive for the sale of our crude
oil and natural gas 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
information regarding our hedging activities.
Risk Factors
Our debt levels and our debt covenants may limit our ability to pursue
business opportunities and to obtain additional financing. We have substantial
indebtedness and debt service requirements. Our total debt and stockholders'
deficit were $267.6 million and $6.5 million, respectively, as of December 31,
2000. We may incur additional indebtedness in the future in connection with
acquiring, developing and exploiting producing properties, although our ability
to incur additional indebtedness is substantially limited by the terms of the
6
First Lien Notes indenture and the Second Lien Notes indenture. You should read
the discussions under the heading " "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and the Consolidated Financial Statements and the notes thereto
included elsewhere in this annual report for more information regarding our
indebtedness.
Our high level of debt affects our operations in several important ways,
including:
o A substantial amount of our cash flow from operations will be used to pay
interest on the First Lien Notes, any outstanding Old Notes and the Second
Lien Notes;
o The covenants contained in the First Lien Notes indenture and the Second
Lien Notes indenture will limit our ability to borrow additional funds or
to dispose of assets and may affect our flexibility in planning for, and
reacting to, changes in our business, including possibly limiting
acquisition activities;
o Our debt level may impair our ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions, interest
payments, scheduled principal payments, general corporate purposes or other
purposes; and
o The terms of the First Lien Notes indenture, the Old Notes indenture and
the Second Lien Notes indenture will permit the holders of the First Lien
Notes, any outstanding Old Notes and the Second Lien Notes to accelerate
payments upon an event of default or a change of control.
Our high level of debt increases the risk that we may default on our debt
obligations. Our ability to meet our debt obligations and to reduce our level of
debt depends on our future performance which, in turn, depends on general
economic conditions and financial, business and other factors many of which are
beyond our control.
We have substantial capital requirements. We make and will continue to make
substantial capital expenditures for the acquisition, exploitation, development,
exploration and production of crude oil and natural gas. In the past, we have
funded our operations primarily through cash flow from operations and borrowings
under our bank credit facilities and other sources. Due to severely depressed
crude oil and natural gas prices in 1999, our cash flow from operations was
substantially reduced. We met our liquidity needs in 1999 through the sale of
the First Lien Notes and the sale of the production payment to Mirant and the
sale of certain non-core properties together with cash flow from operations. In
2000, we met our liquidity needs through cash flow from operations, the sale of
additional non-core properties including those in Wyoming and further
installments on the production payment with Mirant. We are examining certain
alternative sources of long term capital including:
o restructuring, refinancing or recapitalizing our current
indebtedness;
o selling equity securities; and
o selling additional non-core properties.
The availability of these sources of capital depend upon a number of factors,
many of which are beyond our control such as general economic and financial
market conditions and crude oil and natural gas prices.
Our ability to raise funds through additional indebtedness will be
substantially limited by the terms of the indenture governing the First Lien
Notes, the indenture governing the Old Notes and the indenture governing the
Second Lien Notes, although many of the restrictive covenants contained in the
indenture governing the Old Notes were eliminated in connection with the
Exchange Offer.
The First Lien Notes indenture and the Second Lien Notes indenture restrict,
among other things, our ability to:
o incur additional indebtedness;
o incur liens;
o pay dividends or make certain other restricted payments;
7
o consummate certain asset sales;
o enter into certain transactions with affiliates;
o merge or consolidate with any other person; or
o sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets.
Additionally, our ability to raise funds through additional indebtedness
will be limited because substantially all of our crude oil and natural gas
properties and natural gas processing facilities are subject to a first lien or
floating charge for the benefit of the holders of the First Lien Notes and a
second lien or floating charge for the benefit of the holders of the Second Lien
Notes. Finally, our indentures also place restrictions on the use of proceeds
from asset sales.
We believe that our improved cash flow from operations due to higher
commodity prices and operating results, the sale of non-core properties and
additional installments on the production payment with Mirant will provide us
with sufficient capital for the next 12 months. However, if our production or
commodity prices decrease or if our drilling activities cost more than we
anticipate, we may not be able to execute our business plan without additional
capital.
Crude oil and natural gas prices and their volatility could adversely affect
our revenue, cash flows and profitability. Our revenue, profitability and future
rate of growth depend substantially upon prevailing prices for crude oil and
natural gas. Crude oil and natural gas prices fluctuate and prior to 2000 had
declined significantly. Natural gas prices affect us more than crude oil prices
since 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. For example in 1999 we reduced our
capital expenditures budget because of lower crude oil and natural gas prices.
In addition, we may have ceiling test writedowns when prices decline. Lower
prices may also reduce the amount of crude oil and natural gas that we can
produce economically.
We cannot predict future crude oil and natural gas prices. Factors that can
cause price fluctuations include:
o changes in supply and demand for crude oil and natural gas;
o weather conditions;
o the price and availability of alternative fuels;
o political and economic conditions in oil producing countries,
especially those in the Mideast; and
o overall economic conditions.
Hedging transactions may limit our potential gains. We entered into hedge
agreements and other financial arrangements at various times to attempt to
minimize the effect of crude oil and natural gas price fluctuations. We cannot
assure you that such transactions will reduce risk or minimize the effect of any
decline in crude oil or natural gas prices. Any substantial or extended decline
in crude oil or natural gas prices would have a material adverse effect on our
business and financial results. Hedging activities may limit the risk of
declines in prices, but such arrangements may also limit additional revenues
from price increases. In addition, such transactions may expose us to risks of
financial loss under certain circumstances, such as:
o production is less than expected; or
o price differences between delivery points for our production and
those in our hedging agreements increase.
In 2000, we experienced hedging losses of $20.2 million. At year end 2000,
the fair value of future hedges was a liability of approximately $38 million,
which we estimate will reduce cash flow by $27 million in 2001 and $11 million
in 2002. To the extent that these hedge agreements require us to pay the
counterparty, our revenue will be reduced. You should read the discussion under
the heading "Management's Discussion and Analysis of Financial Condition and
8
Results of Operations-- Liquidity and Capital Resources - Hedging Activities"
for more information regarding our hedging activities.
Lower crude oil and natural gas prices increase the risk of ceiling
limitation writedowns. We use the full cost method to account for our crude oil
and natural gas operations. Accordingly, we capitalize the cost to acquire,
explore for and develop crude oil and natural gas properties. Under full cost
accounting rules, the net capitalized cost of crude oil and natural gas
properties may not exceed a "ceiling limit" which is based upon the present
value of estimated future net cash flows from proved reserves, discounted at
10%, plus the lower of cost or fair market value of unproved properties. If net
capitalized costs of crude oil and natural gas properties exceed the ceiling
limit, we must charge the amount of the excess to earnings. This is called a
"ceiling limitation writedown." This charge does not impact cash flow from
operating activities, but does reduce our stockholders' equity. The risk that we
will be required to write down the carrying value of crude oil and natural gas
properties increases when crude oil and natural gas prices are low or volatile.
In addition, writedowns may occur if we experience substantial downward
adjustments to our estimated proved reserves or if purchasers cancel long-term
contracts for our natural gas production. In 1999, we recorded a writedown of
$19.1 million ($11.9 million after tax) as a result of a downward adjustment to
our proved reserves in Canada. In 1998, we recorded a write down of $61 million
as a result of low commodity prices. We cannot assure you that we will not
experience additional ceiling limitation writedowns in the future.
Estimates of our proved reserves and future net revenue are uncertain and
inherently imprecise. This annual report contains estimates of our proved crude
oil and natural gas reserves and the estimated future net revenue from such
reserves. The process of estimating crude oil and natural gas reserves is
complex and involves decisions and assumptions in the evaluation of available
geological, geophysical, engineering and economic data. Therefore, these
estimates are imprecise.
Actual future production, crude oil and natural gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable crude
oil and natural gas reserves most likely will vary from those estimated. Any
significant variance could materially affect the estimated quantities and
present value of reserves set forth in this annual report. In addition, we may
adjust estimates of proved reserves to reflect production history, results of
exploration and development, prevailing crude oil and natural gas prices and
other factors, many of which are beyond our control.
You should not assume that the present value of future net revenues referred
to in this annual report is the current market value of our estimated crude oil
and natural gas reserves. In accordance with SEC requirements, the estimated
discounted future net cash flows from proved reserves are generally based on
prices and costs as of the end of the year of the estimate. Actual future prices
and costs may be materially higher or lower than the prices and costs as of the
end of the year of the estimate. Any changes in consumption by natural gas
purchasers or in governmental regulations or taxation will also affect actual
future net cash flows. The timing of both the production and the expenses from
the development and production of crude oil and natural gas properties will
affect the timing of actual future net cash flows from proved reserves and their
present value. In addition, the 10% discount factor, which is required by the
SEC to be used in calculating discounted future net cash flows for reporting
purposes, is not necessarily the most accurate discount factor. The effective
interest rate at various times and the risks associated with us or the crude oil
and natural gas industry in general will affect the accuracy of the 10% discount
factor.
The estimates of our reserves are based upon various assumptions about
future production levels, prices and costs that may not prove to be correct over
time. In particular, estimates of crude oil and natural gas reserves, future net
revenue from proved reserves and the PV-10 thereof for the crude oil and natural
gas properties described in this document are based on the assumption that
future crude oil and natural gas prices remain the same as crude oil and natural
gas prices at December 31, 2000. The sales prices as of such date used for
purposes of such estimates were $25.73 per Bbl of crude oil, $30.63 per Bbl of
NGLs and $9.21 per Mcf of natural gas. This compares with $24.88 per Bbl of
crude oil, $14.79 per Bbl of NGLs and $2.11 per Mcf of natural gas as of
December 31, 1999. It is also assumed that we will make future capital
expenditures of approximately $55.5 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.
9
We have experienced recurring net losses. The Company has experienced losses
in three of the last four years. Additionally in 2000 if the significant gain on
the sale of partnership is excluded the Company would have experienced a net
loss for the year.
You should read the discussions under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
Consolidated Financial Statements and the notes thereto included elsewhere in
this document for more information regarding these losses. We cannot assure you
that we will remain profitable in the future.
Our ability to replace production with new reserves is highly dependent on
acquisitions or successful development and exploration activities. The rate of
production from crude oil and natural gas properties declines as reserves are
depleted. Our proved reserves will decline as reserves are produced unless we
acquire additional properties containing proved reserves, conduct successful
exploration and development activities or, through engineering studies, identify
additional behind-pipe zones or secondary recovery reserves. Our future crude
oil and natural gas production is therefore highly dependent upon our level of
success in acquiring or finding additional reserves. We cannot assure you that
our exploration and development activities will result in increases in reserves.
Our operations may be curtailed, delayed or cancelled if we lack necessary
capital and by other factors, such as title problems, weather, compliance with
governmental regulations, mechanical problems or shortages or delays in the
delivery of equipment.
Our ability to continue to acquire producing properties or companies that
own such properties assumes that major integrated oil companies and independent
oil companies will continue to divest many of their crude oil and natural gas
properties. We cannot assure you that such divestitures will continue or that we
will be able to acquire such properties at acceptable prices or develop
additional reserves in the future. In addition, under the terms of the First
Lien Notes indenture, the Old Notes indenture and the Second Lien Notes
indenture, our ability to obtain additional financing in the future for
acquisitions and capital expenditures will be limited
Our operations are subject to numerous risks of crude oil and natural gas
drilling and production activities. Crude oil and natural gas drilling and
production activities are subject to numerous risks, many of which are beyond
our control. These risks include the following:
o that no commercially productive crude oil or natural gas reservoirs will be
found;
o that crude oil and natural gas drilling and production activities may be
shortened, delayed or canceled; and
o that our ability to develop, produce and market our reserves may be limited
by:
- title problems,
- weather conditions,
- compliance with governmental requirements, and
- mechanical difficulties or shortages or delays in the delivery
of drilling rigs, work boats and other equipment.
In the past, we have had difficulty securing drilling equipment in certain
of our core areas. We cannot assure you that the new wells we drill will be
productive or that we will recover all or any portion of our investment.
Drilling for crude oil and natural gas may be unprofitable. Dry wells and wells
that are productive but do not produce sufficient net revenues after drilling,
operating and other costs are unprofitable. In addition, our properties may be
susceptible to hydrocarbon draining from production by other operations on
adjacent properties.
Our industry also experiences numerous operating risks. These operating
risks include the risk of fire, explosions, blow-outs, pipe failure, abnormally
pressured formations and environmental hazards. Environmental hazards include
oil spills, gas leaks, ruptures or discharges of toxic gases. If any of these
industry operating risks occur, we could have substantial losses. Substantial
losses also may result from injury or loss of life, severe damage to or
destruction of property, clean-up responsibilities, regulatory investigation and
penalties and suspension of operations. In accordance with industry practice, we
maintain insurance against some, but not all, of the risks described above. We
cannot assure you that our insurance will be adequate to cover losses or
liabilities. Also, we cannot predict the continued availability of insurance at
premium levels that justify its purchase.
10
We operate in a highly competitive industry which may adversely affect our
operations. We operate in a highly competitive environment. Competition is
particularly intense with respect to the acquisition of desirable undeveloped
crude oil and natural gas properties. The principal competitive factors in the
acquisition of such undeveloped crude oil and natural gas properties include the
staff and data necessary to identify, investigate and purchase such properties,
and the financial resources necessary to acquire and develop such properties. We
compete with major and independent crude oil and natural gas companies for
properties and the equipment and labor required to develop and operate such
properties. Many of these competitors have financial and other resources
substantially greater than ours.
The principal resources necessary for the exploration and production of
crude oil and natural gas are leasehold prospects under which crude oil and
natural gas reserves may be discovered, drilling rigs and related equipment to
explore for such reserves and knowledgeable personnel to conduct all phases of
crude oil and natural gas operations. We must compete for such resources with
both major crude oil and natural gas companies and independent operators.
Although we believe our current operating and financial resources are adequate
to preclude any significant disruption of our operations in the immediate future
we cannot assure you that such materials and resources will be available to us.
We face significant competition for obtaining additional natural gas
supplies for gathering and processing operations, for marketing NGLs, residue
gas, helium, condensate and sulfur, and for transporting natural gas and
liquids. Our principal competitors include major integrated oil companies and
their marketing affiliates and national and local gas gatherers, brokers,
marketers and distributors of varying sizes, financial resources and experience.
Certain competitors, such as major crude oil and natural gas companies, have
capital resources and control supplies of natural gas substantially greater than
ours. Smaller local distributors may enjoy a marketing advantage in their
immediate service areas.
We compete against other companies in our natural gas processing business
both for supplies of natural gas and for customers to which we sell our
products. Competition for natural gas supplies is based primarily on location of
natural gas gathering facilities and natural gas gathering plants, operating
efficiency and reliability and ability to obtain a satisfactory price for
products recovered. Competition for customers is based primarily on price and
delivery capabilities.
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 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 regulation of crude oil and gas 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 crude oil and natural gas.
Our crude oil and natural gas operations are subject to various U.S.
federal, state and local and Canadian federal and provincial governmental
regulations that materially affect our operations. Matters regulated include
discharge permits for drilling operations, drilling and abandonment bonds,
reports concerning operations, the spacing of wells and unitization and pooling
of properties and taxation. At various times, regulatory agencies have imposed
price controls and limitations on production. In order to conserve supplies of
crude oil and natural gas, these agencies have restricted the rates of flow of
crude oil and natural gas wells below actual production capacity. Federal,
state, provincial and local laws regulate production, handling, storage,
transportation and disposal of crude oil and natural gas, by-products from crude
oil and natural gas and other substances and materials produced or used in
connection with crude oil and natural gas operations. To date, our expenditures
related to complying with these laws and for remediation of existing
environmental contamination have not been 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
Our Canadian operations are subject to the risks of currency fluctuations
and in some instances economic and political developments. We have significant
11
operations in Canada. The expenses of such operations are payable in Canadian
dollars while most of the revenue from crude oil and natural gas sales is based
upon U.S. dollar price indices. As a result, Canadian operations are subject to
the risk of fluctuations in the relative values of the Canadian and U.S.
dollars. We are also required to recognize foreign currency translation gains or
losses related to the debt issued by our Canadian subsidiary because the debt is
denominated in U.S. dollars and the functional currency of such subsidiary is
the Canadian dollar. Our foreign operations may also be adversely affected by
local political and economic developments, royalty and tax increases and other
foreign laws or policies, as well as U.S. policies affecting trade, taxation and
investment in other countries.
Shares eligible for future sale may depress our stock price. At March 22,
2001, we had 22,593,969 shares of common stock outstanding of which 2,688,558
shares were held by affiliates, 4,035,524 shares of common stock subject to
outstanding options granted under certain stock option plans (of which 1,556,813
shares were vested at March 22, 2001) and 950,000 shares issuable upon exercise
of warrants. In addition, as part of the Exchange Offer, we issued CVRs which
entitled the holders thereof to receive up to a total of 105,408,978 shares of
our common stock if the price of our common stock does not reach certain target
prices. The target price on May 21, 2001 is $5.97. As of March 22, 2001, based
on the Abraxas Common Stock market price, CVR holders would be entitled to
receive approximately 3.3 million shares.
All of the shares of common stock held by affiliates are restricted or
control securities under Rule 144 promulgated under the Securities Act of 1933,
as amended (the "Securities Act"). The shares issuable pursuant to the CVRs are
exempt from registration under the Securities Act. The shares of the common
stock issuable upon exercise of the stock options have been registered under the
Securities Act. The shares of the common stock issuable upon exercise of the
warrants are subject to certain registration rights and, therefore, will be
eligible for resale in the public market after a registration statement covering
such shares has been declared effective. Sales of shares of common stock under
Rule 144 or another exemption under the Securities Act or pursuant to a
registration statement could have a material adverse effect on the price of the
common stock and could impair our ability to raise additional capital through
the sale of equity securities.
We depend on our key personnel. We depend to a large extent on Robert L.G.
Watson, our Chairman of the Board, President and Chief Executive Officer, for
our management and business and financial contacts. The unavailability of Mr.
Watson would have a materially adverse effect on our business. Mr. Watson has a
five-year employment contract with Abraxas which provides that he can be
terminated for cause only. Our success is also dependent upon our ability to
employ and retain skilled technical personnel. While we have not experienced
difficulties in employing or retaining such personnel, our failure to do so in
the future could adversely affect our business.
Anti-takeover provisions could make a third party acquisition of Abraxas
difficult. Abraxas' articles of incorporation and by-laws provide for a
classified board of directors, with each member serving a three-year term and
eliminate the ability of stockholders to call special meetings or take action by
written consent. Abraxas has also adopted a stockholder rights plan. Each of the
provisions in the articles of incorporation and by-laws and the stockholder
rights plan could make it more difficult for a third party to acquire Abraxas
without the approval of Abraxas' board. In addition, the Nevada corporate
statute also contains certain provisions which could make an acquisition by a
third party more difficult
Use of our net operating loss carryforwards may be limited. At December 31,
2000, the Company had, subject to the limitation discussed below, $101,800,000
of net operating loss carryforwards for U.S. tax purposes. These loss
carryforwards will expire from 2001 through 2020 if not utilized. At December
31, 2000, the Company had approximately $11,400,000 of net operating loss
carryforwards for Canadian tax purposes. These carryforwards will expire from
2001 through 2020 if not utilized.
As a result of the acquisition of certain partnership interests and crude
oil and natural gas properties in 1990 and 1991, an ownership change under
Section 382 occurred in December 1991. Accordingly, it is expected that the use
of the U.S. net operating loss carryforwards generated prior to December 31,
1991 of $4,909,000 will be limited to approximately $235,000 per year.
12
During 1992, the Company acquired 100% of the common stock of an unrelated
corporation. The use of net operating loss carryforwards of the acquired
corporation of $257,000 acquired in the acquisition are limited to approximately
$115,000 per year.
As a result of the issuance of additional shares of common stock for
acquisitions and sales of common stock, an additional ownership change under
Section 382 occurred in October 1993. Accordingly, it is expected that the use
of all U.S. net operating loss carryforwards generated through October 1993
(including those subject to the 1991 and 1992 ownership changes discussed above)
of $8,295,000 will be limited as described above and in the following paragraph.
An ownership change under Section 382 occurred in December 1999, following the
issuance of additional shares, as described in Note 5 to the Consolidated
Financial Statements. It is expected that the annual use of U.S. net operating
loss carryforwards subject to this Section 382 limitation will be limited to
approximately $363,000, subject to the lower limitations described above. Future
changes in ownership may further limit the use of the Company's carryforwards.
The annual Section 382 limitation may be increased during any year, within 5
years of a change in ownership, in which built-in gains that existed on the date
of the change in ownership are recognized.
In addition to the Section 382 limitations, uncertainties exist as to
the future utilization of the operating loss carryforwards under the criteria
set forth under FASB Statement No. 109. Therefore, the Company has established a
valuation allowance of $36,134,000 and $34,736,000 for deferred tax assets at
December 31, 1999 and 2000, respectively.
Regulation of Crude Oil and Natural Gas 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, oil and gas
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, the Company's revenue would be adversely affected.
Crude oil and natural gas exported from Canada is subject to regulation by
the National Energy Board ("NEB") and the government of Canada. Exporters are
free to negotiate prices and other terms with purchasers, provided that export
contracts in excess of two years must continue to meet certain criteria
prescribed by the NEB and the government of Canada. Crude oil and natural gas
exports for a term of less than two years must be made pursuant to an NEB order,
or, in the case of exports for a longer duration, pursuant to an NEB license and
Governor in Council approval.
The provincial governments of Alberta, British Columbia and Saskatchewan
also regulate the volume of natural gas that may be removed from these provinces
for consumption elsewhere based on such factors as reserve availability,
transportation arrangements and marketing considerations.
The North American Free Trade Agreement
On January 1, 1994, the North American Free Trade Agreement ("NAFTA") among
the governments of the United States, Canada and Mexico became effective. In the
13
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 gas into Mexico may substantially impact
the interstate 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. In the recent past interstate
pipeline companies in the United States generally acted as wholesale merchants
by purchasing natural gas from producers and reselling the gas to local
distribution companies and large end users. Commencing in late 1985, the Federal
Energy Regulatory Commission (the "FERC") issued a series of orders that have
had a major impact on interstate natural gas pipeline operations, services, and
rates, and thus have significantly altered the marketing and price of natural
gas. The FERC's key rule making action, Order No. 636 ("Order 636"), issued in
April 1992, required each interstate pipeline to, among other things, "unbundle"
its traditional bundled sales services and create and make available on an open
and nondiscriminatory basis numerous constituent services (such as gathering
services, storage services, firm and interruptible transportation services, and
standby sales and gas balancing 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 were not
required to remain "merchants" of natural gas, and most of the interstate
pipeline companies have become "transporters only," although many have
affiliated marketers. Order 636 and related FERC orders have resulted in
increased competition within all phases of the natural gas industry. We do not
believe that Order 636 and the related restructuring proceedings affect us any
differently than other natural gas producers and marketers with which we
compete.
Transportation pipeline availability and 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
transportation. The price and terms for access onto the pipeline transportation
systems remain subject to extensive Federal regulation. Although Order 636 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.
The courts have largely affirmed the significant features of Order No. 636 and
the numerous related orders pertaining to individual pipelines, although some
appeals remain pending and the FERC continues to review and modify its
regulations regarding the transportation of natural gas. For example, the FERC
has recently begun a broad review of its natural gas transportation regulations,
including how its regulation 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 the FERC also has pursued a number of other important policy
initiatives which could significantly affect the marketing of natural gas in the
United States. Some of the more notable of these regulatory initiatives include:
(1) a series of orders in individual pipeline proceedings articulating a
policy of generally approving the voluntary divestiture of interstate pipeline
owned gathering facilities by interstate pipelines to their affiliates (the
so-called "spin down" of previously regulated gathering facilities to the
pipeline's nonregulated affiliates).
(2) Order No. 497 involving the regulation of pipelines with marketing
affiliates.
(3) various FERC orders adopting rules proposed by the Gas Industry
Standards Board which are designed to further standardize pipeline
transportation tariffs and business practices.
14
(4) a notice of proposed rulemaking that, among other things, proposes (a)
to eliminate the cost-based price cap currently imposed on natural gas
transactions of less than one year in duration, (b) to establish mandatory
"transparent" capacity auctions of short-term capacity on a daily basis, and (c)
to permit interstate pipelines to negotiate terms and conditions of service with
individual customers.
(5) issuance of Policy Statements regarding Alternate Rates and Negotiated
Terms and Conditions of Service covering (a)the pricing of long-term pipeline
transportation services by alternative rate mechanism options, including the
pricing of interstate pipeline capacity utilizing market-based rates, incentive
rates, or indexed rates, and (b) investigating of whether FERC should permit
pipelines to negotiate the terms and conditions of service, in addition to rates
of service.
(6) a notice of proposed rulemaking that proposes generic procedures to
expedite the FERC's handling of complaints against interstate pipelines with the
goals of encouraging and supporting consensual resolutions of complaints and
organizing the complaint procedures so that all complaints are handled in a
timely and fair manner.
Several of these initiatives are intended to enhance competition in natural
gas markets, although some, such as "spin downs," may have the adverse effect of
increasing the cost of doing business on some in the industry, including us, as
a result of the geographic monopolization of those facilities by their new,
unregulated owners. As to all of these FERC initiatives, the ongoing, or, in
some instances, preliminary and evolving nature of these regulatory initiatives
makes it impossible at this time to predict their ultimate impact on our
business. However, we do not believe that these FERC initiatives will affect us
any differently than other natural gas producers and marketers with which we
compete.
Since Order 636, FERC decisions involving onshore facilities have been more
liberal in their reliance upon traditional tests for determining what facilities
are "gathering" and therefore exempt from federal regulatory control. In many
instances, what was once classified as "transmission" may now be classified as
"gathering." We ship certain of our natural gas through gathering facilities
owned by others, including interstate pipelines, under existing long term
contractual arrangements. Although these FERC decisions have created the
potential for increasing the cost of shipping our gas on third party gathering
facilities, our shipping activities have not been materially affected by these
decisions.
Commencing in October 1993, the FERC issued a series of rules (Order Nos.
561 and 561-A) establishing an indexing system under which oil pipelines will be
able to change their transportation rates, subject to prescribed ceiling levels.
The indexing system, which allows or may require pipelines to make rate changes
to track changes in the Producer Price Index for Finished Goods, minus one
percent, became effective January 1, 1995. In certain circumstances, these rules
permit oil pipelines to establish rates using traditional cost of service or
other methods of rate making. We do not believe that these rules affect us any
differently than other crude oil producers and marketers with which we compete.
Additional proposals and proceedings that might affect the natural gas
industry in the United States are considered from time to time by Congress, the
FERC, state regulatory bodies and the courts. We cannot predict when or if any
such proposals might become effective or their effect, if any, on our
operations. The oil and gas industry historically has been very heavily
regulated; thus there is no assurance that the less stringent regulatory
approach recently pursued by the FERC and Congress will continue indefinitely
into the future.
State and Other Regulation
All of the jurisdictions in which we own producing crude oil and natural gas
properties have statutory provisions regulating the exploration for and
production of crude oil and natural gas, including provisions requiring permits
for the drilling of wells and maintaining bonding requirements in order to drill
or operate wells and provisions relating to the location of wells, the method of
15
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 crude oil and natural gas properties. In this regard, some states
and provinces allow the forced pooling or integration of tracts to facilitate
exploration while other states and provinces rely on voluntary pooling of lands
and leases. In addition, state and provincial conservation laws establish
maximum rates of production from crude oil and natural gas wells, generally
prohibit the venting or flaring of natural gas and impose certain requirements
regarding the ratability of production. Some states, such as Texas and Oklahoma,
have, in recent years, reviewed and substantially revised methods previously
used to make monthly determinations of allowable rates of production from fields
and individual wells. The effect of these regulations is to limit the amounts of
crude oil and natural gas we can produce from our wells, and to limit the number
of wells or the location at which we can drill.
State and provincial regulation of gathering facilities generally includes
various safety, environmental, and in some circumstances, non-discriminatory
take requirements, but does not generally entail rate regulation. In the United
States, natural gas gathering has received greater regulatory scrutiny at both
the state and federal levels in the wake of the interstate pipeline
restructuring under Order 636. For example, the Texas Railroad Commission
enacted a Natural Gas Transportation Standards and Code of Conduct to provide
regulatory support for the State's more active review of rates, services and
practices associated with the gathering and transportation of gas by an entity
that provides such services to others for a fee, in order to prohibit such
entities from unduly discriminating in favor of their affiliates.
For those operations on U.S. or Indian oil and gas leases, such operations
must comply with numerous regulatory restrictions, including various
non-discrimination statutes, and certain of such operations must be conducted
pursuant to certain on-site security regulations and other permits issued by
various federal agencies. In addition, in the United States, the Minerals
Management Service ("MMS") has recently issued a final rule to clarify or
severely limit the types of costs that are deductible transportation costs for
purposes of royalty valuation of production sold off the lease. In particular,
MMS will not allow deduction of costs associated with marketer fees, cash out
and other pipeline imbalance penalties, or long-term storage fees. Further, the
MMS has been engaged in a process of promulgating new rules and procedures for
determining the value of oil produced from federal lands for purposes of
calculating royalties owed to the government. The oil and gas industry as a
whole has resisted the proposed rules under an assumption that royalty burdens
will substantially increase. We cannot predict what, if any, effect any new rule
will have on our operations.
Canadian Royalty Matters
In addition to Canadian federal regulation, each province has legislation
and regulations that govern land tenure, royalties, production rates,
environmental protection and other matters. The royalty regime is a significant
factor in the profitability of crude oil and natural gas production. Royalties
payable on production from lands other than Crown lands are determined by
negotiations between the mineral owner and the lessee. Crown royalties are
determined by governmental regulation and are generally calculated as a
percentage of the value of the gross production, and the rate of royalties
payable generally depends in part on prescribed preference prices, well
productivity, geographical location, field discovery date and the type and
quality of the petroleum product produced.
From time to time the governments of Canada, Alberta and Saskatchewan have
established incentive programs which have included royalty rate reductions,
royalty holidays and tax credits for the purpose of encouraging crude oil and
natural gas exploration or enhanced planning projects.
Regulations made pursuant to the Mines and Minerals Act (Alberta) provide
various incentives for exploring and developing crude oil reserves in Alberta.
Crude oil produced from horizontal extensions commenced at least five years
after the well was originally spudded may qualify for a royalty reduction. A
24-month, 8,000 cubic metres exemption is available to production from a well
that has not produced for a 12-month period, if resuming production after
January 31, 1993. In addition, crude oil production from eligible new field and
new pool wildcat wells and deeper pool test wells spudded or deepened after
September 30, 1992, is entitled to a 12-month royalty exemption (to a maximum of
CDN$1 million). Crude oil produced from low productivity wells, enhanced
recovery schemes (such as injection wells) and experimental projects is also
subject to royalty reductions.
The Alberta government also introduced the Third Tier Royalty with a base
rate of 10% and a rate cap of 25% from oil pools discovered after September 30,
1992. The new oil royalty reserved to the Crown has a base rate of 10% and a
rate cap of 30% and for old oil a base rate of 10% and a rate cap of 35%.
16
Effective January 1, 1994, the calculation and payment of natural gas
royalties became subject to a simplified process. The royalty reserved to the
Crown, subject to various incentives, is between 15% or 30%, in the case of new
natural gas, and between 15% and 35%, in the case of old natural gas, depending
upon a prescribed or corporate average reference price. Natural gas produced
from qualifying exploratory gas wells spudded or deepened after July 1, 1985 and
before June 1, 1988 continues to be eligible for a royalty exemption for a
period of 12 months, or such later time that the value of the exempted royalty
quantity equals a prescribed maximum amount. Natural gas produced from
qualifying intervals in eligible natural gas wells spudded or deepened to a
depth below 2,500 meters is also subject to a royalty exemption, the amount of
which depends on the depth of the well.
In Alberta, a producer of crude oil or natural gas is entitled to credit
against the royalties payable to the Crown by virtue of the Alberta Royalty Tax
Credit ("ARTC") program. The ARTC program is based on a price-sensitive formula,
and the ARTC rate currently varies between 75% for prices for crude oil at or
below CDN $100 per cubic metre and 35% for prices above CDN $210 per cubic
metre. The ARTC rate is currently applied to a maximum of CDN $2.0 million of
Alberta Crown royalties payable for each producer or associated group of
producers. Crown royalties on production from producing properties acquired from
corporations claiming maximum entitlement to ARTC will generally not be eligible
for ARTC. The rate is established quarterly based on average "par price", as
determined by the Alberta Department of Energy for the previous quarterly
period. On December 22, 1997, the Government of Alberta gave notice that they
intended to review the ARTC program, but no amendments have yet been passed into
law. The government of Alberta did pass a law that effective January 1, 2001,
the ARTC would not be available to individuals or trusts and will not otherwise
be available unless the maximum credit is greater than or equal to $10,000 in
the taxation year.
Producers of oil and natural gas in British Columbia are also required to
pay annual rental payments in respect of Crown leases and royalties and freehold
production taxes in respect of oil and gas produced from Crown and freehold
lands respectively. The amount payable as a royalty in respect of oil depends on
the vintage of the oil (whether it was produced from a pool discovered before or
after October 31, 1975) or a pool in which no well was completed on June 1,
1998), the quantity of oil produced in a month and the value of the oil. Oil
produced from newly discovered pools may be exempt from the payment of a royalty
for the first 36 months of production. The royalty payable on natural gas is
determined by a sliding scale based on a reference price which is the greater of
the amount obtained by the producer and at prescribed minimum price. Gas
produced in association with oil has a minimum royalty of 8% while the royalty
in respect of other gas may not be less than 15%.
Environmental Matters
Our operations are subject to numerous federal, state, provincial and local
laws and regulations controlling the generation, use, storage, and discharge of
materials into the environment or otherwise relating to the protection of the
environment. These laws and regulations may require the acquisition of a permit
or other authorization before construction or drilling commences; restrict the
types, quantities, and concentrations of various substances that can be released
into the environment in connection with drilling, production, and gas processing
activities; suspend, limit or prohibit construction, drilling and other
activities in certain lands lying within wilderness, wetlands, and other
protected areas; require remedial measures to mitigate pollution from historical
and on-going operations such as use of pits and plugging of abandoned wells;
restrict injection of liquids into subsurface strata that may contaminate
groundwater; and impose substantial liabilities for pollution resulting from our
operations. Environmental permits required for our operations may be subject to
revocation, modification, and renewal by issuing authorities. Governmental
authorities have the power to enforce compliance with their regulations and
permits, and violations are subject to injunction, civil fines, and even
criminal penalties. Our management believes that we are in substantial
compliance with current environmental laws and regulations, and that we will not
be required to make material capital expenditures to comply with existing laws.
Nevertheless, changes in existing environmental laws and regulations or
interpretations thereof could have a significant impact on us as well as the oil
and gas industry in general, and thus we are unable to predict the ultimate cost
and effects of future changes in environmental laws and regulations.
17
In the United States, the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), also known as "Superfund," and comparable state
statutes impose strict, joint, and several liability on certain classes of
persons who are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
a disposal site or sites where a release occurred and companies that generated,
disposed or arranged for the disposal of the hazardous substances released at
the site. Under CERCLA such persons or companies may be retroactively liable for
the costs of cleaning up the hazardous substances that have been released into
the environment and for damages to natural resources, and it is common for
neighboring land owners and other third parties to file claims for personal
injury, property damage, and recovery of response costs allegedly caused by the
hazardous substances released into the environment. The Resource Conservation
and Recovery Act ("RCRA") and comparable state statutes govern the disposal of
"solid waste" and "hazardous waste" and authorize imposition of substantial
civil and criminal penalties for failing to prevent surface and subsurface
pollution, as well as to control the generation, transportation, treatment,
storage and disposal of hazardous waste generated by oil and gas operations.
Although CERCLA currently contains a "petroleum exclusion" from the definition
of "hazardous substance," state laws affecting our operations impose cleanup
liability relating to petroleum and petroleum related products, including crude
oil cleanups. In addition, although RCRA regulations currently classify certain
oilfield wastes which are uniquely associated with field operations as
"non-hazardous," such exploration, development and production wastes could be
reclassified by regulation as hazardous wastes thereby administratively making
such wastes subject to more stringent handling and disposal requirements.
