Filed Pursuant to
Rule 424(b)(3)
Registration No. 333-62934
ABRAXAS PETROLEUM CORPORATION
500 NORTH LOOP 1604 EAST, SUITE 100
SAN ANTONIO, TX 78232
(210) 490-4788
August 1, 2001
Dear Grey Wolf shareholder:
I am pleased to enclose Abraxas Acquisition Corporation's offer to acquire
any and all of the common shares of Grey Wolf Exploration Inc.
Under the enclosed offer, Grey Wolf shareholders have an opportunity to
exchange each Grey Wolf common share for 0.6 of a share of Abraxas common stock.
Abraxas Acquisition Corporation is a newly incorporated, wholly-owned Canadian
subsidiary of Abraxas formed for the purpose of acquiring the Grey Wolf common
shares. Abraxas common stock trades on the AMEX in the United States. Based on
the AMEX closing price of Abraxas' common stock of $4.85 per share on April 11,
2001, the day prior to the announcement of the exchange ratio, the value of the
offer is C$4.46 per Grey Wolf common share.
The enclosed materials are lengthy because one document is being used to
satisfy the legal and regulatory requirements of both Canada and the United
States. These materials provide a detailed description of Abraxas Acquisition
Corporation's offer, historical financial statements and other information
relating to Abraxas and Grey Wolf and pro forma financial statements for the
combined company.
Yours very truly,
ABRAXAS PETROLEUM CORPORATION
/s/ ROBERT L.G. WATSON
Robert L.G. Watson
President, Chairman of the Board and
Chief Executive Officer
THIS DOCUMENT IS IMPORTANT AND REQUIRES THE IMMEDIATE ATTENTION OF GREY WOLF
SHAREHOLDERS. IF YOU HAVE ANY QUESTIONS REGARDING THIS DOCUMENT, YOU SHOULD
CONSULT YOUR PROFESSIONAL ADVISORS. NO SECURITIES COMMISSION OR SIMILAR
AUTHORITY IN CANADA OR THE UNITED STATES HAS IN ANY WAY PASSED UPON THE MERITS
OF THE SECURITIES OFFERED HEREUNDER AND ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. INFORMATION RELATING TO ABRAXAS HAS BEEN INCORPORATED BY
REFERENCE FROM DOCUMENTS FILED BY ABRAXAS WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION. COPIES OF SUCH DOCUMENTS WILL BE FILED WITH CANADIAN
SECURITIES REGULATORY AUTHORITIES AND MAY BE OBTAINED ON REQUEST WITHOUT CHARGE
FROM THE SECRETARY OF ABRAXAS AT 500 NORTH LOOP 1604 EAST, SUITE 100, SAN
ANTONIO, TEXAS, 78232.
ABRAXAS PETROLEUM CORPORATION
500 NORTH LOOP 1604 EAST, SUITE 100
SAN ANTONIO, TX 78232
(210) 490-4788
August 1, 2001
Dear Abraxas stockholders:
You are cordially invited to attend the 2001 Annual Meeting of Stockholders
of Abraxas Petroleum Corporation which will be held on August 30, 2001 at 9:00
a.m., local time, at The Petroleum Club, 8620 North New Braunfels, San Antonio,
Texas 78217.
At the meeting you will be asked to consider and vote upon the matters
described in the accompanying notice and proxy statement.
Whether or not you plan to attend the Annual Meeting, please sign and date
the enclosed proxy card and return it promptly in the enclosed postage prepaid
envelope.
Sincerely,
/s/ ROBERT L.G. WATSON
Robert L.G. Watson
President, Chairman of the Board and
Chief Executive Officer
ABRAXAS PETROLEUM CORPORATION
500 NORTH LOOP 1604 EAST, SUITE 100
SAN ANTONIO, TX 78232
(210) 490-4788
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 30, 2001
To Abraxas Stockholders:
The Annual Meeting of Stockholders of Abraxas Petroleum Corporation will be
held at The Petroleum Club, 8620 North New Braunfels, San Antonio, Texas 78217
on August 30, 2001, at 9:00 a.m., local time, to consider and act upon the
following matters, all as more fully described in the accompanying offer to
purchase/circular/proxy statement/prospectus:
Proposal 1. CONSUMMATION OF EXCHANGE OFFER AND ISSUANCE OF
SHARES. Abraxas Acquisition Corporation, a newly
incorporated, wholly-owned Canadian subsidiary of
Abraxas,
has offered to acquire all of the outstanding common
shares
of Abraxas' 48.3%-owned subsidiary, Grey Wolf
Exploration Inc., which are not currently owned by
Abraxas
or any of its subsidiaries. Under the offer, Grey Wolf
shareholders have an opportunity to exchange each Grey
Wolf
common share for 0.6 of a share of Abraxas common stock.
If
the transaction is completed, up to 3,968,488 shares of
Abraxas common stock will be issued to the shareholders
of
Grey Wolf in exchange for all of the outstanding common
shares of Grey Wolf not owned by Abraxas or its
subsidiaries. Abraxas stockholders are being asked to
approve the consummation of the offer and the issuance
of
shares of Abraxas common stock in connection with the
offer
and any compulsory acquisition or subsequent acquisition
transaction completed under Alberta law in order to
acquire
Grey Wolf common shares not acquired in the offer.
Proposal 2. ELECTION OF DIRECTORS. Abraxas stockholders will have
the
opportunity to elect two members to the Abraxas board of
directors for a term of three years. The following two
persons are Abraxas' nominees for election:
Robert L.G. Watson
James C. Phelps
Proposal 3. AMENDMENT OF 1994 LONG TERM INCENTIVE PLAN. Abraxas
stockholders are being asked to approve an amendment to
the
Abraxas Petroleum Corporation 1994 Long Term Incentive
Plan
to increase the number of shares of Abraxas common stock
reserved for issuance under the plan to 5,000,000 shares
if
Proposal 1 is approved and 4,350,000 shares if Proposal
1 is
not approved. Additional shares are required if Proposal
1
is approved in order to accommodate the grant of Abraxas
options to Grey Wolf option holders and additional
shares
are required if Proposal 1 is not approved because
Abraxas
intends to terminate its 2000 Long Term Incentive Plan
and
reissue the outstanding options under the 1994 Plan.
Proposal 4. APPOINTMENT OF INDEPENDENT AUDITORS. Abraxas
stockholders
are being asked to ratify the selection of Deloitte &
Touche
LLP as Abraxas' independent auditors for the year ending
December 31, 2001.
Proposal 5. OTHER BUSINESS. If other business is properly raised at
the
meeting or if Abraxas needs to adjourn the meeting,
Abraxas
stockholders will vote on these matters too.
If you were a holder of Abraxas common stock as of the close of business on
July 16, 2001, you are entitled to vote at this meeting.
We cordially invite all Abraxas stockholders to attend the Annual Meeting in
person. To assure your representation at the meeting, however, we urge you to
mark, sign, date and return the enclosed proxy card as soon as possible in the
enclosed postage-prepaid envelope.
Whether or not you expect to attend the Annual Meeting, please complete,
sign, date and promptly mail your proxy card in the envelope provided. You may
revoke this proxy at any time prior to the Annual Meeting, and, if you attend
the Annual Meeting, you may vote your shares of Abraxas common stock in person.
The Abraxas board of directors has fixed the close of business on July 16,
2001, as the record date for the determination of the stockholders entitled to
notice of and to vote at the Annual Meeting and any adjournment thereof. For ten
days prior to the Annual Meeting, a complete list of stockholders entitled to
vote at the Annual Meeting will be available for examination by any stockholder
for any purpose germane to the Annual Meeting during ordinary business hours at
Abraxas' executive offices, located at the address set forth above.
By Order of the Board of Directors
of Abraxas Petroleum Corporation
/s/ STEPHEN T. WENDEL
Stephen T. Wendel
CORPORATE SECRETARY
San Antonio, Texas
August 1, 2001
NO SECURITIES COMMISSION OR SIMILAR AUTHORITY IN CANADA OR THE UNITED STATES HAS
EXPRESSED AN OPINION ABOUT OR IN ANY WAY PASSED UPON THE MERITS OF THE
SECURITIES OFFERED HEREUNDER AND IT IS AN OFFENCE TO CLAIM OTHERWISE.
OFFER
by
ABRAXAS ACQUISITION CORPORATION
("AcquisitionCo")
to exchange 0.6 of a share of common stock of
ABRAXAS PETROLEUM CORPORATION
("Abraxas")
for each outstanding common share of
GREY WOLF EXPLORATION INC.
("Grey Wolf")
------------------------
TAKE-OVER BID CIRCULAR FOR GREY WOLF COMMON SHARES
------------------------
PROXY STATEMENT FOR 2001 ANNUAL MEETING
OF ABRAXAS STOCKHOLDERS
------------------------
PROSPECTUS FOR ABRAXAS COMMON STOCK
------------------------
AcquisitionCo is hereby offering to exchange, subject to the terms set forth
in the formal Offer to Purchase beginning on page 31, 0.6 of a share of Abraxas
common stock for each of the issued and outstanding Grey Wolf common shares
which Grey Wolf shareholders validly deposit, and do not properly withdraw,
before the offer expires. AcquisitionCo is a newly incorporated, wholly-owned
Canadian subsidiary of Abraxas formed for the purpose of making the offer. The
offer will be open for acceptance until 5:00 p.m., Calgary time, on
September 5, 2001, unless withdrawn or extended. No fractional shares of Abraxas
common stock will be issued in connection with the offer and any Grey Wolf
shareholder who would be entitled to receive a fractional share in the offer
will receive, at the option of AcquisitionCo, cash in lieu of such fractional
share or a whole share of Abraxas common stock.
Abraxas and its wholly-owned subsidiary, Canadian Abraxas Petroleum Limited,
own a total of 6,190,482 Grey Wolf common shares representing approximately
48.3% of the outstanding Grey Wolf common shares. If AcquisitionCo acquires at
least 90% of the Grey Wolf common shares not already owned by Abraxas and
Canadian Abraxas, calculated on a fully-diluted basis (approximately
6,733,859 shares), by the expiration of the offer or within 120 days after the
date of the offer, whichever is earlier, AcquisitionCo intends to acquire the
remaining Grey Wolf common shares in a Compulsory Acquisition (defined herein)
under Alberta law. If a Compulsory Acquisition is not available, AcquisitionCo
intends to acquire the remaining Grey Wolf common shares in a Subsequent
Acquisition Transaction (defined herein) under Alberta law. If AcquisitionCo
acquires at least a majority of the Grey Wolf common shares not currently owned
by Abraxas or Canadian Abraxas, calculated on a fully-diluted basis, and
excluding those Grey Wolf common shares held by persons whose Grey Wolf common
shares may not be voted as part of the "minority" in connection with any
Subsequent Acquisition Transaction pursuant to Rule 61-501 of the Ontario
Securities Commission or
(COVER PAGE CONTINUED)
Policy Q-27 of the Commission des valeurs mobilieres du Quebec in the offer,
then Abraxas and its subsidiaries will control enough Grey Wolf common shares to
complete a Subsequent Acquisition Transaction. A Subsequent Acquisition
Transaction would take the form of an amalgamation, statutory arrangement or
other transaction under Alberta law.
Grey Wolf shareholders have the right to dissent from a Compulsory
Acquisition and to receive the fair value for their shares as determined by a
court and may have such rights in a Subsequent Acquisition Transaction depending
upon the form of the transaction.
Certain executive officers, directors and advisory directors of Abraxas own
a total of approximately 1,714,810 common shares of Grey Wolf (approximately
25.9% of the Grey Wolf common shares not already owned by Abraxas and Canadian
Abraxas). Although there is no formal agreement with these individuals, Abraxas
expects that all of these individuals will deposit their shares in the offer.
The offer is conditional upon, among other things, there being validly
deposited under the offer and not properly withdrawn, that number of Grey Wolf
common shares which represents not less than a majority of the Grey Wolf common
shares, calculated on a fully-diluted basis, excluding those Grey Wolf common
shares held by those persons whose shares may not be voted as part of the
"minority" in connection with any Subsequent Acquisition Transaction pursuant to
OSC Rule 61-501 and CVMQ Policy Q-27.
The shares of Abraxas common stock are listed and traded on the American
Stock Exchange under the symbol "ABP." The closing price of the Abraxas common
stock on the American Stock Exchange on April 11, 2001, the last day on which
such shares traded prior to announcement of the exchange ratio, was $4.85.
According to Grey Wolf's shareholder list, as of July 24, 2001, there were
12,804,628 common shares outstanding. In addition, Grey Wolf has outstanding
options entitling holders to acquire an additional 867,920 common shares. As of
the date hereof, there are 25,988,832 shares of Abraxas common stock outstanding
(including 3,386,488 shares of Abraxas common stock which were issued upon
expiration of Abraxas' contingent value rights on May 21, 2001) and 10 common
shares of AcquisitionCo outstanding. Assuming that all of the outstanding Grey
Wolf common shares are deposited in acceptance of the offer, that AcquisitionCo
effects an exchange of shares of Abraxas common stock for such Grey Wolf common
shares under the offer, and that all Grey Wolf options are assumed by Abraxas,
Abraxas will issue approximately 3,968,488 shares of common stock and will grant
options to purchase an aggregate of 520,752 shares of Abraxas common stock. In
addition, Abraxas has offered Grey Wolf option holders (other than directors of
Grey Wolf who are not also employees of Grey Wolf) the opportunity to receive
additional options to purchase shares of common stock of Abraxas if such option
holders waive their right to have all of their Grey Wolf options vest if the
offer is completed. If all of these Grey Wolf option holders waive these rights,
Abraxas will grant a total of 631,642 options to purchase Abraxas common stock
to Grey Wolf option holders.
Grey Wolf shareholders who wish to accept the offer must properly complete
and execute the accompanying Letter of Acceptance and Transmittal (provided on
yellow paper) or a manually signed facsimile thereof and deposit it, together
with certificates representing their Grey Wolf common shares, in accordance with
the Letter of Acceptance and Transmittal. Alternatively, Grey Wolf shareholders
may follow the procedure for guaranteed delivery set forth in Section 3 of the
formal Offer to Purchase, "Procedure for Guaranteed Delivery" beginning on
page 32, using the accompanying Notice of Guaranteed Delivery (printed on blue
paper).
AcquisitionCo cannot complete the offer unless the Abraxas stockholders vote
to approve the offer and the issuance of shares of Abraxas common stock in the
offer, any Compulsory Acquisition and any Subsequent Acquisition Transaction.
Additionally, at the Abraxas annual meeting, the Abraxas
ii
(COVER PAGE CONTINUED)
stockholders are being asked to elect two directors to the Abraxas board, to
approve an amendment to Abraxas' 1994 Long Term Incentive Plan and to ratify the
selection of Abraxas' auditors for 2001.
This document forms part of the formal Offer to Purchase dated August 1,
2001 made by AcquisitionCo to purchase all of the outstanding Grey Wolf common
shares not already owned by Abraxas or any of its subsidiaries, including all
Grey Wolf common shares issued after the date hereof and prior to the expiration
of the offer pursuant to the exercise of existing options to acquire Grey Wolf
common shares, upon the terms and subject to the conditions set forth in the
formal Offer to Purchase. See the formal Offer to Purchase beginning on page 31
for details of the terms and conditions of the offer.
Under applicable United States and Canadian securities laws, Grey Wolf's
board of directors is required to prepare and mail to its shareholders a
directors' circular in prescribed form not later than ten days after the date of
the offer. The directors' circular must contain a recommendation to accept or
reject the offer and the reasons for their recommendation, or a statement that
they are unable to make or are not making a recommendation and, if no
recommendation is made, the reasons for not making a recommendation. If, at the
time of mailing the directors' circular, Grey Wolf's board of directors is
continuing to consider whether to recommend acceptance or rejection of the
offer, the directors' circular must disclose that fact and may advise the
shareholders not to deposit their Grey Wolf common shares pursuant to the offer
until further communication is received from Grey Wolf's board of directors. In
such event, Grey Wolf's board of directors must make a recommendation to accept
or reject the offer (or, if it is unable to make or is not making a
recommendation, state the reasons therefor) at least seven days before the
scheduled expiration of the offer.
THE INFORMATION CONCERNING GREY WOLF IN THIS DOCUMENT HAS BEEN TAKEN FROM,
AND IS BASED UPON, PUBLICLY AVAILABLE DOCUMENTS OR RECORDS ON FILE WITH CANADIAN
SECURITIES REGULATORY AUTHORITIES AND OTHER PUBLIC SOURCES AT THE TIME OF THE
OFFER. GREY WOLF SHAREHOLDERS AND ABRAXAS STOCKHOLDERS ARE URGED TO READ THIS
DOCUMENT IN ITS ENTIRETY.
Questions and requests for assistance may be directed to CIBC World Markets
Corp, the Dealer Manager for the offer in the United States, CIBC World
Markets Inc., the Dealer Manager for the offer in Canada, or to Valiant
Corporate Trust Company, the Depositary for the offer. Additional copies of this
document, the Letter of Acceptance and Transmittal and the Notice of Guaranteed
Delivery may be obtained, without charge, on request from such persons at their
respective offices listed in the Letter of Acceptance and Transmittal. Grey Wolf
shareholders whose Grey Wolf common shares are registered in the name of a
nominee should contact their broker, investment dealer, bank, trust company or
other nominee for assistance.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS THAT
YOU SHOULD CONSIDER IN CONNECTION WITH THE OFFER.
------------------------
NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION OR PROVINCIAL SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS
OFFER TO PURCHASE/CIRCULAR/PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
NO BROKER, DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
DOCUMENT AND, IF GIVEN OR MADE, SUCH
iii
(COVER PAGE CONTINUED)
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY ANY OF ABRAXAS, ACQUISITIONCO, THE DEALER MANAGERS OR THE DEPOSITARY.
------------------------
All dollar amounts in this document are expressed in either Canadian or U.S.
dollars. References to "$" are to U.S. dollars. References to "C$" are to
Canadian dollars. On July 24, 2001, the noon rate of exchange quoted by the Bank
of Canada, or noon spot rate, for C$1.00 was $0.6502, the inverse of which is
$1.00 in exchange for C$1.5381.
------------------------
THE DEALER MANAGERS FOR THE OFFER ARE:
CIBC WORLD MARKETS CORP
and
CIBC WORLD MARKETS INC.
August 1, 2001
iv
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE OFFER AND THE ABRAXAS ANNUAL
MEETING................................................... ix
SUMMARY..................................................... 1
The Companies............................................. 1
The Offer................................................. 2
Timing and Expiration of the Offer........................ 2
Manner and Time of Acceptance............................. 2
Conditions of the Offer................................... 3
Payment for Deposited Shares.............................. 3
Right to Withdraw Deposited Shares........................ 3
Purpose of the Offer...................................... 4
Acquisition of Grey Wolf Common Shares Not Deposited...... 4
Dissenters' Rights........................................ 5
Interests of Certain Persons in the Offer................. 5
Anticipated Accounting Treatment.......................... 5
Description of Abraxas Common Stock....................... 6
Listing of Abraxas Common Stock........................... 6
Regulatory Approvals...................................... 6
Tax Consequences of the Offer and Acquisition
Transactions............................................ 6
Risk Factors.............................................. 6
Depositary for the Offer.................................. 7
Dealer Managers........................................... 7
Valuation by Financial Advisor to Grey Wolf Special
Committee............................................... 7
Recommendation of the Grey Wolf Board of Directors........ 7
Opinion of the Abraxas Independent Committee's Financial
Advisor................................................. 8
Recommendation to Abraxas Stockholders.................... 8
Who Can Vote at the Abraxas Annual Meeting................ 8
Abraxas Stockholder Vote Required......................... 8
Summary Historical Financial Information of Abraxas....... 8
Summary Historical Financial Information of Grey Wolf..... 9
Summary Unaudited Pro Forma Condensed Consolidated
Financial Information................................... 9
Selected Per Share Financial Information.................. 10
Comparative Per Share Market Price and Dividend
Information............................................. 12
Other Matters to be Voted Upon at the Abraxas Annual
Meeting................................................. 13
Required Vote............................................. 14
RISK FACTORS................................................ 15
Risks Related to the Offer for Grey Wolf Shareholders..... 15
Risks Related to the Offer for Abraxas Stockholders....... 16
Risks Related to Abraxas' Business........................ 17
Risks Related to Abraxas' Common Stock.................... 23
Risks Related to Abraxas' Industry........................ 24
THE ABRAXAS ANNUAL MEETING.................................. 26
v
Date, Time, and Place of Annual Meeting................... 26
Purposes of the Annual Meeting............................ 26
Record Date; Shares Entitled to Vote; Quorum.............. 27
Votes Required............................................ 27
Voting of Proxies......................................... 28
How To Vote By Proxy...................................... 28
Revocability of Proxies................................... 28
Deadline for Voting By Proxy.............................. 28
Solicitation of Proxies................................... 28
DEFINITIONS................................................. 29
OFFER TO PURCHASE........................................... 31
The Offer................................................. 31
Time and Manner for Acceptance............................ 32
Procedure for Guaranteed Delivery......................... 32
Extensions and Variations of the Offer.................... 33
Conditions to the Offer................................... 34
Right to Withdraw Deposited Grey Wolf Common Shares....... 36
Payment for Deposited Grey Wolf Common Shares............. 37
Return of Withdrawn Grey Wolf Common Shares............... 39
Mail Service Interruption................................. 39
Compulsory Acquisition.................................... 39
Alternate Subsequent Acquisition Transactions............. 40
Dividends and Distributions; Liens........................ 40
Notice and Delivery....................................... 41
Other Terms of the Offer.................................. 41
Market Purchases During the Offer......................... 42
General................................................... 42
TAKE-OVER BID CIRCULAR...................................... 44
INFORMATION ABOUT ABRAXAS, ACQUISITIONCO AND GREY WOLF...... 44
Abraxas................................................... 44
Post-Transaction Abraxas Security Ownership of Certain
Beneficial Owners and Management........................ 51
Trading in Shares of Abraxas Common Stock................. 52
AcquisitionCo............................................. 54
Grey Wolf................................................. 54
DESCRIPTION OF THE OFFER.................................... 60
General................................................... 60
Background of the Offer................................... 60
Reasons for the Offer..................................... 65
Purpose of the Offer and Plans for Grey Wolf.............. 66
Recommendation of the Abraxas Board of Directors.......... 66
Opinion of Financial Advisor to the Abraxas Independent
Committee............................................... 66
Valuation of Raymond James and Prior Valuations........... 70
Abraxas' Comments to the Valuation of Raymond James....... 75
Qualified Investments..................................... 76
vi
Foreign Property.......................................... 76
Dealer Managers and Soliciting Dealer Group............... 76
Expenses of the Offer..................................... 77
Offerees' Statutory Rights................................ 77
Anticipated Accounting Treatment.......................... 77
Listing of Abraxas Common Stock........................... 77
Ownership of and Trading in Grey Wolf Common Shares by
Abraxas................................................. 78
Commitments to Acquire Securities......................... 78
Material Changes and Other Information Concerning Grey
Wolf.................................................... 78
Effect of the Offer on Markets for Shares and Stock
Exchange Listings....................................... 78
Regulatory Approvals...................................... 79
Interests of Certain Persons in the Offer................. 79
Acceptance of the Offer................................... 80
Depositary Arrangements................................... 80
Legal Matters............................................. 81
Possible Acquisition of Grey Wolf Common Shares Not
Deposited Under the Offer............................... 81
Comparison of Shareholder Rights.......................... 86
UNITED STATES AND CANADIAN INCOME TAX CONSEQUENCES.......... 92
Canadian Federal Income Tax Considerations................ 92
Material United States Federal Income Tax Consequences to
Grey Wolf Shareholders.................................. 96
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION............................................... 101
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET--As
of March 31, 2001......................................... 102
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS--For the Year Ended December 31, 2000.......... 103
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS--For the Three Months Ended March 31, 2001..... 104
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION..................................... 105
ADDITIONAL PROPOSALS FOR ABRAXAS ANNUAL MEETING............. 106
Proposal 2--Election of Abraxas Directors................. 106
Information Concerning Directors...................... 108
Committees of the Board of Directors.................. 108
Executive Compensation................................ 109
Compensation Summary.................................. 112
Performance Graph..................................... 118
Audit Committee Report................................ 120
Certain Transactions.................................. 121
Proposal 3--Approval of Amendment to the 1994 Long Term
Incentive Plan.......................................... 122
Reasons for the Amendment of the LTIP................. 122
Vote Required......................................... 122
Summary of the LTIP................................... 122
U.S. Federal Income Tax Consequences.................. 123
New Plan Benefits..................................... 124
vii
Proposal 4--Ratification of Selection of Independent
Auditors................................................ 126
LEGAL MATTERS............................................... 127
EXPERTS..................................................... 127
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN
PERSONS................................................... 127
STOCKHOLDER PROPOSALS FOR 2002 ABRAXAS ANNUAL MEETING....... 128
PROXY SOLICITATION.......................................... 128
OTHER MATTERS............................................... 128
WHERE YOU CAN FIND MORE INFORMATION......................... 129
GLOSSARY OF TERMS........................................... 131
APPROVAL AND CERTIFICATE.................................... 133
ANNEXES
Annex A--Information Concerning Abraxas
Annex B--Information Concerning Grey Wolf
Annex C--Valuation of Raymond James & Associates, Inc.
Annex D--Opinion of Jefferies & Company, Inc.
Annex E--Sections 187 -- 199 of the Alberta Business
Corporations Act
Annex F--Information Concerning Abraxas Acquisition
Corporation
Annex G--Abraxas Audit Committee Charter
Annex H--Abraxas Petroleum Corporation 1994 Long Term
Incentive Plan
Annex I--Section 184 of the Alberta Business Corporations
Act
CERTAIN DEFINITIONS
As used in this document, "Abraxas" refers to Abraxas Petroleum Corporation
and all of its subsidiaries, other than Grey Wolf Exploration Inc. and Abraxas
Acquisition Corporation. The term "AcquisitionCo" refers to Abraxas Acquisition
Corporation, a wholly-owned subsidiary of Abraxas. The term "Canadian Abraxas"
refers to Canadian Abraxas Petroleum Limited, a wholly-owned subsidiary of
Abraxas. The term "first lien notes" refers to Abraxas' 12 7/8% Senior Secured
Notes due 2003. The term "second lien notes" refers to Abraxas' and Canadian
Abraxas' 11 1/2% Senior Secured Notes due 2004, Series A. The term "old notes"
refers to Abraxas' and Canadian Abraxas' 11 1/2% Senior Notes due 2004, Series
D.
viii
QUESTIONS AND ANSWERS ABOUT THE OFFER AND THE ABRAXAS ANNUAL MEETING
Q: WHEN AND WHERE IS THE ABRAXAS ANNUAL MEETING?
A: The meeting will take place on August 30, 2001 at The Petroleum Club,
8620 North New Braunfels, San Antonio, Texas 78217 at 9:00 a.m., local time.
Abraxas will begin sending this document, notices and the enclosed proxy
materials on or about August 1, 2001 to all Abraxas stockholders entitled to
vote.
Q: WHAT IS ACQUISITIONCO PROPOSING?
A: AcquisitionCo proposes to acquire the outstanding common shares of Grey
Wolf which are not currently owned by Abraxas and Canadian Abraxas, by offering
to exchange 0.6 of a share of Abraxas common stock for each Grey Wolf common
share not owned by Abraxas or Canadian Abraxas. Abraxas and Canadian Abraxas
currently own approximately 48.3% of Grey Wolf's outstanding common shares. In
addition, certain directors and executive officers of Abraxas own approximately
25.9% of the Grey Wolf common shares not already owned by Abraxas and Canadian
Abraxas.