We currently own or lease, and have in the past owned or leased, numerous
properties that for many years have been used for the exploration and production
of oil and gas. Although we utilized standard industry operating and disposal
practices at the time, hydrocarbons or other wastes may have been disposed of or
released on or under the properties we owned or leased or on or under other
locations where such wastes have been taken for disposal. In addition, many of
these properties have been operated by third parties whose treatment and
disposal or release of hydrocarbons or other wastes was not under our control.
These properties and the wastes disposed thereon may be subject to CERCLA, RCRA,
and analogous state laws. Our operations are also impacted by regulations
governing the disposal of naturally occurring radioactive materials ("NORM"). We
must comply with the Clean Air Act and comparable state statutes which prohibit
the emissions of air contaminants, although a majority of our activities are
exempted under a standard exemption. Moreover, owners, lessees and operators of
oil and gas properties are also subject to increasing civil liability brought by
surface owners and adjoining property owners. Such claims are predicated on the
damage to or contamination of land resources occasioned by drilling and
production operations and the products derived therefrom, and are usually causes
of action based on negligence, trespass, nuisance, strict liability and fraud.
United States federal regulations also require certain owners and operators
of facilities that store or otherwise handle oil, such as us, to prepare and
implement spill prevention, control and countermeasure plans and spill response
plans relating to possible discharge of oil into surface waters. The federal Oil
Pollution Act ("OPA") contains numerous requirements relating to prevention of,
reporting of, and response to oil spills into waters of the United States. For
facilities that may affect state waters, OPA requires an operator to demonstrate
$10 million in financial responsibility. State laws mandate crude oil cleanup
programs with respect to contaminated soil.
Our Canadian operations are also subject to environmental regulation
pursuant to local, provincial and federal legislation which generally require
operations to be conducted in a safe and environmentally responsible manner.
Canadian environmental legislation provides for restrictions and prohibitions
relating to the discharge of air, soil and water pollutants and other substances
produced in association with certain crude oil and natural gas industry
operations, and environmental protection requirements, including certain
conditions of approval and laws relating to storage, handling, transportation
and disposal of materials or substances which may have an adverse effect on the
environment. Environmental legislation can affect the location of wells and
facilities and the extent to which exploration and development is permitted. In
addition, legislation requires that well and facilities sites be abandoned and
reclaimed to the satisfaction of provincial authorities. A breach of such
legislation may result in the imposition of fines or issuance of clean-up
orders.
Certain federal environmental laws that may affect us include the Canadian
Environmental Assessment Act which ensures that the environmental effects of
projects receive careful consideration prior to licenses or permits being
18
issued, to ensure that projects that are to be carried out in Canada or on
federal lands do not cause significant adverse environmental effects outside the
jurisdictions in which they are carried out, and to ensure that there is an
opportunity for public participation in the environmental assessment process;
the Canadian Environmental Protection Act ("CEPA") which is the most
comprehensive federal environmental statute in Canada, and which controls toxic
substances (broadly defined), includes standards relating to the discharge of
air, soil and water pollutants, provides for broad enforcement powers and
remedies and imposes significant penalties for violations; the National Energy
Board Act which can impose certain environmental protection conditions on
approvals issued under the Act; the Fisheries Act which prohibits the depositing
of a deleterious substance of any type in water frequented by fish or in any
place under any condition where such deleterious substance may enter any such
water and provides for significant penalties; the Navigable Waters Protection
Act which requires any work which is built in, on, over, under, through or
across any navigable water to be approved by the Minister of Transportation, and
which attracts severe penalties and remedies for non-compliance, including
removal of the work.
In Alberta, environmental compliance has been governed by the Alberta
Environmental Protection and Enhancement Act ("AEPEA") since September 1, 1993.
In addition to consolidating a variety of environmental statutes, the AEPEA also
imposes certain new environmental responsibilities on oil and natural gas
operators in Alberta. The AEPEA sets out environmental standards and compliance
for releases, clean-up and reporting. The Act provides for a broad range of
liabilities, enforcement actions and penalties.
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 have a Corporate Environmental Policy and a detailed Environmental
Management System in place to ensure continued compliance with environmental,
health and safety laws and regulations. We believe that we have obtained and are
in compliance with all material environmental permits, authorizations and
approvals.
Title to Properties
As is customary in the crude oil and natural gas industry, we make only a
cursory review of title to undeveloped crude oil and natural gas leases at the
time we acquire them. However, before drilling commences, we require a thorough
title search to be conducted, and any material defects in title are remedied
prior to the time actual drilling of a well begins. To the extent title opinions
or other investigations reflect title defects, we, rather than the seller of the
undeveloped property, are typically obligated to cure any title defect at our
expense. If we were unable to remedy or cure any title defect of a nature such
that it would not be prudent to commence drilling operations on the property, we
could suffer a loss of our entire investment in the property. We believe that we
have good title to our crude oil and natural gas properties, some of which are
subject to immaterial encumbrances, easements and restrictions. The crude oil
and natural gas properties we own are also typically subject to royalty and
other similar non-cost bearing interests customary in the industry. We do not
believe that any of these encumbrances or burdens will materially affect our
ownership or use of our properties.
Employees
As of March 22, 2001, we had 47 full-time employees in the United States,
including 3 executive officers, 3 non-executive officers, 2 petroleum engineers,
1 geologist, 5 managers, 1 landman , 10 secretarial and clerical personnel and
22 field personnel. Additionally, we retain contract pumpers on a month-to-month
basis. We retain independent geological and engineering consultants from time to
time on a limited basis and expect to continue to do so in the future.
As of March 22, 2001, Grey Wolf had 42 full-time employees, including 2
executive officers, 2 non-executive officers, 4 petroleum engineers, 3
geologists, 1 geophysicist, 21 technical and clerical personnel and 9 field
personnel.
19
Item 2. Properties
Primary Operating Areas
Texas
Our U.S. operations are concentrated in South and West Texas with over 99%
of the PV-10 of our U.S. crude oil and natural gas properties at December 31,
2000, located in those two regions. We operate 89% of our wells in Texas.
Operations in South Texas are concentrated along the Edwards trend in Live Oak
and Dewitt Counties and in the Frio/Vicksburg trend in San Patricio County. We
own an average 79% working interest in 69 wells with average daily production of
514 net Bbls of crude oil and NGLs and 16,566 net Mcf of natural gas per day for
the year ended December 31, 2000. As of December 31, 2000, we had estimated net
proved reserves in South Texas of 52,881 Mmcfe (75% natural gas) with a PV-10 of
$199.1 million, 79.3% of which was attributable to proved developed reserves.
Our West Texas operations are concentrated along the deep Devonian/Ellenberger
formations and shallow Cherry Canyon sandstones in Ward County, the Spraberry
trend in Midland County and in the Sharon Ridge Clearfork Field in Scurry
County. We own an average 77% working interest in 181 wells with average daily
production of 824 net Bbls of crude oil and NGLs and 5,810 net Mcf of natural
gas per day for the year ended December 31, 2000. As of December 31, 2000, we
had estimated net proved reserves in West Texas of 97,089 Mmcfe (77% natural
gas) with a PV 10 of $350.0 million, 27.6% of which was attributable to proved
developed reserves. During 2000, we drilled a total of 11 new wells (10 net) in
Texas with a 100% success rate.
Western Canada
We own producing properties in western Canada, consisting primarily of
natural gas reserves and interests ranging from 10% to 100% in approximately 200
miles of natural gas gathering systems and 13 natural gas processing plants. As
of December 31, 2000, Canadian Abraxas Petroleum Limited (" Canadian Abraxas")
and Grey Wolf had estimated net proved reserves of 92,991 Mmcfe (82% natural
gas) with a PV-10 of $455.0 million, 95.0% of which was attributable to proved
developed reserves. For the year ended December 31, 2000, the Canadian
properties produced an average of approximately 1,128 net Bbls of crude oil and
NGL's per day and 31,691 net Mcf of natural gas per day. The natural gas
processing plants had aggregate capacity of approximately 316 MMcf of natural
gas per day (120 net MMcf). During 2000, we drilled a total of 16 new wells
(13.39 net) in Canada with a 63% success rate.
Grey Wolf manages the operations of Canadian Abraxas pursuant to a
management agreement between Canadian Abraxas and Grey Wolf. Under the
management agreement, Canadian Abraxas reimburses Grey Wolf for reasonable costs
or expenses attributable to Canadian Abraxas and for administrative expenses
based upon the percentage that Canadian Abraxas' gross revenue bears to the
total gross revenue of Canadian Abraxas and Grey Wolf. In 2000, Canadian Abraxas
paid $2.5 million to Grey Wolf pursuant to this management agreement. Abraxas
and Canadian Abraxas own approximately 49% of the outstanding capital stock of
Grey Wolf. In January 2001, we announced that we were in discussions with Grey
Wolf concerning a stock for stock acquisition of the remaining 51% ownership of
Grey Wolf.
Exploratory and Developmental Acreage
Our principal crude oil and natural gas properties consist of non-producing
and producing crude oil and natural gas leases, including reserves of crude oil
and natural gas in place. The following table indicates our interest in
developed and undeveloped acreage as of December 31, 2000:
Developed and Undeveloped Acreage
-----------------------------------------------------------------------
As of December 31, 2000
-----------------------------------------------------------------------
Developed Acreage (1) Undeveloped Acreage (2)
--------------------------------- -----------------------------------
Gross Acres (3) Net Acres (4) Gross Acres (3) Net Acres (4)
--------------- --------------- --------------- ------------------
Canada 134,175 94,441 953,467 641,416
Texas 33,120 25,720 12,202 11,505
Wyoming 2,560 2,560 64,774 59,772
--------------- --------------- --------------- ------------------
Total 169,855 122,721 1,030,443 712,693
=============== =============== =============== ==================
20
- ---------------
(1) Developed acreage consists of acres spaced or assignable to productive
wells.
(2) Undeveloped acreage is considered to be those leased acres on which wells
have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and gas, regardless of whether or
not such acreage contains proved reserves. (3) Gross acres refers to the
number of acres in which we own a working interest.
(4) Net acres represents the number of acres attributable to an owner's
proportionate working interest and/or royalty interest in a lease (e.g., a
50% working interest in a lease covering 320 acres is equivalent to 160 net
acres).
Productive Wells
The following table sets forth our total gross and net productive wells,
expressed separately for crude oil and natural gas, as of December 31, 2000:
Productive Wells (1)
---------------------------------------------------------------------
As of December 31, 2000
---------------------------------------------------------------------
State/Country Crude Oil Natural Gas
-------------------------------- ----------------------------------
Gross(2) Net(3) Gross(2) Net(3)
--------------- -------------- --------------- ----------------
Canada 381.0 42.0 298.0 138.4
Texas 172.0 136.1 78.0 57.7
Wyoming 3.0 3.0 - -
--------------- -------------- --------------- ----------------
Total 556.0 181.1 376.0 196.1
=============== ============== =============== ================
- -----------
(1) Productive wells are producing wells and wells capable of production.
(2) A gross well is a well in which we own an interest. The number of gross
wells is the total number of wells in which we own an interest.
(3) A net well is deemed to exist when the sum of fractional ownership working
interests in gross wells equals one. The number of net wells is the sum of
our fractional working interest owned in gross wells.
Substantially all of our existing crude oil and natural gas properties are
pledged to secure our indebtedness under the First Lien Notes and Second Lien
Notes. You should read the discussion under the heading "Management's Discussion
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" for more information regarding our indebtedness.
Reserves Information
The crude oil and natural gas reserves of Abraxas have been estimated as of
January 1, 2001, January 1, 2000, and January 1, 1999, by DeGolyer and
MacNaughton, of Dallas, Texas. The reserves of Canadian Abraxas and Grey Wolf as
of January 1, 2001, January 1, 2000 and January 1, 1999 have been estimated by
McDaniel and Associates Consultants Ltd. of Calgary, Alberta. Crude oil and
natural gas reserves, and the estimates of the present value of future net
revenues therefrom, were determined based on then current prices and costs.
Reserve calculations involve the estimate of future net recoverable reserves of
crude oil and natural gas and the timing and amount of future net revenues to be
received therefrom. Such estimates are not precise and are based on assumptions
regarding a variety of factors, many of which are variable and uncertain.
The following table sets forth certain information regarding estimates of
our crude oil, natural gas liquids and natural gas reserves as of January 1,
2001, January 1, 2000 and January 1, 1999:
21
Estimated Proved Reserves
----------------------------------------------------------
Proved Proved Total
Developed Undeveloped Proved
-------------- --------------- ------------------
As of January 1, 1999(1) (2) (3)
Crude oil (MBbls) 3,985 1,628 5,613
NGLs (MBbls) 1,834 248 2,082
Natural gas (MMcf) 144,588 52,890 197,478
As of January 1, 2000(1) (2) (3)(4)
Crude oil (MBbls) 5,513 1,606 7,119
NGLs (MBbls) 4,961 562 5,523
Natural gas (MMcf) 154,221 35,894 190,115
As of January 1, 2001(1) (2) (3)
Crude oil (MBbls) 3,866 1,406 5,272
NGLs (MBbls) 3,135 436 3,571
Natural gas (MMcf) 119,737 71,590 191,327
- ------------------
(1) Includes 31,900, 33,000 and 40,000 barrels of crude oil reserves owned
by Grey Wolf of which 16,400, 16,900 and 20,525 barrels are applicable
to the minority interests share of these reserves as of January 1,
1999, 2000 and 2001, respectively.
(2) Includes 443,500, 236,000 and 692,000 barrels of natural gas liquids
reserves owned by Grey Wolf of which 227,600, 121,098 and 355,083
barrels are applicable to the minority interests share of these
reserves as of January 1, 1999, 2000 and 2001, respectively.
(3) Includes 28,610, 21,710 and 21,389 Mmcf of natural gas reserves owned
by Grey Wolf of which 14,700, 11,140 and 10,975 Mmcf are applicable to
the minority interests share of these reserves as of January 1, 1999,
2000 and 2001, respectively.
(4) Includes 343,941 Bbls of crude oil reserves; 2,448.6 Mbbls of natural
gas liquids reserves and 25,810 Mmcf of natural gas reserves,
attributable to the Wyoming properties which were sold in March 2000.
These reserves were estimated internally.
The process of estimating crude oil and natural gas reserves is complex and
involves decisions and assumptions in the evaluation of available geological,
geophysical, engineering and economic data. Therefore, these estimates are
imprecise.
Actual future production, crude oil and natural gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable crude
oil and natural gas reserves most likely will vary from those estimated. Any
significant variance could materially affect the estimated quantities and
present value of reserves set forth in this annual report. In addition, we may
adjust estimates of proved reserves to reflect production history, results of
exploration and development, prevailing crude oil and natural gas prices and
other factors, many of which are beyond our control.
You should not assume that the present value of future net revenues referred
to in this annual statement is the current market value of our estimated crude
oil and natural gas reserves. In accordance with SEC requirements, the estimated
discounted future net cash flows from proved reserves are generally based on
prices and costs as of the end of the year of the estimate. Actual future prices
and costs may be materially higher or lower than the prices and costs as of the
end of the year of the estimate. Any changes in consumption by natural gas
purchasers or in governmental regulations or taxation will also affect actual
future net cash flows. The timing of both the production and the expenses from
the development and production of crude oil and natural gas properties will
affect the timing of actual future net cash flows from proved reserves and their
present value In addition, the 10% discount factor, which is required by the SEC
to be used in calculating discounted future net cash flows for reporting
purposes, is not necessarily the most accurate discount factor. The effective
interest rate at various times and the risks associated with us or the crude oil
and natural gas industry in general will affect the accuracy of the 10% discount
factor.
22
The estimates of our reserves are based upon various assumptions about
future production levels, prices and costs that may not prove to be correct over
time. In particular, estimates of crude oil and natural gas reserves, future net
revenue from proved reserves and the PV-10 thereof for the crude oil and natural
gas properties described in this report are based on the assumption that future
crude oil and natural gas prices remain the same as crude oil and natural gas
prices at December 31, 2000. The average sales prices as of such date used for
purposes of such estimates were $25.73 per Bbl of crude oil, $30.63 per Bbl of
NGLs and $9.21 per Mcf of natural gas. It is also assumed that we will make
future capital expenditures of approximately $55.5 million in the aggregate,
which are necessary to develop and realize the value of proved undeveloped
reserves on our properties. Any significant variance in actual results from
these assumptions could also materially affect the estimated quantity and value
of reserves set forth herein.
We file reports of our estimated crude oil and natural gas reserves with the
Department of Energy and the Bureau of the Census. The reserves reported to
these agencies are required to be reported on a gross operated basis and
therefore are not comparable to the reserve data reported herein.
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 crude oil and
natural gas 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:
2000 1999 1998
------------------ ------------------ ------------------
Crude oil production (Bbls) 636,734 777,855 728,560
Natural gas production (Mcf) 19,962,470 25,697,899 24,929,866
Natural gas liquids production
(Bbls) 314,897 376,474 867,443
Mmcfe 25,672 32,623 34,506
Average sales price per Bbl of
crude oil $ 18.69 $ 14.57 $13.65
Average sales price per MCF of
natural gas (1) $ 2.71 $ 1.66 $ 1.54
Average sales price per Bbl of
natural gas liquids (1) $ 22.42 $ 13.40 $ 6.81
Average sales price per Mcfe (1) $ 2.84 $ 1.81 $ 1.57
Average cost of production per
BOE produced (2) $ 4.39 $ 3.30 $ 2.93
(1) Average sales prices are net of hedging activity.
(2) Oil and gas were combined by converting gas to a barrel oil equivalent
("BOE") on the basis of 6 Mcf gas =1 Bbl of oil. Production costs include
direct operating costs, ad valorem taxes and gross production taxes.
Drilling Activities
The following table sets forth our gross and net working interests in
exploratory, development, and service wells drilled during the three years ended
December 31:
2000 1999 1998
----------------------------- ---------------------------- ------------------------------
Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2)
------------ ---------- ------------ --------- ----------- --------
Exploratory(3)
Productive(4)
Crude oil - - 2.0 2.0 1.0 1.0
Natural gas 3.0 2.5 8.0 5.3 7.0 5.6
Dry holes(5) 9.0 5.6 11.0 6.2 9.0 7.3
------------ ---------- ------------ --------- ----------- --------
Total 12.0 8.1 21.0 13.5 17.0 13.9
============ ========== ============ ========= =========== ========
23
Development(6)
Productive
Crude oil 9.0 9.0 8.0 1.6 3.0 2.4
Natural gas 16.0 12.2 20.0 13.1 30.0 23.9
Service(7) - - - - 1.0 1.0
Dry holes 3.0 3.0 9.0 4.5 3.0 2.2
------------ ---------- ------------ --------- ----------- --------
Total 28.0 24.2 37.0 19.2 37.0 29.5
- ------------------------ ============ ----- ========== ---- ============ ----- ========= ---- =========== ---- ========
- ------------------
(1) A gross well is a well in which we own an interest.
(2) The number of net wells represents the total percentage of working interests
held in all wells (e.g., total working interest of 50% is equivalent to 0.5
net well. A total working interest of 100% is equivalent to 1.0 net well).
(3) An exploratory well is a well drilled to find and produce crude oil or
natural gas in an unproved area, to find a new reservoir in a field
previously found to be producing crude oil or natural gas in another
reservoir, or to extend a known reservoir.
(4) A productive well is an exploratory or a development well that is not a dry
hole.
(5) A dry hole is an exploratory or development well found to be incapable of
producing either crude oil or natural gas in sufficient quantities to
justify completion as a crude oil or natural gas well.
(6) A development well is a well drilled within the proved area of a crude oil
or natural gas reservoir to the depth of stratigraphic horizon (rock layer
or formation) noted to be productive for the purpose of extracting proved
crude oil or natural gas reserves.
(7) A service well is used for water injection in secondary recovery projects or
for the disposal of produced water.
As of March 15, 2001, we had 3 wells in process of drilling.
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 2005 at an
aggregate base rate of $19,500 per month.
Grey Wolf leases 17,522 square feet of office space in Calgary, Alberta
pursuant to a lease which expires on April 30, 2003.
Other Properties
We own 10 acres of land, an office building, workshop, warehouse and house
in Sinton, Texas, 160 acres of land in Coke County, Texas and a 50% interest in
approximately two acres of land in Bexar County, Texas. All three properties are
used for the storage of tubulars and production equipment. We also own 19
vehicles which are used in the field by employees. We own 2 workover rigs, which
are used for servicing our wells as well as third party wells.
24
Item 3. Legal Proceedings
General. From time to time, we are involved in litigation relating to claims
arising out of our operations in the normal course of business. We are not
currently engaged in any legal proceedings that are expected, individually or in
the aggregate, to have a material adverse effect on us.
In 1995, certain plaintiffs filed a lawsuit against us alleging negligence
and gross negligence, tortious interference with contract, conversion and waste
We fully and finally resolved the litigation on April 25, 2000, through a
payment of $435,780 in the aggregate to the plaintiffs.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our security holders during the fourth
quarter of the fiscal year ended December 31, 2000.
Item 4a. Executive Officers of Abraxas
Certain information is set forth below concerning our executive officers,
each of whom has been selected to serve until the 2001 annual meeting of
shareholders and until his successor is duly elected and qualified.
Robert L. G. Watson, age 50, has served as Chairman of the Board, President,
Chief Executive Officer and a director of Abraxas since 1977. Since May 1996,
Mr. Watson has also served as Chairman of the Board and a director of Grey Wolf.
In November 1996, Mr. Watson was elected Chairman of the Board, President and as
a director of Canadian Abraxas. Prior to joining Abraxas, Mr. Watson was
employed in various petroleum engineering positions with Tesoro Petroleum
Corporation, a crude oil and natural gas exploration and production company,
from 1972 through 1977, and DeGolyer and McNaughton, an independent petroleum
engineering firm, from 1970 to 1972. Mr. Watson received a Bachelor of Science
degree in Mechanical Engineering from Southern Methodist University in 1972 and
a Master of Business Administration degree from the University of Texas at San
Antonio in 1974.
Chris E. Williford, age 49, 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 crude oil and natural gas exploration and production company,
from July 1989 to December 1992 and President of Clark Resources Corp., a crude
oil and natural gas exploration and production company, from January 1987 to May
1989. Mr. Williford received a Bachelor of Science degree in Business
Administration from Pittsburgh State University in 1973.
Robert W. Carington, Jr., age 39, was elected Executive Vice President and a
director of the Company in July 1998. In December 1999, Mr. Carington resigned
as a director of Abraxas. Prior to joining the Company, 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 degree of Bachelor of Science in
Mechanical Engineering from Rice University in 1983 and a Masters of Business
Administration from the University of Houston in 1990.
25
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- -----------------------------------------------------------------------------
Market Information
Our common stock began trading on the American Stock Exchange on August 18,
2000, under the symbol "ABP." Our common stock was formerly listed on the NASDAQ
Stock Market under the symbol "AXAS"; however, effective June 16, 1999, our
common stock was delisted from general quotation on the NASDAQ Stock Market for
failure to satisfy NASDAQ's listing and maintenance standards. During the period
between June 16, 1999 and August 17, 2000, our stock traded on the OTC Bulletin
Board under the symbol "AXAS".
The following table sets forth certain information as to the high and low
bid quotations quoted on NASDAQ for 1998 and 1999 (through June 16, 1999), on
the OTC Bulletin Board for the remainder of 1999 and through August 17, 2000,
and the high low sales price on the American Stock Exchange for the remainder of
2000. Information with respect to over-the-counter bid quotations represents
prices between dealers, does not include retail mark-ups, mark-downs, or
commissions, and may not necessarily represent actual transactions.
Period High Low
1998
First Quarter...............................$15.00 $7.00
Second Quarter...............................11.25 8.25
Third Quarter.................................9.50 5.31
Fourth Quarter................................7.56 4.00
1999
First Quarter................................$3.19 $1.19
Second Quarter................................2.82 0.88
Third Quarter................................ 2.97 0.88
Fourth Quarter............................... 2.44 0.81
2000
First Quarter...............................$ 2.81 $1.06
Second Quarter............................... 2.38 1.34
Third Quarter (OTC through August 17)........ 2.75 1.38
Third Quarter (AMEX from August 17).......... 4.00 2.75
Fourth Quarter.............................. 4.56 2.81
Holders
As of March 22, 2001 we had 22,593,969 shares of common stock outstanding
and had approximately 1,542 stockholders of record.
Dividends
We have not paid any cash dividends on our common stock and it is not
presently determinable when, if ever, we will pay cash dividends in the future.
In addition, the indentures governing the First Lien and Second Lien Notes
prohibit the payment of cash dividends and stock dividends on our common stock.
You should read the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
for more information regarding the restrictions on our ability to pay dividends.
26
Item 6. Selected Financial Data
The following selected financial data are derived from our Consolidated
Financial Statements. The data should be read in conjunction with our
Consolidated Financial Statements and Notes thereto, and other financial
information included herein. See "Financial Statements."
Year Ended December 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------- ----------
(Dollars in thousands except per share data)
Total revenue .............................. $ 76,600 $ 66,770 $ 60,084 $ 70,931(1) $ 26,653
Income (loss) before extraordinary item .... $ 6,676 $ (36,680) $ (83,960)(2)$ (6,485) $ 1,940
Income (loss) before extraordinary item per
common share - diluted................... $ 0.21(3) $ (5.41) $ (13.26) $ (1.11) $ 0.23
Weighted average shares outstanding - basic 22,616 6,784 6,331 6,025 6,794
Total assets ............................... $ 335,560 $ 322,284 $ 291,498 $ 338,528 $ 304,842
Long-term debt, excluding current maturities $ 266,441 $ 273,421 $ 299,698 $ 248,617 $ 215,032
Total stockholders' equity (deficit) ....... $ (6,503) $ (9,505) $ (63,522) $ 26,813 $ 35,656
(1) Increase due to acquisition of Canadian Abraxas and the Wyoming properties.
(2) Increase due to ceiling write down.
(3) Increase due to sale of partnership interest.
Item 7. 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. See "Financial Statements."
General
We have incurred net losses in three of the last four years and there can be
no assurance that operating income and net earnings will be achieved in future
periods. Our revenues, profitability and future rate of growth are substantially
dependent upon prevailing prices for crude oil and natural gas and the volumes
of crude oil, natural gas and natural gas liquids we produce. Natural gas and
crude oil prices weakened somewhat during 1997 and continued to decrease during
1998. Crude oil and natural gas prices increased somewhat in 1999 and increased
substantially in 2000. In addition, because our proved reserves will decline as
crude oil, natural gas and natural gas liquids are produced, unless we are
successful in acquiring properties containing proved reserves or conduct
successful exploration and development activities, our reserves and production
will decrease. Our ability to acquire or find additional reserves in the near
future will be dependent, in part, upon the amount of available funds for
acquisition, exploitation, exploration and development projects. If crude oil
and natural gas prices revert to depressed levels, or if our production levels
decrease, our revenues, cash flow from operations and financial condition will
be materially adversely affected.
Results of Operations
The factors which most significantly affect our results of operations are:
o the sales prices of crude oil, natural gas liquids and natural gas,
o the level of total sales volumes of crude oil, natural gas liquids and
natural gas,
o the level of and interest rates on borrowings, and
o the level and success of exploration and development activity.
27
Selected Operating Data. The following table sets forth certain of our
operating data for the periods presented:
Years Ended December 31,
-------------------------------
(dollars in thousands,
except per unit data)
2000 1999 1998
-------- -------- --------
Operating revenue:
Crude oil sales ....................... $ 11,899 $ 11,330 $ 9,948
NGLs sales ............................ 7,061 5,043 5,905
Natural gas sales ..................... 54,013 42,652 38,410
Gas processing revenue ................ 2,717 4,244 3,159
Other ................................. 910 3,501 2,662
-------- -------- --------
Total operating revenue .................. $ 76,600 $ 66,770 $ 60,084
======== ======== ========
Operating income (loss) .................. $ 11,583 $(10,972) $(56,500)
Crude oil production (MBbls) ............. 636.7 777.9 728.6
NGLs production (MBbls) .................. 314.9 376.5 867.4
Natural gas production (MMcf) ............ 19,962.5 25,697.9 24,929.9
Average crude oil sales price (per Bbl)* . $ 18.69 $ 14.57 $ 13.65
Average NGLs sales price (per Bbl)* ...... $ 22.42 $ 13.40 $ 6.81
Average natural gas sales price (per Mcf)* $ 2.71 $ 1.66 $ 1.54
*Revenue and average sales prices are net of hedging activities.
Comparison of Year Ended December 31, 2000 to Year Ended December 31, 1999
Operating Revenue. During the year ended December 31, 2000, operating
revenue from crude oil, natural gas and natural gas liquids sales increased by
$14.0 million from $59.0 million in 1999 to $73.0 million in 2000. This increase
was primarily attributable to an increase in commodity prices. Increased prices
contributed $26.5 million in additional revenue, which was offset by $12.5
million due to a decrease in production volumes. The decline in production was
due to the disposition of certain non-core properties, primarily in Canada.
Natural gas liquids volumes declined from 376.5 MBbls in 1999 to 314.9 in
2000. Crude oil sales volumes declined from 777.9 MBbls in 1999 to 636.7 MBbls
during 2000. Natural gas sales volumes decreased from 25.7 Bcf in 1999 to 20.0
Bcf in 2000. Production declines were primarily attributable to our disposition
of non-core assets during 2000.
Average sales prices in 2000 net of hedging losses were:
o $18.69 per Bbl of crude oil,
o $22.42 per Bbl of natural gas liquids, and
o $2.71 per Mcf of natural gas.
Average sales prices in 1999 net of hedging losses were:
o $14.57 per Bbl of crude oil,
o $13.40 per Bbl of natural gas liquids, and
o $1.66 per Mcf of natural gas.
28
We also had natural gas processing revenue of $2.7 million in 2000 as compared
to $4.2 million in 1999. The decline in processing revenue is due to a decrease
in third party natural gas being processed. We are utilizing more of the plant
capacity to process our own natural gas, leaving less capacity for third party
processing.
Lease Operating Expense. Lease operating expense ("LOE") and natural gas
processing costs increased by $0.8 million from $17.9 million for the year ended
December 31, 1999 to $18.8 million for the same period of 2000. LOE on a per
Mcfe basis for 2000 was $0.73 per Mcfe as compared to $0.55 per Mcfe in 1999.
The increase was due primarily to a general increase in the cost of services and
increased production taxes due to higher commodity prices in 2000 as compared to
1999. The increase in the per Mcfe cost is due to a decline in production
volumes.
G&A Expense. General and administrative ("G&A") expense increased from $5.3
million for the year ended December 31, 1999 to $6.9 million for the year ended
December 31, 2000. The increase in G&A was due to the loss of approximately
$600,000 of overhead billed to a partnership, substantially all of the assets of
which were sold in March 2000 and an increase in director compensation as a
result of our restructuring in the fourth quarter of 1999. Our G&A expense on a
per Mcfe basis increased from $0.16 in 1999 to $0.27 in 2000. The increase in
the per Mcfe cost was due partly to lower production volumes in 2000 as compared
to 1999.
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 accounted for as variable 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 recognized approximately
$2.8 million as stock-based compensation expense during 2000 related to these
repricings.
DD&A Expense. Depreciation, depletion and amortization ("DD&A") expense
increased by $1.1 million from $34.8 million for the year ended December 31,
1999 to $35.9 million for the year ended December 31, 2000. Our DD&A expense on
a per Mcfe basis for 1999 was $1.07 per Mcfe as compared to $1.40 per Mcfe in
2000. The increase in DD&A is the result of higher finding costs in the later
part of 1999 and 2000.
Interest Expense. Interest expense decreased by $5.9 million from $37.0
million to $31.1 million for the year ended December 31, 2000 compared to 1999.
This decrease resulted from reduced debt levels during 2000 compared to 1999.
The reduced debt level was the result of the exchange of approximately $269.7
million principal amount of our Old Notes for approximately $188.8 million
principal of our Second Lien Notes, shares of our common stock and contingent
value rights.
Ceiling Limitation Writedown. We record the carrying value of our crude oil
and natural gas properties using the full cost method of accounting for oil and
gas properties. Under this method, we capitalize the cost to acquire, explore
for and develop oil and gas properties. Under the full cost accounting rules,
the net capitalized cost of crude oil and natural gas properties less related
deferred taxes, is limited by country, to the lower of the unamortized cost or
the cost ceiling, defined as the sum of the present value of estimated
unescalated future net revenues from proved reserves, discounted at 10%, plus
the cost of properties not being amortized, if any, plus the lower of cost or
estimated fair value of unproved properties included in the costs being
amortized, if any, less related income taxes. If the net capitalized cost of
crude oil and natural gas properties exceeds the ceiling limit, we are subject
to a ceiling limitation writedown to the extent of such excess. A ceiling
limitation writedown is a charge to earnings which does not impact cash flow
from operating activities. However, such writedowns do impact the amount of our
stockholders' equity.
The risk that we will be required to writedown the carrying value of our oil
and gas assets increases when oil and gas prices are depressed or volatile. In
addition, writedowns may occur if we have substantial downward revisions in our
estimated proved reserves or if purchasers or governmental action cause an
29
abrogation of, or if we voluntarily cancel, long-term contracts for our natural
gas. For the year ended December 31, 1999, we recorded a writedown of $19.1
million, $11.9 million after tax, related to our Canadian properties. We cannot
assure you that we will not experience additional writedowns in the future.
Should commodity prices decline, a further writedown of the carrying value of
our crude oil and natural gas properties may be required. See Note 17 of Notes
to Consolidated Financial Statements.
Minority interest. Minority interest in the net income of our 49% owned
subsidiary increased to $1.3 million in 2000 from $269,000 in 1999. This
increase is due to improved profitability of our subsidiary as a result of
improved commodity prices received in 2000 as compared to 1999.
Income taxes Income tax expense (benefit) increased from a benefit of $12.6
million for the year ended December 31, 1999 to expense of $3.7 million for the
year ended December 31, 2000. The benefit for the year ended December 31, 1999
was primarily attributable to the ceiling limitation write down that occurred in
that year.
Other. In March 2000, Abraxas Wamsutter L.P. ("Partnership") sold all of its
interest in its crude oil and natural gas properties to a third party. Prior to
the sale of these properties, effective January 1, 2000, the Company's equity
investee share of oil and gas property cost, results of operations and
amortization were not material to consolidated operations or financial position.
As a result of the sale, the Company received approximately $34 million, which
represented a proportional interest in the Partnership's proved properties.
In June 2000, the we retired $3.5 million of the Old Notes and $3.6 million
of the Second Lien Notes at a discount of $1.7 million.
Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998
Operating Revenue. During the year ended December 31, 1999, operating
revenue from crude oil, natural gas and natural gas liquids sales increased by
$4.7 million from $54.3 million in 1998 to $59.0 million in 1999. This increase
was primarily attributable to an increase in commodity prices. Increased prices
contributed $8.1 million in additional revenue, which was offset by $3.4 million
due to a decrease in production volumes.
Natural gas liquids volumes declined from 867.4 MBbls in 1998 to 376.5 in
1999. The decline in natural gas liquids was primarily a result of the sale of
oil and gas producing properties in Wyoming in late 1998. The Wyoming properties
contributed 440.6 MBbls of natural gas liquids in 1998. Also contributing to the
decline in natural gas liquids volumes was the closing of two natural gas
processing plants in South Texas, one in late 1998 and one in January 1999 and
our decision to stop processing natural gas in early 1999 due to depressed
prices. We resumed processing natural gas in April 1999 as prices improved and
third party facilities became available. Crude oil sales volumes increased by
6.8% from 728.6 MBbls in 1998 to 777.9 MBbls during 1999. Natural gas sales
volumes increased from 24.9 Bcf in 1998 to 25.7 Bcf in 1999. The increase in
crude oil and natural gas sales volumes was attributable to increased production
attributable to our ongoing development program on existing and acquired
properties.
Average sales prices in 1999 net of hedging losses were:
o $14.57 per Bbl of crude oil,
o $13.40 per Bbl of natural gas liquids, and
o $1.66 per Mcf of natural gas.
Average sales prices in 1998 including of hedging gains were:
o $13.65 per Bbl of crude oil,
o $6.81 per Bbl of natural gas liquids, and
o $1.54 per Mcf of natural gas.
We also had gas processing revenue of $4.2 million in 1999 as compared to $3.2
million in 1998.
30
Lease Operating Expense. LOE and natural gas processing costs decreased by
$0.2 million from $18.1 million for the year ended December 31, 1998 to $17.9
million for the same period of 1999. LOE on a per Mcfe basis for 1999 was $0.55
per Mcfe as compared to $0.52 per Mcfe in 1998. The increase in the per Mcfe LOE
is due to the sale of low cost natural gas wells in Wyoming which were replaced
with higher cost crude oil wells acquired in Canada with the acquisition of New
Cache Petroleums, Ltd. in January 1999.
G&A Expense. G&A expense decreased from $5.5 million for the year ended
December 31, 1998 to $5.3 million for the year ended December 31, 1999. This is
primarily a result of cost control measures implemented in the climate of
depressed prices. Our G&A expense on a per Mcfe basis was unchanged at $0.16 per
Mcfe in 1999 and 1998.
DD&A Expense. DD&A expense increased by $3.6 million from $31.2 million for
the year ended December 31, 1998 to $34.8 million for the year ended December
31, 1999. Our DD&A expense on a per Mcfe basis for 1999 was $1.07 per Mcfe as
compared to $0.90 per Mcfe in 1998. The increase in DD&A is primarily the result
of downward reserve revisions in 1999, primarily related to Canadian operations.
Interest Expense. Interest expense increased by $6.0 million from $30.8
million to $36.8 million for the year ended December 31, 1999 compared to 1998.
This increase was attributable to our increased borrowings during 1999. In March
1999, we issued $63.5 million in principal amount of the First Lien Notes . In
December 1999, we consummated the Exchange Offer whereby $188.8 million in
Second Lien Notes, 16,078,990 shares of our common stock, and 16,078,990 CVRs
were exchanged for $269.7 million of the Old Notes. Long-term debt decreased
from $299.7 million at December 31, 1998 to $273.4 million at December 31, 1999.
Ceiling Limitation Writedown. For the year ended December 31, 1999, we
recorded a writedown of $19.1 million, $11.9 million after tax, related to our
Canadian properties. For the year ended December 31, 1998 we recorded a
writedown of $61 million related to our United States operations, We cannot
assure you that we will not experience additional writedowns in the future.
Should commodity prices decline, a further writedown of the carrying value of
our crude oil and natural gas properties may be required. See Note 17 of Notes
to Consolidated Financial Statements.
Minority interest. Minority interest in the net income of our 49% owned
subsidiary increased to $269,000 in 1999 from $4,000 in 19998. This increase is
due to improved profitability of our subsidiary.
Income taxes. Income tax expense (benefit) increased to a benefit of $12.6
million for the year ended December 31, 1999 from a benefit of $4.2 million in
1998. The increase in the benefit in 1999 was primarily attributable to the
ceiling limitation write down that occurred in 1999.
Liquidity and Capital Resources
General. Capital expenditures in 1998, 1999 and 2000 were $57.9 million,
$128.7 million and $74.4 million, respectively. The table below sets forth the
components of these capital expenditures on a historical basis for the three
years ended December 31, 1998, 1999 and 2000.
Year Ended December 31,
------------------------------
1998 1999 2000
-------- -------- --------
(dollars in thousands)
Expenditure category:
Property acquisitions (1) $ 2,729 $ 89,743 $ 7,189
Development ............. 51,821 37,344 64,873
Facilities and other .... 3,311 1,621 2,350
-------- -------- --------
Total ................... $ 57,861 $128,708 $ 74,412
======== ======== ========
- --------
(1) Acquisition cost includes 71,063 shares of Abraxas common stock valued at
approximately $449,000 in 1998 related to the acquisition of certain crude
oil and natural gas properties.
31
During 2000, expenditures were primarily for the development of existing
properties. In 1999, expenditures were primarily the acquisition of New Cache
Petroleums, Ltd. In 1998, expenditures were primarily for the development of
existing properties. These expenditures were funded through internally generated
cash flow, the issuance of $275.0 million of the Old Notes and $63.5 million of
the First Lien Notes, borrowings under a credit facility and the sale of
non-core assets.
At December 31, 2000, we had current assets of $24.3 million and current
liabilities of $38.1 million resulting in a working capital deficit of $13.8
million. The material components of our current liabilities at December 31,
2000, included trade accounts payable of $22.7 million, revenues due third
parties of $6.3 million and accrued interest of $6.1 million. Stockholders'
equity increased from a deficit of $9.5 million at December 31, 1999, to a
deficit of $6.5 million at December 31, 2000.
Our current budget for capital expenditures for 2001 other than acquisition
expenditures is $42.0 million, approximately $11.0 million of which has been
spent to date. The remaining portion of such expenditures is largely
discretionary and will be made primarily for the development of existing
properties. Additional capital expenditures may be made for acquisition of
producing properties if such opportunities arise, but 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 crude
oil and natural gas decline, our cash flows will decrease which may result in a
further reduction of the capital expenditures budget.
Operating activities for the year ended December 31, 2000, provided us $21.4
million of cash. Investing activities used $18.8 million during 2000 comprised
of $34.5 million provided from the sale of an equity investment in Wamsutter
Holdings LP, $21.2 million provided from the sale of non-core properties and
$74.4 million of used primarily for the acquisition and development of producing
properties. Financing activities used $3.8 million during 2000.
Operating activities for the year ended December 31, 1999, provided us $3.9
million of cash. Investing activities used $111.2 million during 1999, comprised
of $17.5 million provided from the sale of oil and gas producing properties and
$128.7 million used primarily for the acquisition and development of producing
properties. Financing provided $49.1 million during 1999.
Operating activities for the year ended December 31, 1998, provided $4.8
million of cash to us. Investing activities provided $2.0 million in 1998,
comprised of $59.4 million provided from the sale of oil and gas producing
properties, primarily the Wyoming Properties, and $57.4 million used primarily
for the acquisition and development of producing properties. Financing provided
$52.5 million during 1998.
We are heavily dependent on crude oil and natural gas prices which have
historically been volatile. Although we have hedged a portion of our natural gas
production and substantially all of our crude oil production and may continue
this practice, future crude oil and natural gas price declines would have a
material adverse effect on our overall results, and therefore, our liquidity.
Furthermore, low crude oil and natural gas prices could affect our ability to
raise capital on terms favorable to us.
Current Liquidity Needs. Since January 1999, we have sought to improve our
liquidity in order to allow us to meet our debt service requirements and to
maintain and increase existing production.
Our sale in March 1999 of our First Lien Notes allowed us to refinance our
bank debt, meet our near-term debt service requirements and make limited crude
oil and natural gas capital expenditures.
In October 1999, we sold a dollar denominated production payment for $4.0
million relating to existing natural gas wells in the Edwards Trend in South
Texas to a unit of Mirant and during 2000, we sold additional production
payments for $6.4 million relating to additional natural gas wells in the
Edwards Trend to Mirant. We have the ability to sell up to $50 million to Mirant
for drilling opportunities in the Edwards Trend.
32
In December 1999, Abraxas and our wholly-owned Canadian subsidiary, Canadian
Abraxas Petroleum Limited, completed an Exchange Offer whereby we exchanged the
Second Lien Notes, common stock, and contingent value rights for approximately
98.43% of our outstanding Old Notes. The Exchange Offer reduced our long term
debt by $76 million net of fees and expenses.
We are continuing to rationalize our significant non-core Canadian assets to
allow us to continue to grow while reducing our debt. We may sell non-core
assets or seek partners to fund a portion of the exploration costs of
undeveloped acreage and are considering other potential strategic alternatives.
In March 2000, we sold our interest in certain crude oil and natural gas
properties that we owned and operated in Wyoming. Simultaneously, a limited
partnership of which one of our subsidiaries was the general partner, accounted
for on the equity method of accounting sold its interest in crude oil and
natural gas properties in the same area. Our net proceeds from these
transactions were approximately $34.0 million.
In March 2001, we announced that we had engaged Credit Lyonnais Securities
(USA) Inc. and CIBC World Markets Corp. to assist us in a review of alternative
financial strategies. Under the terms of this engagement, we may restructure,
refinance or recapitalize some or all of our existing debt and/or issue equity
securities.
We will have three principal sources of liquidity going forward: (i) cash on
hand, (ii) cash flow from operations, and (iii) the production payment with
Mirant. We also intend to continue to sell certain non-core properties, although
the terms of the First Lien Notes indenture, the Second Lien Notes indenture and
the Old Notes indenture substantially limit our use of proceeds from such sales.
We expect that the significantly improved commodity prices realized by us
compared to those received in 1998 and 1999 and the expiration of a significant
portion of the crude oil and natural gas hedges that we had put in place in
earlier years will improve our liquidity position in 2001. Should commodity
prices fall, all of our capital expenditures are discretionary and can be
delayed to maintain liquidity. While the availability of capital resources
cannot be predicted with certainty and is dependent upon a number of factors
including factors outside of management's control, management believes that the
net cash flow from operations plus cash on hand, cash available under the
production payment and the proceeds from the sale of additional non-core
properties will be adequate to fund operations and planned capital expenditures.
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.
In November 1996, we assumed hedge agreements extending through October 2001
with a counterparty involving various quantities and fixed prices. These hedge
agreements provided that we make payments to the counterparty to the extent the
market prices, determined based on the price for crude oil on the NYMEX and the
Inside FERC, Tennessee Gas Pipeline Co. Texas (Zone O) price for natural gas
exceeded certain fixed prices and for the counterparty to make payments to us to
the extent the market prices were less than such fixed prices. We accounted for
the related gains or losses in crude oil and natural gas revenue in the period
of the hedged production. We terminated these hedge agreements in January 1999
and were paid $750,000 by the counterparty for such termination. This amount is
included in other income in the accompanying financial statements.
In March 1998, we entered into a costless collar hedge agreement with Enron
Capital and Trade Resources Corp. for 2,000 Bbls of crude oil per day with a
floor price of $14.00 per Bbl and a ceiling price of $22.30 per Bbl for crude
oil on the NYMEX. The agreement was effective April 1, 1998 and extended through
March 31, 1999. Under the terms of the agreement, we were paid when the average
monthly price for crude oil on the NYMEX is below the floor price and paid the
counterparty when the average monthly price exceeded the ceiling price. During
the year ended December 31, 1999, we realized a loss of $1.8 million on this
agreement, which is accounted for in crude oil and natural gas revenue.
33
We also entered into a hedge agreement with Barrett Resources Corporation
("Barrett") for the period November 1999 through October 2000. This agreement
was for 1,000 Bbls per day with us being paid $20.30 and an additional 1,000
barrels per day with a floor price of $18.00 per barrel and a ceiling of $22.00
per Bbl. We realized losses from hedges of $ 20.2 million for the year ended
December 31, 2000 which is accounted for in crude oil and natural gas revenue.
At year end 2000, Barrett had a swap call on either 1,000 Bbls of crude oil
or 20,000 MMBtu of natural gas per day at Barrett's option at fixed prices
($18.00 for crude oil or $2.95 to $2.60 for natural gas) through October 31,
2002. As of December 31, 2000, the fair market value of the remaining fixed
price hedge agreement was a liability of approximately $38 million, of which $27
million is expected to be charged to revenues in 2001 and $11 million in 2002.
Long-Term Indebtedness
Old Notes. On November 14, 1996, Abraxas and Canadian Abraxas consummated
the offering of $215.0 million of their 11.5% Senior Notes due 2004, Series A,
which were exchanged for Series B Notes in February 1997. On January 27, 1998,
Abraxas and Canadian Abraxas completed the sale of $60.0 million of the Series C
Notes. The Series B Notes and the Series C Notes were subsequently exchanged for
$275.0 million in principal amount of the Old Notes in June 1998.
Interest on the Old Notes is payable semi-annually in arrears on May 1 and
November 1 of each year at the rate of 11.5% per annum. The Old Notes are
redeemable, in whole or in part, at the option of Abraxas and Canadian Abraxas,
on or after November 1, 2000, at the redemption prices set forth below, plus
accrued and unpaid interest to the date of redemption, if redeemed during the
12-month period commencing on November 1 of the years set forth below:
Year Percentage
----- ---------
2000.................................................. 105.750%
2001.................................................. 102.875%
2002 and thereafter................................... 100.000%
The Old Notes are joint and several obligations of Abraxas and Canadian
Abraxas and rank pari passu in right of payment to all existing and future
unsubordinated indebtedness of Abraxas and Canadian Abraxas. The Old Notes rank
senior in right of payment to all future subordinated indebtedness of Abraxas
and Canadian Abraxas. The Old Notes are, however, effectively subordinated to
the First Lien Notes to the extent of the value of the collateral securing the
First Lien Notes and the Second Lien Notes to the extent of the value of the
collateral securing the Second Lien Notes. The Old Notes are unconditionally
guaranteed, on a senior basis by a wholly-owned Abraxas subsidiary, Sandia Oil &
Gas Corporation. The guarantee is a general unsecured obligation of Sandia and
ranks pari passu in right of payment to all unsubordinated indebtedness of
Sandia and senior in right of payment to all subordinated indebtedness of
Sandia. The guarantee is effectively subordinated to the First Lien Notes and
the Second Lien Notes to the extent of the value of the collateral securing
these obligations.
Upon a change of control, as defined in the Old Notes Indenture, each holder
of the Old Notes will have the right to require Abraxas and Canadian Abraxas to
repurchase all or a portion of such holder's Old Notes at a redemption price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest
to the date of repurchase. In addition, Abraxas and Canadian Abraxas will be
obligated to offer to repurchase the Old Notes at 100% of the principal amount
thereof plus accrued and unpaid interest to the date of repurchase in the event
of certain asset sales.
First Lien Notes. In March 1999, Abraxas consummated the sale of $63.5
million of the First Lien Notes. Interest on the First Lien Notes is payable
semi-annually in arrears on March 15 and September 15, commencing September 15,
34
1999. The First Lien Notes are redeemable, in whole or in part, at the option of
Abraxas on or after March 15, 2001, at the redemption prices set forth below,
plus accrued and unpaid interest to the date of redemption, if redeemed during
the 12-month period commencing on March 15 of the years set forth below:
Year Percentage
----- ----------
2001............................................ 103.000%
2002 and thereafter............................. 100.000%
The First Lien Notes are senior indebtedness of Abraxas secured by a first
lien or charge on substantially all of the crude oil and natural gas properties
of Abraxas and the shares of Grey Wolf owned by Abraxas. The First Lien Notes
are unconditionally guaranteed on a senior basis, jointly and severally, by
Canadian Abraxas, Sandia and one of our wholly-owned subsidiaries, Wamsutter
Holdings, Inc.. The guarantees are secured by substantially all of the crude oil
and natural gas properties of the guarantors and the shares of Grey Wolf owned
by Canadian Abraxas.
Upon a change of control, as defined in the First Lien Notes Indenture, each
holder of the First Lien Notes will have the right to require Abraxas to
repurchase such holder's First Lien Notes at a redemption price equal to 101% of
the principal amount thereof plus accrued and unpaid interest to the date of
repurchase. In addition, Abraxas will be obligated to offer to repurchase the
First Lien Notes at 100% of the principal amount thereof plus accrued and unpaid
interest to the date of redemption in the event of certain asset sales.
The First Lien Notes indenture contains certain covenants that limit the
ability of Abraxas and certain of its subsidiaries, including the guarantors of
the First Lien Notes (the "Restricted Subsidiaries") to, among other things,
incur additional indebtedness, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, incur liens, merge or consolidate with any other person or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of the assets of Abraxas.
The First Lien Notes indenture provides, among other things, that Abraxas
may not, and may not cause or permit the Restricted Subsidiaries, to, directly
or indirectly, create or otherwise cause to permit to exist or become effective
any encumbrance or restriction on the ability of such subsidiary to pay
dividends or make distributions on or in respect of its capital stock, make
loans or advances or pay debts owed to Abraxas or any other Restricted
Subsidiary, guarantee any indebtedness of Abraxas or any other Restricted
Subsidiary or transfer any of its assets to Abraxas or any other Restricted
Subsidiary except for such encumbrances or restrictions existing under or by
reason of:
(1) applicable law;
(2) the First Lien Notes indenture;
(3) customary non-assignment provisions of any contract or any lease
governing leasehold interest of such subsidiaries;
(4) any instrument governing indebtedness assumed by us in an
acquisition, which encumbrance or restriction is not applicable to such
Restricted Subsidiary or the properties or assets of such subsidiary other than
the entity or the properties or assets of the entity so acquired;
(5) agreements existing on the Issue Date (as defined in the First Lien
Notes indenture) to the extent and in the manner such agreements were in effect
on the Issue Date;
(6) customary restrictions with respect to subsidiaries of Abraxas
pursuant to an agreement that has been entered into for the sale or disposition
of capital stock or assets of such Restricted Subsidiary to be consummated in
accordance with the terms of the First Lien Notes indenture or any Security
Documents (as defined in the First Lien Notes indenture) solely in respect of
the assets or capital stock to be sold or disposed of;
(7) any instrument governing certain liens permitted by the First Lien
Notes indenture, to the extent and only to the extent such instrument restricts
the transfer or other disposition of assets subject to such lien; or
35
(8) an agreement governing indebtedness incurred to refinance the
indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (2), (4) or (5) above; provided, however, that the provisions relating to
such encumbrance or restriction contained in any such refinancing indebtedness
are no less favorable to the holders of the First Lien Notes in any material
respect as determined by the Board of Directors of Abraxas in their reasonable
and good faith judgment that the provisions relating to such encumbrance or
restriction contained in the applicable agreement referred to in such clause
(2), (4) or (5) and do not extend to or cover any new or additional property or
assets and, with respect to newly created liens, (A) such liens are expressly
junior to the liens securing the First Lien Notes, (B) the refinancing results
in an improvement on a pro forma basis in Abraxas' Consolidated EBITDA Coverage
Ratio (as defined in the First Lien Notes indenture) and (C) the instruments
creating such liens expressly subject the foreclosure rights of the holders of
the refinanced indebtedness to a stand-still of not less than 179 days.
Second Lien Notes. In December 1999, Abraxas and Canadian Abraxas completed
an Exchange Offer whereby $269,699,000 of the Old Notes were exchanged for
$188,778,000 of the new Second Lien Notes. An additional $5,000,000 of the
Second Lien Notes were issued in payment of fees and expenses. Interest on the
Second Lien Notes is payable semi-annually in arrears on May 1 and November 1,
commencing May 1, 2000. The Second Lien Notes are redeemable, in whole or in
part, at the option of Abraxas and Canadian Abraxas on or after December 1,
2000, at the redemption prices set forth below, plus accrued and unpaid interest
to the date of redemption, if redeemed during the 12-month period commencing on
December 1 of the years set forth below:
Year Percentage
----- ----------
2000............................................ 105.750%
2001............................................ 102.875%
2002 and thereafter............................. 100.000%
The Second Lien Notes are senior indebtedness of Abraxas and Canadian
Abraxas and are secured by a second lien on substantially all of the crude oil
and natural gas properties of Abraxas and Canadian Abraxas and the shares of
Grey Wolf owned by Abraxas and Canadian Abraxas. The Second Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Sandia
and Wamsutter. The guarantees are secured by substantially all of the crude oil
and natural gas properties of the guarantors. The Second Lien Notes are,
however, effectively subordinated to the First Lien Notes and related guarantees
to the extent the value of the collateral securing the Second Lien Notes and
related guarantees and the First Lien Notes and related guarantees is
insufficient to pay both the Second Lien Notes and the First Lien Notes.
Upon a change of control, as defined in Second Lien Notes Indenture, each
holder of the Second Lien Notes will have the right to require Abraxas and
Canadian Abraxas to repurchase such holder's Second Lien Notes at a redemption
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase. In addition, Abraxas and Canadian Abraxas
will be obligated to offer to repurchase the Second Lien Notes at 100% of the
principal amount thereof plus accrued and unpaid interest to the date of
redemption in the event of certain asset sales.
The Second Lien Notes indenture contains certain covenants that limit the
ability of Abraxas and Canadian Abraxas and certain of their subsidiaries,
including the guarantors of the Second Lien Notes (the "Restricted
Subsidiaries") to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur liens, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of Abraxas or
Canadian Abraxas.
The Second Lien Notes indenture provides, among other things, that Abraxas
and Canadian Abraxas may not, and may not cause or permit the Restricted
Subsidiaries, to, directly or indirectly, create or otherwise cause to permit to
36
exist or become effective any encumbrance or restriction on the ability of such
subsidiary to pay dividends or make distributions on or in respect of its
capital stock, make loans or advances or pay debts owed to Abraxas, Canadian
Abraxas or any other Restricted Subsidiary, guarantee any indebtedness of
Abraxas, Canadian Abraxas or any other Restricted Subsidiary or transfer any of
its assets to Abraxas, Canadian Abraxas or any other Restricted Subsidiary
except for such encumbrances or restrictions existing under or by reason of:
(1) applicable law;
(2) the Old Notes indenture, the First Lien Notes indenture, or the
Second Lien Notes indenture;
(3) customary non-assignment provisions of any contract or any lease
governing leasehold interest of such subsidiaries;
(4) any instrument governing indebtedness assumed by us in an
acquisition, which encumbrance or restriction is not applicable to such
Restricted Subsidiary or the properties or assets of such subsidiary other than
the entity or the properties or assets of the entity so acquired;
(5) agreements existing on the Issue Date (as defined in the Second
Lien Notes indenture) to the extent and in the manner such agreements were in
effect on the Issue Date;
(6) customary restrictions with respect to subsidiaries of Abraxas and
Canadian Abraxas pursuant to an agreement that has been entered into for the
sale or disposition of capital stock or assets of such Restricted Subsidiary to
be consummated in accordance with the terms of the Second Lien Notes solely in
respect of the assets or capital stock to be sold or disposed of;
(7) any instrument governing certain liens permitted by the Second Lien
Notes indenture, to the extent and only to the extent such instrument restricts
the transfer or other disposition of assets subject to such lien; or
(8) an agreement governing indebtedness incurred to refinance the
indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (2), (4) or (5) above; provided, however, that the provisions relating to
such encumbrance or restriction contained in any such refinancing indebtedness
are no less favorable to the holders of the Second Lien Notes in any material
respect as determined by the Board of Directors of Abraxas in their reasonable
and good faith judgment that the provisions relating to such encumbrance or
restriction contained in the applicable agreement referred to in such clause
(2), (4) or (5).
Net Operating Loss Carryforwards. At December 31, 2000, the Company
had, subject to the limitation discussed below, $101,800,000 of net operating
loss carryforwards for U.S. tax purposes. These loss carryforwards will expire
from 2001 through 2020 if not utilized. At December 31, 2000, the Company had
approximately $11,400,000 of net operating loss carryforwards for Canadian tax
purposes. These carryforwards will expire from 2001 through 2020 if not
utilized.
As a result of the acquisition of certain partnership interests and
crude oil and natural gas properties in 1990 and 1991, an ownership change under
Section 382 occurred in December 1991. Accordingly, it is expected that the use
of the U.S. net operating loss carryforwards generated prior to December 31,
1991 of $4,909,000 will be limited to approximately $235,000 per year.
During 1992, the Company acquired 100% of the common stock of an
unrelated corporation. The use of net operating loss carryforwards of the
acquired corporation of $257,000 acquired in the acquisition are limited to
approximately $115,000 per year.
As a result of the issuance of additional shares of common stock for
acquisitions and sales of common stock, an additional ownership change under
Section 382 occurred in October 1993. Accordingly, it is expected that the use
of all U.S. net operating loss carryforwards generated through October 1993
(including those subject to the 1991 and 1992 ownership changes discussed above)
of $8,295,000 will be limited as described above and in the following paragraph.
37
An ownership change under Section 382 occurred in December 1999,
following the issuance of additional shares, as described in Note 5. It is
expected that the annual use of U.S. net operating loss carryforwards subject to
this Section 382 limitation will be limited to approximately $363,000, subject
to the lower limitations described above. Future changes in ownership may
further limit the use of the Company's carryforwards.
The annual Section 382 limitation may be increased during any year,
within 5 years of a change in ownership, in which built-in gains that existed on
the date of the change in ownership are recognized.
In addition to the Section 382 limitations, uncertainties exist as to
the future utilization of the operating loss carryforwards under the criteria
set forth under FASB Statement No. 109. Therefore, the Company has established a
valuation allowance of $36,134,000 and $34,763,000 for deferred tax assets at
December 31, 1999 and 2000, respectively.
New Accounting Pronouncement
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, is effective for the Company as of 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 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 we recognized in
earnings.
The Company expects that at January 1, 2001, it will record a liability
of $38 million with the offsetting charge to OCI as a cumulative transition
adjustment for derivatives designated as cash-flow hedges prior to adopting SFAS
133.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk; Commodity
Price Risk
Commodity Price Risk
Our exposure to market risks rests primarily with the volatile nature of
crude oil, natural gas and natural gas liquids prices. We manage crude oil and
natural gas prices through the periodic use of commodity price hedging
agreements. You should read the discussion under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" for more information regarding our hedging activities. Assuming the
production levels we attained during the year ended December 31, 2000, a 10%
decline in crude oil, natural gas and natural gas liquids prices would have
reduced our operating revenue, cash flow and net income by approximately $7.3
million for the year.
Hedging Sensitivity
The fair value of our hedge instrument was determined based on NYMEX
forward price quotes as of December 31, 2000. As of December 31, 2000, a
commodity price increase of 10% would have resulted in an unfavorable change in
the fair market value of our hedging instrument of $7.6 million and a commodity
price decrease of 10% would have resulted in a favorable change in the fair
value of our hedge instrument of $7.9 million.
The following table sets forth our hedge position as of December 31,
2000.
Time Period Notional Quantities Price Fair Value
- ------------------------------------ --------------------------- ---------------------------- --------------------
January 1, 2001 - October 31, 2002 20,000 Mcf/day of natural Fixed price swap $(38.0) million
gas or 1,000 Bbl/day of $2.60-$2.95 natural gas or [$(27) in 2001,
crude oil $18.90 Crude oil $(11) in 2002]
38
Interest rate risk
At December 31, 2000, substantially all of our long-term debt was at fixed
interest rates from 11.5% to 12.875% and not subject to fluctuations in market
rates.
Foreign currency
Our Canadian operations are measured in the local currency of Canada. As a
result, our financial results are affected by changes in foreign currency
exchange rates or weak economic conditions in the foreign markets. Canadian
operations reported a pre-tax loss of $2.4 million for the year ended December
31, 2000. 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 $120,000.
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.
Item 8. Financial Statements.
For the financial statements and supplementary data required by this Item 8,
see the Index to Consolidated Financial Statements .
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
As noted in the Form 8-K filed on August 22, 2000, the Board of
Directors of Abraxas Petroleum Corporation engaged the accounting firm of
Deloitte & Touche LLP as the Company's certifying accountant for the year ended
December 31, 2000. The Audit Committee of the Board of Directors approved the
dismissal of Ernst & Young LLP.
PART III
Item 10. Directors and Executive Officers of the Registrant.
There is incorporated in this Item 10 by reference that portion of our
definitive proxy statement for the 2001 Annual Meeting of Stockholders which
appears therein under the caption "Election of Directors". See also the
information in Item 4a of Part I of this Report.
Item 11. Executive Compensation.
There is incorporated in this Item 11 by reference that portion of our
definitive proxy statement for the 2001 Annual Meeting of Stockholders which
appears therein under the caption "Executive Compensation", except for those
parts under the captions "Compensation Committee Report on Executive
Compensation," "Performance Graph" and "Report on Repricing of Options."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
There is incorporated in this Item 12 by reference that portion of our
definitive proxy statement for the 2001 Annual Meeting of Stockholders which
appears therein under the caption "Securities Holdings of Principal
Stockholders, Directors and Officers."
Item 13. Certain Relationships and Related Transactions.
There is incorporated in this Item 13 by reference that portion of our
definitive proxy statement for the 2001 Annual Meeting of Stockholders which
appears therein under the caption "Certain Transactions."
39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)1. Consolidated Financial Statements Page
----
Report of Deloitte & Touche LLP, Independent Auditors..............F-2
Report of Ernst & Young, LLP, Independent Auditors.................F-3
Consolidated Balance Sheets,
December 31, 2000 and 1999.......................................F-4
Consolidated Statements of Operations,
Years Ended December 31, 2000, 1999, and 1998....................F-6
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 2000, 1999 and 1998....................F-7
Consolidated Statements of Cash Flows
Years Ended December 31, 2000, 1999 and 1998.....................F-9
Notes to Consolidated Financial Statements.........................F-11
(a)2. Financial Statement Schedules
All schedules have been omitted because they are not applicable, not
required under the instructions or the information requested is set forth in the
consolidated financial statements or related notes thereto.
Item 14 (b): Reports on Form 8-K Filed in the Fourth Quarter of 2000
None
(a)3.Exhibits
The following Exhibits have previously been filed by the Registrant
or are included following the Index to Exhibits.
Exhibit Number. Description
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 herewith)
40
3.6 Amended and Restated Bylaws of Abraxas. (Filed as Exhibit 3.5 to the S-3
Registration Statement).
4.1 Specimen Common Stock Certificate of Abraxas. (Filed as Exhibit 4.1 to the
S-4 Registration Statement).
4.2 Specimen Preferred Stock Certificate of Abraxas. (Filed as Exhibit 4.2 to
Abraxas' Annual Report on Form 10-K filed on March 31, 1995).
4.3 Rights Agreement dated as of December 6, 1994 between Abraxas and First
Union National Bank of North Carolina ("FUNB"). (Filed as Exhibit 4.1 to
Abraxas' Registration Statement on Form 8-A filed on December 6, 1994).
4.4 Amendment to Rights Agreement dated as of July 14, 1997 by and between
Abraxas and American Stock Transfer & Trust Company (Filed as Exhibit 1 to
Amendment No. 1 to Abraxas' Registration Statement on Form 8-A filed on August
20, 1997).
4.5 Second Amendment to Rights Agreement as of May 22, 1998, by and between
Abraxas and American Stock Transfer & Trust Company (Filed as Exhibit 1 to
Amendment No. 2 to Abraxas' Registration Statement on Form 8-A filed on August
24, 1998)
4.6 Contingent Value Rights Agreement dated December 21, 1999, by and between
Abraxas and American Stock Transfer & Trust Company (Filed as Exhibit 4.5 to
Abraxas' Registration Statement on Form S-1, No. 333-95281).
4.7 Indenture dated January 27, 1999 by and among Abraxas, Canadian Abraxas and
IBJ Schroder Bank & Trust Company (filed as Exhibit 4.1 to Abraxas' Current
Report on Form 8-K dated February 5, 1999).
4.8 Third Supplemental Indenture dated December 21, 1999, by and among Abraxas,
Canadian Abraxas and The Bank of New York f/k/a IBJ Schroder Bank & Trust
Company (Filed as Exhibit 4.7 to Abraxas' Registration Statement on Form S-1,
No. 333-95281 (the "2000 S-1 Registration Statement")).
4.9 Indenture dated March 26, 1999 by and among Abraxas, Canadian Abraxas, New
Cache, Sandia and Norwest Bank Minnesota, National Association (Filed as Exhibit
4.6 to Abraxas' Annual Report on Form 10-K dated March 31, 1999).
4.10 Indenture dated December 21, 1999, by and among Abraxas, Canadian Abraxas,
Sandia, New Cache, Wamsutter and Firstar Bank, National Association (Filed as
Exhibit T3C to Abraxas' and Canadian Abraxas' Indenture Qualification on Form
T3-A, No. 022-22449).
4.11 Form of Old Note (Filed as Exhibit A to Exhibit 4.6).
4.12 Form of First Lien Note (Filed as Exhibit A to Exhibit 4.8).
4.13 Form of Second Lien Note (Filed as Exhibit A to Exhibit 4.9).
*10.1 Abraxas Petroleum Corporation 1984 Non-Qualified Stock Option Plan, as
amended and restated. (Filed as Exhibit 10.7 to Abraxas' Annual Report on Form
10-K filed April 14, 1993).
*10.2 Abraxas Petroleum Corporation 1984 Incentive Stock Option Plan, as amended
and restated. (Filed as Exhibit 10.8 to Abraxas' Annual Report on Form 10-K
filed April 14, 1993).
41
*10.3 Abraxas Petroleum Corporation 1993 Key Contributor Stock Option Plan.
(Filed as Exhibit 10.9 to Abraxas' Annual Report on Form 10-K filed April 14,
1993
*10.4 Abraxas Petroleum Corporation 401(k) Profit Sharing Plan. (Filed as
Exhibit 10.4 to Abraxas and Canadian Abraxas' Registration Statement on Form
S-4, No. 333-18673, (the "1996 Exchange Offer Registration Statement")).
*10.5 Abraxas Petroleum Corporation Director Stock Option Plan. (Filed as
Exhibit 10.5 to the 1996 Exchange Offer Registration Statement).
*10.6 Abraxas Petroleum Corporation Restricted Share Plan for Directors. (Filed
as Exhibit 10.20 to Abraxas' Annual Report on Form 10-K filed on April 12,
1994).
*10.7 Abraxas Petroleum Corporation 1994 Long Term Incentive Plan. (Filed as
Exhibit 10.21 to Abraxas' Annual Report on Form 10-K filed on April 12, 1994).
*10.8 Abraxas Petroleum Corporation Incentive Performance Bonus Plan. (Filed as
Exhibit 10.24 to Abraxas' Annual Report on Form 10-K filed on April 12, 1994).
10.9 Common Stock Purchase Warrant dated August 11, 1993 between Abraxas and
Associated Energy Managers, Inc. (Filed as Exhibit 10.37 to the 1993 S-1
Registration Statement).
10.10 Form of Indemnity Agreement between Abraxas and each of its directors and
officers. (Filed as Exhibit 10.30 to the 1993 S-1 Registration Statement).
*10.11 Employment Agreement between Abraxas and Robert L. G. Watson. (Filed as
Exhibit 10.19 to the 2000 S-1 Registration Statement).
*10.12 Employment Agreement between Abraxas and Chris E. Williford. (Filed as
Exhibit 10.20 to the 2000 S-1 Registration Statement).
*10.13 Employment Agreement between Abraxas and Stephen T. Wendel. (Filed as
Exhibit 10.26 to the S-3 Registration Statement).
*10.14 Employment Agreement between Abraxas and Robert W. Carington, Jr. (Filed
as Exhibit 10.22 to the 2000 S-1 registration Statement).
10.15 Common Stock Purchase Warrant dated August 1, 2000 between Abraxas and
Basil Street Company (Filed herewith).
10.16 Common Stock Purchase Warrant dated September 1, 2000 between Jessup &
Lamont Holdings (Filed herewith).
10.17 Common Stock Purchase Warrant dated August 1, 2000 between Abraxas and
TNC, Inc. (Filed herewith).
10.18 Common Stock Purchase Warrant dated August 1, 2000 between Abraxas and
Charles K. Butler (Filed herewith).
10.19 Management Agreement dated November 14, 1996 by and between Canadian
Abraxas and Cascade Oil & Gas Ltd. (Filed as Exhibit 10.36 to the Exchange Offer
Registration Statement).
42
10.20 Agreement of Limited Partnership of Abraxas Wamsutter L.P. dated as of
November 12, 1999 by and between Wamsutter Holdings, Inc. and TIFD III-X Inc.
(Filed as Exhibit 10.2 to Abraxas' Current Report on Form 8-K filed November
30,1999).
10.21 Registration Rights Agreement dated December 21, 1999, by and among
Abraxas, Jefferies & Company, Inc. and Houlihan Lokey Howard & Zukin Capital.
(Filed as Exhibit 10.26 to the 2000 S-1 Registration Statement).
10.22 Registration Rights Agreement dated December 21, 1999, by and among
Abraxas, Halcyon/Alan B. Slifka Management Company LLC and Franklin Resources,
Inc. (Filed as Exhibit 10.27 to the 1999 S-1 Registration Statement).
10.23 Purchase Agreement for Dollar Denominated Production Payment dated as of
October 6, 1999 by and between Abraxas and Southern Producer Services, L.P.