Q: WHAT WILL GREY WOLF SHAREHOLDERS RECEIVE IN EXCHANGE FOR THEIR SHARES?
A: AcquisitionCo is offering 0.6 of a share of Abraxas common stock for each
Grey Wolf common share properly deposited and not properly withdrawn. Grey Wolf
shareholders will not receive any fractional shares of Abraxas common stock.
Instead, Grey Wolf shareholders will receive, at the option of AcquisitionCo,
either a cash payment or a whole share of Abraxas common stock. The cash amount
will be equal to the relevant fraction multiplied by the average closing price
of a share of Abraxas common stock on the AMEX for the ten trading days ending
immediately prior to the closing of the offer.
Q: WHY IS ACQUISITIONCO MAKING THE OFFER?
A: Abraxas and AcquisitionCo believe that the acquisition of the outstanding
common shares of Grey Wolf will enhance value for Abraxas and Grey Wolf
shareholders by, among other things:
- eliminating the minority interest in Abraxas' financial statements,
thus increasing stockholders' equity, property and equipment and net
income;
- offering a premium over the price of Grey Wolf's common shares at the
time a possible combination was announced on January 19, 2001 of 34%
and at the time that the exchange ratio was first announced on April
12, 2001 of 35%;
- achieving better long-term growth prospects;
- reducing administrative costs and costs of operations over the
long-term; and
- providing Grey Wolf shareholders with increased investment liquidity as
a shareholder of a company, the stock of which is traded on the AMEX,
with 25,988,832 shares of common stock outstanding as of July 24, 2001,
of which approximately 23,295,024 shares are held by non-affiliates,
with an average daily trading volume of approximately 130,000 shares
during the previous 52 weeks. This compares to Grey Wolf's 12,804,628
common shares outstanding, of which approximately 4,813,283 shares are
held by non-affiliates, with an average daily trading volume of
approximately 25,000 shares during the previous 52 weeks.
ix
Q: HOW DOES A GREY WOLF SHAREHOLDER PARTICIPATE IN THE OFFER?
A: To participate in the offer, a Grey Wolf shareholder should deposit Grey
Wolf common shares as follows:
- If you hold Grey Wolf common shares in your own name, complete and sign
the enclosed Letter of Acceptance and Transmittal and return it with
your Grey Wolf common share certificates to Valiant Corporate Trust
Company, the Depositary for the offer, at the appropriate address
specified on page 80 of this document before the expiration of the
offer.
- If you hold Grey Wolf common shares in "street name" through a broker,
instruct your broker to deposit your shares before the expiration of
the offer.
Q: HOW LONG WILL IT TAKE ACQUISITIONCO TO COMPLETE THE OFFER?
A: The offer will be open for acceptance until 5:00 p.m., Calgary time, on
September 5, 2001, unless withdrawn or extended.
Q: WHEN AND HOW CAN A GREY WOLF SHAREHOLDER WITHDRAW DEPOSITED SHARES?
A: Grey Wolf common shares deposited in the offer may be withdrawn at any
time (including after the expiration of the offer) prior to the expiration of
35 days from the date of this document and thereafter if the shares have not
been taken up by AcquisitionCo prior to the receipt by the Depositary of the
notice of withdrawal, and, unless AcquisitionCo exchanges shares of Abraxas
common stock for Grey Wolf common shares pursuant to the offer within three
business days of taking up the Grey Wolf common shares, the Grey Wolf common
shares may also be withdrawn at any time after such three business day period or
at any time before the expiration of 10 days from the date of any notice of a
change or variation in the terms of the offer.
Withdrawal of Grey Wolf common shares will only be effective if the
Depositary for the offer receives a written notice of withdrawal at 510, 550-6th
Avenue S.W., Calgary, Alberta, T2P OS2 or by facsimile at (403) 233-3857. The
written notice must contain the Grey Wolf shareholder's name, address, social
security or tax payer identification number (if the shareholder is a U.S.
person), the number of shares to be withdrawn, the certificate number or numbers
for such shares and the name of the registered holder of the shares, if
different from the person who deposited the shares. All signatures on the notice
of withdrawal must be guaranteed by a financial institution in accordance with
the procedures set forth in Section 6 of the formal Offer to Purchase, "Right to
Withdraw Deposited Grey Wolf Common Shares" beginning on page 36.
Q: MAY ACQUISITIONCO ELECT, OR BE REQUIRED, TO EXTEND THE DURATION OF THE
OFFER?
A: Yes. AcquisitionCo, at its election, may extend the offering period by at
least 10 days, by giving written notice to the Depositary. AcquisitionCo will
publicly announce any such extension and cause the Depositary to mail a copy of
any such notice to Grey Wolf shareholders. Any such extension will be announced
no later than 9:00 a.m., Eastern time, on the next business day following the
expiration of the offer. A voluntary extension by AcquisitionCo would be
designed to:
- assist AcquisitionCo in reaching the statutory minimum necessary to
perform a Compulsory Acquisition, and
- provide Grey Wolf shareholders one last opportunity to deposit into an
offer that is otherwise complete,
thereby avoiding the delay and illiquid market that can result after a tender
offer and before the related Compulsory Acquisition or Subsequent Acquisition
Transaction. Upon the expiration of the
x
extended offering period, AcquisitionCo would accept and promptly exchange
shares of Abraxas common stock for Grey Wolf common shares after such extension,
providing Grey Wolf shareholders with the same form and amount of consideration
as paid in the offer.
Also, under applicable Canadian law, AcquisitionCo could be required to extend
the offer if there is a variation in the terms of the offer or a material change
in the information contained in this document.
Any amendment to the offer or dissemination of new information to Grey Wolf
shareholders made pursuant to an extension of the offer would be accomplished
through a press release disclosing such information and a notice mailed to Grey
Wolf shareholders whose shares have not yet been exchanged.
Q: HOW WOULD ACQUISITIONCO COMPLETE THE PROPOSED ACQUISITION OF GREY WOLF?
A: Abraxas and its wholly-owned subsidiary, Canadian Abraxas, own a total of
6,190,482 Grey Wolf common shares representing approximately 48.3% of the
outstanding Grey Wolf common shares. If AcquisitionCo acquires at least 90% of
the Grey Wolf common shares not owned by Abraxas and Canadian Abraxas,
calculated on a fully-diluted basis (approximately 6,733,859 shares), by the
expiration of the offer or within 120 days after the date of the offer,
whichever occurs first, AcquisitionCo intends to acquire the remaining Grey Wolf
common shares in a Compulsory Acquisition under Alberta law. If a Compulsory
Acquisition is not available, AcquisitionCo intends to acquire the remaining
Grey Wolf common shares in a Subsequent Acquisition Transaction under Alberta
law. If AcquisitionCo acquires at least a majority of the Grey Wolf common
shares not currently owned by Abraxas or Canadian Abraxas, calculated on a
fully-diluted basis, and excluding those Grey Wolf common shares held by persons
whose Grey Wolf common shares may not be voted as part of the "minority" in
connection with any Subsequent Acquisition Transaction pursuant to OSC Rule
61-501 or CVMQ Policy Q-27 in the offer, then Abraxas and its subsidiaries will
control enough Grey Wolf common shares to complete a Subsequent Acquisition
Transaction. A Subsequent Acquisition Transaction would take the form of an
amalgamation, statutory arrangement or other transaction. Grey Wolf shareholders
have the right to dissent from a Compulsory Acquisition and to receive the fair
value for their shares as determined by a court and may have such rights in a
Subsequent Acquisition Transaction depending upon the form of the transaction.
Q: HAVE ANY GREY WOLF SHAREHOLDERS AGREED TO DEPOSIT THEIR SHARES?
A: No. However, certain executive officers, directors and advisory directors
of Abraxas own a total of approximately 1,714,810 common shares of Grey Wolf
(approximately 25.9% of the Grey Wolf common shares not already owned by Abraxas
and Canadian Abraxas). Abraxas expects that all of these individuals will
deposit their shares.
Q: WHAT PERCENTAGE OF ABRAXAS COMMON STOCK WILL GREY WOLF SHAREHOLDERS OWN
AFTER THE OFFER AND ANY COMPULSORY ACQUISITION OR SUBSEQUENT ACQUISITION
TRANSACTION?
A: Assuming that 100% of the Grey Wolf common shares are acquired, Grey Wolf
shareholders will own approximately 13.2% of the issued and outstanding shares
of Abraxas common stock.
Q: WHAT ARE THE CONDITIONS TO THE OFFER?
A: Several conditions must be satisfied before AcquisitionCo will purchase
any Grey Wolf common shares pursuant to the offer, including those summarized
below:
- Grey Wolf shareholders having validly deposited under the offer and not
properly withdrawn, that number of Grey Wolf common shares which
represents not less than a majority of the Grey Wolf common shares not
currently held by Abraxas and Canadian Abraxas, calculated on a
fully-diluted basis, excluding those Grey Wolf common shares held
xi
by persons whose shares may not be voted as part of the "minority" in
connection with any Subsequent Acquisition Transaction under OSC
Rule 61-501 and CVMQ Policy Q-27;
- effectiveness of the registration statement covering the issuance of
Abraxas common stock to Grey Wolf shareholders;
- the approval by the Abraxas stockholders of the consummation of the
offer and the issuance of the shares of Abraxas common stock in the
offer, any Compulsory Acquisition or any Subsequent Acquisition
Transaction;
- the absence of any other agreement or transaction involving Grey Wolf
which would impair AcquisitionCo's ability to acquire Grey Wolf common
shares or otherwise diminish the expected economic value of the offer;
- there shall not be any threatened, instituted or pending act, action,
suit or proceeding by any arbitrator, governmental entity, public
official or private person in Canada or elsewhere, or any law,
regulation or policy proposed, enacted, promulgated or applied
(A) that would affect the purchase by or the sale to AcquisitionCo of
the Grey Wolf common shares or the right of AcquisitionCo to own or
exercise full rights of ownership of the Grey Wolf shares, (B) which
has had or would have a material adverse effect upon Grey Wolf or (C)
which would prevent a Subsequent Acquisition Transaction; and
- Grey Wolf shall have received waivers relating to any change of control
provisions in any instrument or obligation to which Grey Wolf or any of
its subsidiaries is a party or by which any of them or any of their
properties or assets may be bound.
FOR A COMPLETE LIST OF THE CONDITIONS TO THE OFFER, PLEASE SEE SECTION 5 OF
THE FORMAL OFFER TO PURCHASE, "CONDITIONS TO THE OFFER" BEGINNING ON PAGE 34.
Q: HAS GREY WOLF'S BOARD OF DIRECTORS RECOMMENDED THAT GREY WOLF'S SHAREHOLDERS
ACCEPT THE OFFER?
A: No. To Abraxas' and AcquisitionCo's knowledge, Grey Wolf's directors have
taken no action concerning a recommendation to its shareholders. Grey Wolf's
board consists of six persons, three of whom are directors or advisory directors
of Abraxas.
Under applicable United States and Canadian securities laws, Grey Wolf's
board of directors is required to prepare and mail to shareholders a directors'
circular in prescribed form not later than ten days after the date of the offer.
The directors' circular must contain a recommendation to accept or reject the
offer and the reasons for their recommendation, or a statement that they are
unable to make or are not making a recommendation and, if no recommendation is
made, the reasons for not making a recommendation. If, at the time of mailing
the directors' circular, Grey Wolf's board of directors is continuing to
consider whether to recommend acceptance or rejection of the offer, the
directors' circular must disclose that fact and may advise the shareholders not
to deposit their shares pursuant to the offer until further communication is
received from Grey Wolf's board of directors. In such event, Grey Wolf's board
of directors must make a recommendation to accept or reject the offer or state
that they are not making a recommendation and reasons therefor at least seven
days before the scheduled expiration of the offer.
Q: WILL THE RECEIPT OF SHARES OF ABRAXAS COMMON STOCK BE A TAXABLE TRANSACTION
TO GREY WOLF SHAREHOLDERS?
A: CANADIAN RESIDENTS. Yes. The exchange by shareholders of Grey Wolf who
are residents of Canada of their Grey Wolf common shares for 0.6 of a share of
Abraxas common stock will be a taxable event for purposes of the Canadian Tax
Act. The proceeds of disposition for Canadian tax
xii
purposes of each Grey Wolf common share exchanged will be the fair market value
of the 0.6 of a share of Abraxas common stock received in the exchange.
UNITED STATES RESIDENTS. Generally, for U.S. federal income tax
purposes, it is more likely than not that the receipt of shares of Abraxas
common stock by Grey Wolf shareholders subject to U.S. federal income tax laws
will not be taxable.
Q: ARE ABRAXAS STOCKHOLDERS OR GREY WOLF SHAREHOLDERS ENTITLED TO DISSENTERS'
RIGHTS OR RIGHTS OF APPRAISAL IN THE OFFER?
A: No. Alberta law does not provide dissenters' rights or rights of
appraisal for Grey Wolf shareholders in connection with the offer and Nevada law
does not provide dissenters' rights or rights of appraisal for Abraxas
stockholders in connection with the offer.
Q: ARE GREY WOLF SHAREHOLDERS OR ABRAXAS STOCKHOLDERS ENTITLED TO DISSENTERS'
RIGHTS OR RIGHTS OF APPRAISAL IN CONNECTION WITH A COMPULSORY ACQUISITION OR
SUBSEQUENT ACQUISITION TRANSACTION?
A: Yes. If Grey Wolf shareholders deposit a sufficient number of shares in
the offer so that the Compulsory Acquisition may be completed, Grey Wolf
shareholders who do not deposit shares in the offer will have the right under
Alberta law to dissent and demand appraisal of their shares in connection with a
Compulsory Acquisition and will likely have them in connection with a Subsequent
Acquisition Transaction. This would entitle such shareholders to receive a
judicial determination of, and receive payment for, the fair value of their
shares.
Abraxas stockholders do not have any dissenters' rights or rights of appraisal
in connection with a Compulsory Acquisition or a Subsequent Acquisition
Transaction.
Q: WHAT VOTE IS REQUIRED FROM ABRAXAS STOCKHOLDERS TO COMPLETE THE OFFER?
A: The consummation of the offer and the issuance of Abraxas common stock in
the offer, any Compulsory Acquisition and any Subsequent Acquisition Transaction
require the approval of the holders of a majority of the shares of Abraxas
common stock present and voting at the Abraxas annual meeting.
Q: AS AN ABRAXAS STOCKHOLDER, WHAT DO I NEED TO DO NOW?
A: If you are an Abraxas stockholder, you should read this document and
indicate on your proxy card how you want to vote with respect to each proposal,
and sign and mail your proxy card in the enclosed return envelope as soon as
possible, so that your shares may be represented at the annual meeting. If you
sign and send in your proxy and do not indicate how you want to vote, your proxy
will be counted as a vote in favor of the offer and the issuance of Abraxas
common stock and the other proposals to be considered at the Abraxas annual
meeting, as the case may be. If you are an Abraxas stockholder, you may also
choose to attend the annual meeting and vote your shares in person.
Q: WHAT DO ABRAXAS STOCKHOLDERS DO TO CHANGE OR REVOKE THEIR VOTE?
A: Abraxas stockholders may change their vote by sending in a later-dated
signed proxy card to Abraxas' Secretary, or by attending the annual meeting in
person and voting. You may also revoke your proxy by sending a notice of
revocation to Abraxas' Secretary at 500 North Loop 1604 East, Suite 100, San
Antonio, Texas 78232.
xiii
Q: IF MY SHARES OF ABRAXAS COMMON STOCK ARE HELD IN "STREET NAME" BY MY BROKER,
WILL MY BROKER VOTE MY SHARES FOR ME?
A: If you are an Abraxas stockholder, your broker will vote your shares only
if you provide instructions on how to vote. Without instructions, your shares of
Abraxas common stock will not be voted. You should instruct your broker to vote
your shares, following the directions provided by your broker.
Q: WHERE CAN I FIND MORE INFORMATION ABOUT ABRAXAS AND GREY WOLF?
A: You can find more information about Abraxas and Grey Wolf from various
sources described under "Where You Can Find More Information" on page 129.
Q: WHO CAN I CALL WITH QUESTIONS ABOUT THE OFFER OR THE ABRAXAS ANNUAL MEETING?
A: For questions about the offer, the Abraxas annual meeting and for any
other matters, Grey Wolf shareholders may call Valiant Corporate Trust Company,
the Depositary for the offer at (403) 233-2801, CIBC World Markets Corp., the
Dealer Manager for the offer in the United States at (713) 650-2500, or CIBC
World Markets Inc., the Dealer Manager for the offer in Canada, at
(403) 260-0500. Abraxas stockholders may call Abraxas at 1-888-227-2927.
xiv
SUMMARY
THE FOLLOWING IS A SUMMARY OF THE PRINCIPAL FEATURES OF THE OFFER AND SHOULD
BE READ TOGETHER WITH THE MORE DETAILED INFORMATION AND FINANCIAL DATA AND
STATEMENTS CONTAINED ELSEWHERE IN THIS OFFER TO PURCHASE/ CIRCULAR/PROXY
STATEMENT/PROSPECTUS. TO BETTER UNDERSTAND AND FOR A MORE COMPLETE DESCRIPTION
OF THE OFFER, YOU SHOULD CAREFULLY READ THIS ENTIRE DOCUMENT, THE FINANCIAL DATA
AND STATEMENTS CONTAINED ELSEWHERE IN THIS DOCUMENT AND THE DOCUMENTS TO WHICH
ABRAXAS HAS REFERRED YOU UNDER THE HEADING "WHERE YOU CAN FIND MORE INFORMATION"
BEGINNING ON PAGE 129.
THE COMPANIES
ABRAXAS PETROLEUM CORPORATION
500 NORTH LOOP 1604 EAST
SUITE 100
SAN ANTONIO, TEXAS 78232
(210) 490-4788
Abraxas is an independent energy company engaged primarily in the
acquisition, exploration, exploitation and production of crude oil and natural
gas. Since January 1, 1991, Abraxas' principal means of growth has been through
the acquisition and subsequent development and exploitation of producing
properties and related assets.
Since 1995, Abraxas has considered western Canada to be an area of strategic
importance in achieving its growth objectives. In pursuing its strategy in
western Canada, Abraxas, through its wholly-owned subsidiary, Canadian Abraxas,
acquired all of the capital stock of CGGS Canadian Gas Gathering Systems, Inc.
in November 1996 for C$130.5 million. Grey Wolf manages the operations of
Canadian Abraxas pursuant to a management agreement between Canadian Abraxas and
Grey Wolf.
As of December 31, 2000, Abraxas owned interests in 1,147,983 gross acres
(582,014 net acres) and 869 gross wells (338 net wells), 78% of which were
operated by Abraxas, and interests in 12 natural gas processing plants or
compression facilities. On January 1, 2001, Abraxas had total proved reserves of
218.6 Bcfe (78% natural gas) of which 62% were proved developed, with an
aggregate PV-10 of $865.5 million.
ABRAXAS ACQUISITION CORPORATION
1900, 333-7TH AVE. S.W.
CALGARY, ALBERTA T2P 2Z1
(403) 262-1949
AcquisitionCo is a wholly-owned subsidiary of Abraxas and was incorporated
under Alberta law on May 31, 2001 for the purpose of making the offer.
AcquisitionCo has no material assets or liabilities and no operating history.
GREY WOLF EXPLORATION INC.
1600, 255-5TH AVENUE, S.W.
CALGARY, ALBERTA
T2P 3G6
(403) 262-1949
Grey Wolf is a crude oil and natural gas company which focuses its efforts
on exploring for, developing, acquiring and producing crude oil and natural gas
in western Canada and the Northwest Territories. Natural gas in central and
northern Alberta accounts for over 90% of Grey Wolf's reserves and production.
As of December 31, 2000, Grey Wolf owned interests in 1,009,072 gross acres
(280,602 net acres) and 251 gross wells (39 net wells), 84% of which were
operated by Grey Wolf, and interests in 9
natural gas processing plants or compression facilities. On January 1, 2001,
Grey Wolf had total proved reserves of 25.8 Bcfe (83% natural gas) of which 99%
were proved developed, with an aggregate PV-10 of $131.9 million.
THE OFFER
AcquisitionCo is offering to purchase all of the issued and outstanding
shares of Grey Wolf in exchange for 0.6 of a share of Abraxas common stock for
each issued and outstanding common share of Grey Wolf which is not currently
owned by Abraxas or Canadian Abraxas. Abraxas will not issue any fractional
shares. Instead of any fractional share, the shareholder will receive, at the
option of AcquisitionCo, either a cash payment or a whole share of Abraxas
common stock. Any cash payment will be in an amount equal to the applicable
fraction times the average closing price of the Abraxas common stock on the AMEX
for the 10 trading days prior to the closing of the offer.
According to Grey Wolf's shareholder list, as of July 13, 2001, there were
12,804,628 common shares issued and outstanding. In addition, Grey Wolf has
outstanding options entitling holders to acquire 867,920 common shares at
exercise prices ranging from C$1.15 to C$4.80. Assuming that all of the
outstanding Grey Wolf common shares are deposited in acceptance of the offer and
that AcquisitionCo exchanges shares of Abraxas common stock for such shares
under the offer, Abraxas will issue approximately 3,968,488 shares of common
stock.
On July 24, 2001, the closing price of the Abraxas common stock on the AMEX
was $3.44. Based on such closing price and converting the United States dollars
to Canadian dollars using the Noon Spot Rate on such date, the value of 0.6 of a
share of Abraxas common stock was C$3.17. On July 24, 2001, the closing price of
the Grey Wolf common shares on the TSE was C$3.00.
TIMING AND EXPIRATION OF THE OFFER
Grey Wolf shareholders may accept the offer until 5:00 p.m., Calgary time,
on September 5, 2001, unless the offer is withdrawn or extended.
MANNER AND TIME OF ACCEPTANCE
To validly accept the offer, Grey Wolf shareholders must deposit the
certificate or certificates representing Grey Wolf common shares, together with
the Letter of Acceptance and Transmittal (printed on yellow paper) or a manually
signed facsimile thereof, properly completed and duly executed, on or before
September 5, 2001, the date on which the offer expires, at one of the offices of
the Depositary for the offer, as specified in the Letter of Acceptance and
Transmittal, in accordance with the instructions in the Letter of Acceptance and
Transmittal. Grey Wolf shareholders holding their shares in the name of a
nominee should request the broker, dealer, bank, trust company or other nominee
to effect the transaction. If you are a Grey Wolf shareholder and you wish to
accept the offer but your Grey Wolf common shares to be deposited are not
immediately available, you may validly accept the offer by following the
procedures for guaranteed delivery set forth in the Notice of Guaranteed
Delivery (printed on blue paper).
Any holder of options, warrants, rights or other entitlements to acquire
Grey Wolf common shares who wishes to accept the offer must, to the extent
permitted, exercise such rights in order to obtain certificates representing
Grey Wolf common shares and deposit those shares in accordance with the offer.
See Section 3 of the formal Offer to Purchase, "Procedure for Guaranteed
Delivery" beginning on page 32.
Grey Wolf shareholders will not be required to pay any fee or commission if
they accept the offer by transmitting their Grey Wolf common shares directly to
the Depositary for the offer.
2
CONDITIONS OF THE OFFER
Several conditions must be satisfied before AcquisitionCo will purchase any
Grey Wolf common shares pursuant to the offer, including those summarized below:
- Grey Wolf shareholders having validly deposited under the offer and not
properly withdrawn, that number of Grey Wolf common shares which
represents not less than a majority of the Grey Wolf common shares not
currently held by Abraxas and Canadian Abraxas, calculated on a fully-
diluted basis, excluding those Grey Wolf common shares held by persons
whose shares may not be voted as part of the "minority" in connection with
any Subsequent Acquisition Transaction under OSC Rule 61-501 and CVMQ
Policy Q-27;
- effectiveness of the registration statement covering the issuance of
Abraxas common stock to Grey Wolf shareholders;
- the approval by the Abraxas stockholders of the consummation of the offer
and the issuance of the shares of Abraxas common stock in the offer, any
Compulsory Acquisition or any Subsequent Acquisition Transaction;
- the absence of any other agreement or transaction involving Grey Wolf
which would impair Abraxas' and AcquisitionCo's ability to acquire Grey
Wolf or otherwise diminish the expected economic value of the offer;
- there shall not be any threatened, instituted or pending act, action, suit
or proceeding by any arbitrator, governmental entity, public official or
private person in Canada or elsewhere, or any law, regulation or policy
proposed, enacted, promulgated or applied (A) that would affect the
purchase by or the sale to AcquisitionCo of the Grey Wolf common shares or
the right of AcquisitionCo to own or exercise full rights of ownership of
the Grey Wolf shares, (B) which has had or would have a material adverse
effect upon Grey Wolf or (C) which would prevent a Subsequent Acquisition
Transaction; and
- Grey Wolf shall have received waivers relating to any change of control
provisions in any instrument or obligation to which Grey Wolf or any of
its subsidiaries is a party or by which any of them or any of their
properties or assets may be bound.
FOR A COMPLETE LIST OF THE CONDITIONS TO THE OFFER PLEASE SEE SECTION 5 OF
THE FORMAL OFFER TO PURCHASE, "CONDITIONS TO THE OFFER" BEGINNING ON PAGE 34.
PAYMENT FOR DEPOSITED SHARES
Upon the terms and subject to the conditions of the offer, AcquisitionCo
will exchange shares of Abraxas common stock for Grey Wolf common shares validly
deposited under the offer and not withdrawn within all time periods prescribed
by applicable securities laws. Any Grey Wolf common shares deposited under the
offer after the first date on which Grey Wolf common shares have been exchanged
for shares of Abraxas common stock by AcquisitionCo will be exchanged within
three business days of that deposit. See Section 7 of the formal Offer to
Purchase, "Payment for Deposited Grey Wolf Common Shares" beginning on page 37.
RIGHT TO WITHDRAW DEPOSITED SHARES
Grey Wolf common shares deposited in the offer may be withdrawn at any time
(including after the expiration of the offer) prior to the expiration of
35 days from the date of this document and thereafter if the shares have not
been taken up by AcquisitionCo prior to the receipt by the Depositary of the
notice of withdrawal, and, unless AcquisitionCo exchanges shares of Abraxas
common stock for Grey Wolf common shares pursuant to the offer within three
business days of taking up the Grey Wolf common shares, the Grey Wolf common
shares may also be withdrawn at any time after such three
3
business day period or at any time before the expiration of 10 days from the
date of any notice of a change or variation in the terms of the offer.
PURPOSE OF THE OFFER (SEE PAGE 66)
The purpose of the offer is to enable AcquisitionCo to acquire all of the
Grey Wolf common shares not already held by Abraxas and its affiliates and
thereby make Grey Wolf an indirect wholly-owned subsidiary of Abraxas. Abraxas
believes that the acquisition of the outstanding common shares of Grey Wolf will
enhance value for Abraxas and Grey Wolf shareholders by, among other things:
- eliminating the minority interest in Abraxas' financial statements, thus
increasing stockholders' equity, property and equipment and net income;
- offering a premium over the price of Grey Wolf's common shares at the time
a possible combination was announced on January 19, 2001 of 34% and at the
time that the exchange ratio was first announced on April 12, 2001 of 35%;
- achieving better long-term growth prospects;
- reducing administrative costs and costs of operations over the long-term;
and
- providing Grey Wolf shareholders with increased investment liquidity as a
shareholder of a company, the stock of which is traded on the AMEX, with
25,988,832 shares of common stock outstanding as of July 24, 2001, of
which approximately 23,295,024 shares are held by non-affiliates with an
average daily trading volume of approximately 130,000 shares during the
previous 52 weeks. This compares to Grey Wolf's 12,804,628 common shares
outstanding, of which approximately 4,813,283 shares are held by
non-affiliates with an average daily trading volume of approximately
25,000 shares during the previous 52 weeks.