(Filed as Exhibit 10.1 to Abraxas' Quarterly Report on Form 10-Q filed November
15, 1999)
10.24 Conveyance of Dollar Denominated Production Payment dated as of October 6,
1999 by and between Abraxas and Southern Producer Services, L.P. (Filed as
Exhibit 10.2 to Abraxas' Quarterly Report on Form 10-Q filed November 15, 1999)
21.1 Subsidiaries of Abraxas. (Filed as Exhibit 21.1 to Abraxas' Annual Report
on Form 10-K filed March 31, 1000).
23.1 Consent of Independent Auditors (Deloitte & Touche LLP). (Filed herewith).
23.2 Consent of Independent Auditors (Ernst & Young, LLP). (Filed herewith).
23.3 Consent of DeGolyer and MacNaughton. (Filed herewith).
23.4 Consent of McDaniel & Associates Consultants, Ltd. (Filed herewith).
* Management Compensatory Plan or Agreement.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to the signed on its
behalf by the undersigned, thereunto duly authorized.
ABRAXAS PETROLEUM CORPORATION
By: /s/Robert L.G. Watson By:/s/Chris Williford
------------------------------- ---------------------------
President and Principal Exec. Vice President and
Executive Officer Principal Financial and
Accounting Officer
DATED:
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Name and Title Date
/s/ Robert L.G. Watson Chairman of the Board,
- ----------------------------- President (Principal Executive
Robert L.G. Watson Officer)and Director 4/02/2001
---------
/s/ Chris Williford Exec. Vice President and
- ----------------------------- Treasurer (Principal Financial
Chris Williford and Accounting Officer) 4/02/2001
---------
/s/Craig S. Bartlett, Jr. Director 4/02/2001
- ----------------------------- ---------
Craig S. Bartlett, Jr.
/s/ Franklin A. Burke Director 4/02/2001
- ----------------------------- ---------
Franklin Burke
/s/ Ralph F. Cox Director 4/02/2001
- ----------------------------- ---------
Ralph F. Cox
/s/ Fredrick M. Pevow, Jr. Director 4/02/2001
- ----------------------------- ---------
Fredrick M. Pevow, Jr.
/s/ James C. Phelps Director 4/02/2001
- ----------------------------- ---------
James C. Phelps
/s/ Joseph A. Wagda Director 4/02/2001
- ----------------------------- ---------
Joseph A. Wagda
44
Exhibit 3.5
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION OF
ABRAXAS PETROLEUM CORPORATION
Pursuant to the provisions of Title 7, Sections 78.385 and 78.390 of
the Nevada Revised Statutes, Abraxas Petroleum Corporation (the "Company") does
hereby certify as follows:
FIRST: That at a meeting of the Board of Directors of the Company held
on March 22, 2000, resolutions setting forth certain proposed amendments to the
Articles of Incorporation of the Company and declaring the advisability of such
amendments were adopted and the annual meeting of the stockholders of the
Company entitled to vote for the consideration thereof was called.
SECOND: That on May 26, 2000, the annual meeting of the stockholders of
the Company was duly called and held and the stockholders holding shares of
common stock, par value $.01 per share, of the Company entitling them to
exercise at least a majority of the voting power of the Company have voted in
favor of such amendments.
THIRD: That the amendments to the Articles of Incorporation of the
Company adopted at the annual meeting of stockholders are as follows:
A. Article Fourth of the Articles of Incorporation of the Company has
been amended to read in its entirety as follows:
FOURTH: (a) The total number of shares of all classes of stock
which the corporation shall have authority to issue is (i) 200,000,000 shares
with par value $.01 per share which are to be of a class designated "Common
Stock" and (ii) 1,000,000 shares with par value $.01 per share which are to be
of a class designated "Preferred Stock."
(b) The Board of Directors is hereby expressly granted
authority to authorize from time to time, in accordance with law, the issue of
one or more series of Preferred Stock and, with respect to any such series, to
fix by resolution or resolutions the numbers, powers, designations, preferences
and relative, participating, option or other special rights of such series and
the qualifications, limitations or restrictions thereof including, but without
limiting the generality of the foregoing, the following:
(i) entitling the holders thereof to cumulative,
non-cumulative or partially cumulative dividends, or to no dividends;
(ii) entitling the holders thereof to receive
dividends payable on a parity with, junior to, or in preference to, the
dividends payable on any other class or series of capital stock of the
corporation;
(iii) entitling the holders thereof to rights upon
the voluntary or involuntary liquidation, dissolution or winding up of, or upon
any other distribution of the assets of, the corporation, on a parity with,
junior to or in preference to, the rights of any other class or series of
capital stock of the corporation;
(iv) providing for the conversion, at the option of
the holder or of the corporation or both, the shares of Preferred Stock into
shares of any other class or classes of capital stock of the corporation or of
any series of the same or any other class or classes or into property of the
corporation or into the securities or properties of any other corporation or
person, including provision for adjustment of the conversion rate in such events
as the Board of Directors shall so provide, including provisions for the
creation of a sinking fund for the redemption thereof, or providing for no
redemption;
(v) providing for the redemption, in whole or in
part, of the shares of Preferred Stock at the option of the corporation or the
holder thereof, in cash, bonds or other property, at such price or prices (which
amount may vary under different conditions and at different redemption dates),
within such period or periods, and under such conditions as the Board of
Directors shall so provide, including provisions for the creation of a sinking
fund for the redemption thereof, or providing for no redemption;
(vi) lacking voting rights or having limited voting
rights or enjoying general, special or multiple voting rights;
(vii) providing for the operation of a retirement or
sinking fund with respect thereto or for no such retirement or sinking fund,
and, if so, the extent to and manner in which any such retirement or sinking
fund shall be applied to the purchase or redemption of the shares of such series
for retirement or other corporate purposes and the terms and provisions relative
to the operation thereof;
1
(viii) providing the limitations or restrictions, if
any, to be effective while any shares of such series are outstanding upon the
payment of dividends or the making of other distributions on, and upon the
purchase, redemption or other acquisition by the corporation of, the Common
Stock or shares of stock of any other class or any other series of the same
class;
(ix) providing the conditions or restrictions, if
any, upon the creation of indebtedness of the corporation or upon the issuance
of any additional stock, including shares of any other class or series;
(x) specifying the number of shares constituting that
series and the distinctive designation of that series; and
(xi) providing any other powers, preferences and
relative, participating, optional and other special rights, and any
qualifications, limitations and restrictions thereof, insofar as they are not
inconsistent with the provisions of these Articles of Incorporation, to the full
extent permitted in accordance with the laws of the State of Nevada.
FOURTH: The number of shares of Common Stock outstanding and entitled
to vote on the amendments to the Articles of Incorporation of the Company was
22,595,016 shares. The affirmative vote of the stockholders holding a majority
of the outstanding shares of Common Stock present at the meeting, in person or
by proxy, voting together as a single class was necessary for the approval of
the amendments. Stockholders were entitled to one vote for each share of Common
Stock.
FIFTH: A. The number of shares of Common Stock voted in favor of the
amendment to Article Fourth was 14,578,364 shares, the number voted against was
5,626,851 shares and the number abstaining was 116,665 shares.
2
IN WITNESS WHEREOF, the undersigned officers of the Company have
executed this Certificate this 17th day of August, 2000.
ABRAXAS PETROLEUM CORPORATION
By:
--------------------------------------------
Robert L. G. Watson,
Chairman of the Board, President and
Chief Executive Officer
By:
--------------------------------------------
Stephen T. Wendel, Secretary and
Vice President - Land and Contracts
3
Exhibit10.15
THIS WARRANT AND THE SECURITIES PURCHASABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") AND MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED
UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
COVERING SUCH SECURITIES OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE
HOLDER OF THESE SECURITIES (REASONABLY SATISFACTORY TO THE COMPANY AND ITS
COUNSEL), OR AN OPINION OF THE COMPANY'S COUNSEL, STATING THAT SUCH SALE,
ASSIGNMENT OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
ABRAXAS PETROLEUM CORPORATION
COMMON STOCK PURCHASE WARRANT
FOR VALUE RECEIVED, Basil Street Company, or its transferees or assigns
(the "Holder"), is entitled to purchase, from ABRAXAS PETROLEUM CORPORATION, a
Nevada corporation (the "Company"), subject to the provisions hereof, 750,000
fully paid, validly issued and non-assessable shares ("Shares") of common stock,
par value $.01 per share ("Common Stock"), of the Company at an exercise price
("Exercise Price") of $3.50 per Share, subject to adjustment as provided below.
The right to purchase Shares under this Warrant is exercisable, in whole or in
part, as more specifically set forth below.
Article 1
Definitions
For all purposes of this Warrant, unless the context otherwise
requires, the following terms have the following meanings:
1.1 "Affiliate" means, with respect to any Person, any other Person
that directly or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with the Person specified.
1.2 "Common Stock" means the Company's authorized common stock, par
value $.01 per share.
1.3 "Company" means Abraxas Petroleum Corporation, a corporation
organized and existing under the laws of the State of Nevada, and any successor
corporation.
1.4 "Exercise Price" means, with respect to Shares of Warrant Stock,
$3.50 per Share.
1
1.5 "Market Price" shall mean the average of the daily market prices of
Common Stock over a period of 20 consecutive business days prior to the day as
of which "Market Price" is being determined. The Market Price for each such
business day shall be the average of the closing prices on such day of the
Common Stock on all domestic exchanges on which the Common Stock is then listed,
or, if there shall have been no sales on any such exchange on such day, the
average of the highest bid and lowest asked prices on all such exchanges at the
end of such day, or, if the Common Stock shall not be so listed, the average of
the representative bid and asked prices quoted in the NASDAQ National Market as
of 3:30 p.m., New York time, on such day, or if the Common Stock shall not be
quoted in the NASDAQ National Market, the average of the high and low bid and
asked prices on such day in the domestic over-the-counter market as successor
organization. If the Common Stock is listed on any domestic exchange the term
"business days" as used in this sentence shall mean business days on which such
exchange is open for trading. If at any time the Common Stock is not listed on
any domestic exchange or quoted in the NASDAQ National Market or the domestic
over-the-counter market, the "Market Price" shall be deemed to be the highest of
(i) the book value thereof, as determined by any firm of independent public
accountants of recognized standing selected by the Board of Directors of the
Company, as at the last day of any month ending within 60 days preceding the
date as of which the determination is to be made, (ii) the fair value thereof,
which shall be reasonably determined by the Board of Directors of the Company as
of a date which is within 15 days of the date as of which the determination is
to be made, or (iii) the Exercise Price in effect immediately prior to the
determination of Market Price.
1.6 "Person" means any natural person, sole proprietorship, general
partnership, limited partnership, joint venture, trust, unincorporated
organization, association, corporation, institution, private or governmental
entity or party.
1.7 "Warrant" means this Warrant and any warrants issued on or in
substitution for this Warrant including warrants issued in exchange for this
Warrant pursuant to Article 2.
1.8 "Warrant Stock" means the shares of Common Stock or other
securities acquired or to be acquired upon the exercise of this Warrant.
Article 2
Grant and Exercise of Warrant
2.1 Grant and Exercise. This Warrant is granted to the Holder pursuant
to the terms of the Company's financial advisory service agreement with the
Holder. This Warrant may be exercised by the Holder, at the Holder's election,
at any time.
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2.2 Holder's Procedure. To exercise this Warrant and purchase the
Warrant Stock, the Holder shall deliver to the Company at its principal office:
(a) a written notice, in substantially the form of the
Subscription Notice appearing at the end of this Warrant, of the Holder's
election to exercise this Warrant;
(b) this Warrant; and
(c) a check payable to the Company in the amount of the
Exercise Price per share of Warrant Stock.
Notwithstanding anything to the contrary set forth herein, the Holder
may at any time exercise this Warrant for "Net Warrant Shares." The number of
Net Warrant Shares shall equal [WS x (MP - EP)/MP] where "WS" is the aggregate
number of Shares issuable upon exercise of this Warrant or the portion being
exercised, "MP" is the Market Price of the Common Stock and "EP" is the Exercise
Price then in effect.
2.3 Company's Procedure. The Company shall as promptly as practicable,
and in any event within ten (10) days after receipt of the notice required under
Section 2.2, execute and deliver or cause to be executed and delivered one or
more certificates representing the aggregate number of shares of Warrant Stock
to which the Holder is entitled.
2.4 Name and Effective Date. The stock certificate(s) so delivered
shall be issued in the name of the Holder or such other name as shall be
designated in the Subscription Notice specified in Section 2.2. Such
certificate(s) shall be deemed to have been issued and the Holder or any other
Person so designated to be named therein shall be deemed for all purposes to
have become a holder of record of such shares as of the date the Company
actually receives the notice specified in Section 2.2.
2.5 Expenses. The Company shall pay all expenses, taxes, and other
charges payable in connection with the preparation, issue, and delivery of such
stock certificate(s), except that, in case such stock certificate(s) shall be
registered in a name or names other than the name of the Holder of this Warrant,
stock transfer taxes that are payable upon the issuance of such stock
certificate(s) shall be paid by the Holder hereof.
2.6 Legal Requirements. The Warrant Stock issued upon the exercise of
this Warrant shall be validly issued, fully paid, and nonassessable.
2.7 Registration. The Company will keep at its principal office a
register that will provide for the registration and transfer of the Warrant.
3
2.8 Expiration. This Warrant will expire on August 1, 2004, or the
first business day thereafter if such date is not a business day, or such other
date as may be established by mutual agreement of the parties hereto.
Article 3
Transfer
3.1 Permitted Transfers. This Warrant shall be freely transferable, in
whole or in part to any Affiliate of the Holder, subject to the limitations
specified in Section 3.2. This Warrant shall not be transferable to any other
Person except with the written consent of the Company, which consent shall not
be unreasonably withheld, and subject to the limitations specified in Section
3.2.
3.2. Securities Laws. Neither this Warrant nor the Warrant Stock shall
be transferable unless:
(a) either a registration statement under the Securities Act of 1933,
as amended (the "Securities Act"), is in effect covering this Warrant or the
Warrant Stock, as the case may be, or the Company has received an opinion from
the Company's counsel to the effect that such registration is not required, or
the Holder has furnished to the Company an opinion of the Holder's counsel,
which counsel shall be reasonably satisfactory to the Company, to the effect
that such registration is not required; and
(b) the transfer complies with any applicable state securities laws.
In the event the Holder seeks an opinion as to transfer without
registration from the Holder's counsel, the Company shall provide such factual
information to the Holder's counsel as the Holder's counsel may reasonably
request for the purpose of rendering such opinion and such counsel may rely on
the accuracy and completeness of such information in rendering such opinion.
Upon issuance at a time when the Common Stock is not publicly traded, the
Warrant Stock will bear a legend describing the restrictions on transfer set
forth in this Section 3.2.
3.3 Procedure. (a) The Holder of this Warrant, or of any warrant
substituted therefor pursuant to the provisions of this Section 3.3, may,
subject to the limitations set forth in Section 3.1, in person or by duly
authorized attorney, surrender the same for exchange at the principal office of
the Company and, within a reasonable time thereafter and without expense (other
than transfer taxes, if any), receive in exchange therefor one or more duly
executed warrants each evidencing the right to receive one share of Common Stock
or such other number of shares as may be designated by the Holder at the time of
surrender.
The Company and any agent of the Company may treat the Person in whose
name a Warrant is registered as the owner of the Warrant for all purposes
hereunder and neither the Company nor such agent shall be affected by notice to
the contrary. The Company covenants and agrees to take and cause to be taken all
action necessary to effect such registrations, transfers and exchanges.
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(b) The Holder may transfer the Warrant on the books of the Company by
surrendering to the Company:
(i) the Warrant;
(ii) a written assignment of the Warrant, in substantially the form of
the Assignment appearing at the end of this Warrant, naming the assignee and
duly executed by the Holder; and
(iii) funds sufficient to pay any stock transfer taxes payable upon the
making of such transfer.
The Company shall thereupon execute and deliver a new Warrant in the
name of the assignee specified in such instrument of assignment. Upon issuance
of the new Warrant or Warrants, the Warrant surrendered for transfer shall be
canceled by the Company.
3.4 Expenses. The Company shall pay all expenses, taxes (other than
transfer taxes), and other charges payable in connection with the preparation,
issue and delivery of any new Warrant under this Article 3.
Article 4
Adjustments
4.1 Stock Splits, Stock Dividends and Reverse Stock Splits. If at any
time the Company shall subdivide (by reclassification, by the issuance of a
Common Stock dividend on Common Stock, or otherwise) its outstanding shares of
Common Stock into a greater number, the number of shares of Common Stock that
may be purchased hereunder shall be increased proportionately and the Exercise
Price per share of Warrant Stock shall be decreased proportionately as of the
effective date of such action. The effective date of a stock dividend shall be
the date on which the dividend is declared. Issuance of a Common Stock dividend
shall be treated as a subdivision of the whole number of shares of Common Stock
outstanding immediately before the record date for such dividend into a number
of shares equal to such whole number of shares so outstanding plus the number of
shares issued as a stock dividend. If at any time the Company shall combine (by
reclassification or otherwise) its outstanding number of shares of Common Stock
into a lesser number, the number of shares of Warrant Stock that may be
purchased hereunder shall be reduced proportionately and the Exercise Price per
share of Warrant Stock shall be increased proportionately as of the effective
date of such action.
4.2 Reorganization and Reclassification. In case of any capital
reorganization or any reclassification of the capital stock of the Company while
this Warrant remains outstanding, the Holder of this Warrant shall thereafter be
5
entitled to purchase pursuant to this Warrant (in lieu of the kind and number of
shares of Warrant Stock that the Holder would have been entitled to purchase or
acquire immediately before such reorganization or reclassification) the kind and
number of shares of stock of any class or classes or other securities or
property for or into which such shares of Common Stock would have been
exchanged, converted or reclassified if the Warrant Stock had been purchased
immediately before such reorganization or reclassification at a total price not
to exceed that payable upon the exercise of the unexercised portion of this
Warrant. In case of any such reorganization or reclassification, appropriate
provision (as determined by resolution of the Board of Directors of the Company)
shall be made with respect to the rights and interests thereafter of the Holder
of this Warrant, to the end that all the provisions of the Warrant (including
adjustment provisions) shall thereafter be applicable, as nearly as reasonably
practicable, in relation to such stock or other securities or property.
4.3 Statement of Adjustment of Warrant Stock. Whenever the number or
kind of shares comprising Warrant Stock or the Exercise Price is adjusted
pursuant to this Article 4, the Company shall promptly give notice to the
Holder, stating that such an adjustment has been effected and setting forth the
number and kind of shares purchasable and the amount of the then-current
Exercise Price, and stating in reasonable detail the facts requiring such
adjustment and the calculation of such adjustment.
4.6 No Other Adjustments. No adjustments in the number or kind or price
of shares constituting Warrant Stock shall be made except as provided in this
Article 4.
Article 5
Covenants of the Company
The Company covenants and agrees that:
5.1 Reservation of Shares. At all times, the Company will reserve and
set apart and have, free from pre-emptive rights, a sufficient number of shares
of authorized but unissued Common Stock or other securities, if applicable, to
enable it at any time to fulfill all of its obligations hereunder.
5.2 Adjustment of Par Value. Before taking any action that would cause
an adjustment reducing the Exercise Price per share below the then-current par
value of the shares of Warrant Stock issuable upon exercise of the Warrant, the
Company will take any corporate action that may be necessary in order that the
Company may validly and legally issue fully paid and nonassessable shares of
such Warrant Stock at such adjusted price.
5.3 Notice of Significant Events. In case the Company proposes to:
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(a) pay any dividend, payable in stock (of any class or
classes) or in convertible securities, upon its Common Stock or to make any
distribution (other than ordinary cash dividends) to the holders of its Common
Stock;
(b) subdivide as a whole (by reclassification, by the issuance
of a stock dividend on Common Stock, or otherwise) the number of shares of
Common Stock then outstanding into a greater number of shares of Common Stock,
with or without par value;
(c) effect any capital reorganization or reclassification of
capital stock of the Company;
(d) consolidate with, or merge into, any other corporation or
business or sell or convey its assets as an entirety or substantially as an
entirety;
(e) effect the liquidation, dissolution, or winding up of the
Company;
(f) make any other fundamental change in respect of which the
Holder of this Warrant would have been entitled to vote, pursuant to the
corporation law of the State of Nevada, if the Warrant had been previously
exercised;
then the Company shall cause notice of any such intended action to be given to
the Holder (i) not less than thirty (30) days before the date on which the
transfer books of the Company shall close or a record be taken for such stock
dividend or for determining rights to vote in respect of any fundamental change,
including any capital reorganization, reclassification, consolidation, merger,
transfer, liquidation, dissolution, winding up, or any other fundamental change,
and (ii) not less than thirty (30) days before the effective date, in the case
of any such capital reorganization, reclassification, consolidation, merger,
transfer, liquidation, dissolution, winding up, or other fundamental change.
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Article 6
Limitation of Liability
No provision of this Warrant shall be construed as conferring upon the
Holder hereof the right to vote or to consent or to receive dividends or to
receive notice as a stockholder in respect of meetings of stockholders for the
election of members of the Board of Directors of the Company or any other matter
whatsoever as stockholders of the Company. In the absence of affirmative action
by the Holder to purchase shares of Common Stock, no provision hereof shall give
rise to any liability of the Holder for the purchase price or as a stockholder
of the Company, whether such liability is asserted by the Company or by
creditors of the Company.
Article 7
Merger, Consolidation, or Change
7.1 Continuation of Warrant. Except as provided in Section 7.2, in the
event that the Company proposes to consolidate with, or merge into, any other
corporation or business or to transfer its property as an entirety or
substantially as an entirety, or to effect the liquidation, dissolution, or
winding up of the Company, or to change the Common Stock in any manner (other
than to change its par value), then after the Company causes notice of such
proposed action to be given to the Holder of record as provided in Section 5.3,
the Holder shall be entitled, on or before the effective date of such merger,
consolidation, transfer, liquidation, dissolution, winding up, or change to
require the Company or the successor or purchasing entity, as the case may be,
to (a) execute with the Holder an agreement providing that the Holder shall have
the right thereafter and throughout the remaining term of the Warrant upon
payment of the Exercise Price per share of Warrant Stock in effect immediately
prior to such action to purchase with respect to each share of Warrant Stock
issuable upon exercise of this Warrant the kind and amount of shares of stock
and other securities, property (including cash) or any combination thereof which
the Holder would have owned or have been entitled to receive after the happening
of such consolidation, merger, sale, conveyance, or change had this Warrant been
exercised with respect to such share of Warrant Stock immediately prior to such
action and (b) make effective provision in its Articles of Incorporation or
otherwise, if necessary, in order to effect such agreement. Such agreement shall
provide for adjustments which shall be as nearly equivalent as practicable to
the adjustments in Article 4 of this Warrant. The provisions of this Section 7.1
shall similarly apply to successive consolidations, mergers, sales, conveyances
or changes.
7.2 Exception. Section 7.1 shall not apply to a consolidation or merger
with a Person in which the Company is the surviving entity.
8
Article 8
REGISTRATION RIGHTS
8.1 Piggyback Registration Rights. If, at any time on or before the
expiration of this Warrant, the Company proposes to file a registration
statement for the public sale of any of its Common Stock under the Securities
Act, other than a registration statement originally declared effective prior to
the date hereof or a registration effected solely to implement an employee
benefit plan or a transaction to which Rule 145 under the Securities Act is
applicable or pursuant to which Common Stock is registered other than for sale
to the public, the Company shall, not later than thirty (30) days prior to the
initial filing of the registration statement, deliver notice of its intent to
file such registration statement to the Holder, setting forth the minimum and
maximum proposed offering price, commissions, and discounts in connection with
the offering, and other relevant information. Within ten (10) days after receipt
of notice of the Company's intent to file a registration statement, the Holder
shall be entitled to request that the Warrant Stock be included in such
registration statement, and the Company will use its best efforts to cause such
Warrant Stock to be included in the offering covered by such registration
statement. In the event the Warrant Stock is included in the registration
statement, the Holder may transfer the Warrant to an underwriter or broker for
exercise by such underwriter or broker in connection with a distribution of the
Warrant Stock.
8.2 Filing Obligations of the Company. In connection with any
registration of the Warrant Stock effected under Section 8.1, the Company shall:
(a) prepare and file the registration statement and such amendments and
supplements to the registration statement and the prospectus or offering
circular used in connection therewith as may be necessary to keep the
registration statement effective for a period of ninety (90) days and to comply
with the provisions of the Securities Act and the rules and regulations
thereunder with respect to the disposition of the Warrant Stock covered by the
registration statement for the period required to effect the distribution
thereof, but in no event shall the Company be required to do so for a period of
more than ninety (90) days following the effective date of such registration
statement;
(b) furnish to the Holder such number of copies of any prospectus or
offering circular, including a preliminary prospectus, and of a full
registration statement and exhibits in conformity with the requirements of the
Securities Act and rules and regulations thereunder, as the Holder may
reasonably request in order to facilitate the disposition of such securities;
(c) use its best efforts to register or qualify the Warrant Stock
covered by the registration statement, as the case may be, under the securities
or blue sky laws of such jurisdictions as the Holder may reasonably request, and
accomplish any and all other acts and things which may be necessary or advisable
to permit sale in such jurisdictions of such Warrant Stock; provided, however,
that the Company shall not be required to register as a dealer or to qualify as
a foreign corporation in any such jurisdictions or to escrow any shares of its
capital stock.
9
8.3 Expenses. All expenses incurred by the Company in connection with
any registration of the Warrant Stock effected under Section 8.1, including,
without limitation, all registration and filing fees, fees and expenses of
complying with state securities and blue sky laws, printing expenses, fees and
expenses of the Company's counsel and accountants and fees and expenses of
counsel for the Holder, shall be paid by the Company; provided, however, that
all underwriting discounts and selling commission applicable to the Warrant
Stock shall not be borne by the Company but shall be borne by the Holder.
8.4 Indemnification.
(a) By the Company. In connection with the filing of any registration
statement and sales of Warrant Stock thereunder, the Company shall indemnify and
hold harmless the Holder of this Warrant, any underwriter, and each other
Person, if any, who controls the Holder or the underwriter within the meaning of
the Securities Act, against losses, claims, damages or liabilities, joint or
several (or actions in respect thereto) ("Losses"), to which any such Holder,
underwriter, or controlling Person may become subject under the Securities Act
or otherwise, insofar as such Losses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which the Warrant Stock was registered under the
Securities Act, any preliminary prospectus, offering circular or final
prospectus contained therein, or any amendment or supplement thereto, or any
report filed with the Securities and Exchange Commission (the "Disclosure
Documents"), or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse any such Holder,
underwriter, or controlling Person for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claims, excluding any amounts paid in settlement of litigation, commenced or
threatened, if such settlement is effected without the prior written consent of
the Company; provided, however, that the Company shall not be liable in any such
case to the extent that any such Losses arise out of or omission or alleged
omission made in such Disclosure Documents in reliance upon and in conformity
with information furnished to the Company in writing by or on behalf of the
Holder of this Warrant for use specifically in connection with the preparation
of such Disclosure Document.
(b) By the Holder. In connection with the filing of any registration
statement and sales of the Warrant Stock thereunder, the Holder shall indemnify
the Company, any underwriter, each of the Company's directors, each of its
officers who signed such registration statement, and each other Person, if any,
who controls the Company or the underwriter within the meaning of the Securities
Act, against any Losses to which the Company, any of its directors, officers, or
controlling Persons may become subject under the Securities Act or otherwise,
10
insofar as such Losses arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any of the Disclosure
Documents or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse the Company, the
underwriters, and any of their respective directors, officers, or controlling
Persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claims, excluding any amounts paid in
settlement of litigation, commenced or threatened, if such settlement is
effected without the prior written consent of the Holder; provided, however,
that such indemnification or reimbursement shall be payable in any such case
only to the extent that such statement or alleged statement or omission or
alleged omission is made in reliance on information furnished to the Company in
writing by or on behalf of the Holder for use specifically in connection with
the preparation of such Disclosure Document.
8.5 Discharge of Registration Obligations. In the event the Holder
demands that the Warrant Stock be registered pursuant to Section 8.1 herein, the
Company shall have the right to discharge the registration obligations set forth
in Section 8.1 by repurchasing all or any part of the Warrant or Warrant Stock,
as designated by the Holder, for cash at the Market Price determined as of the
date the Holder demands registration or the date the Company delivers notice of
its election to repurchase, whichever is higher. The Company must deliver
written notice to the Holder of its election to repurchase the Warrant within
thirty (30) days after receipt of a request by the Holder for registration. The
Company shall deliver the purchase price to the Holder upon delivery of the
Warrant or Warrant Stock. In the event the Company does not deliver cash to the
Holder as required under this Section 8.5, the Company's right to repurchase
under this Section 8.5 shall be terminated.
ARTICLE 9
Miscellaneous
9.1 Governing Law. The rights of the parties arising under this Warrant
shall be construed and enforced under the laws of the State of Nevada without
giving effect to any choice of law or conflict of law rules.
9.2 Notices. Any notice or other communication required or permitted to
be given or delivered pursuant to this Warrant shall be in writing and shall be
deemed effective as of the date of receipt if delivered personally, by facsimile
transmission (if receipt is confirmed by the facsimile operator of the
recipient), by overnight courier service or by registered or certified mail
(return receipt requested), postage prepaid, to the parties at the following
addresses (or at such other address in the United States of America for a party
as shall be specified by like notice; provided that notices of change of address
be effective only upon receipt thereof):
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(i) to the Holder as follows:
Basil Street Company
(ii) to the Company as follows:
Abraxas Petroleum Corporation
500 N. Loop 1604 East, Suite 100
San Antonio, Texas 78232
9.3 Severability. If any provision of this Warrant shall be held
invalid, such invalidity shall not affect any other provision of this Warrant
that can be given effect without the invalid provision, and to this end, the
provisions hereof are separable.
9.4 Headings. The headings in this Warrant are for reference purposes
only and shall not affect in any way the meaning of interpretation of this
Warrant.
9.5 Internal References. References to an "article," "section" or a
"subsection" when used without further attribution shall refer to the particular
articles, sections or subsections of this Warrant.
9.6 Amendment. This Warrant cannot be amended or modified except by a
written agreement executed by the Company and the Holder.
9.7 Assignment. This Warrant shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns except that no party may assign or
transfer its rights or obligations under this Warrant except to the extent
explicitly permitted herein.
9.8 Entire Agreement. This Warrant, together with its attachments,
contains the entire understanding among the parties hereto with respect to the
subject matter hereof and supersedes all prior and contemporaneous agreements
and understandings, inducements or conditions, express or implied, oral or
written, except as herein contained.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in
its name by its Chairman of the Board, President and Chief Executive Officer
thereunto duly authorized.
Dated: August 1, 2000
ABRAXAS PETROLEUM CORPORATION
By:
------------------------------------------------
Robert L. G. Watson, Chairman of the Board,
President and Chief Executive Officer
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SUBSCRIPTION NOTICE
The undersigned, the Holder of a Common Stock Purchase Warrant issued
by Abraxas Petroleum Corporation, a Nevada corporation (the "Company"), dated as
of ______________, 2000, hereby elects to purchase thereunder _______ shares of
Common Stock, par value $.01 per share, of the Company covered by such Warrant
and herewith makes payment in full therefor of ________________________ and
requests that the certificate(s) for such shares (and any securities or the
property issuable upon such exercise) be issued in the name of and delivered to
_________________________ whose address is_____________________________________.
The undersigned hereby agrees to pay any transfer taxes on the transfer
of all or any portion of the Warrant or Common Stock requested herein.
The undersigned agrees that, in the absence of an effective
registration statement with respect to Common Stock issued upon this exercise,
the undersigned is acquiring such Common Stock for investment and not with a
view to distribution thereof and the certificate or certificates representing
such Common Stock may bear a legend substantially as follows: "The shares
represented by this certificate have not been registered under the Securities
Act of 1933, as amended, and may not be transferred except as provided in
Article 3 of the Warrant to purchase Common Stock of Abraxas Petroleum
Corporation, a copy of which is on file at the principal office of Abraxas
Petroleum Corporation"
______________________________________
Signature guaranteed:
Dated:_____________________________
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ASSIGNMENT
FOR VALUED RECEIVED, the undersigned hereby sells, assigns and
transfers unto ________________________ the rights represented by the foregoing
Common Stock Purchase Warrant of Abraxas Petroleum Corporation, and appoints
__________________ its attorney to transfer said rights on the books of said
corporation, with full power of substitution in the premises.
_____________________________________
Signature guaranteed:
Dated:_________________________________
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Exhibit 10.16
THIS WARRANT AND THE SECURITIES PURCHASABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") AND MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED
UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
COVERING SUCH SECURITIES OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE
HOLDER OF THESE SECURITIES (REASONABLY SATISFACTORY TO THE COMPANY AND ITS
COUNSEL), OR AN OPINION OF THE COMPANY'S COUNSEL, STATING THAT SUCH SALE,
ASSIGNMENT OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
ABRAXAS PETROLEUM CORPORATION
COMMON STOCK PURCHASE WARRANT
FOR VALUE RECEIVED, [Holder], or its transferees or assigns (the
"Holder"), is entitled to purchase, from ABRAXAS PETROLEUM CORPORATION, a Nevada
corporation (the "Company"), subject to the provisions hereof, 10,000 fully
paid, validly issued and non-assessable shares ("Shares") of common stock, par
value $.01 per share ("Common Stock"), of the Company at an exercise price
("Exercise Price") of $3.50 per Share, subject to adjustment as provided below.
The right to purchase Shares under this Warrant is exercisable, in whole or in
part, as more specifically set forth below.
Article 1
Definitions
For all purposes of this Warrant, unless the context otherwise
requires, the following terms have the following meanings:
1.1 "Affiliate" means, with respect to any Person, any other Person
that directly or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with the Person specified.
1.2 "Common Stock" means the Company's authorized common stock, par
value $.01 per share.
1.3 "Company" means Abraxas Petroleum Corporation, a corporation
organized and existing under the laws of the State of Nevada, and any successor
corporation.
1.4 "Exercise Price" means, with respect to Shares of Warrant Stock,
$3.50 per Share.
1
1.5 "Market Price" shall mean the average of the daily market prices of
Common Stock over a period of 20 consecutive business days prior to the day as
of which "Market Price" is being determined. The Market Price for each such
business day shall be the average of the closing prices on such day of the
Common Stock on all domestic exchanges on which the Common Stock is then listed,
or, if there shall have been no sales on any such exchange on such day, the
average of the highest bid and lowest asked prices on all such exchanges at the
end of such day, or, if the Common Stock shall not be so listed, the average of
the representative bid and asked prices quoted in the NASDAQ National Market as
of 3:30 p.m., New York time, on such day, or if the Common Stock shall not be
quoted in the NASDAQ National Market, the average of the high and low bid and
asked prices on such day in the domestic over-the-counter market as successor
organization. If the Common Stock is listed on any domestic exchange the term
"business days" as used in this sentence shall mean business days on which such
exchange is open for trading. If at any time the Common Stock is not listed on
any domestic exchange or quoted in the NASDAQ National Market or the domestic
over-the-counter market, the "Market Price" shall be deemed to be the highest of
(i) the book value thereof, as determined by any firm of independent public
accountants of recognized standing selected by the Board of Directors of the
Company, as at the last day of any month ending within 60 days preceding the
date as of which the determination is to be made, (ii) the fair value thereof,
which shall be reasonably determined by the Board of Directors of the Company as
of a date which is within 15 days of the date as of which the determination is
to be made, or (iii) the Exercise Price in effect immediately prior to the
determination of Market Price.
1.6 "Person" means any natural person, sole proprietorship, general
partnership, limited partnership, joint venture, trust, unincorporated
organization, association, corporation, institution, private or governmental
entity or party.
1.7 "Warrant" means this Warrant and any warrants issued on or in
substitution for this Warrant including warrants issued in exchange for this
Warrant pursuant to Article 2.
1.8 "Warrant Stock" means the shares of Common Stock or other
securities acquired or to be acquired upon the exercise of this Warrant.
Article 2
Grant and Exercise of Warrant
2.1 Grant and Exercise. This Warrant is granted to the Holder pursuant
to the terms of the Company's financial advisory service agreement with the
Holder. This Warrant may be exercised by the Holder, at the Holder's election,
at any time.