Abraxas expects to cause Grey Wolf to conduct its business operations in
substantially the same way as Grey Wolf has conducted its operations in the
past.
ACQUISITION OF GREY WOLF COMMON SHARES NOT DEPOSITED (SEE PAGE 81)
Abraxas and its wholly-owned subsidiary, Canadian Abraxas, own a total of
6,190,482 Grey Wolf common shares representing approximately 48.3% of the
outstanding Grey Wolf common shares. If AcquisitionCo acquires at least 90% of
the Grey Wolf common shares not owned by Abraxas and Canadian Abraxas,
calculated on a fully-diluted basis (approximately 6,733,859 shares), by the
expiration of the offer or within 120 days after the date of the offer,
whichever occurs first, AcquisitionCo intends to acquire the remaining Grey Wolf
common shares in a Compulsory Acquisition under Alberta law. If a Compulsory
Acquisition is not available, AcquisitionCo intends to acquire the remaining
Grey Wolf common shares in a Subsequent Acquisition Transaction under Alberta
law. If AcquisitionCo acquires at least a majority of the Grey Wolf common
shares not currently owned by Abraxas or Canadian Abraxas, calculated on a
fully-diluted basis, and excluding those Grey Wolf common shares held by persons
whose Grey Wolf common shares may not be voted as part of the "minority" in
connection with any Subsequent Acquisition Transaction pursuant to OSC Rule
61-501 or CVMQ Policy Q-27 in the offer, then Abraxas and its subsidiaries will
control enough Grey Wolf common shares to complete a Subsequent Acquisition
Transaction. A Subsequent Acquisition Transaction would take the form of an
amalgamation, statutory arrangement or other transaction. Grey Wolf shareholders
have the right to dissent from a Compulsory Acquisition and to receive the fair
value for their shares as determined by a court and may have such rights in a
Subsequent Acquisition Transaction depending upon the form of the transaction.
4
DISSENTERS' RIGHTS (SEE PAGES 81 AND 84)
Abraxas stockholders and Grey Wolf shareholders do not have any right to an
appraisal of the value of their shares in connection with the offer. Grey Wolf
shareholders have the right to dissent under the Alberta Business Corporations
Act with respect to any Compulsory Acquisition or Subsequent Acquisition
Transaction and to be paid the fair value for their shares, with such fair value
to be determined by a court. Abraxas stockholders do not have any dissenters'
rights or rights of appraisal in connection with any Compulsory Acquisition or
Subsequent Acquisition Transaction.
INTERESTS OF CERTAIN PERSONS IN THE OFFER (SEE PAGE 79)
GREY WOLF. Some of Grey Wolf's directors and officers have interests that may
differ from, or be in addition to, the interests of Grey Wolf shareholders.
These interests include:
- Mr. Watson, the Chairman of the Board and Chief Executive Officer of Grey
Wolf, is Chairman of the Board, President and Chief Executive Officer of
Abraxas, Mr. Phelps, a director of Grey Wolf, is a director of Abraxas,
and Mr. Riggs, a director of Grey Wolf, is an advisory director of
Abraxas;
- Directors and officers of Grey Wolf own options to purchase a total of
468,586 Grey Wolf common shares. These options will immediately vest once
there is a change of control of Grey Wolf. Upon the closing of a
Compulsory Acquisition or Subsequent Acquisition Transaction, these
options will become options to purchase Abraxas common stock. Abraxas has
offered the option holders (other than directors of Grey Wolf who are not
also employees of Grey Wolf) the opportunity to waive the accelerated
vesting in exchange for additional Abraxas options. In total, options to
purchase up to 332,143 shares of Abraxas common stock could be issued to
Grey Wolf's directors and officers at exercise prices ranging from $0.86
to $3.13 per share of which 223,698 will be immediately vested, an
additional 10,547 will vest prior to December 31, 2001, 38,823 will vest
in 2002, 29,977 will vest in 2003 and 29,098 will vest in 2004; and
- Four employees of Grey Wolf, two of whom are executive officers, could
receive cash payments ranging from one-half of a year's salary to two
years' salary under certain circumstances which could arise in connection
with the offer.
ABRAXAS. Some of Abraxas' directors and officers have interests in the offer
that may differ from or be in addition to, the interests of Abraxas
stockholders. These interests include:
- Mr. Watson, the Chairman of the Board, President and Chief Executive
Officer of Abraxas and Chairman of the Board and Chief Executive Officer
of Grey Wolf, owns 137,936 Grey Wolf common shares and options to purchase
91,419 Grey Wolf common shares. As a result of the offer, Mr. Watson will
receive 82,761 shares of Abraxas common stock and options to purchase
68,564 shares of Abraxas common stock at exercise prices ranging from
$2.09 to $2.55 per share of which 65,544 will be immediately vested, an
additional 2,141 will vest in 2002 and 879 will vest in 2003; and
- In addition to Mr. Watson, certain directors and officers of Abraxas own a
total of 1,576,874 Grey Wolf common shares and options to purchase 22,627
Grey Wolf common shares. As a result of the offer, these individuals will
receive a total of 946,124 shares of Abraxas common stock and options to
purchase 13,576 shares of Abraxas common stock at exercise prices ranging
from $2.09 to $2.55 per share, all of which will be immediately vested.
ANTICIPATED ACCOUNTING TREATMENT (SEE PAGE 77)
The acquisition of the minority interest of Grey Wolf will be accounted for
by Abraxas under the purchase method. The aggregate purchase price of the
acquisition (including the value of Abraxas
5
common shares issued, and potential equivalent stock options assumed by Abraxas,
as well as direct costs of the acquisition) will be allocated based upon the
fair values of the assets acquired and liabilities assumed. Any excess purchase
price will be recorded as goodwill. The results of the final valuation of fair
value have not yet been completed. Under current generally accepted accounting
principles in the United States, goodwill will be reviewed periodically for
impairment.
DESCRIPTION OF ABRAXAS COMMON STOCK (SEE PAGE 46)
Abraxas is currently authorized to issue 200,000,000 shares of common stock,
par value $.01 per share. As of July 24, 2001, there were 25,988,832 shares of
Abraxas common stock outstanding. The Abraxas common stock trades on the AMEX
under the symbol "ABP."
Holders of Abraxas common stock are entitled to one vote per share at all
meetings of Abraxas stockholders. Abraxas stockholders are entitled to
participate, on a PRO RATA basis, in any distribution of Abraxas assets in the
event of a liquidation, dissolution or winding-up of Abraxas. No dividends will
be paid on Abraxas common stock for so long as any first lien notes or second
lien notes are outstanding.
LISTING OF ABRAXAS COMMON STOCK
Abraxas will apply to list the shares of Abraxas common stock issuable in
the offer on the AMEX.
REGULATORY APPROVALS (SEE PAGE 79)
AcquisitionCo cannot complete the offer until the registration statement
filed by Abraxas relating to the issuance of the shares of Abraxas common stock
in the offer is declared effective by the SEC.
TAX CONSEQUENCES OF THE OFFER AND ACQUISITION TRANSACTIONS (SEE PAGE 92)
UNITED STATES. In the opinion of Abraxas' U.S. tax counsel, it is more
likely than not that Grey Wolf shareholders subject to U.S. federal income tax
laws who exchange their Grey Wolf common shares for shares of Abraxas common
stock will not recognize a gain or loss on the exchange, except as described in
"United States and Canadian Income Tax Consequences--Material United States
Federal Income Tax Consequences to Grey Wolf Shareholders" beginning on page 96.
CANADA. In the opinion of Abraxas' Canadian tax counsel, the exchange by a
shareholder of Grey Wolf who is a resident of Canada of that shareholder's
common shares of Grey Wolf for shares of Abraxas common stock will be a taxable
event for purposes of the Canadian Tax Act, and a gain or loss will be
recognized by the shareholder. See "United States and Canadian Income Tax
Consequences--Canadian Federal Income Tax Considerations" beginning on page 92.
RISK FACTORS (SEE PAGE 15)
For a discussion of risk factors to be considered by Grey Wolf shareholders
in accepting the offer and Abraxas stockholders in voting to approve the offer
and the share issuance, see the "Risk Factors" section of this document on page
15. These risk factors include each of the following:
- risks related to the offer for Grey Wolf shareholders;
- risks related to the offer for Abraxas stockholders;
- risks related to the Abraxas business;
- risks related to the Abraxas common stock; and
- risks related to Abraxas' industry.
6
DEPOSITARY FOR THE OFFER (SEE PAGE 80)
Valiant Corporate Trust Company is acting as Depositary for the offer. The
Depositary will receive deposits of certificates representing Grey Wolf common
shares and accompanying Letters of Acceptance and Transmittal. In exchange for
Grey Wolf common shares, the Depositary will issue certificates representing
shares of Abraxas common stock and any cash payments required in lieu of
fractional shares.
DEALER MANAGERS (SEE PAGE 76)
CIBC World Markets Corp. has been retained to act as financial advisor to
Abraxas in connection with the offer and has been appointed to act as the dealer
manager of the offer in the United States to solicit acceptances of the offer in
the United States. CIBC World Markets Inc. has been retained to act as dealer
manager of the offer in Canada and will form a soliciting dealer group comprised
of members of the Investment Dealers Association of Canada and members of
Canadian stock exchanges to solicit acceptances of the offer in Canada.
VALUATION BY FINANCIAL ADVISOR TO GREY WOLF SPECIAL COMMITTEE (SEE PAGE 70)
Ontario Securities Commission Rule 61-501 and Commission des valeurs
mobilieres du Quebec Policy Q-27 set out specific requirements and recommended
procedures for disclosure, valuation, review and approval applicable to insider
bids, issuer bids, going private transactions and related party transactions.
Abraxas and Canadian Abraxas own approximately 48.3% of the outstanding
shares of Grey Wolf. Accordingly, the offer is an insider bid for purposes of
OSC Rule 61-501 and CVMQ Policy Q-27. Consummation of the offer will result in
Grey Wolf shareholders receiving shares of Abraxas common stock for their Grey
Wolf common shares. In accordance with the guidelines for an insider bid under
OSC Rule 61-501 and CVMQ Policy Q-27, a formal valuation of the Grey Wolf common
shares and Abraxas common stock was prepared by Raymond James &
Associates, Inc., an independent valuer, and is attached hereto as Annex C.
In the opinion of Raymond James, based on the scope of its review, the
valuation methodologies applied and subject to the assumptions and limitations
noted in the valuation, the fair market value of the Grey Wolf common shares
ranges from $2.57 to $3.37 per share and the fair market value of the Abraxas
common stock ranges from $0.75 to $7.92 per share.
RECOMMENDATION OF THE GREY WOLF BOARD OF DIRECTORS
To Abraxas' and AcquisitionCo's knowledge, Grey Wolf's directors have taken
no action concerning a recommendation to its shareholders. Grey Wolf's board
consists of six persons, three of whom are directors or advisory directors of
Abraxas.
Under applicable United States and Canadian securities laws, Grey Wolf's
board of directors is required to prepare and mail to shareholders a directors'
circular in prescribed form not later than ten days after the date of the offer.
The directors' circular must contain a recommendation to accept or reject the
offer and the reasons for their recommendation, or a statement that they are
unable to make or are not making a recommendation and, if no recommendation is
made, the reasons for not making a recommendation. If, at the time of mailing
the directors' circular, Grey Wolf's board of directors is continuing to
consider whether to recommend acceptance or rejection of the offer, the
directors' circular must disclose that fact and may advise the shareholders not
to deposit their shares pursuant to the offer until further communication is
received from Grey Wolf's board of directors. In such event, Grey Wolf's board
of directors must make a recommendation to accept or reject the offer (or, if it
is
7
unable to make or is not making a recommendation, state the reasons therefore)
at least seven days before the scheduled expiration of the offer.
OPINION OF THE ABRAXAS INDEPENDENT COMMITTEE'S FINANCIAL ADVISOR (SEE PAGE 66)
In deciding to approve the transaction, the Abraxas board considered the
opinion of the Abraxas Independent Committee's financial advisor. The committee
received an opinion from Jefferies & Company, Inc. as to the fairness to Abraxas
stockholders, other than Abraxas stockholders who also own Grey Wolf common
shares, from a financial point of view as of June 7, 2001 of the exchange ratio
of 0.6 of a share of Abraxas common stock for each Grey Wolf common share. This
opinion is attached as Annex D. Abraxas encourages you to read the opinion.
RECOMMENDATION TO ABRAXAS STOCKHOLDERS
THE ABRAXAS BOARD OF DIRECTORS BELIEVES THAT THE OFFER IS FAIR TO AND IN THE
BEST INTEREST OF ABRAXAS STOCKHOLDERS AND THE ABRAXAS BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT ABRAXAS STOCKHOLDERS VOTE FOR THE CONSUMMATION OF
THE OFFER AND THE ISSUANCE OF ABRAXAS COMMON STOCK IN CONNECTION WITH THE OFFER
AND ANY COMPULSORY ACQUISITION OR SUBSEQUENT ACQUISITION TRANSACTION.
WHO CAN VOTE AT THE ABRAXAS ANNUAL MEETING
Only record holders of Abraxas common stock at the close of business on
July 16, 2001 are entitled to notice of and to vote at the Abraxas annual
meeting. On July 16, 2001, 25,988,832 shares of Abraxas common stock were
outstanding. Each share will have one vote on each matter at the Abraxas annual
meeting.
ABRAXAS STOCKHOLDER VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding shares
of Abraxas common stock present at the meeting is necessary for approval of the
consummation of the offer and the issuance of the shares of Abraxas common stock
in connection with the offer.
SUMMARY HISTORICAL FINANCIAL INFORMATION OF ABRAXAS
See the Abraxas 2000 Annual Report on Form 10-K which is incorporated by
reference in this document for the "Selected Financial Data" Part II, Item 6.
for five years of summary historical information.
Abraxas is providing the additional following information to aid Grey Wolf
shareholders and Abraxas stockholders in their analysis of the financial aspects
of the offer. Abraxas also derived this information from the audited financial
statements of Abraxas for the years 1998 through 2000 and the unaudited
financial statements of Abraxas for each of the three month periods ended
March 31, 2000 and March 31, 2001 included in Abraxas' Quarterly Report on Form
10-Q for the quarter ended March 31, 2001 incorporated by reference in this
document and the March 31, 2000 Form 10-Q not included herein. This information
is only a summary, and you should read it together with Abraxas' historical
financial statements and related notes contained in the annual reports and other
information
8
that Abraxas has filed with the Securities and Exchange Commission, or SEC, and
incorporated by reference in this document.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31,
MARCH 31
----------------------------------------
--------------------------
1998 1999 2000
2000 2001
----------- -------- ------------
------------ --------
(DOLLARS IN THOUSANDS EXCEPT
PER SHARE DATA)
Total revenue..................... $ 60,084 $ 66,770 $ 76,600
$ 16,717 $ 29,086
Income (loss) before extraordinary
item............................ (83,960)(1) (36,680) 6,676 (2)
27,156 (2) 255
Income (loss) before extraordinary
item per common
share--diluted.................. (13.26) (5.41) 0.21 (2)
0.52 (2) 0.01
Weighted average shares
outstanding--basic.............. 6,331 6,784 22,616
22,627 22,596
Total assets...................... 291,498 322,284 335,560
355,186 333,974
Long-term debt, excluding current
maturities...................... 299,698 273,421 266,441
275,384 266,786
Total stockholders' equity
(deficit)....................... (63,522) (9,505) (6,503)
15,806 (32,984)
--------------------------
(1) Increase due to ceiling test write down of oil and gas properties.
(2) Increase due to the sale of equity interest in partnership.
SUMMARY HISTORICAL FINANCIAL INFORMATION OF GREY WOLF
The following is a summary of selected historical financial information for
Grey Wolf for the periods indicated in thousands of Canadian dollars, except for
per share amounts, and prepared based on accounting principles used in Canada.
This summary information is derived from the information included in Annex B.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31,
MARCH 31,
----------------------------------------
--------------------------
1998 1999 2000
2000 2001
----------- -------- ------------
------------ --------
Total revenue..................... $ 7,863 $ 13,064 $ 20,629
$ 3,592 $ 8,740
Income before extraordinary
item............................ 9 1,347 3,940
37 2,868
Income before extraordinary item
per common share--diluted....... -- 0.11 0.31
-- 0.22
Weighted average shares
outstanding--basic.............. 9,810 12,695 12,661
12,660 12,666
Total assets...................... 45,694 50,541 64,597
52,673 70,641
Long-term debt, excluding current
maturities...................... 9,971 12,066 11,793
13,596 13,040
Total stockholders' equity........ 28,195 29,464 32,845
28,939 35,725
For more information, you should read the Grey Wolf information included in
Annex B.
SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following summary pro forma information has been derived from and should
be read together with the unaudited pro forma condensed consolidated financial
information and related notes beginning on page 101.
The following summary unaudited pro forma financial information for Abraxas
gives effect to the proposed acquisition by Abraxas of the remaining common
shares of Grey Wolf that it does not already own (6.6 million shares) plus stock
options anticipated to be assumed (0.5 million shares). Abraxas plans to issue
approximately 4.5 million shares of common stock to acquire such minority
interest in Grey Wolf and related stock options. The purchase price of $20.6
million is based on the market price of Abraxas common stock over a reasonable
period of time around the announcement on April 12,
9
2001 ($4.58 per share). The book value of such Grey Wolf minority interest is
$13.2 million at March 31, 2001. The purchase price value above such book value
is allocated to oil and gas properties. The results of the final valuation of
fair value is not yet complete and subject to stock options to be assumed. The
summary unaudited pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of the actual results that would
have occurred had the minority interest been acquired on these respective dates
or of future results of operations. The historical financial information has
been adjusted for amortization of the oil and gas properties based on the
purchase price and related changes in deferred income taxes.
YEAR ENDED THREE MONTH
DECEMBER 31, ENDED
2000 MARCH 31,
2001
------------
--------------
Total operating revenue............................ $76,600 $ 29,086
Income from continuing operations.................. 7,021 984
Income per common share:
Basic.......................................... $ 0.26 $ 0.04
Diluted........................................ $ 0.19 $ 0.03
AT MARCH 31,
2001
------------
Total assets....................................... $345,436
Total debt (excluding current maturities).......... 266,786
Stockholders' equity (deficit)..................... (12,374)
SELECTED PER SHARE FINANCIAL INFORMATION
The following table sets forth selected historical per share financial
information for each of Abraxas and Grey Wolf and unaudited pro forma per share
financial information for Abraxas giving effect to the transaction, as if it had
been consummated as of December 31, 2000. The information presented below is
derived from (i) the consolidated historical financial statements of Abraxas and
Grey Wolf, including the related notes thereto, incorporated by reference or
contained elsewhere in this document and (ii) the Unaudited Pro Forma Financial
Information, including the notes thereto, contained elsewhere in this document,
and should be read in conjunction therewith. You should refer to the information
under the caption "Unaudited Pro Forma Condensed Consolidated Financial
Information," the Consolidated Financial Statements of Abraxas and the notes
thereto included in Abraxas' Annual Report on Form 10-K for the year ended
December 31, 2000 and Quarterly Report on Form 10-Q for the quarter ended March
31, 2001 incorporated by reference in this document and the Financial Statements
of Grey Wolf and the notes thereto included in Annex B hereto for more
information. The pro forma per share information set forth herein assumes the
initial issuance of 0.6 of a share of Abraxas common stock in connection with
the transaction. The pro forma information set forth below is not necessarily
indicative of what Abraxas' actual financial position or results of operations
would have been had the offer been consummated as of the above referenced dates
or of
10
the financial position or results of operations that may be reported by Abraxas
in the future. All dollars in U.S. $.
YEAR ENDED
THREE MONTHS
DECEMBER 31,
ENDED
2000
MARCH 31, 2001
------------
--------------
ABRAXAS--HISTORICAL:
Earnings per common share from continuing
operations--basic......................................... $ 0.29
$ 0.01
--diluted... 0.21
0.01
Book value per common share (1)........................... (0.29)
(1.46)
Dividends per common share (2)............................ --
--
ABRAXAS--PRO FORMA:
Earnings per common share from continuing
operations--basic (3)..................................... $ 0.26
$ 0.04
--diluted... 0.19
0.03
Book value per common share (4)........................... 0.48
(0.45)
Dividends per common share (2)............................ --
--
GREY WOLF--HISTORICAL:
Earnings per common share from continuing
operations--basic......................................... $ 0.20
$ 0.15
--diluted... 0.20
0.14
Book value per common share (1)........................... 1.73
1.83
GREY WOLF--PRO FORMA EQUIVALENTS: (5)
Earnings per common share from continuing
operations--basic......................................... $ 0.12
$ 0.09
--diluted... 0.12
0.08
Book value per common share............................... 1.04
1.10
------------------------
(1) Historical book value per common share of Abraxas and Grey Wolf is computed
by dividing each entities stockholders' equity at December 31, 2000 and
March 31, 2001 by the number of common shares outstanding at the end of the
respective periods excluding any shares held in the treasury and the
dilutive effect of options, warrants and convertible preferred stock. The
historical book value per common share of Abraxas at December 31, 2000
assumed the issuance of 9.5 million shares pursuant to Abraxas' contingent
value rights, and the historical book value per common share of Abraxas at
March 31, 2001 assumed the issuance of 3.2 million shares pursuant to the
CVRs. On May 21, 2001, Abraxas' CVRs expired. Under the terms of the CVRs,
Abraxas issued a total of 3,386,488 shares of its common stock to holders of
CVRs.
(2) Abraxas' ability to pay dividends is restricted pursuant to the terms of the
indentures for the first-lien notes, second-lien notes and old notes.
(3) Pro forma earnings per common share from continuing operations is computed
by dividing income from continuing operations, less any preferred stock
dividends, by the historical weighted average shares outstanding for the
respective periods plus the 4.50 million shares of Abraxas common stock
assumed to be issued in the offer.
(4) Pro forma book value per common share of Abraxas is computed by dividing pro
forma stockholders' equity by the number of common shares outstanding at the
end of the period plus 4.50 million shares of Abraxas common stock assumed
to be issued in the offer.
(5) Pro forma equivalent data of Grey Wolf is computed by multiplying the Grey
Wolf historical data by the exchange ratio of 0.6.
11
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
ABRAXAS. Abraxas common stock began trading on the American Stock Exchange
on August 18, 2000, under the symbol "ABP." Abraxas common stock was formerly
listed on the NASDAQ Stock Market under the symbol "AXAS," however, effective
June 16, 1999, Abraxas common stock was delisted from quotation on the NASDAQ
Stock Market for failure to satisfy NASDAQ's listing and maintenance standards.
During the period beginning June 16, 1999, and ending on August 17, 2000,
Abraxas common stock traded on the OTC Bulletin Board under the symbol "AXAS."
As of July 24, 2001, Abraxas had 25,988,832 shares of common stock outstanding
and had approximately 1,537 stockholders of record.
The following table sets forth certain information as to the high and low
bid quotations quoted on the NASDAQ Stock Market 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 and low sales price on the American Stock Exchange
from August 18, 2000 through June 30, 2001 and for the third quarter of 2001
through July 24, 2001. 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, 2000)................. 2.75
1.38
Third Quarter (AMEX through September 30, 2000)............. 4.00
2.75
Fourth Quarter.............................................. 4.56
2.81
2001
First Quarter............................................... $ 5.32
$3.69
Second Quarter.............................................. 4.98
3.10
Third Quarter (through July 24, 2001)....................... 3.59
2.88
As of January 18, 2001, the day before a possible combination between
Abraxas and Grey Wolf was initially announced, the closing price of Abraxas'
common stock was $3.94 and as of April 11, 2001, the day before the exchange
ratio was initially announced, the closing price of Abraxas common stock was
$4.85.
The terms of Abraxas' first lien notes and second lien notes restrict
Abraxas from paying dividends on Abraxas' common stock. Abraxas has never paid
dividends on its common stock and does not expect to do so in the foreseeable
future.
GREY WOLF. The common shares of Grey Wolf's predecessor, Cascade Oil &
Gas, Ltd, began trading on the Alberta Stock Exchange under the symbol "COL" in
August 1987. Grey Wolf's common
12
shares were traded on the Alberta Stock Exchange beginning June 22, 1998 under
the symbol "GWX." On January 7, 1999, Grey Wolf's common shares began trading on
The Toronto Stock Exchange. On June 14, 1999, Grey Wolf effected a one-for-ten
reverse stock split.
The following table sets forth certain information as to the high and low
sales price on the Alberta Stock Exchange (now the Canadian Venture Exchange) of
the Grey Wolf common shares from January 1, 1998 until January 6, 1999, and on
The Toronto Stock Exchange from January 7, 1999 until July 24, 2001. As of
July 24, 2001, Grey Wolf had 12,804,628 common shares outstanding and had
approximately 76 shareholders of record.
PERIOD HIGH
LOW
------ --------
--------
1998
First Quarter............................................... C$0.50
C$0.25
Second Quarter.............................................. 0.40
0.22
Third Quarter............................................... 0.40
0.23
Fourth Quarter.............................................. 0.40
0.28
1999
First Quarter............................................... C$0.32
C$0.12
Second Quarter.............................................. 0.28
0.11
Third Quarter............................................... 2.80
0.93
Fourth Quarter.............................................. 2.70
1.12
2000
First Quarter............................................... C$1.80
C$1.20
Second Quarter.............................................. 2.10
1.26
Third Quarter............................................... 2.45
1.45
Fourth Quarter.............................................. 2.25
1.50
2001
First Quarter............................................... C$3.28
C$1.95
Second Quarter.............................................. 4.15
2.60
Third Quarter (through July 24, 2001)....................... 3.29
2.70
As of January 18, 2001, the day before a possible combination between
Abraxas and Grey Wolf was initially announced, the closing price of Grey Wolf
common shares was C$2.70 and as of April 11, 2001, the day before the exchange
ratio was initially announced, the closing price of Grey Wolf common shares was
C$3.30. Grey Wolf has never paid dividends on its common shares and does not
expect to do so in the foreseeable future.
OTHER MATTERS TO BE VOTED UPON AT THE ABRAXAS ANNUAL MEETING
In addition to approving the consummation of the offer and the issuance of
the shares of Abraxas common stock in connection with the offer and any
Compulsory Acquisition or Subsequent Acquisition Transaction, Abraxas
stockholders are being asked to vote upon the following additional matters:
- ELECTION OF DIRECTORS. Election of two members to the Abraxas board of
directors to serve until the 2004 Abraxas annual meeting of stockholders
and until their respective successors shall be duly elected and qualified.
- AMENDMENT TO 1994 LONG TERM INCENTIVE PLAN. Approval of an amendment to
the Abraxas 1994 Long Term Incentive Plan to increase the number of shares
of Abraxas common stock reserved for issuance under the Plan to 5,000,000
shares if the consummation of the offer and the issuance of shares is
approved and 4,350,000 shares if it is not approved. Additional shares are
13
required if the offer and issuance is approved in order to accommodate the
grant of Abraxas options to Grey Wolf option holders.
- APPROVAL OF INDEPENDENT AUDITORS. Ratification of the selection of
Deloitte & Touche LLP as independent auditors for the fiscal year ending
December 31, 2001.
REQUIRED VOTE
- ELECTION OF DIRECTORS. The two nominees for director who receive the most
votes will be elected. So, if you are an Abraxas stockholder and you do
not vote for a particular nominee, you do not instruct your broker on how
to vote or you indicate "withhold authority to vote" for a particular
nominee on your proxy card, your abstention or broker non-vote will have
no effect on the election of directors.