2
2.2 Holder's Procedure. To exercise this Warrant and purchase the
Warrant Stock, the Holder shall deliver to the Company at its principal office:
(a) a written notice, in substantially the form of the
Subscription Notice appearing at the end of this Warrant, of the Holder's
election to exercise this Warrant;
(b) this Warrant; and
(c) a check payable to the Company in the amount of the
Exercise Price per share of Warrant Stock.
Notwithstanding anything to the contrary set forth herein, the Holder
may at any time exercise this Warrant for "Net Warrant Shares." The number of
Net Warrant Shares shall equal [WS x (MP - EP)/MP] where "WS" is the aggregate
number of Shares issuable upon exercise of this Warrant or the portion being
exercised, "MP" is the Market Price of the Common Stock and "EP" is the Exercise
Price then in effect.
2.3 Company's Procedure. The Company shall as promptly as practicable,
and in any event within ten (10) days after receipt of the notice required under
Section 2.2, execute and deliver or cause to be executed and delivered one or
more certificates representing the aggregate number of shares of Warrant Stock
to which the Holder is entitled.
2.4 Name and Effective Date. The stock certificate(s) so delivered
shall be issued in the name of the Holder or such other name as shall be
designated in the Subscription Notice specified in Section 2.2. Such
certificate(s) shall be deemed to have been issued and the Holder or any other
Person so designated to be named therein shall be deemed for all purposes to
have become a holder of record of such shares as of the date the Company
actually receives the notice specified in Section 2.2.
2.5 Expenses. The Company shall pay all expenses, taxes, and other
charges payable in connection with the preparation, issue, and delivery of such
stock certificate(s), except that, in case such stock certificate(s) shall be
registered in a name or names other than the name of the Holder of this Warrant,
stock transfer taxes that are payable upon the issuance of such stock
certificate(s) shall be paid by the Holder hereof.
2.6 Legal Requirements. The Warrant Stock issued upon the exercise of
this Warrant shall be validly issued, fully paid, and nonassessable.
2.7 Registration. The Company will keep at its principal office a
register that will provide for the registration and transfer of the Warrant.
3
2.8 Expiration. This Warrant will expire on August 1, 2004, or the
first business day thereafter if such date is not a business day, or such other
date as may be established by mutual agreement of the parties hereto.
Article 3
Transfer
3.1 Permitted Transfers. This Warrant shall be freely transferable, in
whole or in part to any Affiliate of the Holder, subject to the limitations
specified in Section 3.2. This Warrant shall not be transferable to any other
Person except with the written consent of the Company, which consent shall not
be unreasonably withheld, and subject to the limitations specified in Section
3.2.
3.2. Securities Laws. Neither this Warrant nor the Warrant Stock shall
be transferable unless:
(a) either a registration statement under the Securities Act of 1933,
as amended (the "Securities Act"), is in effect covering this Warrant or the
Warrant Stock, as the case may be, or the Company has received an opinion from
the Company's counsel to the effect that such registration is not required, or
the Holder has furnished to the Company an opinion of the Holder's counsel,
which counsel shall be reasonably satisfactory to the Company, to the effect
that such registration is not required; and
(b) the transfer complies with any applicable state securities laws.
In the event the Holder seeks an opinion as to transfer without
registration from the Holder's counsel, the Company shall provide such factual
information to the Holder's counsel as the Holder's counsel may reasonably
request for the purpose of rendering such opinion and such counsel may rely on
the accuracy and completeness of such information in rendering such opinion.
Upon issuance at a time when the Common Stock is not publicly traded, the
Warrant Stock will bear a legend describing the restrictions on transfer set
forth in this Section 3.2.
3.3 Procedure. (a) The Holder of this Warrant, or of any warrant
substituted therefor pursuant to the provisions of this Section 3.3, may,
subject to the limitations set forth in Section 3.1, in person or by duly
authorized attorney, surrender the same for exchange at the principal office of
the Company and, within a reasonable time thereafter and without expense (other
than transfer taxes, if any), receive in exchange therefor one or more duly
executed warrants each evidencing the right to receive one share of Common Stock
or such other number of shares as may be designated by the Holder at the time of
surrender.
The Company and any agent of the Company may treat the Person in whose
name a Warrant is registered as the owner of the Warrant for all purposes
hereunder and neither the Company nor such agent shall be affected by notice to
the contrary. The Company covenants and agrees to take and cause to be taken all
action necessary to effect such registrations, transfers and exchanges.
4
(b) The Holder may transfer the Warrant on the books of the Company by
surrendering to the Company:
(i) the Warrant;
(ii) a written assignment of the Warrant, in substantially the form of
the Assignment appearing at the end of this Warrant, naming the assignee and
duly executed by the Holder; and
(iii) funds sufficient to pay any stock transfer taxes payable upon the
making of such transfer.
The Company shall thereupon execute and deliver a new Warrant in the
name of the assignee specified in such instrument of assignment. Upon issuance
of the new Warrant or Warrants, the Warrant surrendered for transfer shall be
canceled by the Company.
3.4 Expenses. The Company shall pay all expenses, taxes (other than
transfer taxes), and other charges payable in connection with the preparation,
issue and delivery of any new Warrant under this Article 3.
Article 4
Adjustments
4.1 Stock Splits, Stock Dividends and Reverse Stock Splits. If at any
time the Company shall subdivide (by reclassification, by the issuance of a
Common Stock dividend on Common Stock, or otherwise) its outstanding shares of
Common Stock into a greater number, the number of shares of Common Stock that
may be purchased hereunder shall be increased proportionately and the Exercise
Price per share of Warrant Stock shall be decreased proportionately as of the
effective date of such action. The effective date of a stock dividend shall be
the date on which the dividend is declared. Issuance of a Common Stock dividend
shall be treated as a subdivision of the whole number of shares of Common Stock
outstanding immediately before the record date for such dividend into a number
of shares equal to such whole number of shares so outstanding plus the number of
shares issued as a stock dividend. If at any time the Company shall combine (by
reclassification or otherwise) its outstanding number of shares of Common Stock
into a lesser number, the number of shares of Warrant Stock that may be
purchased hereunder shall be reduced proportionately and the Exercise Price per
share of Warrant Stock shall be increased proportionately as of the effective
date of such action.
4.2 Reorganization and Reclassification. In case of any capital
reorganization or any reclassification of the capital stock of the Company while
5
this Warrant remains outstanding, the Holder of this Warrant shall thereafter be
entitled to purchase pursuant to this Warrant (in lieu of the kind and number of
shares of Warrant Stock that the Holder would have been entitled to purchase or
acquire immediately before such reorganization or reclassification) the kind and
number of shares of stock of any class or classes or other securities or
property for or into which such shares of Common Stock would have been
exchanged, converted or reclassified if the Warrant Stock had been purchased
immediately before such reorganization or reclassification at a total price not
to exceed that payable upon the exercise of the unexercised portion of this
Warrant. In case of any such reorganization or reclassification, appropriate
provision (as determined by resolution of the Board of Directors of the Company)
shall be made with respect to the rights and interests thereafter of the Holder
of this Warrant, to the end that all the provisions of the Warrant (including
adjustment provisions) shall thereafter be applicable, as nearly as reasonably
practicable, in relation to such stock or other securities or property.
4.3 Statement of Adjustment of Warrant Stock. Whenever the number or
kind of shares comprising Warrant Stock or the Exercise Price is adjusted
pursuant to this Article 4, the Company shall promptly give notice to the
Holder, stating that such an adjustment has been effected and setting forth the
number and kind of shares purchasable and the amount of the then-current
Exercise Price, and stating in reasonable detail the facts requiring such
adjustment and the calculation of such adjustment.
4.6 No Other Adjustments. No adjustments in the number or kind or price
of shares constituting Warrant Stock shall be made except as provided in this
Article 4.
Article 5
Covenants of the Company
The Company covenants and agrees that:
5.1 Reservation of Shares. At all times, the Company will reserve and
set apart and have, free from pre-emptive rights, a sufficient number of shares
of authorized but unissued Common Stock or other securities, if applicable, to
enable it at any time to fulfill all of its obligations hereunder.
5.2 Adjustment of Par Value. Before taking any action that would cause
an adjustment reducing the Exercise Price per share below the then-current par
value of the shares of Warrant Stock issuable upon exercise of the Warrant, the
Company will take any corporate action that may be necessary in order that the
Company may validly and legally issue fully paid and nonassessable shares of
such Warrant Stock at such adjusted price.
5.3 Notice of Significant Events. In case the Company proposes to:
6
(a) pay any dividend, payable in stock (of any class or
classes) or in convertible securities, upon its Common Stock or to make any
distribution (other than ordinary cash dividends) to the holders of its Common
Stock;
(b) subdivide as a whole (by reclassification, by the issuance
of a stock dividend on Common Stock, or otherwise) the number of shares of
Common Stock then outstanding into a greater number of shares of Common Stock,
with or without par value;
(c) effect any capital reorganization or reclassification of
capital stock of the Company;
(d) consolidate with, or merge into, any other corporation or
business or sell or convey its assets as an entirety or substantially as an
entirety;
(e) effect the liquidation, dissolution, or winding up of the
Company;
(f) make any other fundamental change in respect of which the
Holder of this Warrant would have been entitled to vote, pursuant to the
corporation law of the State of Nevada, if the Warrant had been previously
exercised;
then the Company shall cause notice of any such intended action to be given to
the Holder (i) not less than thirty (30) days before the date on which the
transfer books of the Company shall close or a record be taken for such stock
dividend or for determining rights to vote in respect of any fundamental change,
including any capital reorganization, reclassification, consolidation, merger,
transfer, liquidation, dissolution, winding up, or any other fundamental change,
and (ii) not less than thirty (30) days before the effective date, in the case
of any such capital reorganization, reclassification, consolidation, merger,
transfer, liquidation, dissolution, winding up, or other fundamental change.
7
Article 6
Limitation of Liability
No provision of this Warrant shall be construed as conferring upon the
Holder hereof the right to vote or to consent or to receive dividends or to
receive notice as a stockholder in respect of meetings of stockholders for the
election of members of the Board of Directors of the Company or any other matter
whatsoever as stockholders of the Company. In the absence of affirmative action
by the Holder to purchase shares of Common Stock, no provision hereof shall give
rise to any liability of the Holder for the purchase price or as a stockholder
of the Company, whether such liability is asserted by the Company or by
creditors of the Company.
Article 7
Merger, Consolidation, or Change
7.1 Continuation of Warrant. Except as provided in Section 7.2, in the
event that the Company proposes to consolidate with, or merge into, any other
corporation or business or to transfer its property as an entirety or
substantially as an entirety, or to effect the liquidation, dissolution, or
winding up of the Company, or to change the Common Stock in any manner (other
than to change its par value), then after the Company causes notice of such
proposed action to be given to the Holder of record as provided in Section 5.3,
the Holder shall be entitled, on or before the effective date of such merger,
consolidation, transfer, liquidation, dissolution, winding up, or change to
require the Company or the successor or purchasing entity, as the case may be,
to (a) execute with the Holder an agreement providing that the Holder shall have
the right thereafter and throughout the remaining term of the Warrant upon
payment of the Exercise Price per share of Warrant Stock in effect immediately
prior to such action to purchase with respect to each share of Warrant Stock
issuable upon exercise of this Warrant the kind and amount of shares of stock
and other securities, property (including cash) or any combination thereof which
the Holder would have owned or have been entitled to receive after the happening
of such consolidation, merger, sale, conveyance, or change had this Warrant been
exercised with respect to such share of Warrant Stock immediately prior to such
action and (b) make effective provision in its Articles of Incorporation or
otherwise, if necessary, in order to effect such agreement. Such agreement shall
provide for adjustments which shall be as nearly equivalent as practicable to
the adjustments in Article 4 of this Warrant. The provisions of this Section 7.1
shall similarly apply to successive consolidations, mergers, sales, conveyances
or changes.
7.2 Exception. Section 7.1 shall not apply to a consolidation or merger
with a Person in which the Company is the surviving entity.
8
Article 8
REGISTRATION RIGHTS
8.1 Piggyback Registration Rights. If, at any time on or before the
expiration of this Warrant, the Company proposes to file a registration
statement for the public sale of any of its Common Stock under the Securities
Act, other than a registration statement originally declared effective prior to
the date hereof or a registration effected solely to implement an employee
benefit plan or a transaction to which Rule 145 under the Securities Act is
applicable or pursuant to which Common Stock is registered other than for sale
to the public, the Company shall, not later than thirty (30) days prior to the
initial filing of the registration statement, deliver notice of its intent to
file such registration statement to the Holder, setting forth the minimum and
maximum proposed offering price, commissions, and discounts in connection with
the offering, and other relevant information. Within ten (10) days after receipt
of notice of the Company's intent to file a registration statement, the Holder
shall be entitled to request that the Warrant Stock be included in such
registration statement. In the event the Warrant Stock is included in the
registration statement, the Holder may transfer the Warrant to an underwriter or
broker for exercise by such underwriter or broker in connection with a
distribution of the Warrant Stock.
8.2 Filing Obligations of the Company. In connection with any
registration of the Warrant Stock effected under Section 8.1, the Company shall:
(a) prepare and file the registration statement and such amendments and
supplements to the registration statement and the prospectus or offering
circular used in connection therewith as may be necessary to keep the
registration statement effective for a period of ninety (90) days and to comply
with the provisions of the Securities Act and the rules and regulations
thereunder with respect to the disposition of the Warrant Stock covered by the
registration statement for the period required to effect the distribution
thereof, but in no event shall the Company be required to do so for a period of
more than ninety (90) days following the effective date of such registration
statement;
(b) furnish to the Holder such number of copies of any prospectus or
offering circular, including a preliminary prospectus, and of a full
registration statement and exhibits in conformity with the requirements of the
Securities Act and rules and regulations thereunder, as the Holder may
reasonably request in order to facilitate the disposition of such securities;
(c) register or qualify the Warrant Stock covered by the registration
statement, as the case may be, under the securities or blue sky laws of such
jurisdictions as the Holder may reasonably request, and accomplish any and all
other acts and things which may be necessary or advisable to permit sale in such
jurisdictions of such Warrant Stock; provided, however, that the Company shall
9
not be required to register as a dealer or to qualify as a foreign corporation
in any such jurisdictions or to escrow any shares of its capital stock.
8.3 Expenses. All expenses incurred by the Company in connection with
any registration of the Warrant Stock effected under Section 8.1, including,
without limitation, all registration and filing fees, fees and expenses of
complying with state securities and blue sky laws, printing expenses, fees and
expenses of the Company's counsel and accountants and fees and expenses of
counsel for the Holder, shall be paid by the Company; provided, however, that
all underwriting discounts and selling commission applicable to the Warrant
Stock shall not be borne by the Company but shall be borne by the Holder.
8.4 Indemnification.
---------------
(a) By the Company. In connection with the filing of any registration
statement and sales of Warrant Stock thereunder, the Company shall indemnify and
hold harmless the Holder of this Warrant, any underwriter, and each other
Person, if any, who controls the Holder or the underwriter within the meaning of
the Securities Act, against losses, claims, damages or liabilities, joint or
several (or actions in respect thereto) ("Losses"), to which any such Holder,
underwriter, or controlling Person may become subject under the Securities Act
or otherwise, insofar as such Losses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which the Warrant Stock was registered under the
Securities Act, any preliminary prospectus, offering circular or final
prospectus contained therein, or any amendment or supplement thereto, or any
report filed with the Securities and Exchange Commission (the "Disclosure
Documents"), or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse any such Holder,
underwriter, or controlling Person for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claims, excluding any amounts paid in settlement of litigation, commenced or
threatened, if such settlement is effected without the prior written consent of
the Company; provided, however, that the Company shall not be liable in any such
case to the extent that any such Losses arise out of or omission or alleged
omission made in such Disclosure Documents in reliance upon and in conformity
with information furnished to the Company in writing by or on behalf of the
Holder of this Warrant for use specifically in connection with the preparation
of such Disclosure Document.
(b) By the Holder. In connection with the filing of any registration
statement and sales of the Warrant Stock thereunder, the Holder shall indemnify
the Company, any underwriter, each of the Company's directors, each of its
officers who signed such registration statement, and each other Person, if any,
who controls the Company or the underwriter within the meaning of the Securities
Act, against any Losses to which the Company, any of its directors, officers, or
controlling Persons may become subject under the Securities Act or otherwise,
10
insofar as such Losses arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any of the Disclosure
Documents or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse the Company, the
underwriters, and any of their respective directors, officers, or controlling
Persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claims, excluding any amounts paid in
settlement of litigation, commenced or threatened, if such settlement is
effected without the prior written consent of the Holder; provided, however,
that such indemnification or reimbursement shall be payable in any such case
only to the extent that such statement or alleged statement or omission or
alleged omission is made in reliance on information furnished to the Company in
writing by or on behalf of the Holder for use specifically in connection with
the preparation of such Disclosure Document.
8.5 Discharge of Registration Obligations. In the event the Holder
demands that the Warrant Stock be registered pursuant to Section 8.1 herein, the
Company shall have the right to discharge the registration obligations set forth
in Section 8.1 by repurchasing all or any part of the Warrant or Warrant Stock,
as designated by the Holder, for cash at the Market Price determined as of the
date the Holder demands registration or the date the Company delivers notice of
its election to repurchase, whichever is higher. The Company must deliver
written notice to the Holder of its election to repurchase the Warrant within
thirty (30) days after receipt of a request by the Holder for registration. The
Company shall deliver the purchase price to the Holder upon delivery of the
Warrant or Warrant Stock. In the event the Company does not deliver cash to the
Holder as required under this Section 8.5, the Company's right to repurchase
under this Section 8.5 shall be terminated.
ARTICLE 9
Miscellaneous
9.1 Governing Law. The rights of the parties arising under this Warrant
shall be construed and enforced under the laws of the State of Nevada without
giving effect to any choice of law or conflict of law rules.
9.2 Notices. Any notice or other communication required or permitted to
be given or delivered pursuant to this Warrant shall be in writing and shall be
deemed effective as of the date of receipt if delivered personally, by facsimile
transmission (if receipt is confirmed by the facsimile operator of the
recipient), by overnight courier service or by registered or certified mail
(return receipt requested), postage prepaid, to the parties at the following
addresses (or at such other address in the United States of America for a party
as shall be specified by like notice; provided that notices of change of address
be effective only upon receipt thereof):
11
(i) to the Holder as follows:
[Holder]
(ii) to the Company as follows:
Abraxas Petroleum Corporation
500 N. Loop 1604 East, Suite 100
San Antonio, Texas 78232
9.3 Severability. If any provision of this Warrant shall be held
invalid, such invalidity shall not affect any other provision of this Warrant
that can be given effect without the invalid provision, and to this end, the
provisions hereof are separable.
9.4 Headings. The headings in this Warrant are for reference purposes
only and shall not affect in any way the meaning of interpretation of this
Warrant.
9.5 Internal References. References to an "article," "section" or a
"subsection" when used without further attribution shall refer to the particular
articles, sections or subsections of this Warrant.
9.6 Amendment. This Warrant cannot be amended or modified except by a
written agreement executed by the Company and the Holder.
9.7 Assignment. This Warrant shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns except that no party may assign or
transfer its rights or obligations under this Warrant except to the extent
explicitly permitted herein.
9.8 Entire Agreement. This Warrant, together with its attachments,
contains the entire understanding among the parties hereto with respect to the
subject matter hereof and supersedes all prior and contemporaneous agreements
and understandings, inducements or conditions, express or implied, oral or
written, except as herein contained.
12
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in
its name by its Chairman of the Board, President and Chief Executive Officer
thereunto duly authorized.
Dated: September __, 2000
ABRAXAS PETROLEUM CORPORATION
By:
---------------------------------------------
Robert L. G. Watson, Chairman of the Board,
President and Chief Executive Officer
13
SUBSCRIPTION NOTICE
The undersigned, the Holder of a Common Stock Purchase Warrant issued
by Abraxas Petroleum Corporation, a Nevada corporation (the "Company"), dated as
of ______________, 2000, hereby elects to purchase thereunder _______ shares of
Common Stock, par value $.01 per share, of the Company covered by such Warrant
and herewith makes payment in full therefor of ________________________ and
requests that the certificate(s) for such shares (and any securities or the
property issuable upon such exercise) be issued in the name of and delivered to
_________________ whose address is
_______________________________________________.
The undersigned hereby agrees to pay any transfer taxes on the transfer
of all or any portion of the Warrant or Common Stock requested herein.
The undersigned agrees that, in the absence of an effective
registration statement with respect to Common Stock issued upon this exercise,
the undersigned is acquiring such Common Stock for investment and not with a
view to distribution thereof and the certificate or certificates representing
such Common Stock may bear a legend substantially as follows: "The shares
represented by this certificate have not been registered under the Securities
Act of 1933, as amended, and may not be transferred except as provided in
Article 3 of the Warrant to purchase Common Stock of Abraxas Petroleum
Corporation, a copy of which is on file at the principal office of Abraxas
Petroleum Corporation"
______________________________________
Signature guaranteed:
Dated:_____________________________________
14
ASSIGNMENT
FOR VALUED RECEIVED, the undersigned hereby sells, assigns and
transfers unto ________________________ the rights represented by the foregoing
Common Stock Purchase Warrant of Abraxas Petroleum Corporation, and appoints
__________________ its attorney to transfer said rights on the books of said
corporation, with full power of substitution in the premises.
______________________________________
Signature guaranteed:
Dated:______________________________________
15
Exhibit 10.17
THIS WARRANT AND THE SECURITIES PURCHASABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") AND MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED
UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
COVERING SUCH SECURITIES OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE
HOLDER OF THESE SECURITIES (REASONABLY SATISFACTORY TO THE COMPANY AND ITS
COUNSEL), OR AN OPINION OF THE COMPANY'S COUNSEL, STATING THAT SUCH SALE,
ASSIGNMENT OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
ABRAXAS PETROLEUM CORPORATION
COMMON STOCK PURCHASE WARRANT
FOR VALUE RECEIVED, [Holder], or its transferees or assigns (the
"Holder"), is entitled to purchase, from ABRAXAS PETROLEUM CORPORATION, a Nevada
corporation (the "Company"), subject to the provisions hereof, 100,000 fully
paid, validly issued and non-assessable shares ("Shares") of common stock, par
value $.01 per share ("Common Stock"), of the Company at an exercise price
("Exercise Price") of $3.50 per Share, subject to adjustment as provided below.
The right to purchase Shares under this Warrant is exercisable, in whole or in
part, as more specifically set forth below.
Article 1
Definitions
For all purposes of this Warrant, unless the context otherwise
requires, the following terms have the following meanings:
1.1 "Affiliate" means, with respect to any Person, any other Person
that directly or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with the Person specified.
1.2 "Common Stock" means the Company's authorized common stock, par
value $.01 per share.
1.3 "Company" means Abraxas Petroleum Corporation, a corporation
organized and existing under the laws of the State of Nevada, and any successor
corporation.
1.4 "Exercise Price" means, with respect to Shares of Warrant Stock,
$3.50 per Share.
1
1.5 "Market Price" shall mean the average of the daily market prices of
Common Stock over a period of 20 consecutive business days prior to the day as
of which "Market Price" is being determined. The Market Price for each such
business day shall be the average of the closing prices on such day of the
Common Stock on all domestic exchanges on which the Common Stock is then listed,
or, if there shall have been no sales on any such exchange on such day, the
average of the highest bid and lowest asked prices on all such exchanges at the
end of such day, or, if the Common Stock shall not be so listed, the average of
the representative bid and asked prices quoted in the NASDAQ National Market as
of 3:30 p.m., New York time, on such day, or if the Common Stock shall not be
quoted in the NASDAQ National Market, the average of the high and low bid and
asked prices on such day in the domestic over-the-counter market as successor
organization. If the Common Stock is listed on any domestic exchange the term
"business days" as used in this sentence shall mean business days on which such
exchange is open for trading. If at any time the Common Stock is not listed on
any domestic exchange or quoted in the NASDAQ National Market or the domestic
over-the-counter market, the "Market Price" shall be deemed to be the highest of
(i) the book value thereof, as determined by any firm of independent public
accountants of recognized standing selected by the Board of Directors of the
Company, as at the last day of any month ending within 60 days preceding the
date as of which the determination is to be made, (ii) the fair value thereof,
which shall be reasonably determined by the Board of Directors of the Company as
of a date which is within 15 days of the date as of which the determination is
to be made, or (iii) the Exercise Price in effect immediately prior to the
determination of Market Price.
1.6 "Person" means any natural person, sole proprietorship, general
partnership, limited partnership, joint venture, trust, unincorporated
organization, association, corporation, institution, private or governmental
entity or party.
1.7 "Warrant" means this Warrant and any warrants issued on or in
substitution for this Warrant including warrants issued in exchange for this
Warrant pursuant to Article 2.
1.8 "Warrant Stock" means the shares of Common Stock or other
securities acquired or to be acquired upon the exercise of this Warrant.
Article 2
Grant and Exercise of Warrant
2.1 Grant and Exercise. This Warrant is granted to the Holder pursuant
to the terms of the Company's financial advisory service agreement with the
Holder. This Warrant may be exercised by the Holder, at the Holder's election,
at any time.
2
2.2 Holder's Procedure. To exercise this Warrant and purchase the
Warrant Stock, the Holder shall deliver to the Company at its principal office:
(a) a written notice, in substantially the form of the
Subscription Notice appearing at the end of this Warrant, of the Holder's
election to exercise this Warrant;
(b) this Warrant; and
(c) a check payable to the Company in the amount of the
Exercise Price per share of Warrant Stock.
Notwithstanding anything to the contrary set forth herein, the Holder
may at any time exercise this Warrant for "Net Warrant Shares." The number of
Net Warrant Shares shall equal [WS x (MP - EP)/MP] where "WS" is the aggregate
number of Shares issuable upon exercise of this Warrant or the portion being
exercised, "MP" is the Market Price of the Common Stock and "EP" is the Exercise
Price then in effect.
2.3 Company's Procedure. The Company shall as promptly as practicable,
and in any event within ten (10) days after receipt of the notice required under
Section 2.2, execute and deliver or cause to be executed and delivered one or
more certificates representing the aggregate number of shares of Warrant Stock
to which the Holder is entitled.
2.4 Name and Effective Date. The stock certificate(s) so delivered
shall be issued in the name of the Holder or such other name as shall be
designated in the Subscription Notice specified in Section 2.2. Such
certificate(s) shall be deemed to have been issued and the Holder or any other
Person so designated to be named therein shall be deemed for all purposes to
have become a holder of record of such shares as of the date the Company
actually receives the notice specified in Section 2.2.
2.5 Expenses. The Company shall pay all expenses, taxes, and other
charges payable in connection with the preparation, issue, and delivery of such
stock certificate(s), except that, in case such stock certificate(s) shall be
registered in a name or names other than the name of the Holder of this Warrant,
stock transfer taxes that are payable upon the issuance of such stock
certificate(s) shall be paid by the Holder hereof.
2.6 Legal Requirements. The Warrant Stock issued upon the exercise of
this Warrant shall be validly issued, fully paid, and nonassessable.
2.7 Registration. The Company will keep at its principal office a
register that will provide for the registration and transfer of the Warrant.
3
2.8 Expiration. This Warrant will expire on August 1, 2004, or the
first business day thereafter if such date is not a business day, or such other
date as may be established by mutual agreement of the parties hereto.
Article 3
Transfer
3.1 Permitted Transfers. This Warrant shall be freely transferable, in
whole or in part to any Affiliate of the Holder, subject to the limitations
specified in Section 3.2. This Warrant shall not be transferable to any other
Person except with the written consent of the Company, which consent shall not
be unreasonably withheld, and subject to the limitations specified in Section
3.2.
3.2. Securities Laws. Neither this Warrant nor the Warrant Stock shall
be transferable unless:
(a) either a registration statement under the Securities Act of 1933,
as amended (the "Securities Act"), is in effect covering this Warrant or the
Warrant Stock, as the case may be, or the Company has received an opinion from
the Company's counsel to the effect that such registration is not required, or
the Holder has furnished to the Company an opinion of the Holder's counsel,
which counsel shall be reasonably satisfactory to the Company, to the effect
that such registration is not required; and
(b) the transfer complies with any applicable state securities laws.
In the event the Holder seeks an opinion as to transfer without
registration from the Holder's counsel, the Company shall provide such factual
information to the Holder's counsel as the Holder's counsel may reasonably
request for the purpose of rendering such opinion and such counsel may rely on
the accuracy and completeness of such information in rendering such opinion.
Upon issuance at a time when the Common Stock is not publicly traded, the
Warrant Stock will bear a legend describing the restrictions on transfer set
forth in this Section 3.2.
3.3 Procedure. (a) The Holder of this Warrant, or of any warrant
substituted therefor pursuant to the provisions of this Section 3.3, may,
subject to the limitations set forth in Section 3.1, in person or by duly
authorized attorney, surrender the same for exchange at the principal office of
the Company and, within a reasonable time thereafter and without expense (other
than transfer taxes, if any), receive in exchange therefor one or more duly
executed warrants each evidencing the right to receive one share of Common Stock
or such other number of shares as may be designated by the Holder at the time of
surrender.
The Company and any agent of the Company may treat the Person in whose
name a Warrant is registered as the owner of the Warrant for all purposes
hereunder and neither the Company nor such agent shall be affected by notice to
the contrary. The Company covenants and agrees to take and cause to be taken all
4
action necessary to effect such registrations, transfers and exchanges.
(b) The Holder may transfer the Warrant on the books of the Company by
surrendering to the Company:
(i) the Warrant;
(ii) a written assignment of the Warrant, in substantially the form of
the Assignment appearing at the end of this Warrant, naming the assignee and
duly executed by the Holder; and
(iii) funds sufficient to pay any stock transfer taxes payable upon the
making of such transfer.
The Company shall thereupon execute and deliver a new Warrant in the
name of the assignee specified in such instrument of assignment. Upon issuance
of the new Warrant or Warrants, the Warrant surrendered for transfer shall be
canceled by the Company.
3.4 Expenses. The Company shall pay all expenses, taxes (other than
transfer taxes), and other charges payable in connection with the preparation,
issue and delivery of any new Warrant under this Article 3.
Article 4
Adjustments
4.1 Stock Splits, Stock Dividends and Reverse Stock Splits. If at any
time the Company shall subdivide (by reclassification, by the issuance of a
Common Stock dividend on Common Stock, or otherwise) its outstanding shares of
Common Stock into a greater number, the number of shares of Common Stock that
may be purchased hereunder shall be increased proportionately and the Exercise
Price per share of Warrant Stock shall be decreased proportionately as of the
effective date of such action. The effective date of a stock dividend shall be
the date on which the dividend is declared. Issuance of a Common Stock dividend
shall be treated as a subdivision of the whole number of shares of Common Stock
outstanding immediately before the record date for such dividend into a number
of shares equal to such whole number of shares so outstanding plus the number of
shares issued as a stock dividend. If at any time the Company shall combine (by
reclassification or otherwise) its outstanding number of shares of Common Stock
into a lesser number, the number of shares of Warrant Stock that may be
purchased hereunder shall be reduced proportionately and the Exercise Price per
share of Warrant Stock shall be increased proportionately as of the effective
date of such action.
4.2 Reorganization and Reclassification. In case of any capital
reorganization or any reclassification of the capital stock of the Company while
5
this Warrant remains outstanding, the Holder of this Warrant shall thereafter be
entitled to purchase pursuant to this Warrant (in lieu of the kind and number of
shares of Warrant Stock that the Holder would have been entitled to purchase or
acquire immediately before such reorganization or reclassification) the kind and
number of shares of stock of any class or classes or other securities or
property for or into which such shares of Common Stock would have been
exchanged, converted or reclassified if the Warrant Stock had been purchased
immediately before such reorganization or reclassification at a total price not
to exceed that payable upon the exercise of the unexercised portion of this
Warrant. In case of any such reorganization or reclassification, appropriate
provision (as determined by resolution of the Board of Directors of the Company)
shall be made with respect to the rights and interests thereafter of the Holder
of this Warrant, to the end that all the provisions of the Warrant (including
adjustment provisions) shall thereafter be applicable, as nearly as reasonably
practicable, in relation to such stock or other securities or property.
4.3 Statement of Adjustment of Warrant Stock. Whenever the number or
kind of shares comprising Warrant Stock or the Exercise Price is adjusted
pursuant to this Article 4, the Company shall promptly give notice to the
Holder, stating that such an adjustment has been effected and setting forth the
number and kind of shares purchasable and the amount of the then-current
Exercise Price, and stating in reasonable detail the facts requiring such
adjustment and the calculation of such adjustment.
4.6 No Other Adjustments. No adjustments in the number or kind or price
of shares constituting Warrant Stock shall be made except as provided in this
Article 4.
Article 5
Covenants of the Company
The Company covenants and agrees that:
5.1 Reservation of Shares. At all times, the Company will reserve and
set apart and have, free from pre-emptive rights, a sufficient number of shares
of authorized but unissued Common Stock or other securities, if applicable, to
enable it at any time to fulfill all of its obligations hereunder.
5.2 Adjustment of Par Value. Before taking any action that would cause
an adjustment reducing the Exercise Price per share below the then-current par
value of the shares of Warrant Stock issuable upon exercise of the Warrant, the
Company will take any corporate action that may be necessary in order that the
Company may validly and legally issue fully paid and nonassessable shares of
such Warrant Stock at such adjusted price.
5.3 Notice of Significant Events. In case the Company proposes to:
6
(a) pay any dividend, payable in stock (of any class or
classes) or in convertible securities, upon its Common Stock or to make any
distribution (other than ordinary cash dividends) to the holders of its Common
Stock;
(b) subdivide as a whole (by reclassification, by the issuance
of a stock dividend on Common Stock, or otherwise) the number of shares of
Common Stock then outstanding into a greater number of shares of Common Stock,
with or without par value;
(c) effect any capital reorganization or reclassification of
capital stock of the Company;
(d) consolidate with, or merge into, any other corporation or
business or sell or convey its assets as an entirety or substantially as an
entirety;
(e) effect the liquidation, dissolution, or winding up of the
Company;
(f) make any other fundamental change in respect of which the
Holder of this Warrant would have been entitled to vote, pursuant to the
corporation law of the State of Nevada, if the Warrant had been previously
exercised;
then the Company shall cause notice of any such intended action to be given to
the Holder (i) not less than thirty (30) days before the date on which the
transfer books of the Company shall close or a record be taken for such stock
dividend or for determining rights to vote in respect of any fundamental change,
including any capital reorganization, reclassification, consolidation, merger,
transfer, liquidation, dissolution, winding up, or any other fundamental change,
and (ii) not less than thirty (30) days before the effective date, in the case
of any such capital reorganization, reclassification, consolidation, merger,
transfer, liquidation, dissolution, winding up, or other fundamental change.
7
Article 6
Limitation of Liability
No provision of this Warrant shall be construed as conferring upon the
Holder hereof the right to vote or to consent or to receive dividends or to
receive notice as a stockholder in respect of meetings of stockholders for the
election of members of the Board of Directors of the Company or any other matter
whatsoever as stockholders of the Company. In the absence of affirmative action
by the Holder to purchase shares of Common Stock, no provision hereof shall give
rise to any liability of the Holder for the purchase price or as a stockholder
of the Company, whether such liability is asserted by the Company or by
creditors of the Company.
Article 7
Merger, Consolidation, or Change
7.1 Continuation of Warrant. Except as provided in Section 7.2, in the
event that the Company proposes to consolidate with, or merge into, any other
corporation or business or to transfer its property as an entirety or
substantially as an entirety, or to effect the liquidation, dissolution, or
winding up of the Company, or to change the Common Stock in any manner (other
than to change its par value), then after the Company causes notice of such
proposed action to be given to the Holder of record as provided in Section 5.3,
the Holder shall be entitled, on or before the effective date of such merger,
consolidation, transfer, liquidation, dissolution, winding up, or change to
require the Company or the successor or purchasing entity, as the case may be,
to (a) execute with the Holder an agreement providing that the Holder shall have
the right thereafter and throughout the remaining term of the Warrant upon
payment of the Exercise Price per share of Warrant Stock in effect immediately
prior to such action to purchase with respect to each share of Warrant Stock
issuable upon exercise of this Warrant the kind and amount of shares of stock
and other securities, property (including cash) or any combination thereof which
the Holder would have owned or have been entitled to receive after the happening
of such consolidation, merger, sale, conveyance, or change had this Warrant been
exercised with respect to such share of Warrant Stock immediately prior to such
action and (b) make effective provision in its Articles of Incorporation or
otherwise, if necessary, in order to effect such agreement. Such agreement shall
provide for adjustments which shall be as nearly equivalent as practicable to
the adjustments in Article 4 of this Warrant. The provisions of this Section 7.1
shall similarly apply to successive consolidations, mergers, sales, conveyances
or changes.
7.2 Exception. Section 7.1 shall not apply to a consolidation or merger
with a Person in which the Company is the surviving entity.
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Article 8
REGISTRATION RIGHTS
8.1 Piggyback Registration Rights. If, at any time on or before the
expiration of this Warrant, the Company proposes to file a registration
statement for the public sale of any of its Common Stock under the Securities
Act, other than a registration statement originally declared effective prior to
the date hereof or a registration effected solely to implement an employee
benefit plan or a transaction to which Rule 145 under the Securities Act is
applicable or pursuant to which Common Stock is registered other than for sale
to the public, the Company shall, not later than thirty (30) days prior to the
initial filing of the registration statement, deliver notice of its intent to
file such registration statement to the Holder, setting forth the minimum and
maximum proposed offering price, commissions, and discounts in connection with
the offering, and other relevant information. Within ten (10) days after receipt
of notice of the Company's intent to file a registration statement, the Holder
shall be entitled to request that the Warrant Stock be included in such
registration statement. In the event the Warrant Stock is included in the
registration statement, the Holder may transfer the Warrant to an underwriter or
broker for exercise by such underwriter or broker in connection with a
distribution of the Warrant Stock.
8.2 Filing Obligations of the Company. In connection with any
registration of the Warrant Stock effected under Section 8.1, the Company shall:
(a) prepare and file the registration statement and such amendments and
supplements to the registration statement and the prospectus or offering
circular used in connection therewith as may be necessary to keep the
registration statement effective for a period of ninety (90) days and to comply
with the provisions of the Securities Act and the rules and regulations
thereunder with respect to the disposition of the Warrant Stock covered by the
registration statement for the period required to effect the distribution
thereof, but in no event shall the Company be required to do so for a period of
more than ninety (90) days following the effective date of such registration
statement;
(b) furnish to the Holder such number of copies of any prospectus or
offering circular, including a preliminary prospectus, and of a full
registration statement and exhibits in conformity with the requirements of the
Securities Act and rules and regulations thereunder, as the Holder may
reasonably request in order to facilitate the disposition of such securities;
(c) register or qualify the Warrant Stock covered by the registration
statement, as the case may be, under the securities or blue sky laws of such
jurisdictions as the Holder may reasonably request, and accomplish any and all
other acts and things which may be necessary or advisable to permit sale in such
jurisdictions of such Warrant Stock; provided, however, that the Company shall
9
not be required to register as a dealer or to qualify as a foreign corporation
in any such jurisdictions or to escrow any shares of its capital stock.
8.3 Expenses. All expenses incurred by the Company in connection with
any registration of the Warrant Stock effected under Section 8.1, including,
without limitation, all registration and filing fees, fees and expenses of
complying with state securities and blue sky laws, printing expenses, fees and
expenses of the Company's counsel and accountants and fees and expenses of
counsel for the Holder, shall be paid by the Company; provided, however, that
all underwriting discounts and selling commission applicable to the Warrant
Stock shall not be borne by the Company but shall be borne by the Holder.
8.4 Indemnification.
---------------
(a) By the Company. In connection with the filing of any registration
statement and sales of Warrant Stock thereunder, the Company shall indemnify and
hold harmless the Holder of this Warrant, any underwriter, and each other
Person, if any, who controls the Holder or the underwriter within the meaning of
the Securities Act, against losses, claims, damages or liabilities, joint or
several (or actions in respect thereto) ("Losses"), to which any such Holder,
underwriter, or controlling Person may become subject under the Securities Act
or otherwise, insofar as such Losses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which the Warrant Stock was registered under the
Securities Act, any preliminary prospectus, offering circular or final
prospectus contained therein, or any amendment or supplement thereto, or any
report filed with the Securities and Exchange Commission (the "Disclosure
Documents"), or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse any such Holder,
underwriter, or controlling Person for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claims, excluding any amounts paid in settlement of litigation, commenced or
threatened, if such settlement is effected without the prior written consent of
the Company; provided, however, that the Company shall not be liable in any such
case to the extent that any such Losses arise out of or omission or alleged
omission made in such Disclosure Documents in reliance upon and in conformity
with information furnished to the Company in writing by or on behalf of the
Holder of this Warrant for use specifically in connection with the preparation
of such Disclosure Document.
(b) By the Holder. In connection with the filing of any registration
statement and sales of the Warrant Stock thereunder, the Holder shall indemnify
the Company, any underwriter, each of the Company's directors, each of its
officers who signed such registration statement, and each other Person, if any,
who controls the Company or the underwriter within the meaning of the Securities
Act, against any Losses to which the Company, any of its directors, officers, or
10
controlling Persons may become subject under the Securities Act or otherwise,
insofar as such Losses arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any of the Disclosure
Documents or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse the Company, the
underwriters, and any of their respective directors, officers, or controlling
Persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claims, excluding any amounts paid in
settlement of litigation, commenced or threatened, if such settlement is
effected without the prior written consent of the Holder; provided, however,
that such indemnification or reimbursement shall be payable in any such case
only to the extent that such statement or alleged statement or omission or
alleged omission is made in reliance on information furnished to the Company in
writing by or on behalf of the Holder for use specifically in connection with
the preparation of such Disclosure Document.
8.5 Discharge of Registration Obligations. In the event the Holder
demands that the Warrant Stock be registered pursuant to Section 8.1 herein, the
Company shall have the right to discharge the registration obligations set forth
in Section 8.1 by repurchasing all or any part of the Warrant or Warrant Stock,
as designated by the Holder, for cash at the Market Price determined as of the
date the Holder demands registration or the date the Company delivers notice of
its election to repurchase, whichever is higher. The Company must deliver
written notice to the Holder of its election to repurchase the Warrant within
thirty (30) days after receipt of a request by the Holder for registration. The
Company shall deliver the purchase price to the Holder upon delivery of the
Warrant or Warrant Stock. In the event the Company does not deliver cash to the
Holder as required under this Section 8.5, the Company's right to repurchase
under this Section 8.5 shall be terminated.
ARTICLE 9
Miscellaneous
9.1 Governing Law. The rights of the parties arising under this Warrant
shall be construed and enforced under the laws of the State of Nevada without
giving effect to any choice of law or conflict of law rules.
9.2 Notices. Any notice or other communication required or permitted to
be given or delivered pursuant to this Warrant shall be in writing and shall be
deemed effective as of the date of receipt if delivered personally, by facsimile
transmission (if receipt is confirmed by the facsimile operator of the
recipient), by overnight courier service or by registered or certified mail
(return receipt requested), postage prepaid, to the parties at the following
addresses (or at such other address in the United States of America for a party
as shall be specified by like notice; provided that notices of change of address
be effective only upon receipt thereof):
11
(i) to the Holder as follows:
[Holder]
(ii) to the Company as follows:
Abraxas Petroleum Corporation
500 N. Loop 1604 East, Suite 100
San Antonio, Texas 78232
9.3 Severability. If any provision of this Warrant shall be held
invalid, such invalidity shall not affect any other provision of this Warrant
that can be given effect without the invalid provision, and to this end, the
provisions hereof are separable.
9.4 Headings. The headings in this Warrant are for reference purposes
only and shall not affect in any way the meaning of interpretation of this
Warrant.
9.5 Internal References. References to an "article," "section" or a
"subsection" when used without further attribution shall refer to the particular
articles, sections or subsections of this Warrant.
9.6 Amendment. This Warrant cannot be amended or modified except by a
written agreement executed by the Company and the Holder.
9.7 Assignment. This Warrant shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns except that no party may assign or
transfer its rights or obligations under this Warrant except to the extent
explicitly permitted herein.
9.8 Entire Agreement. This Warrant, together with its attachments,
contains the entire understanding among the parties hereto with respect to the
subject matter hereof and supersedes all prior and contemporaneous agreements
and understandings, inducements or conditions, express or implied, oral or
written, except as herein contained.
12
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in
its name by its Chairman of the Board, President and Chief Executive Officer
thereunto duly authorized.
Dated: September __, 2000
ABRAXAS PETROLEUM CORPORATION
By:
---------------------------------------------
Robert L. G. Watson, Chairman of the Board,
President and Chief Executive Officer
13
SUBSCRIPTION NOTICE
The undersigned, the Holder of a Common Stock Purchase Warrant issued
by Abraxas Petroleum Corporation, a Nevada corporation (the "Company"), dated as
of ______________, 2000, hereby elects to purchase thereunder _______ shares of
Common Stock, par value $.01 per share, of the Company covered by such Warrant
and herewith makes payment in full therefor of ________________________ and
requests that the certificate(s) for such shares (and any securities or the
property issuable upon such exercise) be issued in the name of and delivered to
_________________ whose address is
_______________________________________________.
The undersigned hereby agrees to pay any transfer taxes on the transfer
of all or any portion of the Warrant or Common Stock requested herein.
The undersigned agrees that, in the absence of an effective
registration statement with respect to Common Stock issued upon this exercise,
the undersigned is acquiring such Common Stock for investment and not with a
view to distribution thereof and the certificate or certificates representing
such Common Stock may bear a legend substantially as follows: "The shares
represented by this certificate have not been registered under the Securities
Act of 1933, as amended, and may not be transferred except as provided in
Article 3 of the Warrant to purchase Common Stock of Abraxas Petroleum
Corporation, a copy of which is on file at the principal office of Abraxas
Petroleum Corporation"
______________________________________
Signature guaranteed:
Dated:_____________________________________
14
ASSIGNMENT
FOR VALUED RECEIVED, the undersigned hereby sells, assigns and
transfers unto ________________________ the rights represented by the foregoing
Common Stock Purchase Warrant of Abraxas Petroleum Corporation, and appoints
__________________ its attorney to transfer said rights on the books of said
corporation, with full power of substitution in the premises.
______________________________________
Signature guaranteed:
Dated:______________________________________
15
Exhibit 10.18
THIS WARRANT AND THE SECURITIES PURCHASABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") AND MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED
UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
COVERING SUCH SECURITIES OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE
HOLDER OF THESE SECURITIES (REASONABLY SATISFACTORY TO THE COMPANY AND ITS
COUNSEL), OR AN OPINION OF THE COMPANY'S COUNSEL, STATING THAT SUCH SALE,
ASSIGNMENT OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
ABRAXAS PETROLEUM CORPORATION
COMMON STOCK PURCHASE WARRANT
FOR VALUE RECEIVED, [Holder], or its transferees or assigns (the
"Holder"), is entitled to purchase, from ABRAXAS PETROLEUM CORPORATION, a Nevada
corporation (the "Company"), subject to the provisions hereof, 90,000 fully
paid, validly issued and non-assessable shares ("Shares") of common stock, par
value $.01 per share ("Common Stock"), of the Company at an exercise price
("Exercise Price") of $3.50 per Share, subject to adjustment as provided below.
The right to purchase Shares under this Warrant is exercisable, in whole or in
part, as more specifically set forth below.
Article 1
Definitions
For all purposes of this Warrant, unless the context otherwise
requires, the following terms have the following meanings:
1.1 "Affiliate" means, with respect to any Person, any other Person
that directly or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with the Person specified.
1.2 "Common Stock" means the Company's authorized common stock, par
value $.01 per share.
1.3 "Company" means Abraxas Petroleum Corporation, a corporation
organized and existing under the laws of the State of Nevada, and any successor
corporation.
1.4 "Exercise Price" means, with respect to Shares of Warrant Stock,
$3.50 per Share.
1
1.5 "Market Price" shall mean the average of the daily market prices of
Common Stock over a period of 20 consecutive business days prior to the day as
of which "Market Price" is being determined. The Market Price for each such
business day shall be the average of the closing prices on such day of the
Common Stock on all domestic exchanges on which the Common Stock is then listed,
or, if there shall have been no sales on any such exchange on such day, the
average of the highest bid and lowest asked prices on all such exchanges at the
end of such day, or, if the Common Stock shall not be so listed, the average of
the representative bid and asked prices quoted in the NASDAQ National Market as
of 3:30 p.m., New York time, on such day, or if the Common Stock shall not be
quoted in the NASDAQ National Market, the average of the high and low bid and
asked prices on such day in the domestic over-the-counter market as successor
organization. If the Common Stock is listed on any domestic exchange the term
"business days" as used in this sentence shall mean business days on which such
exchange is open for trading. If at any time the Common Stock is not listed on
any domestic exchange or quoted in the NASDAQ National Market or the domestic
over-the-counter market, the "Market Price" shall be deemed to be the highest of
(i) the book value thereof, as determined by any firm of independent public
accountants of recognized standing selected by the Board of Directors of the
Company, as at the last day of any month ending within 60 days preceding the
date as of which the determination is to be made, (ii) the fair value thereof,
which shall be reasonably determined by the Board of Directors of the Company as
of a date which is within 15 days of the date as of which the determination is
to be made, or (iii) the Exercise Price in effect immediately prior to the
determination of Market Price.
1.6 "Person" means any natural person, sole proprietorship, general
partnership, limited partnership, joint venture, trust, unincorporated
organization, association, corporation, institution, private or governmental
entity or party.
1.7 "Warrant" means this Warrant and any warrants issued on or in
substitution for this Warrant including warrants issued in exchange for this
Warrant pursuant to Article 2.
1.8 "Warrant Stock" means the shares of Common Stock or other
securities acquired or to be acquired upon the exercise of this Warrant.
Article 2
Grant and Exercise of Warrant
2.1 Grant and Exercise. This Warrant is granted to the Holder pursuant
to the terms of the Company's financial advisory service agreement with the
Holder. This Warrant may be exercised by the Holder, at the Holder's election,
at any time.
2
2.2 Holder's Procedure. To exercise this Warrant and purchase the
Warrant Stock, the Holder shall deliver to the Company at its principal office:
(a) a written notice, in substantially the form of the
Subscription Notice appearing at the end of this Warrant, of the Holder's
election to exercise this Warrant;
(b) this Warrant; and
(c) a check payable to the Company in the amount of the
Exercise Price per share of Warrant Stock.
Notwithstanding anything to the contrary set forth herein, the Holder
may at any time exercise this Warrant for "Net Warrant Shares." The number of
Net Warrant Shares shall equal [WS x (MP - EP)/MP] where "WS" is the aggregate
number of Shares issuable upon exercise of this Warrant or the portion being
exercised, "MP" is the Market Price of the Common Stock and "EP" is the Exercise
Price then in effect.
2.3 Company's Procedure. The Company shall as promptly as practicable,
and in any event within ten (10) days after receipt of the notice required under
Section 2.2, execute and deliver or cause to be executed and delivered one or
more certificates representing the aggregate number of shares of Warrant Stock
to which the Holder is entitled.
2.4 Name and Effective Date. The stock certificate(s) so delivered
shall be issued in the name of the Holder or such other name as shall be
designated in the Subscription Notice specified in Section 2.2. Such
certificate(s) shall be deemed to have been issued and the Holder or any other
Person so designated to be named therein shall be deemed for all purposes to
have become a holder of record of such shares as of the date the Company
actually receives the notice specified in Section 2.2.
2.5 Expenses. The Company shall pay all expenses, taxes, and other
charges payable in connection with the preparation, issue, and delivery of such
stock certificate(s), except that, in case such stock certificate(s) shall be
registered in a name or names other than the name of the Holder of this Warrant,
stock transfer taxes that are payable upon the issuance of such stock
certificate(s) shall be paid by the Holder hereof.
2.6 Legal Requirements. The Warrant Stock issued upon the exercise of
this Warrant shall be validly issued, fully paid, and nonassessable.
2.7 Registration. The Company will keep at its principal office a
register that will provide for the registration and transfer of the Warrant.
3
2.8 Expiration. This Warrant will expire on August 1, 2004, or the
first business day thereafter if such date is not a business day, or such other
date as may be established by mutual agreement of the parties hereto.
Article 3
Transfer
3.1 Permitted Transfers. This Warrant shall be freely transferable, in
whole or in part to any Affiliate of the Holder, subject to the limitations
specified in Section 3.2. This Warrant shall not be transferable to any other
Person except with the written consent of the Company, which consent shall not
be unreasonably withheld, and subject to the limitations specified in Section
3.2.
3.2. Securities Laws. Neither this Warrant nor the Warrant Stock shall
be transferable unless:
(a) either a registration statement under the Securities Act of 1933,
as amended (the "Securities Act"), is in effect covering this Warrant or the
Warrant Stock, as the case may be, or the Company has received an opinion from
the Company's counsel to the effect that such registration is not required, or
the Holder has furnished to the Company an opinion of the Holder's counsel,
which counsel shall be reasonably satisfactory to the Company, to the effect
that such registration is not required; and
(b) the transfer complies with any applicable state securities laws.
In the event the Holder seeks an opinion as to transfer without
registration from the Holder's counsel, the Company shall provide such factual
information to the Holder's counsel as the Holder's counsel may reasonably
request for the purpose of rendering such opinion and such counsel may rely on
the accuracy and completeness of such information in rendering such opinion.
Upon issuance at a time when the Common Stock is not publicly traded, the
Warrant Stock will bear a legend describing the restrictions on transfer set
forth in this Section 3.2.
3.3 Procedure. (a) The Holder of this Warrant, or of any warrant
substituted therefor pursuant to the provisions of this Section 3.3, may,
subject to the limitations set forth in Section 3.1, in person or by duly
authorized attorney, surrender the same for exchange at the principal office of
the Company and, within a reasonable time thereafter and without expense (other
than transfer taxes, if any), receive in exchange therefor one or more duly
executed warrants each evidencing the right to receive one share of Common Stock
or such other number of shares as may be designated by the Holder at the time of
surrender.
The Company and any agent of the Company may treat the Person in whose
name a Warrant is registered as the owner of the Warrant for all purposes
hereunder and neither the Company nor such agent shall be affected by notice to
4
the contrary. The Company covenants and agrees to take and cause to be taken all
action necessary to effect such registrations, transfers and exchanges.
(b) The Holder may transfer the Warrant on the books of the Company by
surrendering to the Company:
(i) the Warrant;
(ii) a written assignment of the Warrant, in substantially the form of
the Assignment appearing at the end of this Warrant, naming the assignee and
duly executed by the Holder; and
(iii) funds sufficient to pay any stock transfer taxes payable upon the
making of such transfer.
The Company shall thereupon execute and deliver a new Warrant in the
name of the assignee specified in such instrument of assignment. Upon issuance
of the new Warrant or Warrants, the Warrant surrendered for transfer shall be
canceled by the Company.
3.4 Expenses. The Company shall pay all expenses, taxes (other than
transfer taxes), and other charges payable in connection with the preparation,
issue and delivery of any new Warrant under this Article 3.
Article 4
Adjustments
4.1 Stock Splits, Stock Dividends and Reverse Stock Splits. If at any
time the Company shall subdivide (by reclassification, by the issuance of a
Common Stock dividend on Common Stock, or otherwise) its outstanding shares of
Common Stock into a greater number, the number of shares of Common Stock that
may be purchased hereunder shall be increased proportionately and the Exercise
Price per share of Warrant Stock shall be decreased proportionately as of the
effective date of such action. The effective date of a stock dividend shall be
the date on which the dividend is declared. Issuance of a Common Stock dividend
shall be treated as a subdivision of the whole number of shares of Common Stock
outstanding immediately before the record date for such dividend into a number
of shares equal to such whole number of shares so outstanding plus the number of
shares issued as a stock dividend. If at any time the Company shall combine (by
reclassification or otherwise) its outstanding number of shares of Common Stock
into a lesser number, the number of shares of Warrant Stock that may be
purchased hereunder shall be reduced proportionately and the Exercise Price per
share of Warrant Stock shall be increased proportionately as of the effective
date of such action.
4.2 Reorganization and Reclassification. In case of any capital
reorganization or any reclassification of the capital stock of the Company while
5
this Warrant remains outstanding, the Holder of this Warrant shall thereafter be
entitled to purchase pursuant to this Warrant (in lieu of the kind and number of
shares of Warrant Stock that the Holder would have been entitled to purchase or
acquire immediately before such reorganization or reclassification) the kind and
number of shares of stock of any class or classes or other securities or
property for or into which such shares of Common Stock would have been
exchanged, converted or reclassified if the Warrant Stock had been purchased
immediately before such reorganization or reclassification at a total price not
to exceed that payable upon the exercise of the unexercised portion of this
Warrant. In case of any such reorganization or reclassification, appropriate
provision (as determined by resolution of the Board of Directors of the Company)
shall be made with respect to the rights and interests thereafter of the Holder
of this Warrant, to the end that all the provisions of the Warrant (including
adjustment provisions) shall thereafter be applicable, as nearly as reasonably
practicable, in relation to such stock or other securities or property.
4.3 Statement of Adjustment of Warrant Stock. Whenever the number or
kind of shares comprising Warrant Stock or the Exercise Price is adjusted
pursuant to this Article 4, the Company shall promptly give notice to the
Holder, stating that such an adjustment has been effected and setting forth the
number and kind of shares purchasable and the amount of the then-current
Exercise Price, and stating in reasonable detail the facts requiring such
adjustment and the calculation of such adjustment.
4.6 No Other Adjustments. No adjustments in the number or kind or price
of shares constituting Warrant Stock shall be made except as provided in this
Article 4.
Article 5
Covenants of the Company
The Company covenants and agrees that:
5.1 Reservation of Shares. At all times, the Company will reserve and
set apart and have, free from pre-emptive rights, a sufficient number of shares
of authorized but unissued Common Stock or other securities, if applicable, to
enable it at any time to fulfill all of its obligations hereunder.
5.2 Adjustment of Par Value. Before taking any action that would cause
an adjustment reducing the Exercise Price per share below the then-current par
value of the shares of Warrant Stock issuable upon exercise of the Warrant, the
Company will take any corporate action that may be necessary in order that the
Company may validly and legally issue fully paid and nonassessable shares of
such Warrant Stock at such adjusted price.
5.3 Notice of Significant Events. In case the Company proposes to:
6
(a) pay any dividend, payable in stock (of any class or
classes) or in convertible securities, upon its Common Stock or to make any
distribution (other than ordinary cash dividends) to the holders of its Common
Stock;
(b) subdivide as a whole (by reclassification, by the issuance
of a stock dividend on Common Stock, or otherwise) the number of shares of
Common Stock then outstanding into a greater number of shares of Common Stock,
with or without par value;
(c) effect any capital reorganization or reclassification of
capital stock of the Company;
(d) consolidate with, or merge into, any other corporation or
business or sell or convey its assets as an entirety or substantially as an
entirety;
(e) effect the liquidation, dissolution, or winding up of the
Company;
(f) make any other fundamental change in respect of which the
Holder of this Warrant would have been entitled to vote, pursuant to the
corporation law of the State of Nevada, if the Warrant had been previously
exercised;
then the Company shall cause notice of any such intended action to be given to
the Holder (i) not less than thirty (30) days before the date on which the
transfer books of the Company shall close or a record be taken for such stock
dividend or for determining rights to vote in respect of any fundamental change,
including any capital reorganization, reclassification, consolidation, merger,
transfer, liquidation, dissolution, winding up, or any other fundamental change,
and (ii) not less than thirty (30) days before the effective date, in the case
of any such capital reorganization, reclassification, consolidation, merger,
transfer, liquidation, dissolution, winding up, or other fundamental change.
7
Article 6
Limitation of Liability
No provision of this Warrant shall be construed as conferring upon the
Holder hereof the right to vote or to consent or to receive dividends or to
receive notice as a stockholder in respect of meetings of stockholders for the
election of members of the Board of Directors of the Company or any other matter
whatsoever as stockholders of the Company. In the absence of affirmative action
by the Holder to purchase shares of Common Stock, no provision hereof shall give
rise to any liability of the Holder for the purchase price or as a stockholder
of the Company, whether such liability is asserted by the Company or by
creditors of the Company.
Article 7
Merger, Consolidation, or Change
7.1 Continuation of Warrant. Except as provided in Section 7.2, in the
event that the Company proposes to consolidate with, or merge into, any other
corporation or business or to transfer its property as an entirety or
substantially as an entirety, or to effect the liquidation, dissolution, or
winding up of the Company, or to change the Common Stock in any manner (other
than to change its par value), then after the Company causes notice of such
proposed action to be given to the Holder of record as provided in Section 5.3,
the Holder shall be entitled, on or before the effective date of such merger,
consolidation, transfer, liquidation, dissolution, winding up, or change to
require the Company or the successor or purchasing entity, as the case may be,
to (a) execute with the Holder an agreement providing that the Holder shall have
the right thereafter and throughout the remaining term of the Warrant upon
payment of the Exercise Price per share of Warrant Stock in effect immediately
prior to such action to purchase with respect to each share of Warrant Stock
issuable upon exercise of this Warrant the kind and amount of shares of stock
and other securities, property (including cash) or any combination thereof which
the Holder would have owned or have been entitled to receive after the happening
of such consolidation, merger, sale, conveyance, or change had this Warrant been
exercised with respect to such share of Warrant Stock immediately prior to such
action and (b) make effective provision in its Articles of Incorporation or
otherwise, if necessary, in order to effect such agreement. Such agreement shall
provide for adjustments which shall be as nearly equivalent as practicable to
the adjustments in Article 4 of this Warrant. The provisions of this Section 7.1
shall similarly apply to successive consolidations, mergers, sales, conveyances
or changes.
7.2 Exception. Section 7.1 shall not apply to a consolidation or merger
with a Person in which the Company is the surviving entity.
8
Article 8
REGISTRATION RIGHTS
8.1 Piggyback Registration Rights. If, at any time on or before the
expiration of this Warrant, the Company proposes to file a registration
statement for the public sale of any of its Common Stock under the Securities
Act, other than a registration statement originally declared effective prior to
the date hereof or a registration effected solely to implement an employee
benefit plan or a transaction to which Rule 145 under the Securities Act is
applicable or pursuant to which Common Stock is registered other than for sale
to the public, the Company shall, not later than thirty (30) days prior to the
initial filing of the registration statement, deliver notice of its intent to
file such registration statement to the Holder, setting forth the minimum and
maximum proposed offering price, commissions, and discounts in connection with
the offering, and other relevant information. Within ten (10) days after receipt
of notice of the Company's intent to file a registration statement, the Holder
shall be entitled to request that the Warrant Stock be included in such
registration statement. In the event the Warrant Stock is included in the
registration statement, the Holder may transfer the Warrant to an underwriter or
broker for exercise by such underwriter or broker in connection with a
distribution of the Warrant Stock.
8.2 Filing Obligations of the Company. In connection with any
registration of the Warrant Stock effected under Section 8.1, the Company shall:
(a) prepare and file the registration statement and such amendments and
supplements to the registration statement and the prospectus or offering
circular used in connection therewith as may be necessary to keep the
registration statement effective for a period of ninety (90) days and to comply
with the provisions of the Securities Act and the rules and regulations
thereunder with respect to the disposition of the Warrant Stock covered by the
registration statement for the period required to effect the distribution
thereof, but in no event shall the Company be required to do so for a period of
more than ninety (90) days following the effective date of such registration
statement;
(b) furnish to the Holder such number of copies of any prospectus or
offering circular, including a preliminary prospectus, and of a full
registration statement and exhibits in conformity with the requirements of the
Securities Act and rules and regulations thereunder, as the Holder may
reasonably request in order to facilitate the disposition of such securities;
(c) register or qualify the Warrant Stock covered by the registration
statement, as the case may be, under the securities or blue sky laws of such
jurisdictions as the Holder may reasonably request, and accomplish any and all
other acts and things which may be necessary or advisable to permit sale in such
jurisdictions of such Warrant Stock; provided, however, that the Company shall
9
not be required to register as a dealer or to qualify as a foreign corporation
in any such jurisdictions or to escrow any shares of its capital stock.
8.3 Expenses. All expenses incurred by the Company in connection with
any registration of the Warrant Stock effected under Section 8.1, including,
without limitation, all registration and filing fees, fees and expenses of
complying with state securities and blue sky laws, printing expenses, fees and
expenses of the Company's counsel and accountants and fees and expenses of
counsel for the Holder, shall be paid by the Company; provided, however, that
all underwriting discounts and selling commission applicable to the Warrant
Stock shall not be borne by the Company but shall be borne by the Holder.
8.4 Indemnification.
---------------
(a) By the Company. In connection with the filing of any registration
statement and sales of Warrant Stock thereunder, the Company shall indemnify and
hold harmless the Holder of this Warrant, any underwriter, and each other
Person, if any, who controls the Holder or the underwriter within the meaning of
the Securities Act, against losses, claims, damages or liabilities, joint or
several (or actions in respect thereto) ("Losses"), to which any such Holder,
underwriter, or controlling Person may become subject under the Securities Act
or otherwise, insofar as such Losses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which the Warrant Stock was registered under the
Securities Act, any preliminary prospectus, offering circular or final
prospectus contained therein, or any amendment or supplement thereto, or any
report filed with the Securities and Exchange Commission (the "Disclosure
Documents"), or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse any such Holder,
underwriter, or controlling Person for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claims, excluding any amounts paid in settlement of litigation, commenced or
threatened, if such settlement is effected without the prior written consent of
the Company; provided, however, that the Company shall not be liable in any such
case to the extent that any such Losses arise out of or omission or alleged
omission made in such Disclosure Documents in reliance upon and in conformity
with information furnished to the Company in writing by or on behalf of the
Holder of this Warrant for use specifically in connection with the preparation
of such Disclosure Document.
(b) By the Holder. In connection with the filing of any registration
statement and sales of the Warrant Stock thereunder, the Holder shall indemnify
the Company, any underwriter, each of the Company's directors, each of its
officers who signed such registration statement, and each other Person, if any,
who controls the Company or the underwriter within the meaning of the Securities
Act, against any Losses to which the Company, any of its directors, officers, or
10
controlling Persons may become subject under the Securities Act or otherwise,
insofar as such Losses arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any of the Disclosure
Documents or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse the Company, the
underwriters, and any of their respective directors, officers, or controlling
Persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claims, excluding any amounts paid in
settlement of litigation, commenced or threatened, if such settlement is
effected without the prior written consent of the Holder; provided, however,
that such indemnification or reimbursement shall be payable in any such case
only to the extent that such statement or alleged statement or omission or
alleged omission is made in reliance on information furnished to the Company in
writing by or on behalf of the Holder for use specifically in connection with
the preparation of such Disclosure Document.
8.5 Discharge of Registration Obligations. In the event the Holder
demands that the Warrant Stock be registered pursuant to Section 8.1 herein, the
Company shall have the right to discharge the registration obligations set forth
in Section 8.1 by repurchasing all or any part of the Warrant or Warrant Stock,
as designated by the Holder, for cash at the Market Price determined as of the
date the Holder demands registration or the date the Company delivers notice of
its election to repurchase, whichever is higher. The Company must deliver
written notice to the Holder of its election to repurchase the Warrant within
thirty (30) days after receipt of a request by the Holder for registration. The
Company shall deliver the purchase price to the Holder upon delivery of the
Warrant or Warrant Stock. In the event the Company does not deliver cash to the
Holder as required under this Section 8.5, the Company's right to repurchase
under this Section 8.5 shall be terminated.
ARTICLE 9
Miscellaneous
9.1 Governing Law. The rights of the parties arising under this Warrant
shall be construed and enforced under the laws of the State of Nevada without
giving effect to any choice of law or conflict of law rules.
9.2 Notices. Any notice or other communication required or permitted to
be given or delivered pursuant to this Warrant shall be in writing and shall be
deemed effective as of the date of receipt if delivered personally, by facsimile
transmission (if receipt is confirmed by the facsimile operator of the
recipient), by overnight courier service or by registered or certified mail
(return receipt requested), postage prepaid, to the parties at the following
addresses (or at such other address in the United States of America for a party
as shall be specified by like notice; provided that notices of change of address
be effective only upon receipt thereof):
11
(i) to the Holder as follows:
[Holder]
(ii) to the Company as follows:
Abraxas Petroleum Corporation
500 N. Loop 1604 East, Suite 100
San Antonio, Texas 78232
9.3 Severability. If any provision of this Warrant shall be held
invalid, such invalidity shall not affect any other provision of this Warrant
that can be given effect without the invalid provision, and to this end, the
provisions hereof are separable.
9.4 Headings. The headings in this Warrant are for reference purposes
only and shall not affect in any way the meaning of interpretation of this
Warrant.
9.5 Internal References. References to an "article," "section" or a
"subsection" when used without further attribution shall refer to the particular
articles, sections or subsections of this Warrant.
9.6 Amendment. This Warrant cannot be amended or modified except by a
written agreement executed by the Company and the Holder.
9.7 Assignment. This Warrant shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns except that no party may assign or
transfer its rights or obligations under this Warrant except to the extent
explicitly permitted herein.
9.8 Entire Agreement. This Warrant, together with its attachments,
contains the entire understanding among the parties hereto with respect to the
subject matter hereof and supersedes all prior and contemporaneous agreements
and understandings, inducements or conditions, express or implied, oral or
written, except as herein contained.
12
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in
its name by its Chairman of the Board, President and Chief Executive Officer
thereunto duly authorized.
Dated: September __, 2000
ABRAXAS PETROLEUM CORPORATION
By:
---------------------------------------------
Robert L. G. Watson, Chairman of the Board,
President and Chief Executive Officer
13
SUBSCRIPTION NOTICE
The undersigned, the Holder of a Common Stock Purchase Warrant issued
by Abraxas Petroleum Corporation, a Nevada corporation (the "Company"), dated as
of ______________, 2000, hereby elects to purchase thereunder _______ shares of
Common Stock, par value $.01 per share, of the Company covered by such Warrant
and herewith makes payment in full therefor of ________________________ and
requests that the certificate(s) for such shares (and any securities or the
property issuable upon such exercise) be issued in the name of and delivered to
_________________ whose address is
_______________________________________________.
The undersigned hereby agrees to pay any transfer taxes on the transfer
of all or any portion of the Warrant or Common Stock requested herein.
The undersigned agrees that, in the absence of an effective
registration statement with respect to Common Stock issued upon this exercise,
the undersigned is acquiring such Common Stock for investment and not with a
view to distribution thereof and the certificate or certificates representing
such Common Stock may bear a legend substantially as follows: "The shares
represented by this certificate have not been registered under the Securities
Act of 1933, as amended, and may not be transferred except as provided in
Article 3 of the Warrant to purchase Common Stock of Abraxas Petroleum
Corporation, a copy of which is on file at the principal office of Abraxas
Petroleum Corporation"
______________________________________
Signature guaranteed:
Dated:_____________________________________
14
ASSIGNMENT
FOR VALUED RECEIVED, the undersigned hereby sells, assigns and
transfers unto ________________________ the rights represented by the foregoing
Common Stock Purchase Warrant of Abraxas Petroleum Corporation, and appoints
__________________ its attorney to transfer said rights on the books of said
corporation, with full power of substitution in the premises.
______________________________________
Signature guaranteed:
Dated:______________________________________
15
Exhibit 23.1
Independent Auditors Consent
We consent to the incorporation by reference in the Registration Statements
No. 33-48932, 33-48934, 33-72268, 33-81416, 33-81418, 333-17375, and 333-17377
of Abraxas Petroleum Corporation on Form S-8 of our report dated March 22, 2001,
appearing in this Annual Report on Form 10-K of Abraxas Petroleum Corporation
for the year ended December 31, 2000.