- AMENDMENT TO 1994 LONG TERM INCENTIVE PLAN. The proposal to amend the 1994
Long Term Incentive Plan must receive the affirmative vote of the holders
of a majority of the shares of Abraxas common stock represented and voting
at the meeting. If you are an Abraxas stockholder and you are present in
person or represented by proxy at the meeting and abstain from voting or
if you do not instruct your broker on how to vote, it will have no effect
on the proposal because shares for which you abstain or for which your
broker is not entitled to vote will not be considered as voting at the
annual meeting and for purposes of approving this proposal.
- APPROVAL OF INDEPENDENT AUDITORS. The proposal to ratify the selection of
Abraxas' independent auditors must receive the affirmative vote of the
holders of a majority of the shares of Abraxas common stock represented
and voting at the meeting. If you are an Abraxas stockholder and you are
present in person or represented by proxy at the meeting and abstain from
voting or if you do not instruct your broker on how to vote, it will have
no effect on the proposal because shares for which you abstain or for
which your broker is not entitled to vote will not be considered as voting
at the annual meeting and for purposes of approving this proposal.
14
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED BY GREY WOLF SHAREHOLDERS IN
EVALUATING WHETHER OR NOT TO ACCEPT THE OFFER AND BY ABRAXAS STOCKHOLDERS IN
EVALUATING WHETHER TO VOTE IN FAVOR OF THE CONSUMMATION OF THE OFFER AND THE
ISSUANCE OF SHARES OF ABRAXAS COMMON STOCK IN THE OFFER, ANY COMPULSORY
ACQUISITION AND ANY SUBSEQUENT ACQUISITION TRANSACTION. SOME OF THESE RISK
FACTORS RELATE DIRECTLY TO THE COMPLETION OF THE OFFER, A COMPULSORY ACQUISITION
OR ANOTHER FORM OF SUBSEQUENT ACQUISITION TRANSACTION WHILE OTHERS RELATE TO THE
BUSINESS AND PROPERTIES OF ABRAXAS AND ITS AFFILIATES, INDEPENDENT OF THE OFFER
OR ANY COMPULSORY ACQUISITION AND ANY SUBSEQUENT ACQUISITION TRANSACTION. THESE
RISK FACTORS SHOULD BE CONSIDERED IN CONJUNCTION WITH THE OTHER INFORMATION
INCLUDED HEREIN. YOU ARE URGED TO READ THIS SECTION IN ITS ENTIRETY. CAPITALIZED
TERMS USED BUT NOT DEFINED IN THIS SECTION ARE DEFINED BELOW UNDER
"DEFINITIONS."
RISKS RELATED TO THE OFFER FOR GREY WOLF SHAREHOLDERS
GREY WOLF SHAREHOLDERS WILL RECEIVE 0.6 OF A SHARE OF ABRAXAS COMMON STOCK
FOR EACH COMMON SHARE OF GREY WOLF, REGARDLESS OF ANY CHANGES IN THE MARKET
VALUE OF ABRAXAS COMMON STOCK OR GREY WOLF COMMON SHARES. At the closing of the
offer, each common share of Grey Wolf deposited will be exchanged for 0.6 of a
share of Abraxas common stock. This exchange ratio will not be adjusted for
changes in the market prices of Abraxas common stock or Grey Wolf common shares.
THE INTERESTS OF GREY WOLF SHAREHOLDERS MAY NOT BE REPRESENTED IN THE OFFER
BECAUSE SEVERAL DIRECTORS AND EXECUTIVE OFFICERS OF ABRAXAS AND GREY WOLF HAVE
INTERESTS IN THE OFFER WHICH MAY BE DIFFERENT FROM THE INTERESTS OF OTHER GREY
WOLF SHAREHOLDERS. Some of the directors and executive officers of Abraxas and
Grey Wolf are parties to agreements, own interests in or participate in other
arrangements that give them interests in the offer that may be different from
your interests as a shareholder of Grey Wolf. Grey Wolf shareholders should
consider these interests before depositing shares in the offer. The interests of
such persons are described under "Description of the Offer--Interest of Certain
Persons in the Offer" beginning on page 79.
THE OFFER COULD HAVE AN ADVERSE EFFECT ON THE MARKET FOR AND LIQUIDITY OF
THE GREY WOLF COMMON SHARES. The purchase of any shares by AcquisitionCo
pursuant to the offer will reduce the number of Grey Wolf common shares that
might otherwise trade publicly, as well as the number of shareholders, and,
depending on the number of shareholders depositing and the number of shares
purchased under the offer, the offer could adversely affect the liquidity and
market value of the remaining shares held by the public. After the purchase of
Grey Wolf common shares under the offer, it may be possible for AcquisitionCo
and Abraxas to take steps toward the elimination of any applicable public
reporting requirements under applicable securities legislation in any province
in which it has an insignificant number of security holders.
The rules and regulations of the TSE establish certain criteria which, if
not met, could lead to the delisting of the shares from the TSE. Among such
criteria are the number of shareholders, the number of shares publicly held and
the aggregate market value of the shares publicly held. Depending on the number
of shares purchased pursuant to the offer, it is possible that the Grey Wolf
common shares would fail to meet the criteria for continued listing on the TSE.
If this were to happen, the shares could be delisted and this could, in turn,
adversely affect the market or result in a lack of an established market for
such shares. Abraxas and AcquisitionCo intend to cause Grey Wolf to apply to
delist the Grey Wolf common shares from the TSE as soon as practicable after the
completion of the offer and any Compulsory Acquisition or Subsequent Acquisition
Transaction.
ABRAXAS AND ITS AFFILIATES WILL BE ABLE TO EXERT SIGNIFICANT CONTROL OVER
GREY WOLF. Abraxas and its wholly-owned subsidiary, Canadian Abraxas, currently
own approximately 48.3% of the outstanding Grey Wolf common shares. In addition,
Abraxas directors and officers own approximately 25.9% of the Grey Wolf common
shares not already owned by Abraxas and Canadian Abraxas. All of these directors
and executive officers are expected to exchange their Grey Wolf common shares
for shares of Abraxas
15
common stock pursuant to the offer. At the conclusion of the offer, Abraxas and
AcquisitionCo will have the ability to elect the entire board of directors of
Grey Wolf, control Grey Wolf and direct its policies.
THERE MAY BE POTENTIAL ADVERSE TAX IMPACT FOR U.S. GREY WOLF SHAREHOLDERS.
Abraxas expects to receive an opinion from Cox & Smith Incorporated, that it is
more likely than not that Grey Wolf shareholders that are United States persons
should not be required to recognize taxable gain or loss on the exchange of Grey
Wolf common shares for Abraxas common stock. However, this opinion is subject to
certain conditions, which, if not satisfied, could result in the offer and
Acquisition Transactions not qualifying as a reorganization for U.S. federal
income tax purposes. If the offer and Acquisition Transactions do not qualify as
a reorganization for U.S. federal income tax purposes, Grey Wolf shareholders
subject to U.S. federal income tax laws may be required to recognize gain or
loss on their exchange of Grey Wolf common shares for shares of Abraxas common
stock. See "United States and Canadian Income Tax Consequences--Material United
States Federal Income Tax Consequences to Grey Wolf Shareholders" beginning on
page 96.
THE EXCHANGE OF GREY WOLF COMMON SHARES BY A GREY WOLF SHAREHOLDER WHO IS A
RESIDENT OF CANADA FOR SHARES OF ABRAXAS COMMON STOCK WILL BE A TAXABLE EVENT
UNDER THE CANADIAN TAX ACT. The Canadian resident shareholder will realize a
capital gain (or capital loss) equal to the amount by which the fair market
value at the time of the exchange of the Abraxas common stock received on the
exchange plus any cash received in lieu of a fractional share of Abraxas common
stock received on the exchange exceed (or are less than) the sum of the Canadian
resident's "adjusted cost base" of those Grey Wolf common shares determined
immediately before the exchange plus any reasonable costs of disposition. See
"United States and Canadian Income Tax Consequences--Canadian Federal Income Tax
Considerations" beginning on page 92.
RISKS RELATED TO THE OFFER FOR ABRAXAS STOCKHOLDERS
GREY WOLF SHAREHOLDERS WILL RECEIVE 0.6 OF A SHARE OF ABRAXAS COMMON STOCK
FOR EACH COMMON SHARE OF GREY WOLF, REGARDLESS OF ANY CHANGES IN THE MARKET
VALUE OF ABRAXAS COMMON STOCK OR GREY WOLF COMMON SHARES. At the closing of the
offer, each common share of Grey Wolf deposited will be exchanged for 0.6 of a
share of Abraxas common stock. This exchange ratio will not be adjusted for
changes in the market prices of Abraxas common stock or Grey Wolf common shares.
THE INTERESTS OF ABRAXAS STOCKHOLDERS MAY NOT BE REPRESENTED IN THE OFFER
BECAUSE SEVERAL DIRECTORS AND EXECUTIVE OFFICERS OF ABRAXAS AND GREY WOLF HAVE
INTERESTS IN THE OFFER WHICH MAY BE DIFFERENT FROM THE INTERESTS OF OTHER
STOCKHOLDERS. Some of the directors and executive officers of Abraxas and Grey
Wolf are parties to agreements, own interests or participate in other
arrangements that give them interests in the offer that may be different from
your interests as a stockholder of Abraxas. Abraxas stockholders should consider
these interests before voting on the offer and the share issuance. The interests
of such persons are described under "Description of the Offer--Interests of
Certain Persons in the Offer" beginning on page 79.
ABRAXAS WILL INCUR SIGNIFICANT CHARGES AND EXPENSES AS A RESULT OF THE OFFER
WHICH WILL NOT BE AVAILABLE TO FUND ITS OPERATIONS. Abraxas expects to incur
approximately $1.25 million of costs related to the offer. These expenses will
include investment banking fees, legal, accounting and reserve engineering fees,
printing costs and other related charges. Abraxas may also incur unanticipated
costs in the offer.
ABRAXAS MAY NOT REALIZE THE BENEFITS EXPECTED FROM THE OFFER. To be
successful after the offer, Abraxas will need to integrate the operations of
Grey Wolf with those of Abraxas. It will require substantial management
attention and could detract from attention to day-to-day operations. While
Abraxas expects to realize certain cost savings from the successful completion
of the offer, Abraxas may not realize these cost savings.
16
SHARES ELIGIBLE FOR FUTURE SALE MAY DEPRESS ABRAXAS' STOCK PRICE. At July
24, 2001, Abraxas had 25,988,832 shares of common stock outstanding of which
approximately 2,693,808 shares were held by affiliates, 4,257,024 shares were
subject to outstanding options granted under certain stock option plans (of
which 1,752,688 shares were vested at July 24, 2001) and 950,000 shares were
issuable upon exercise of warrants.
If all of the outstanding common shares of Grey Wolf are exchanged for
shares of Abraxas common stock, a total of 29,957,320 shares of Abraxas common
stock will be outstanding, of which approximately 7,488,615 will be held by
affiliates of Abraxas and Grey Wolf. In addition, Grey Wolf has options to
purchase 867,920 common shares outstanding which will become exercisable for
shares of Abraxas common stock if the offer is approved by Abraxas stockholders
and the offer and any Compulsory Acquisition or Subsequent Acquisition
Transaction are consummated. In addition, Abraxas has offered an aggregate of
110,891 options to purchase Abraxas common stock to Grey Wolf option holders who
waive their right to accelerated vesting of their Grey Wolf options upon the
closing of the offer, subject to the approval at the Abraxas Annual Meeting of
an increase in the number of shares of common stock reserved for issuance under
the 1994 LTIP. See "Proposal 3" beginning on page 122. If such an increase is
approved, a total of 3,450,000 additional shares of Abraxas common stock will be
reserved for issuance under the 1994 LTIP, of which 2,449,309 will initially be
reserved for issuance pursuant to outstanding options (of which 489,861 were
vested as of July 24, 2001).
All of the shares of Abraxas common stock held by affiliates are restricted
or control securities under Rule 144 promulgated under the United States
Securities Act. The shares of the common stock issuable upon exercise of the
stock options have been or will be registered under the United States 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 United States Securities Act or pursuant to a
registration statement could have a material adverse effect on the price of the
common stock and could impair Abraxas' ability to raise additional capital
through the sale of equity securities.
RISKS RELATED TO ABRAXAS' BUSINESS
ABRAXAS' DEBT LEVELS AND DEBT COVENANTS MAY LIMIT ITS ABILITY TO PURSUE
BUSINESS OPPORTUNITIES AND TO OBTAIN ADDITIONAL FINANCING. Abraxas has
substantial indebtedness and debt service requirements. As of March 31, 2001,
Abraxas' total debt, excluding current maturities, was $266.8 million and its
stockholders' deficit was $33.0 million. Abraxas may incur additional
indebtedness in the future in connection with acquiring, developing and
exploiting producing properties, although its ability to incur additional
indebtedness is substantially limited by the terms of the 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 of Abraxas and the notes thereto included in the Abraxas
Annual Report on Form 10-K for the year ended December 31, 2000 and Abraxas'
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, incorporated
by reference in this document.
Abraxas' high level of debt affects its operations in several important
ways, including:
- A substantial amount of Abraxas' cash flow from operations will be used to
pay interest on the first lien notes, any outstanding old notes and the
second lien notes;
- The covenants contained in the first lien notes indenture and the second
lien notes indenture will limit Abraxas' ability to borrow additional
funds or to dispose of assets and may affect its flexibility in planning
for, and reacting to, changes in its business, including possibly limiting
acquisition activities;
17
- Abraxas' debt level may impair its 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
- 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.
Abraxas' high level of debt increases the risk that Abraxas may default on
its debt obligations. Abraxas' ability to meet its debt obligations and to
reduce its level of debt depends on its future performance which, in turn,
depends on general economic conditions and financial, business and other
factors, many of which are beyond Abraxas' control.