/s/ Deloitte & Touche LLP
San Antonio, Texas
April 2, 2001
Exhibit 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-48932) pertaining to Abraxas Petroleum Corporation 1984
Non-Qualified Stock Option Plan; (Form S-8 No. 33-48934) pertaining to Abraxas
Petroleum Corporation 1984 Incentive Stock Option Plan; (Form S-8 No. 33-72268)
pertaining to the Abraxas Petroleum Corporation 1993 Key Contribution Stock
Option Plan; (Form S-8 No. 33-81416) pertaining to the Abraxas Petroleum
Corporation Restricted Share Plan for Directors; (Form S-8 No. 33-81418)
pertaining to Abraxas Petroleum Corporation 1994 Long Term Incentive Plan; (Form
S-8 No. 333-17375) pertaining to the Abraxas Petroleum Corporation Director
Stock Option Plan; and (Form S-8 No. 333-17377) pertaining to the Abraxas
Petroleum Corporation 401 (K) Profit Sharing Plan of our report dated March 17,
2000, except for Notes 2 and 18, as to which the date is March 31, 2000 with
respect to the consolidated financial statements of Abraxas Petroleum
Corporation included in this Annual Report (Form 10-K) for the year ended
December 31, 2000.
Ernst & Young LLP
San Antonio, Texas
March 30, 2001
Exhibit 23.2
Consent of DeGolyer and MacNaughton
We hereby consent to the incorporation in your Annual Report on Form 10-K
of the references to DeGolyer and MacNaughton in the "Reserves Information"
section on page 21 and to the use by reference of information contained in our
Appraisal Report as of December 31, 2000 on Certain Interests owned by Abraxas
Petroleum Corporation provided, however, that since the crude oil, condensate,
natural gas reserves estimates, as of December 31, 2000, set forth in this
Report have been combined with reserve estimates of other petroleum consultants,
we are necessarily unable to verify the accuracy of the reserves values
contained in the aforementioned Annual Report.
DeGolyer and MacNaughton
Dallas, Texas
March 28, 2001
Exhibit 23.3
Consent of McDaniel and Associates Consultants LTD.
We consent to the incorporation in your Annual Report on Form 10-K of the
references to McDaniel and Associates Consultants Ltd. in the "Reserves
Information" section and to the use by reference of information contained in our
Evaluation Report "Canadian Abraxas Petroleum Ltd., Evaluation of Oil & Gas
Reserves, As of January 1, 2001", dated March 30, 2001.
McDaniel & Associates Consultants LTD
Calgary, Alberta
March 30, 2001
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Abraxas Petroleum Corporation and Subsidiaries
Independent Auditors' Report for the year ended December 31, 2000...........F-2
Independent Auditors' Report for the years ended
December 31, 1999 and 1998................................................F-3
Consolidated Balance Sheets at December 31, 1999 and 2000 ..................F-4
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000 .........................................F-6
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1998, 1999 and 2000 .....................F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1998,1999 and 2000 ..........................................F-9
Notes to Consolidated Financial Statements .. ..............................F-11
F-1
INDEPENDENT AUDITORS' REPORT
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, 2000, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the 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 financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2000, and the
results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/DELOITTE & TOUCHE LLP
San Antonio, Texas
March 22, 2001
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Abraxas Petroleum Corporation
We have audited the accompanying consolidated balance sheets of Abraxas
Petroleum Corporation and Subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the two years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Abraxas
Petroleum Corporation and Subsidiaries at December 31, 1999, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
San Antonio, Texas March 17, 2000, except for Notes 2 and 18 as to which the
date is March 31,2000
F-3
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
--------------------------------------
1999 2000
------------------ -------------------
(In thousands)
Current assets:
Cash ................................................... $ 3,799 $ 2,004
Accounts receivable, less allowance for doubtful
accounts:
Joint owners ....................................... 5,140 3,771
Oil and gas production sales ....................... 7,955 16,106
Other .............................................. 1,257 841
------------------ -------------------
14,352 20,718
Equipment inventory .................................... 447 1,411
Other current assets ................................... 431 179
------------------ -------------------
Total current assets ................................. 19,029 24,312
Property and equipment:
Oil and gas properties, full cost method of accounting:
Proved ............................................. 433,596 481,802
Unproved, not subject to amortization .............. 17,057 12,831
Other property and equipment ......................... 63,700 63,720
------------------ -------------------
Total .......................................... 514,353 558,353
Less accumulated depreciation, depletion, and
amortization ..................................... 219,687 253,569
------------------ -------------------
Total property and equipment - net ................. 294,666 304,784
Deferred financing fees, net of accumulated amortization
of $4,826 and $6,917 at December 31, 1999 and 2000,
respectively ........................................... 7,711 5,556
Other assets .............................................. 878 908
------------------ -------------------
Total assets ........................................... $ 322,284 $ 335,560
================== ===================
See accompanying Notes to Consolidated Financial Statements.
F-4
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 31
--------------------------------------
1999 2000
------------------ -------------------
(In thousands)
Current liabilities:
Accounts payable .......................................... $ 8,445 $ 22,721
Joint interest oil and gas production payable ............. 10,608 6,281
Accrued interest .......................................... 6,358 6,079
Other accrued expenses .................................... 923 1,932
Current maturities of long-term debt ...................... - 1,128
------------------ -------------------
Total current liabilities ............................... 26,334 38,141
Long-term debt ............................................... 273,421 266,441
Deferred income taxes ........................................ 16,935 21,079
Future site restoration ..................................... 4,603 4,305
Minority interest in foreign subsidiary ...................... 10,496 12,097
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, par value $.01 per share - authorized
200,000,000 shares; issued 22,747,099 and 22,759,852
shares at December 31, 1999 and 2000, respectively ...... 227 227
Additional paid-in capital ................................ 127,562 130,409
Accumulated deficit ....................................... (139,825) (131,376)
Treasury stock, at cost, 152,083 and 165,883 shares at
December 31, 1999 and 2000, respectively ................ (1,071) (964)
Accumulated other comprehensive income (loss).............. 3,602 (4,799)
------------------ ------------------
Total stockholders' equity (deficit)......................... (9,505) (6,503)
------------------ -------------------
Total liabilities and stockholders' equity (deficit)...... $ 322,284 $ 335,560
================== ===================
See accompanying Notes to Consolidated Financial Statements.
F-5
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
-------------------------------------
1998 1999 2000
-------------------------------------
(In thousands except per share data)
Revenues:
Oil and gas production revenues .......................... $ 54,263 $ 59,025 $ 72,973
Gas processing revenues .................................. 3,159 4,244 2,717
Rig revenues ............................................. 469 444 505
Other .................................................... 2,193 3,057 405
--------- ---------- ----------
60,084 66,770 76,600
Operating costs and expenses:
Lease operating and production taxes ..................... 18,091 17,938 18,783
Depreciation, depletion, and amortization ................ 31,226 34,811 35,857
Proved property impairment ............................... 61,224 19,100 --
Rig operations ........................................... 521 624 717
General and administrative ............................... 5,522 5,269 6,893
General and administrative (Stock-based Compensation)..... -- -- 2,767
--------- ---------- ----------
116,584 77,742 65,017
--------- ---------- ----------
Operating income (loss) ..................................... (56,500) (10,972) 11,583
Other (income) expense:
Interest income .......................................... (805) (666) (530)
Amortization of deferred financing fee ................... 1,571 1,915 2,091
Interest expense ......................................... 30,848 36,815 31,140
Gain on sale of equity investment ........................ -- -- (33,983)
Other .................................................... -- -- 1,203
--------- ---------- ----------
31,614 38,064 (79)
--------- ---------- ----------
Income (loss) from operations before income tax and
extraordinary item ....................................... (88,114) (49,036) 11,662
Income tax expense (benefit):
Current .................................................. 231 491 (1,233)
Deferred ................................................. (4,389) (13,116) 4,938
Minority interest in income of consolidated foreign
subsidiary ............................................... 4 269 1,281
--------- ---------- ----------
Income (loss) before extraordinary item ..................... (83,960) (36,680) 6,676
Extraordinary item:
Debt extinguishment ...................................... -- -- 1,773
--------- ---------- ----------
Net income .................................................. $ (83,960) $ (36,680) $ 8,449
========== ========== ==========
Basis earnings (loss) per common share:
Net income (loss) before extraordinary item .............. $ (13.26) $ (5.41) $ 0.29
Extraordinary item ....................................... -- -- 0.08
--------- ---------- ----------
Net income (loss) per common share .......................... $ (13.26) $ (5.41) $ 0.37
========= ========== ==========
Diluted earnings (loss) per common share :
Net income (loss) before extraordinary item .............. $ (13.26) $ (5.41) $ 0.21
Extraordinary item ....................................... -- -- 0.05
--------- ---------- ----------
Net income (loss) per common share - diluted ............... $ (13.26) $ (5.41) $ 0.26
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements
F-6
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands except share amounts)
Accumulated
Common Stock Treasury Stock Additional Other
--------------------- --------------------- Paid-In Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Income (Loss) Total
----------- -------- --------- ---------- ---------- ------------ ------------- ----------
Balance at January 1, 1998 . 6,422,540 $ 63 53,023 $ (281) $ 51,118 $ (19,185) $ (4,902) $ 26,813
Comprehensive income
(loss)
Net loss .............. -- -- -- -- -- (83,960) -- (83,960)
Other comprehensive
income:
Foreign currency
translation
adjustment ........ -- -- -- -- -- -- (6,068) (6,068)
----------- ---------- ----------
Comprehensive income ....
(loss)................. (83,960) (6,068) (90,028)
Issuance of common stock
for compensation ...... 4,838 -- (18,263) 94 114 -- -- 208
----------- --------- ----------
Purchase of treasury
stock ................. -- -- 136,255 (980) -- -- -- (980)
Options exercised ....... 3,000 -- -- -- 16 -- -- 16
Issuance of common stock
for acquisition of oil
and gas properties .... 71,063 2 -- -- 447 -- -- 449
----------- --------- --------- --------- ---------- ------------ ---------- ----------
Balance at December 31, 1998 6,501,441 $ 65 171,015 $ (1,167) $ 51,695 $ (103,145) $(10,970) $ (63,522)
Comprehensive income
(loss):
Net loss ............. . -- -- -- -- -- (36,680) -- (36,680)
Other comprehensive
income:
Foreign currency
translation
adjustment ........ -- -- -- -- -- -- 14,572 14,572
----------- ---------- ----------
Comprehensive income
(loss) ................ -- -- -- -- -- (36,680) 14,572 (22,108)
Issuance of common stock
for compensation ...... 3,314 -- (18,932) 96 (43) -- -- 53
Issuance of common stock
in connection with
Exchange Offer (Note ..
2, 5 and 6) ........... 16,242,344 162 -- -- 75,910 -- -- 76,072
----------- --------- --------- --------- ---------- ------------ ---------- ----------
Balance at December 31, 1999 22,747,099 $ 227 152,083 $ (1,071) $ 127,562 $ (139,825) $ 3,602 $ (9,505)
(continued)
F-7
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(continued)
(In thousands except share amounts)
Accumulated
Common Stock Treasury Stock Additional Other
--------------------- --------------------- Paid-In Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Income (Loss) Total
----------- -------- --------- ---------- ---------- ------------ ------------- ----------
Balance at December 31, 1999 22,747,099 $ 227 152,083 $(1,071) $ 127,562 $ (139,825) $ 3,602 $ (9,505)
Comprehensive income
(loss):
Net income............... -- -- -- -- -- 8,449 -- 8,449
Other comprehensive
income:
Foreign currency
translation
adjustment ........ -- -- -- -- -- -- (8,401) (8,401)
----------- ----------- ----------
Comprehensive income (loss) 8,449 (8,401) 48
Stock-based compensation -- -- -- -- 2,767 -- -- 2,767
Issuance of common stock
and warrants for
compensation .......... 12,753 -- (25,000) 185 80 -- -- 265
Purchase of treasury
stock ................. -- -- 38,800 (78) -- -- -- (78)
----------- --------- --------- --------- ---------- ------------ ----------- ----------
Balance at December 31, 2000 22,759,852 $ 227 165,883 $ (964) $ 130,409 $ (131,376) $ (4,799) $ (6,503)
=========== ========= ========= ========= ========== ============ =========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-8
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
------------------------------------
1998 1999 2000
----------- ----------- -----------
(In thousands)
Operating Activities
Net income (loss) ........................ $ (83,960) $ (36,680) $ 8,449
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Minority interest in income of
foreign subsidiary ................ 4 269 1,281
Extraordinary gain on
extinguishment of debt ............ -- -- (1,773)
Gain on sale of equity investment ... -- -- (33,983)
Depreciation, depletion, and
amortization ...................... 31,226 34,811 35,857
Proved property impairment .......... 61,224 19,100 --
Deferred income tax (benefit) expense
(4,389) (13,116) 4,938
Amortization of deferred financing
fees .............................. 1,571 1,915 2,091
Amortization of premium on long term
debt .............................. -- (579) --
Stock-based compensation ............ -- -- 2,767
Issuance of common stock and
warrants for compensation ......... 208 53 265
Changes in operating assets and
liabilities:
Accounts receivable ............. 4,738 (2,698) (7,036)
Equipment inventory ............. (137) 57 (538)
Other ........................... (468) 396 (1,839)
Accounts payables ............... (3,867) (744) 11,318
Accrued expenses ................ (1,305) 1,098 (425)
--------- --------- ---------
Net cash provided by operating activities 4,845 3,882 21,372
Investing Activities
Capital expenditures, including purchases
and development of properties ......... (57,412) (128,708) (74,412)
Proceeds from sale of oil and gas
properties and equipment inventory .... 59,389 17,494 21,157
Proceeds from sale of equity investment .. -- -- 34,482
--------- --------- ---------
Net cash (used) provided by investing
activities ............................ 1,977 (111,214) (18,773)
F-9
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year Ended December 31
-----------------------------------
1998 1999 2000
----------- ----------- ----------
(In thousands)
Financing Activities
Issuance of common stock, net of expenses .. $ 3,926 $ -- $ --
Purchase of treasury stock, net ............ (979) -- (78)
Proceeds from long-term borrowings ......... 83,691 88,457 6,400
Payments on long-term borrowings ........... (32,433) (35,747) (10,163)
Deferred financing fees .................... (1,688) (3,586) 23
--------- --------- --------
Net cash provided by (used) in financing
activities .............................. 52,517 49,124 (3,818)
--------- --------- --------
Increase (decrease) in cash ................ 59,339 (58,208) (1,219)
--------- --------- --------
Effect of exchange rate changes on cash .... (825) 617 (576)
--------- --------- --------
Increase (decrease) in cash ................ 58,514 (57,591) (1,795)
Cash at beginning of year .................. 2,876 61,390 3,799
--------- --------- ---------
Cash at end of year ........................ $ 61,390 $ 3,799 $ 2,004
========= ========= =========
Supplemental Disclosures
Supplemental disclosures of cash flow
information:
Interest paid ......................... $ 30,362 $ 35,979 $ 33,004
========= ========= =========
Supplemental schedule of noncash investing
and financing activities:
In December 1999 the Company completed the exchange of $269,699,000 of
its 11.5% Old Notes for $188,778,000 of new Second Lien Notes, issuance
of 16,078,990 shares of common stock and contingent value rights. An
additional $5,000,000 of the Second Lien Notes were issued for payment
of fees and expenses. See Note 2, 5 and 6.
Decrease in long-term debt $ -- $ 75,921 $ --
========= ========= =========
Increase in shareholder's equity $ -- $ 75,921 $ --
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
F-10
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999, and 2000
1. Organization and Significant Accounting Policies
Nature of Operations
Abraxas Petroleum Corporation (the "Company" or "Abraxas") is an
independent energy company engaged in the exploration for and the acquisition,
development, and production of crude oil and natural gas primarily along the
Texas Gulf Coast, in the Permian Basin of western Texas and in Canada and the
processing of natural gas primarily in Canada. The consolidated financial
statements include the accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The consolidated financial statements include the accounts of the
Company, its wholly-owned foreign subsidiary Canadian Abraxas Petroleum Limited
("Canadian Abraxas") and the Company's 49% owned subsidiary Grey Wolf
Exploration Inc. ("Grey Wolf") - see Note 9. Minority interest represents the
minority shareholders' proportionate share of the equity and income of Grey
Wolf. See Note 18 regarding potential acquisition of remaining Grey Wolf shares.
Use of Estimates
The preparation of 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 financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Management believes that it is reasonably possible that estimates of
proved crude oil and natural gas revenues could significantly change in the
future.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to credit
risk consist principally of trade receivables, interest rate and crude oil and
natural gas price swap agreements. Accounts receivable are generally from
companies with significant oil and gas marketing activities. The Company
performs ongoing credit evaluations and, generally, requires no collateral from
its customers.
Equipment Inventory
Equipment inventory principally consists of casing, tubing, and
compression equipment and is carried at the lower of cost or market.
Oil and Gas Properties
The Company follows the full cost method of accounting for crude oil
and natural gas properties. Under this method, all 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 ("DD&A") 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, 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 - see Note 3.
F-11
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
1998, 1999 and 2000, the Company capitalized $414,000, $193,000 and $589,000 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 gas gathering and processing facilities and other property and
equipment is provided over the estimated useful lives using the straight-line
method. Major renewals and betterments are recorded as additions to the property
and equipment accounts. Repairs that do not improve or extend the useful lives
of assets are expensed.
Hedging
The Company periodically enters into agreements to hedge the risk of
future crude oil and natural gas price fluctuations. Such agreements primarily
in the form of price swaps, may either fix or support crude oil and natural gas
prices or limit the impact of price fluctuations with respect to the Company's
sale of crude oil and natural gas. Gains and losses on such hedging activities
are recognized in oil and gas production revenues when hedged production is
sold. 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.
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 March 1999, the Company amended the exercise price to $2.06 on all
options with an existing exercise price greater than $2.06. See Note 7. The
Company recognized approximately $2.8 million as General and Administrative
(Stock-based compensation) expense during 2000.
Foreign Currency Translation
The functional currency for Canadian Abraxas and Grey Wolf is the
Canadian dollar. The Company translates the functional currency into U.S.
dollars based on the current exchange rate at the end of the period for the
balance sheet and a weighted average rate for the period on the statement of
operations. Translation adjustments are reflected as Accumulated Other
Comprehensive Income (Loss) in Stockholders' Equity (Deficit).
Fair Value of Financial Instruments
The Company includes fair value information in the notes to
consolidated financial statements when the fair value of its financial
instruments is materially different from the book value. The Company assumes the
book value of those financial instruments that are classified as current
approximates fair value because of the short maturity of these instruments. For
noncurrent financial instruments, the Company uses quoted market prices or, to
the extent that there are no available quoted market prices, market prices for
similar instruments.
F-12
Restoration, Removal and Environmental Liabilities
The estimated costs of restoration and removal of major processing
facilities are accrued on a straight-line basis over the life of the property.
The estimated future costs for known environmental remediation requirements are
accrued when it is probable that a liability has been incurred and the amount of
remediation costs can be reasonably estimated. These amounts are the
undiscounted, future estimated costs under existing regulatory requirements and
using existing technology.
Revenue Recognition
The Company recognizes crude oil and natural gas revenue from its
interest in producing wells as crude oil and natural gas is sold from those
wells net of royalties. Revenue from the processing of natural gas is recognized
in the period the service is performed. 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. Management does not believe that the Company had material gas
imbalances at December 31, 1999 or 2000.
The Company adopted the provisions of Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition in Financial Statements" issued by the Staff of
the Securities and Exchange Commission. The impact of adopting SAB No. 101 was
not material to the Company.
Deferred Financing Fees
Deferred financing fees are being amortized on a level yield basis over
the term of the related debt.
Federal Income Taxes
The Company records income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
New Accounting Pronouncement
Statement of Financial Accounting Standards, ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", is 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 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 we recognized in earnings.
The Company expects that at January 1, 2001, it will record a liability
of $38 million with the offstting charge to OCI as a cumulative transition
adjustment for derivatives designated as cash-flow hedges prior to adopting SFAS
133.
Reclassifications
Certain prior years balances have been reclassified for comparative
purposes.
2. Liquidity
The Company will have three principal sources of liquidity going
forward: (i) cash on hand, (ii) cash flow from operations, and (iii) the
production payment with Mirant. The Company also intends to continue to sell
certain non-core properties, although the terms of the First Lien Notes
indenture, the Second Lien Notes indenture and the Old Notes indenture
substantially limit our use of proceeds from such sales. The Company expects
F-13
that the significantly improved commodity prices realized by it compared to
those received in 1998 and the expiration of a significant portion of the crude
oil and natural gas hedges that it had put in place in earlier years will
improve its liquidity position in 2001. Should commodity prices fall, all of the
Company's capital expenditures are discretionary and can be delayed to maintain
liquidity. While the availability of capital resources cannot be predicted with
certainty and is dependent upon a number of factors including factors outside of
management's control, management believes that the net cash flow from operations
plus cash on hand, cash available under the production payment and the proceeds
from the sale of additional non-core properties will be adequate to fund
operations and planned capital expenditures.
The Company's operating results had been adversely affected by low
crude oil and natural gas prices in 1998 and early 1999. In addition, the
Company had significant interest payments due on its long term debt. As a result
of these conditions, the Company issued $63.5 million of debt securities ("First
Lien Notes") in March 1999. The First Lien Notes are unconditionally guaranteed
on a senior basis, jointly and severally, by Canadian Abraxas, Sandia Oil and
Gas Corporation ("Sandia") and Wamsutter Holdings, Inc. ("Wamsutter"),
100%-owned subsidiaries of Abraxas. These First Lien Notes and the guarantees
are secured by a first lien or charge on substantially all of the crude oil and
natural gas properties and natural gas processing plants owned by Abraxas,
Canadian Abraxas, Sandia and Wamsutter and the shares of Grey Wolf owned by the
Company and Canadian Abraxas and bear interest at 12.875%, payable semi-annually
on March 15 and September 15. The First Lien Notes will mature in 2003. Proceeds
from the First Lien Notes were used to re-pay the Company's Credit Facility, and
re-pay approximately $10 million of debt assumed in connection with the
Company's acquisition of New Cache in January 1999 with the remainder being used
for general corporate purposes.
In October 1999 the Company entered into a non-recourse Dollar
Denominated Production Payment agreement (the "Production Payment") with a third
party. The Production Payment has an aggregate total availability of up to $50
million at 15% interest. The Production Payment relates to a portion of the
production from several natural gas wells in the Edwards Trend, in south Texas.
As of December 31, 2000, the Company had received $10.4 million under this
agreement. The outstanding balance as of December 31, 2000 is $5.2 million. See
Note 5.
In December 1999, Abraxas and Canadian Abraxas completed an Exchange
Offer ("Exchange Offer") whereby they exchanged $270 million of 11.5% Senior
Notes due 2004 (the "Old Notes") for $189 million in new 11.5% Senior Secured
Notes due 2004 (the "Second Lien Notes"), 16,078,990 shares of Abraxas common
stock and contingent value rights. An additional $5 million of the Second Lien
Notes were issued for payment of fees and expenses. See Note 5 and 6.
The Second Lien Notes are senior obligations of Abraxas and Canadian
Abraxas and are jointly and severally guaranteed by Sandia and Wamsutter. The
Second Lien Notes and the guarantees are secured by a second lien or charge on
substantially all of the crude oil and natural gas properties and natural gas
processing plants owned by Abraxas, Canadian Abraxas, Sandia and Wamsutter, as
well as shares of common stock of Grey Wolf owned by Abraxas and Canadian
Abraxas. The Exchange Offer reduced the Company's long term debt by $75.9
million and annual interest payments by approximately $8.8 million.
In March 2000, the Company sold its interests in certain crude oil and
natural gas properties in Wyoming. Simultaneously, a limited partnership, in
which the Company has a limited partnership interest and Wamsutter acts as
general partner, sold its crude oil and natural gas properties in the same area.
The Company realized $34 million in net proceeds from the sales, which enabled
the Company to meet its interest obligations throughout 2000. See Note 3.
In March 2001, we announced that we had engaged Credit Lyonnais
Securities (USA) Inc. and CIBC World Markets Corp. to assist us in a review of
alternative financial strategies. Under the terms of this engagement, we may
restructure, refinance or recapitalize some or all of our existing debt and/or
issue equity securities.
The Company has implemented a number of measures to conserve its cash
resources, including postponement of certain exploration and development
projects. However, while these measures will help conserve the Company's cash
resources in the near term, they will also limit the Company's ability to
replenish its depleting reserves, which could negatively impact the Company's
operating cash flow and results of operations in the future.
3. Acquisitions and Divestitures
Wyoming Properties Divestiture
In November 1998, the Company sold its interest in certain Wyoming
properties to Abraxas Wamsutter L.P., a Texas limited partnership (the
"Partnership"), for approximately $58.6 million and a minority equity ownership
in the Partnership. Wamsutter initially owned a one percent interest and acted
F-14
as general partner of the Partnership. The investment in the Partnership was
accounted for by the equity method. After certain payback requirements are
satisfied, the Company's interest would increase to 35% initially and could
increase to as high as 65%. The Company also received a management fee and
reimbursement of certain overhead costs from the Partnership which amounted to
$50,700; $594,700 and $112,700 for the years ended December 31, 1998, 1999 and
2000 respectively. See Abraxas Wamsutter L.P. Divestiture, below.
New Cache Petroleums LTD Acquisition
In January 1999, Canadian Abraxas completed the acquisition of New
Cache Petroleums, LTD, ("New Cache"), for approximately $78 million in cash and
the assumption of approximately $10 million in debt. The debt was paid off with
a portion of the proceeds from the sale of the First Lien Notes.
The acquisition was accounted for as a purchase, and the purchase price
was allocated to the crude oil and natural gas properties based on the fair
values of the properties acquired. Results of operations for New Cache have been
included in the consolidated financial statements since January 1999.
Abraxas Wamsutter L.P. Divestiture
In March 2000, the Partnership sold all of its interest in its crude
oil and natural gas properties to a third party. Prior to the sale of these
properties, effective January 1, 2000, the Company's equity investee share of
oil and gas property cost, results of operations and amortization were not
material to consolidated operations or financial position. As a result of the
sale, the Company received approximately $34 million, which represented a
proportional interest in the Partnership's proved properties
The condensed pro forma financial information presented below
summarizes on an unaudited pro forma basis, approximate results of the Company's
consolidated results of operations for the year ended December 31, 1999,
assuming the divestiture had occurred on January 1, 1999.
(In thousands except
per share data)
-----------------------
Revenue ................................... $ 66,770
=======================
Net income (loss) ......................... $ (3,294)
=======================
Income (loss) per common share ............ $ (0.49)
=======================
4. Property and Equipment
The major components of property and equipment, at cost, are as
follows:
Estimated December 31
Useful -------------------
Life 1999 2000
--------- -------- ---------
Years (In thousands)
Land, buildings, and improvements .. 15 $ 310 $ 318
Crude oil and natural gas properties -- 450,653 494,633
Natural gas processing plants ...... 18 60,291 60,299
Equipment and other ................ 7 3,099 3,103
-------- --------
$514,353 $558,353
======== ========
Long-Term Debt
Long-term debt consists of the following:
December 31
----------------------------------
1999 2000
---------------- ----------------
(In thousands)
11.5% Senior Notes due 2004 ("Old Notes") ...................... $ 4,321 $ 801
12.875% Senior Secured Notes due 2003 ("First Lien Notes") ..... 63,500 63,500
11.5% Second Lien Notes due 2004 ("Second Lien Notes").......... 193,769 190,178
F-15
Credit facility payable to a Canadian bank (due 2002),
providing for borrowings to approximately $11,630,000
at the bank's prime rate plus .125%, 7.5% at December
31, 2000, secured by the assets of Grey Wolf and
non-recourse to Abraxas................................ 8,360 7,859
Production Payment - see Note 2 ................................ 3,471 5,231
---------------- ----------------
273,421 267,569
Less current maturities ........................................ - 1,128
---------------- ----------------
$ 273,421 $ 266,441
================ ================
Long-Term Indebtedness
Old Notes. On November 14, 1996, the Company consummated the offering
of $215.0 million of it's 11.5% Senior Notes due 2004, Series A, which were
exchanged for the Series B Notes in February 1997. On January 27, 1998, the
Company completed the sale of $60.0 million of the Series C Notes. The Series B
Notes and the Series C Notes were subsequently combined into $275.0 million in
principal amount of the Old Notes in June 1998.
Interest on the Old Notes is payable semi-annually in arrears on May 1
and November 1 of each year at the rate of 11.5% per annum. The Old Notes are
redeemable, in whole or in part, at the option of the Company, on or after
November 1, 2000, at the redemption prices set forth below, plus accrued and
unpaid interest to the date of redemption, if redeemed during the 12-month
period commencing on November 1 of the years set forth below:
Year Percentage
----- -----------
2000.................................................. 105.750%
2001.................................................. 102.875%
2002 and thereafter................................... 100.000%
The Old Notes are joint and several obligations of the Company and rank
pari passu in right of payment to all existing and future unsubordinated
indebtedness of the Company. The Old Notes rank senior in right of payment to
all future subordinated indebtedness of the Company. The Old Notes are, however,
effectively subordinated to the First Lien Notes to the extent of the value of
the collateral securing the First Lien Notes and the Second Lien Notes to the
extent of the value of the collateral securing the Second Lien Notes. The Old
Notes are unconditionally guaranteed, on a senior basis by Sandia. The guarantee
is a general unsecured obligation of Sandia and ranks pari passu in right of
payment to all unsubordinated indebtedness of Sandia and senior in right of
payment to all subordinated indebtedness of Sandia. The guarantee is effectively
subordinated to the First Lien Notes and the Second Lien Notes to the extent of
the value of the collateral
Upon a Change of Control, as defined in the Old Notes Indenture, each
holder of the Old Notes will have the right to require the Company to repurchase
all or a portion of such holder's Old Notes at a redemption price equal to 101%
of the principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. In addition, the Company will be obligated to offer to repurchase
the Old Notes at 100% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase in the event of certain asset sales.
First Lien Notes. In March 1999, Abraxas consummated the sale of $63.5
million of the First Lien Notes. Interest on the First Lien Notes is payable
semi-annually in arrears on March 15 and September 15, commencing September 15,
1999. The First Lien Notes are redeemable, in whole or in part, at the option of
Abraxas on or after March 15, 2001, at the redemption prices set forth below,
plus accrued and unpaid interest to the date of redemption, if redeemed during
the 12-month period commencing on March 15 of the years set forth below:
Year Percentage
----- ----------
2001.......................................... 103.000%
2002 and thereafter........................... 100.000%
At any time, or from time to time, prior to March 15, 2001, Abraxas may, at its
option, use all or a portion of the net cash proceeds of one or more equity
offerings to redeem up to 35% of the aggregate original principal amount of the
First Lien Notes at a redemption price equal to 112.875% of the aggregate
principal amount of the First Lien Notes to be redeemed, plus accrued and unpaid
interest.
F-16
The First Lien Notes are senior indebtedness of Abraxas secured by a
first lien on substantially all of the crude oil and natural gas properties of
Abraxas and the shares of Grey Wolf owned by Abraxas. The First Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Canadian
Abraxas, Sandia and Wamsutter. The guarantees are secured by substantially all
of the crude oil and natural gas properties of the guarantors and the shares of
Grey Wolf owned by Canadian Abraxas.
Upon a Change of Control, as defined in the First Lien Notes Indenture, each
holder of the First Lien Notes will have the right to require Abraxas to
repurchase such holder's First Lien Notes at a redemption price equal to 101% of
the principal amount thereof plus accrued and unpaid interest to the date of
repurchase. In addition, Abraxas will be obligated to offer to repurchase the
First Lien Notes at 100% of the principal amount thereof plus accrued and unpaid
interest to the date of redemption in the event of certain asset sales.
The First Lien Notes indenture contains certain covenants that limit the ability
of Abraxas and certain of its subsidiaries, including the guarantors of the
First Lien Notes (the "Restricted Subsidiaries") to, among other things, incur
additional indebtedness, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, incur liens, merge or consolidate with any other person or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of the assets of Abraxas.
The First Lien Notes indenture provides, among other things, that
Abraxas may not, and may not cause or permit the Restricted Subsidiaries, to,
directly or indirectly, create or otherwise cause to permit to exist or become
effective any encumbrance or restriction on the ability of such subsidiary to
pay dividends or make distributions on or in respect of its capital stock, make
loans or advances or pay debts owed to Abraxas or any other Restricted
Subsidiary, guarantee any indebtedness of Abraxas or any other Restricted
Subsidiary or transfer any of its assets to Abraxas or any other Restricted
Subsidiary except in certain situations as described in the First Lien Notes
indenture.
Second Lien Notes. In December 1999, Abraxas and Canadian Abraxas
consummated an Exchange Offer (see Note 2) whereby $269,699,000 of the Old Notes
were exchanged for $188,778,000 of new Second Lien Notes, and 16,078,990 shares
of Abraxas common stock and contingent value rights. See Note 6. An additional
$5,000,000 of the Second Lien Notes were issued in payment of fees and expenses.
Interest on the Second Lien Notes is payable semi-annually in arrears
on May 1 and November 1, commencing May 1, 2000. The Second Lien Notes are
redeemable, in whole or in part, at the option of Abraxas and Canadian Abraxas
on or after December 1, 2000, at the redemption prices set forth below, plus
accrued and unpaid interest to the date of redemption, if redeemed during the
12-month period commencing on December 1 of the years set forth below:
Year Percentage
----- ----------
2000......................................... 105.750%
2001......................................... 102.875%
2002 and thereafter.......................... 100.000%
The Second Lien Notes are senior indebtedness of Abraxas and Canadian
Abraxas and are secured by a second lien on substantially all of the crude oil
and natural gas properties of Abraxas and Canadian Abraxas and the shares of
Grey Wolf owned by Abraxas and Canadian Abraxas. The Second Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Sandia
and Wamsutter. The guarantees are secured by substantially all of the crude oil
and natural gas properties of the guarantors. The Second Lien Notes are,
however, effectively subordinated to the First Lien Notes and related guarantees
to the extent the value of the collateral securing the Second Lien Notes and
related guarantees and the First Lien Notes and related guarantees is
insufficient to pay both the Second Lien Notes and the First Lien Notes.
Upon a Change of Control, as defined in the Second Lien Notes Indenture, each
holder of the Second Lien Notes will have the right to require Abraxas and
Canadian Abraxas to repurchase such holder's Second Lien Notes at a redemption
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase. In addition, Abraxas and Canadian Abraxas
will be obligated to offer to repurchase the Second Lien Notes at 100% of the
principal amount thereof plus accrued and unpaid interest to the date of
redemption in the event of certain asset sales.
The Second Lien Notes indenture contains certain covenants that limit the
ability of Abraxas and Canadian Abraxas and certain of their subsidiaries,
F-17
including the guarantors of the Second Lien Notes (the "Restricted
Subsidiaries") to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur liens, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of Abraxas or
Canadian Abraxas.
The Second Lien Notes indenture provides, among other things, that
Abraxas and Canadian Abraxas may not, and may not cause or permit the Restricted
Subsidiaries, to, directly or indirectly, create or otherwise cause to permit to
exist or become effective any encumbrance or restriction on the ability of such
subsidiary to pay dividends or make distributions on or in respect of its
capital stock, make loans or advances or pay debts owed to Abraxas, Canadian
Abraxas or any other Restricted Subsidiary, guarantee any indebtedness of
Abraxas, Canadian Abraxas or any other Restricted Subsidiary or transfer any of
its assets to Abraxas, Canadian Abraxas or any other Restricted Subsidiary
except in certain situations as described in the Second Lien Notes indenture.
The fair value of the Old Notes, First Lien Notes and Second Lien Notes
was approximately $235.2 million as of December 31, 2000. The Company has
approximately $250,000 of standby letters of credit and a $10,000 performance
bond open at December 31, 2000. Approximately $261,000 of cash is restricted and
in escrow related to certain of the letters of credit and the bond.
Extraordinary Item
In June 2000, the Company retired $3.5 million of the Old Notes and
$3.6 million of the Second Lien Notes at a discount of $1.7 million.
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
Contingent Value Rights ("CVRs")
As part of the Exchange Offer consummated by the Company in December
1999 (see Note 2), Abraxas issued contingent value rights or CVRs, which
entitled the holders to receive up to a total of 105,408,978 of Abraxas common
stock under certain circumstances as defined. On May 21, 2001, Abraxas may be
required to issue additional shares to the holders of the CVRs . The actual
number of shares issued will depend on the average market price of Abraxas
common stock over a defined period. Any future issuance of common stock will
result in a transfer from Additional Paid In Capital to Common Stock. The CVRs
will terminate if the market price of Abraxas common stock exceeds certain
prices for a period of 30 trading days during any 45 day consecutive trading day
period prior to the expiration date. The target price on a given date will equal
$5.03 plus daily interest at an annual rate of 11.5% from November 1, 1999. The
target price on May 21, 2001 is $5.97. As of December 31, 2000, based on the
Abraxas common stock market price, CVR holders would have been entitled to
receive approximately 9.5 million shares. As of March 22, 2001, based on the
Abraxas Common Stock market price, CVR holders would be entitled to receive
approximately 3.3 million shares.
Treasury Stock
In March 1996, the Board of Directors authorized the purchase in the
open market of up to 500,000 shares of the Company's outstanding common stock,
the aggregate purchase price not to exceed $3,500,000. During the year ended
December 31, 1998, 136,255 shares with an aggregate cost of $980,000 were
purchased. During the year ended December 31, 1999 the Company did not purchase
any shares of its common stock for treasury stock. During the year ended
December 31, 2000, 38,800 shares with an aggregate cost of $78,000 were
purchased.
F-18
7. Stock Option Plans and Warrants
Stock Options
The Company grants options to its officers, directors, and key
employees under various stock option and incentive plans.
The Company's various stock option plans have authorized the grant of
options to management personnel and directors for up to approximately 4.7
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, 2000
approximately 547,800 options remain available for grant.
Pro forma information regarding net income (loss) and earnings (loss)
per share is required by SFAS 123, "Accounting for Stock-Based Compensation",
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 that SFAS. 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 1998, 1999, and 2000,
: risk-free interest rates of 6.25%, 6.25% and 6.25%, respectively; dividend
yields of -0-%; volatility factors of the expected market price of the Company's
common stock of .667, .928 and .916, respectively; 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:
1998 1999 2000
---------------------------------------------
(In thousands except per share data)
Pro forma net income (loss) ............................ $ (85,619) $ (37,240) $ 10,089
Pro forma net income (loss) per common share ........... $ (13.52) $ (5.49) $ 0.45
Pro forma net income (loss) per common share - diluted $ (13.52) $ (5.49) $ 0.31
A summary of the Company's stock option activity, and related
information for the years ended December 31, follows:
1998 1999 2000
----------------------------- ----------------------------- -----------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price(1) Options Exercise Price(2) Options Exercise Price
(000s) (000s) (000s)
---------- ------------------ ---------- ------------------ --------- ------------------
Outstanding-beginning of
year ................... 834 $ 8.27 1,572 $ 7.33 1,890 $ 1.82
Granted ................... 792 7.37 534 1.19 2,240 4.62
Exercised ................. (3) 5.33 - - - -
Forfeited/Expired ......... (51) 7.39 (216) 2.06 (88) 1.89
---------- ---------- ---------
Outstanding-end of year ... 1,572 $ 7.33 1,890 $ 1.82 4,042 $ 3.37
========== ========== =========
Exercisable at end of year 501 $ 6.71 685 $ 2.06 1,067 $ 1.99
========== ========== =========
Weighted-average fair
value of options
granted during the year $ 5.15 $ 1.07 $ 1.21
F-19
Exercise prices for options outstanding as of December 31, 2000 ranged
from $1.30 to $5.03 The weighted-average remaining contractual life of those
options is approximately 8.5 years.
(1) In March 1998, the Company amended the exercise price to $7.44 per share on
all options with an existing exercise price greater than $7.44.
(2) In March 1999, the Company amended the exercise price to $2.06 per
share on all options with an existing exercise price greater than $2.06.
See Note 1 General and Administrative (Stock-based compensaation).
Stock Awards
In addition to stock options granted under the plans described above,
the Long-Term Incentive Plan also provides for the right to receive compensation
in cash, awards of common stock, or a combination thereof. In 1998 and 1999, the
Company made direct awards of common stock of 18,263 shares and 18,932 shares,
respectively, at weighted average fair values of $5.13 and $5.09 per share,
respectively. The Company recorded compensation expense of $135,900 and $37,900
for the years ended December 31, 1998 and 1999 respectively. There were no
awards in 2000.
The Company also has adopted the Restricted Share Plan for Directors
which provides for awards of common stock to nonemployee directors of the
Company who did not, within the year immediately preceding the determination of
the director's eligibility, receive any award under any other plan of the
Company. In 1998, 1999, and 2000, the Company made direct awards of common stock
of 4,838 shares; 3,314 shares and 12,753 shares, respectively, at weighted
average fair values of $14.75, $4.38 and $0.94 per share, respectively. The
Company recorded compensation expense of $71,400; $13,700 and $11,900 for the
years ended December 31, 1998, 1999 and 2000 respectively.
During 1996, the Company's stockholders approved the Abraxas Petroleum
Corporation Director Stock Option Plan (Plan), which authorizes the grant of
nonstatutory options to acquire an aggregate of 104,000 common shares to those
persons who are directors and not officers of the Company. During 1998 each of
the seven eligible directors were granted an option to purchase 2,000 common
shares at $7.44 and 3,000 common shares at $5.56. An additional option was
granted to an eligible director to purchase 4,000 common shares at $7.44. In
March 1999 each of the seven eligible directors were granted an option to
purchase 2,000 common shares at $2.06, in November 1999 five of the eligible
directors were granted options to purchase 15,000 common shares at $1.41. In
December 1999 a new board was appointed in connection with the Company's
Exchange Offer, each of the four new eligible directors were granted options for
75,000 common shares at $0.97.
Stock Warrants and Other
In 2000, the Company committed to issue 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 recorded approximately
$219,000 of compensation expense which is included in Other expense.
At December 31, 2000, the Company has approximately 62,572,000 shares
reserved for future issuance for conversion of its stock options, warrants,
Contingent Value Rights, and incentive plans for the Company's directors and
employees.
8. Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets are as follows:
December 31
---------------------
1999 2000
-------- ---------
(In thousands)
Deferred tax liabilities:
U.S. full cost pool ..................... $ -- $ 2,359
Canadian full cost pool ................. 20,368 21,079
State taxes ............................. 67 --
-------- --------
Total deferred tax liabilities ............ 20,435 23,438
F-20
Deferred tax assets:
U.S. full cost pool ..................... 6,252 --
Depletion ............................... 1,075 1,439
Net operating losses ("NOL") ........... 32,155 34,624
Other ................................... 152 1,059
-------- --------
Total deferred tax assets ................. 39,634 37,122
Valuation allowance for deferred tax assets (36,134) (34,763)
-------- --------
Net deferred tax assets ................... 3,500 2,359
-------- --------
Net deferred tax liabilities .............. $ 16,935 $ 21,079
======== ========
Significant components of the provision (benefit) for income taxes are
as follows:
1998 1999 2000
----------------------------
Current:
Foreign ........................ $ 231 $ 491 $ (1,233)
-------- --------- ----------
$ 231 $ 491 $ (1,233)
======== ========= ==========
Deferred:
Federal ........................ $ - $ - $ 3,433
Foreign ........................ (4,389) (13,116) 1,505
--------- --------- ----------
$(4,389) $(13,116) $ 4,938
========= ========= ==========
At December 31, 2000, the Company had, subject to the limitation
discussed below, $101,800,000 of net operating loss carryforwards for U.S. tax
purposes. These loss carryforwards will expire from 2001 through 2020 if not
utilized. At December 31, 2000, the Company had approximately $11,400,000 of net
operating loss carryforwards for Canadian tax purposes. These carryforwards will
expire from 2001 through 2020 if not utilized.
As a result of the acquisition of certain partnership interests and
crude oil and natural gas properties in 1990 and 1991, an ownership change under
Section 382 occurred in December 1991. Accordingly, it is expected that the use
of the U.S. net operating loss carryforwards generated prior to December 31,
1991 of $4,909,000 will be limited to approximately $235,000 per year.
During 1992, the Company acquired 100% of the common stock of an
unrelated corporation. The use of net operating loss carryforwards of the
acquired corporation of $257,000 acquired in the acquisition are limited to
approximately $115,000 per year.
As a result of the issuance of additional shares of common stock for
acquisitions and sales of common stock, an additional ownership change under
Section 382 occurred in October 1993. Accordingly, it is expected that the use
of all U.S. net operating loss carryforwards generated through October 1993
(including those subject to the 1991 and 1992 ownership changes discussed above)
of $8,295,000 will be limited as described above and in the following paragraph.
An ownership change under Section 382 occurred in December 1999,
following the issuance of additional shares, as described in Note 5. It is
expected that the annual use of U.S. net operating loss carryforwards subject to
this Section 382 limitation will be limited to approximately $363,000, subject
to the lower limitations described above. Future changes in ownership may
further limit the use of the Company's carryforwards.
The annual Section 382 limitation may be increased during any year,
within 5 years of a change in ownership, in which built-in gains that existed on
the date of the change in ownership are recognized.
In addition to the Section 382 limitations, uncertainties exist as to the
future utilization of the operating loss carryforwards under the criteria set
forth under FASB Statement No. 109. Therefore, the Company has established a
valuation allowance of $36,134,000 and $34,763,000 for deferred tax assets at
December 31, 1999 and 2000, respectively.
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:
F-21
December 31
---------------------------------
1998 1999 2000
--------- ---------- ----------
(In thousands)
Tax (expense) benefit at U.S. .......
statutory rates (34%) ............. $ 29,958 $ 16,672 $ (3,965)
(Increase) decrease in deferred tax
asset valuation allowance ......... (26,907) (3,312) 1,371
NOL utilization - extraordinary gain -- -- (603)
Higher effective rate of foreign
operations ........................ (231) (491) (1,098)
Percentage depletion ................ 146 -- 363
Other ............................... 1,192 (244) 227
--------- --------- ---------
$ 4,158 $ 12,625 $ (3,705)
========= ========= =========
9. Related Party Transactions
Accounts receivable - Other and Other assets includes approximately
$220,000 and $268,000 as of December 31, 1999 and 2000, respectively,
representing amounts due from officers and stockholders relating primarily to
joint interest billings on properties which the Company operates and advances
made to employees.
At December 31, 2000, the Company owns approximately 49% of Grey Wolf.
The Company's President, as well as certain directors, directly own
approximately 13% of Grey Wolf. Additionally the Company's President owns
options to purchase up to 91,000 shares of Grey Wolf capital stock at an
exercise price of CDN$3.42 per share, and certain of the Company's directors own
options to purchase in the aggregate up to 120,000 shares of Grey Wolf capital
stock at an exercise price of CDN$2.00 per share. Grey Wolf currently has
approximately 12,700,000 shares of capital stock outstanding. See Note 18.
Grey Wolf owns a 10% interest in the Canadian Abraxas oil and gas
properties and the Canadian Abraxas gas processing plants acquired by Canadian
Abraxas in November 1996 and manages the operations of Canadian Abraxas,
pursuant to a management agreement between Canadian Abraxas and Grey Wolf. Under
the management agreement, Canadian Abraxas reimburses Grey Wolf for reasonable
costs or expenses attributable to Canadian Abraxas and for administrative
expenses based upon the percentage that Canadian Abraxas' gross revenue bears to
the total gross revenue of Canadian Abraxas and Grey Wolf. Amounts paid under
this agreement were $1.5 million, $2.3 million and $2.5 million for the years
ended December 31, 1998, 1999 and 2000, respectively.
Wind River Resources Corporation ("Wind River"), all of the capital
stock of which is owned by the Company's President owns a twin-engine airplane.
The airplane is available for business use by the employees of Abraxas from time
to time at Wind River's cost. Abraxas paid Wind River a total of $302,000,
$336,000 and $336,000 in 1998, 1999 and 2000 respectively.
10. Commitments and Contingencies
Operating Leases
During the years ended December 31, 1998, 1999, and 2000, the Company
incurred rent expense related to leasing office facilities of approximately
$292,000, $396,000, and $465,000 respectively. Future minimum rental payments
are as follows at December 31, 2000.
2001 ............................................$ 530,000
2002 ............................................ 550,000
2003 ............................................ 336,000
2004 ............................................ 228,000
2005 ............................................ 228,000
Thereafter ...................................... 171,000
F-22
Litigation and Contingencies
In 1995, certain plaintiffs filed a lawsuit against the Company
alleging negligence and gross negligence, tortious interference with contract,
conversion and waste. The Company fully and finally resolved the litigation on
April 25, 2000, through a payment of $435,780 in the aggregate to the
plaintiffs.
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, 2000, the Company was not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on the Company.
11. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
1998 1999 2000
------------------ ----------------- ------------------
Numerator:
Numerator for basic and diluted earnings per share
- net income (loss) before extraordinary item $ (83,960,000) $ (36,680,000) $ 6,676,000
Extraordinary item - - 1,773,000
------------------ ----------------- ------------------
Numerator for basis and diluted earnings per share
- net income (loss) available to common
stockholders (83,960,000) (36,680,000) 8,449,000
================== ================= ==================
Denominator:
Denominator for basic earnings per share -
weighted-average shares 6,331,292 6,783,633 22,615,777
Effect of dilutive securities:
Stock options, warrants and CVRs - - 10,011,987
------------------ ----------------- ------------------
Dilutive potential common shares Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed
conversions 6,331,292 6,783,633 32,627,764
================== ================= ==================
Basic earnings (loss) per share:
Net income (loss) before extraordinary item $ (13.26) $ (5.41) $ 0.29
Extraordinary item - - 0.08
------------------ ----------------- ------------------
Net income (loss) per common share $ (13.26) $ (5.41) $ 0.37
================== ================= ==================
Diluted earnings (loss) per share:
Net income (loss) before extraordinary item $ (13.26) $ (5.41) $ 0.21
Extraordinary item - - 0.05
------------------ ----------------- ------------------
Net income (loss) per common share - diluted $ (13.26) $ (5.41) $ 0.26
================== ================= ==================
For the years ended December 31, 1998 and 1999 none of the shares
issuable in connection with stock options, warrants or CVRs are included in
diluted shares. Inclusion of these shares would be antidilutive due to losses
incurred in those years. Had losses not been incurred, 48,400 shares and 68.2
million shares would have been included for the years ended December 31, 1998
and 1999, respectively.
F-23
12. Quarterly Results of Operations (Unaudited)
Selected results of operations for each of the fiscal quarters during
the years ended December 31, 1999 and 2000 are as follows:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
---------------- ----------------- ---------------- ----------------
(In thousands, except per share data)
Year Ended December 31, 1999
Net revenue .................... $ 15,970 $ 16,776 $ 16,958 $ 17,066
Operating income (loss) ........ 604 1,692 2,982 (16,250)
Net income (loss) .............. (6,294) (6,741) (6,919) (16,726)
Earnings (loss) per common
share basic and diluted ...... $ (0.99) $ (1.06) $ (1.09) $ (2.06)
Year Ended December 31, 2000
Net revenue .................... $ 16,717 $ 16,287 $ 16,377 $ 27,219
Operating income (loss) ........ 1,513 1,629 (963) 9,404
Net income (loss) before
extraordinary item ........... 27,156 (7,186) (13,586) 292
Net income (loss) .............. 27,156 (5,413) (13,586) 292
Net income (loss) before
extraordinary item per
common share- basic .......... $ 1.20 $ (0.32) $ (0.60) $ 0.01
Net income (loss) before
extraordinary item per common
share - diluted ............. $ 0.52 $ (0.32) $ (0.60) $ 0.01
Net income (loss) per common
share- basic ................. $ 1.20 $ (0.24) $ (0.60) $ 0.01
Net income (loss) per common
share- diluted ............... $ 0.52 $ (0.24) $ (0.60) $ 0.01
During the fourth quarter of 1999, the Company recorded a write-down
of its Canadian proved crude oil and natural gas properties of approximately
$19.1 million ($11.9 million after tax) under the ceiling limitation. During the
first quarter of 2000, the Company recognized a gain of $34 million on the sale
of its equity investment in the Partnership. In the second quarter of 2000, the
Company recognized an extraordinary gain on debt extinguishment of $1.8 million.
13. Benefit Plans
The Company has a defined contribution plan (401(k)) covering all
eligible employees of the Company. During 1998 the Company contributed 10,329
shares of its common stock held in the treasury to the Plan and recorded the
fair value of $76,847 as compensation expense. The Company did not contribute to
the plan in 1999 or 2000. The employee contribution limitations are determined
by formulas which limit the upper one-third of the plan members from
contributing amounts that would cause the plan to be top-heavy. The employee
contribution is limited to the lesser of 20% of the employee's annual
compensation or $10,000.
14. Summary Financial Information of Canadian Abraxas Petroleum Ltd.
The following is summary financial information of Canadian Abraxas, a
wholly owned subsidiary of the Company. Canadian Abraxas is jointly and
severally liable for the entire balance of the Old Notes ($801,000) and the
Second Lien Notes ($190.2 million) and is a guarantor of the First Lien Notes
($63.5 million). The Company has not presented separate financial statements and
other disclosures concerning Canadian Abraxas because management has determined
that such information is not material to the holders of the Old Notes, the First
Lien Notes and the Second Lien Notes.
F-24
December 31,
1999 2000
----------------- ---------------
(In thousands)
BALANCE SHEET
Assets
Total current assets .................................. $ 11,777 $ 7,435
Oil and gas, and processing properties ................ 164,420 148,585
Other assets .......................................... 2,777 2,272
----------------- ---------------
$ 178,974 $ 158,292
================= ===============
Liabilities and Stockholder's Equity
Total current liabilities ............................. $ 3,158 $ 6,016
Second Lien Notes due 2004 ........................... 52,629 52,629
Notes payable to Abraxas Petroleum Corporation ........ 38,580 28,629
Other liabilities ..................................... 23,642 22,587
Stockholder's equity................................... 60,965 48,431
----------------- ---------------
$ 178,974 $ 158,292
================= ===============
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1999 December 31, 2000
------------------------ ---------------------- ----------------------
(In Thousands)
STATEMENTS OF OPERATIONS
Revenues ...................................... $ 18,624 $ 33,362 $ 29,866
Operating costs and expenses .................. (18,026) (31,171) (28,305)
Proved property impairment .................... -- (19,100) --
Interest expense .............................. (10,356) (10,093) (8,013)
Other income (expense)......................... 191 347 (447)
Income tax (expense) benefit .................. 4,158 9,677 1,545
------------------------ ---------------------- ----------------------
Net income (loss) ........................... $ (5,409) $ (16,978) $ (5,354)
======================== ====================== ======================
15. Business Segments
The Company conducts its operations through two geographic segments,
the United States and Canada, and is engaged in the acquisition, development and
production of crude oil and natural gas and the processing of natural gas in
each country. The Company's significant operations are located in the Texas Gulf
Coast, the Permian Basin of western Texas and Canada. Identifiable assets are
those assets used in the operations of the segment. Corporate assets consist
primarily of deferred financing fees and other property and equipment. The
Company's revenues are derived primarily from the sale of crude oil, condensate,
natural gas liquids and natural gas to marketers and refiners and from
processing fees from the custom processing of natural gas. As a general policy,
collateral is not required for receivables; however, the credit of the Company's
customers is regularly assessed. The Company is not aware of any significant
credit risk relating to its customers and has not experienced significant credit
losses associated with such receivables.
In 2000, two customers accounted for approximately 26% of oil and
natural gas production revenue, three customers accounted for approximately 59%
of United States revenue and two customers accounted for approximately 36% of
revenue in Canada. In 1999, three customers accounted for approximately 58% of
oil and natural gas production revenues. In 1998, four customers accounted for
approximately 58% of oil and natural gas production revenues and gas processing
revenues.
The Company operates in one segment. Business segment information about
the Company's 1998 operations in different geographic areas is as follows:
U.S. Canada Total
---------- ------------ -----------
(In thousands)
Revenues ............................... $ 36,267 $ 23,817 $ 60,084
========= ========= ==========
F-25
Operating profit (loss) ................ $ (53,016) $ 877 $ (52,139)
========= =========
General corporate ...................... (4,361)
Net interest expense and amortization of
deferred financing fees ............. (31,614)
----------
Loss before income taxes ............ $ (88,114)
==========
Identifiable assets at December 31, 1998 $ 153,030 $ 129,301 $ 282,331
========= =========
Corporate assets ....................... 9,167
----------
Total assets ........................ $ 291,498
==========
Business segment information about the Company's 1999 operations in different
geographic areas is as follows:
U.S. Canada Total
---------- ------------ -----------
(In thousands)
Revenues ............................... $ 24,586 $ 42,184 $ 66,770
========= ========= ==========
Operating profit (loss) ................ $ 7,765 $ (15,444) $ (7,679)
========= ==========
General corporate ...................... (3,293)
Net interest expense and amortization of
deferred financing fees ............. (38,064)
----------
Loss before income taxes ............ $ (49,036)
==========
Identifiable assets at December 31, 1999 $ 107,336 $ 206,474 $ 313,810
========= =========
Corporate assets ....................... 8,474
---------
Total assets ........................ $ 322,284
=========
Business segment information about the Company's 2000 operations in different
geographic areas is as follows:
U.S. Canada Total
---------- ------------ -----------
(In thousands)
Revenues ............................... $ 32,886 $ 43,714 $ 76,600
========== ========== ==========
Operating profit ....................... $ 12,446 $ 6,739 $ 19,185
========= ==========
General corporate ...................... (7,602)
Net interest expense and amortization of
deferred financing fees ............. (32,701)
Other income (net) ..................... 32,780
---------
Income before income taxes and
extraordinary items ............... $ 11,662
=========
Identifiable assets at December 31, 2000 $ 132,327 $ 197,229 $ 329,556
========= ==========
Corporate assets ....................... 6,004
---------
Total assets ........................ $ 335,560
=========
16. Commodity Swap Agreements
The Company enters into a commodity swap agreement (Hedge Agreement) to
reduce its exposure to price risk in the spot market for crude oil and natural
gas. Pursuant to the Hedge Agreement, either the Company or the counterparty
thereto is required to make payment to the other at the end of each month.
In November 1996, the Company assumed swap arrangements extending
through October 2001 with a counterparty involving various quantities and fixed
prices. These swap arrangements provided that the Company make payments to the
F-26
counterparty to the extent the market prices, determined based on the price for
crude oil on the NYMEX and the Inside FERC, Tennessee Gas Pipeline Co. Texas
(Zone O) price for natural gas exceeded certain fixed prices and for the
counterparty to make payments to us to the extent the market prices were less
than such fixed prices. The Company accounted for the related gains or losses in
crude oil and natural gas revenue in the period of the hedged production. These
swap arrangements terminated in January 1999 and the Company was paid $750,000
by the counterparty for such termination. This amount is included in Other
Revenue in the accompanying financial statements.
In March 1998, the Company entered into a costless collar hedge
agreement with Enron Capital and Trade Resources Corp. for 2,000 Bbls of crude
oil per day with a floor price of $14.00 per Bbl and a ceiling price of $22.30
per Bbl for crude oil on the NYMEX. The agreement was effective April 1, 1998
and extended through March 31, 1999. Under the terms of the agreement the
Company was paid when the average monthly price for crude oil on the NYMEX was
below the floor price, and the Company paid the counterparty when the average
monthly price exceeded the ceiling price. For the year ended December 31, 1999
the Company realized a loss of $1.8 million on this agreement, which is
accounted for in Crude Oil and Natural Gas Revenue. The Company has also entered
into a costless collar hedge agreement with Barrett Resources Corporation
("Barrett") for the period November 1999 through October 2000. This agreement
consisted of a swap for 1,000 Bbls per day with the Company being paid $20.30
and paying NYMEX calendar month average, and an additional 1,000 barrels per day
with a floor price of $18.00 per Bbl and a ceiling of $22.00 per Bbl. The
Company realized a loss from hedges of $20.2 million for the year ended December
31, 2000, which is accounted for in Oil and Gas Production Revenue.
At year end 2000 Barrett has a swap call on either 1,000 Bbls of crude
oil or 20,000 MMBtu of natural gas per day at Barrett's option at fixed prices
($18.00 for crude oil or $2.60 to $2.95 for natural gas) through October 31,
2002. As of December 31, 2000, the fair market value of the remaining fixed
price Hedge Agreement is a liability of approximately $38 million, of which $27
million is expected to be charged to revenues in 2001 and $11 million in 2002.
See Note 1, New Accounting Pronouncement regarding adoption of SFAS 133
effective January 1, 2001.
17. Proved Property Impairment
In 1998 and 1999, respectively, the Company recorded write-downs of its
proved crude oil and natural gas properties of approximately $61,224,000 and
$19,100,000 under the ceiling limitation prescribed for companies following the
full cost method of accounting for its oil and gas properties. The write-down in
1999 was related to the Company's Canadian oil and gas properties and the 1998
write-down was related to the Company's United States oil and gas properties.
The write down in 1998 was due primarily to a decrease in spot market prices for
the Company's crude oil and natural gas. The write-down in 1999 was due to a
downward revision of the Company's proved reserves in Canada. Under full cost
accounting rules, the net capitalized costs of oil and gas properties, less
related deferred taxes, are limited by country, to the lower of unamortized cost
or the cost ceiling as discussed in Note 1. The risk that the Company will be
required to write-down the carrying value of its crude oil and natural gas
properties increases when crude oil and natural gas prices are depressed or
volatile. Depending on future prices, further impairment of the Company's crude
oil and natural gas properties may be required.
18. Subsequent Event
On January 19, 2001, the Company announced that it is in discussions
concerning a stock for stock acquisition of the remaining 51% of Grey Wolf that
it does not currently own.
F-27
19. Supplemental Oil and Gas Disclosures (Unaudited)
The accompanying table presents information concerning the Company's
crude oil and natural gas producing activities as required by 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
--------------------------------------------------------------------------
1999 2000
------------------------------------ -----------------------------------
Total U.S. Canada Total U.S. Canada
--------- ----------- ---------- ---------- ----------- ----------
(In thousands)
Proved crude oil and natural
gas properties .................. $ 433,596 $ 266,058 $ 167,538 $ 481,802 $ 274,939 $ 206,863
Unproved properties ............... 17,057 -- 17,057 12,831 -- 12,831
--------- --------- --------- --------- --------- ---------
Total ........................... 450,653 266,058 184,595 494,633 274,939 219,694
Accumulated depreciation,
depletion, and
amortization, and
impairment ...................... (215,144) (141,099) (74,045) (250,641) (155,043) (95,598)
--------- --------- --------- --------- --------- ---------
Net capitalized costs ......... $ 235,509 124,959 $ 110,550 $ 243,992 $ 119,896 $ 124,096
========= ========= ========= ========= ========= =========
Cost incurred in oil and gas property acquisitions, exploration and
development activities are as follows:
Years Ended December 31
---------------------------------------------------------------------------------------
1998 1999 2000
--------------------------- ------------------------------ ---------------------------
Total U.S. Canada Total U.S. Canada Total U.S. Canada
---------- ------- -------- -------- -------- --------- -------- -------- --------
(In thousands)
Property acquisition costs:
Proved .................. $ 2,729 $ 1,319 $ 1,410 $89,743 $ -- $89,743 $ 7,189 $ -- $ 7,189
Unproved ................ -- -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
$ 2,729 $ 1,319 $ 1,410 $89,743 $ -- $89,743 $ 7,189 $ -- $ 7,189
======= ======= ======= ======= ======= ======= ======= ======= =======
Property development and
exploration costs ....... $51,821 $35,421 $16,400 $37,344 $18,901 $18,443 $64,873 $39,631 $25,242
======= ======= ======= ======= ======= ======= ======= =======
F-28
The results of operations for oil and gas producing activities are as
follows:
Years Ended December 31
-------------------------------------------------------------------------------------
1998 1999 2000
------------------------------- ------------------------------ ---------------------------
Total U.S. Canada Total U.S. Canada Total U.S. Canada
---------- ------- -------- -------- -------- --------- -------- -------- --------
(In thousands)
Revenues ...................... $ 54,263 $ 33,705 $ 20,558 $ 59,025 $ 21,331 $ 37,694 $ 72,973 $ 32,165 $ 40,808
Production costs .............. (16,841) (10,299) (6,542) (17,938) (6,627) (11,311) (18,783) (7,755) (11,028)
Depreciation, depletion,
and amortization ............ (30,832) (17,239) (13,593) (34,452) (9,571) (24,881) (35,497) (11,968) (23,529)
Proved property impairment .... (61,223) (61,223) -- (19,100) -- (19,100) -- -- --
General and administrative .... (1,381) (992) (389) (1,317) (733) (584) (1,722) (1,118) (604)
Income taxes expense
(benefit) ................... (14) -- (14) 7,455 -- 7,455 (339) -- (339)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Results of operations from oil
and gas producing activities
(excluding corporate overhead
and interest costs) ......... $(56,028) $(56,048) $ 20 $ (6,327) $ 4,400 $(10,727) $ 16,632 $ 11,324 $ 5,308
======== ======== ======== ======== ======== ======== ======== ======== ========
Depletion rate per barrel
of oil equivalent ........... $ 5.36 $ 5.26 $ 5.49 $ 6.34 $ 4.91 $ 7.13 $ 8.30 $ 6.19 $ 10.02
======== ======== ======== ======== ======== ======== ======== ======== ========
F-29
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, 1998, 1999, and 2000. 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 December 31, 1997 ........... 17,777 221,314 16,261 140,295 1,516(1) 81,019 (2)
Revisions of previous estimates ...... (3,323) (7,834) (3,903) (17,501) 580 9,667
Extensions and discoveries ........... 266 49,403 237 43,900 29 5,503
Purchase of minerals in place ........ 464 15,167 126 2,033 338 13,134
Production ........................... (1,596) (24,930) (1,322) (11,707) (274) (13,223)
Sale of minerals in place ............ (5,893) (55,642) (5,648) (46,781) (245) (8,861)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1998 ........... 7,695 197,478 5,751 110,239 1,944 (1) 87,239 (2)
Revisions of previous estimates ...... (167) (80,592) 1,153 (45,697) (1,320) (34,895)
Extensions and discoveries ........... 354 30,305 196 24,686 158 5,619
Purchase of minerals in place ........ 3,246 58,354 -- -- 3,246 58,354
Production ........................... (1,154) (25,698) (584) (8,190) (570) (17,508)
Sale of minerals in place ............ (125) (15,542) (95) (621) (30) (14,921)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1999 (3) ....... 9,849 164,305 6,421 80,417 3,428 (1) 83,888 (2)
Revisions of previous estimates ...... (216) (21,342) 54 (13,441) (270) (7,901)
Extensions and discoveries ........... 791 72,498 315 57,371 476 15,127
Purchase of minerals in place ........ 254 6,822 -- -- 254 6,822
Production ........................... (952) (19,963) (539) (8,364) (413) (11,599)
Sale of minerals in place ............ (882) (10,993) (170) (1,075) (712) (9,918)
-------- -------- ------- -------- -------- --------
Balance at December 31, 2000 ........... 8,844 191,327 6,081 114,908 2,763 (1) 76,419 (2)
======== ======== ======== ======== ======== ========
(1) Includes 475,400; 269,000 and 732,000 barrels of liquid hydrocarbon reserves
owned by Grey Wolf of which approximately 244,000; 138,000 and 376,000 barrels
are applicable to the minority interest's share of these reserves at December
31, 1998, 1999 and 2000, respectively.
(2) Includes 28,610; 21,710 and 21,389 MMcf of natural gas reserves owned by
Grey Wolf of which 14,700; 11,140 and 10,975 MMcf are applicable to the minority
interest's share of these reserves at December 31, 1998,1999 and 2000,
respectively. (3) At year end 1999 excludes the Company's proportional interest
in Partnership proved reserves, accounted for by the equity method, of 2.8 Mbbls
of liquid hydrocarbons and 25.8 MMcf of natural gas.
F-30
Estimated Quantities of Proved Oil and Gas Reserves (continued)
Total United States Canada
---------------------- ----------------------- -------------------------
Liquid Natural Liquid Natural Liquid Natural
Hydrocarbons Gas Hydrocarbons Gas Hydrocarbons Gas
------------ -------- -------------- -------- -------------- ---------
(Barrels) (Mcf) (Barrels) (Mcf) (Barrels) (Mcf)
(In Thousands)
Proved developed reserves:
December 31, 1998 ...................... 5,819 144,588 4,138 65,075 1,681 79,513
======= ======= ======= ======= ======= =======
December 31, 1999 ...................... 7,700 128,587 4,492 53,275 3,208 75,312
======= ======= ======= ======= ======= =======
December 31, 2000 ...................... 7,001 119,737 4,309 48,177 2,692 71,560
======= ======= ======= ======= ======= =======
F-31
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves
The following disclosures concerning the standardized measure of future
cash flows from proved crude oil and natural gas reserves are presented in
accordance with 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, 2000, adjusted for fixed and
determinable escalations, to the estimated future production of year-end proved
reserves. Future cash inflows were reduced by estimated future production and
development costs based on year-end costs to determine pre-tax cash inflows.
Future income taxes were computed by applying the statutory tax rate to the
excess of pre-tax cash inflows over the tax basis of the properties. Operating
loss carryforwards, tax credits, and permanent differences to the extent
estimated to be available in the future were also considered in the future
income tax calculations, thereby reducing the expected tax expense.
Future net cash inflows after income taxes were discounted using a 10%
annual discount rate to arrive at the Standardized Measure.
F-32
Set forth below is the Standardized Measure relating to proved oil and
gas reserves for:
Years Ended December 31
-------------------------------------------------------------------------------------------------------
1998 1999 2000
--------------------------------- -------------------------------- ------------------------------------
Total U.S. Canada (1) Total U.S. Canada (1) Total U.S. Canada (1)
---------- ---------- ---------- ---------- ---------- ---------- ------------ ------------ ----------
(In thousands)
Future cash inflows ....... $ 474,263 $ 268,821 $ 205,442 $ 577,407 $ 309,609 $ 267,798 $ 2,046,039 $ 1,274,871 $ 771,168
Future production and
development costs ....... (169,736) (99,187) (70,549) (181,109) (96,302) (84,807) (318,130) (254,667) (63,463)
Future income tax expense . (20,655) -- (20,655) (6,319) -- (6,319) (230,987) (65,421) (165,566)
---------- ---------- ---------- ---------- ---------- ---------- ------------ ------------ ----------
Future net cash flows ..... 283,872 169,634 114,238 389,979 213,307 176,672 1,496,922 954,783 542,139
Discount .................. (102,291) (75,389) (26,902) (151,528) (90,024) (61,504) (721,388) (468,663) (252,725)
---------- ---------- ---------- ---------- ---------- ---------- ------------ ------------ ----------
Standardized Measure of
discounted future net
cash relating to proved
reserves................. $ 181,581 $ 94,245 $ 87,336 $ 238,451 $ 123,283 $ 115,168 $ 775,534 $ 486,120 $ 289,414
========== ========== ========== ========== ========== ========== ============ ============ ==========
At year end 1999 amounts exclude the Partnership, accounted for by the equity
method, which was sold in 2000.
(1) The Standardized Measure of discounted future net cash flows relating to
proved reserves includes approximately $13,000, $12,400 and $43,700 relating to
minority interest.
F-33
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
----------------------------------------------------------
1998 1999 2000
------------------- ------------------- ------------------
(In thousands)
Standardized Measure, beginning
of year ................................. $ 252,079 $ 181,581 $ 238,451
Sales and transfers of oil and gas
produced, net of production costs ....... (37,422) (41,086) (54,190)
Net changes in prices and development
and production costs from prior year .... (26,858) 77,060 707,755
Extensions, discoveries, and improved
recovery, less related costs ............ 36,187 34,445 290,283
Purchases of minerals in place ............ 28,079 90,510 33,586
Sales of minerals in place ................ (58,099) (18,797) (75,391)
Revision of previous quantity estimates ... (12,514) (90,030) (95,757)
Change in future income tax expense ....... (17,727) (6,319) (224,668)
Other ..................................... (9,005) (7,071) (68,380)
Accretion of discount ..................... 26,861 18,158 23,845
------------------- ------------------- ------------------
Standardized Measure, end of year ....... $ 181,581 $ 238,451 $ 775,534
=================== =================== ==================
F-34