ABRAXAS HAS SUBSTANTIAL CAPITAL REQUIREMENTS. Abraxas makes 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, Abraxas has funded its operations primarily through cash flow
from operations and borrowings under its bank credit facilities and other
sources. Due to severely depressed crude oil and natural gas prices in 1999,
Abraxas' cash flow from operations was substantially reduced. Abraxas met its
liquidity needs in 1999 through the sale of the first lien notes, the sale of a
production payment to a third party and the sale of certain non-core properties
together with cash flow from operations. In 2000, Abraxas met its liquidity
needs through cash flow from operations, the sale of additional non-core
properties and further installments on the production payment. Abraxas is
examining certain alternative sources of long term capital including:
- restructuring, refinancing or recapitalizing Abraxas' current
indebtedness;
- selling equity securities; and
- selling additional non-core properties.
Abraxas continued its past practice of selling non-core assets at appropriate
prices in May 2001. A Canadian oil and gas property was sold for $9.8 million.
Additional sales of non-core assets may continue.
The availability of these sources of capital depends upon a number of
factors, many of which are beyond Abraxas' control, such as general economic and
financial market conditions and crude oil and natural gas prices.
Abraxas' 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 1999
Abraxas exchange offer relating to the old notes.
The first lien notes indenture and the second lien notes indenture restrict,
among other things, Abraxas' ability to:
- incur additional indebtedness;
- incur liens;
- pay dividends or make certain other restricted payments;
- consummate certain asset sales;
- enter into certain transactions with affiliates;
- merge or consolidate with any other person; or
18
- sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of Abraxas' assets.
Additionally, Abraxas' ability to raise funds through additional
indebtedness will be limited because substantially all of its 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, Abraxas' indentures also place restrictions on the
use of proceeds from asset sales.
Abraxas believes that its 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 will provide Abraxas with
sufficient capital for the next 12 months. However, if Abraxas' production or
commodity prices decrease or if its drilling activities cost more than Abraxas
anticipates, Abraxas may not be able to execute its business plan without
additional capital.
CRUDE OIL AND NATURAL GAS PRICES AND THEIR VOLATILITY COULD ADVERSELY AFFECT
ABRAXAS' REVENUE, CASH FLOWS AND PROFITABILITY. Abraxas' 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 Abraxas more than
crude oil prices since most of its production and reserves are natural gas.
Prices also affect the amount of cash flow available for capital expenditures
and Abraxas' ability to borrow money or raise additional capital. For example,
in 1999 Abraxas reduced its capital expenditures budget because of lower crude
oil and natural gas prices. In addition, Abraxas may have ceiling test
writedowns when prices decline. Lower prices may also reduce the amount of crude
oil and natural gas that Abraxas can produce economically. Crude oil and natural
gas prices have decreased since December 31, 2000. For more information on the
effects of these price decreases, you should read the information under
"--Estimates of Abraxas' proved reserves and future net revenues are uncertain
and inherently imprecise" and "Information About Abraxas, AcquisitionCo and Grey
Wolf--Abraxas--Recent Developments."
Abraxas cannot predict future crude oil and natural gas prices. Factors that
can cause price fluctuations include:
- changes in supply and demand for crude oil and natural gas;
- weather conditions;
- the price and availability of alternative fuels;
- political and economic conditions in oil producing countries, especially
those in the Mideast; and
- overall economic conditions.
HEDGING TRANSACTIONS MAY LIMIT ABRAXAS' POTENTIAL GAINS. Abraxas enters into
hedge agreements and other financial arrangements at various times to attempt to
minimize the effect of crude oil and natural gas price fluctuations. Abraxas
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 Abraxas' 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 Abraxas
to risks of financial loss under certain circumstances, such as:
- production is less than expected; or
- price differences between delivery points for Abraxas' production and
those in its hedging agreements increase.
19
In 2000, Abraxas experienced hedging losses of $20.2 million. At year end
2000, the fair value of future hedges was a liability of approximately $38
million. On January 1, 2001, in accordance with the transition provisions of
SFAS 133, Abraxas recorded $31 million, net of tax, in Other Comprehensive Loss
representing the cumulative effect of an accounting change to recognize the fair
value of cash flow derivatives. Abraxas recorded cash flow hedge derivative
liabilities of $38 million on that date and a deferred tax asset of $7 million.
During the first quarter of 2001, losses before tax of approximately $7 million
were transferred from Other Comprehensive Income/Loss to revenue and the fair
value of outstanding liabilities decreased by approximately $5 million. For the
three months ended March 31, 2001, the ineffective portion of the cash flow
hedges were not material. As of March 31, 2001, $21 million of deferred net
losses on derivative instruments were recorded in Other Comprehensive
Income/Loss, of which $14 million is expected to be reclassified to earnings
during the next twelve-month period. To the extent that these hedge agreements
require Abraxas to pay the counterparty, Abraxas' revenue will be reduced. As a
result of commodity price decreases since December 31, 2000, the hedging losses
recorded on January 1, 2001 by Abraxas could be reduced. For more information on
the effects of these price decreases, you should read the information under
"--Estimates of Abraxas' proved reserves and future net revenues are uncertain
and inherently imprecise" and "Information About Abraxas, AcquisitionCo and Grey
Wolf--Abraxas--Recent Developments." You should read the discussion under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources--Hedging Activities" in the
Abraxas Form 10-K for the year ended December 31, 2000, and in the Abraxas Form
10-Q for the quarter ended March 31, 2001, incorporated by reference in this
document for more information regarding Abraxas' hedging activities.
LOWER CRUDE OIL AND NATURAL GAS PRICES INCREASE THE RISK OF CEILING
LIMITATION WRITEDOWNS. Abraxas uses the full cost method to account for its
crude oil and natural gas operations. Accordingly, Abraxas capitalizes 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, Abraxas 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 Abraxas' stockholders' equity. The risk
that Abraxas 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 Abraxas experiences
substantial downward adjustments to its estimated proved reserves or if
purchasers cancel long-term contracts for Abraxas' natural gas production. In
1999, Abraxas recorded a writedown of $19.1 million ($11.9 million after tax) as
a result of a downward adjustment to its proved reserves in Canada. In 1998,
Abraxas recorded a write down of $61 million as a result of low commodity
prices. Abraxas cannot assure you that it will not experience additional ceiling
limitation writedowns in the future. As a result of commodity price decreases
since December 31, 2000, Abraxas could have a ceiling limitation write down
during 2001. For more information on the effects of these price decreases, you
should read the information under "--Estimates of Abraxas' proved reserves and
future net revenues are uncertain and inherently imprecise" and "Information
About Abraxas, AcquisitionCo and Grey Wolf--Abraxas--Recent Developments."
ESTIMATES OF ABRAXAS' PROVED RESERVES AND FUTURE NET REVENUE ARE UNCERTAIN
AND INHERENTLY IMPRECISE. This document and Abraxas' Annual Report on Form 10-K
for the year ended December 31, 2000 contain estimates of Abraxas' 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.
20
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 document. In addition, Abraxas 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 Abraxas' control.
You should not assume that the present value of future net revenues referred
to in this document and Abraxas' annual report is the current market value of
its 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 Abraxas or the crude oil and natural gas industry in general
will affect the accuracy of the 10% discount factor.
The estimates of Abraxas' 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. At July 1, 2001, prices on the NYMEX were $25.95 per Bbl of
crude oil and $3.117 per Mcf of natural gas, and in June 2001, Abraxas received
an average of approximately $16.50 per Bbl of NGLs. As a result of these price
decreases, the estimated quantity and value of Abraxas' and Grey Wolf's reserves
could be significantly reduced at June 30, 2001. In addition, as a result of
these price decreases, Abraxas and Grey Wolf could experience increased
depreciation, depletion and amortization expense during the remainder of 2001.
For more information on the effects of these price decreases, you should read
the information under "Information about Abraxas, AcqusitionCo and Grey
Wolf--Abraxas--Recent Developments." It is also assumed that Abraxas 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 Abraxas' properties. Any significant variance in actual results from
these assumptions could also materially affect the estimated quantity and value
of reserves set forth herein.
ABRAXAS HAS EXPERIENCED RECURRING NET LOSSES. The following table shows the
losses Abraxas had in 1995, 1997, 1998 and 1999:
1995 1997
1998 1999
-------- --------
-------- --------
(US $ IN
MILLIONS)
Net loss applicable to common stock........................ (1.6) (6.7)
(84.0) (36.7)
While Abraxas had net income in 2000 of $8.4 million, if the significant
gain on the sale of an interest in a partnership were excluded, Abraxas would
have experienced a net loss for the year of $(25.5) million. Abraxas cannot
assure you that it will remain profitable in the future.
21
You should read the discussions in Abraxas' Annual Report on Form 10-K for
the year ended December 31, 2000 and its Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001 incorporated by reference in this document, for
more information regarding these losses.
ABRAXAS' 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. Abraxas' proved reserves will decline as reserves are produced unless
Abraxas acquires additional properties containing proved reserves, conducts
successful exploration and development activities or, through engineering
studies, identifies additional behind-pipe zones or secondary recovery reserves.
Abraxas' future crude oil and natural gas production is therefore highly
dependent upon its level of success in acquiring or finding additional reserves.
Abraxas cannot assure you that its exploration and development activities will
result in increases in reserves. Abraxas' operations may be curtailed, delayed
or cancelled if Abraxas lacks 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.
Abraxas' 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. Abraxas cannot assure you that such divestitures will
continue or that Abraxas 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, Abraxas' ability to obtain additional financing in the
future for acquisitions and capital expenditures will be limited.
THE MARKETABILITY OF ABRAXAS' PRODUCTION DEPENDS LARGELY UPON THE
AVAILABILITY, PROXIMITY AND CAPACITY OF NATURAL GAS GATHERING SYSTEMS, PIPELINES
AND PROCESSING FACILITIES. The marketability of Abraxas' production depends in
part upon processing facilities. Transportation space on 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. Abraxas' access to
transportation options can also be affected by U.S. federal and state and
Canadian federal and provincial 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 Abraxas' control. If
market factors dramatically change, the financial impact on Abraxas could be
substantial and adversely affect its ability to produce and market crude oil and
natural gas.
ABRAXAS' CANADIAN OPERATIONS ARE SUBJECT TO THE RISKS OF CURRENCY
FLUCTUATIONS AND IN SOME INSTANCES ECONOMIC AND POLITICAL DEVELOPMENTS. Abraxas
has significant 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. Abraxas is also required to recognize foreign
currency translation gains or losses related to the debt issued by its Canadian
subsidiary because the debt is denominated in U.S. dollars and the functional
currency of such subsidiary is the Canadian dollar. Abraxas' 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.
ABRAXAS DEPENDS ON ITS KEY PERSONNEL. Abraxas depends to a large extent on
Robert L.G. Watson, its Chairman of the Board, President and Chief Executive
Officer, for Abraxas' management and business and financial contacts. The
unavailability of Mr. Watson would have a materially adverse effect on Abraxas'
business. Mr. Watson has a five-year employment contract with Abraxas which
provides that he can be terminated for cause only. Abraxas' success is also
dependent upon its ability to employ and
22
retain skilled technical personnel. While Abraxas has not experienced
difficulties in employing or retaining such personnel, its failure to do so in
the future could adversely affect its business.
USE OF ABRAXAS' NET OPERATING LOSS CARRYFORWARDS MAY BE LIMITED. At December
31, 2000, Abraxas 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, Abraxas had approximately $11,400,000 of non-capital 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 of the Internal Revenue Code of 1986, as amended, 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, Abraxas 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. 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 Abraxas'
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, Abraxas has established a
valuation allowance of $36,134,000 and $34,736,000 for deferred tax assets at
December 31, 1999 and 2000, respectively.
RISKS RELATED TO ABRAXAS' COMMON STOCK
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.
LACK OF DIVIDENDS ON ABRAXAS COMMON STOCK. Abraxas has never paid a cash
dividend on its common stock and the terms of the first lien notes indenture and
the second lien notes indenture limit the ability of Abraxas to pay dividends on
its common stock.
23
THE PRICE OF ABRAXAS' COMMON STOCK HAS BEEN VOLATILE AND COULD CONTINUE TO
FLUCTUATE SUBSTANTIALLY. Abraxas' common stock is traded on the AMEX. The market
price of Abraxas' common stock has been volatile and could fluctuate
substantially based on a variety of factors, including the following:
- fluctuations in commodity prices;
- variations in results of operations;
- legislative or regulatory changes;
- general trends in the industry;
- market conditions; and
- analysts' estimates and other events in the crude oil and natural gas
industry.
RISKS RELATED TO ABRAXAS' INDUSTRY
ABRAXAS' 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
Abraxas' control. These risks include the following:
- that no commercially productive crude oil or natural gas reservoirs will
be found;
- that crude oil and natural gas drilling and production activities may be
shortened, delayed or canceled; and
- that Abraxas' ability to develop, produce and market its 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, Abraxas has had difficulty securing drilling equipment in
certain of its core areas. Abraxas cannot assure you that the new wells it
drills will be productive or that Abraxas will recover all or any portion of its
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,
Abraxas' properties may be susceptible to hydrocarbon draining from production
by other operations on adjacent properties.
Abraxas' 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, Abraxas 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, Abraxas maintains insurance against some, but not all, of the risks
described above. Abraxas cannot assure you that its insurance will be adequate
to cover losses or liabilities. Also, Abraxas cannot predict the continued
availability of insurance at premium levels that justify its purchase.
ABRAXAS OPERATES IN A HIGHLY COMPETITIVE INDUSTRY WHICH MAY ADVERSELY AFFECT
ITS OPERATIONS. Abraxas operates 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
24
data necessary to identify, investigate and purchase such properties, and the
financial resources necessary to acquire and develop such properties. Abraxas
competes 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 Abraxas.
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. Abraxas must compete for such resources
with both major crude oil and natural gas companies and independent operators.
Although Abraxas believes its current operating and financial resources are
adequate to preclude any significant disruption of its operations in the
immediate future, it cannot assure you that such materials and resources will be
available to it.
Abraxas faces significant competition for obtaining additional natural gas
supplies for gathering and processing operations, for marketing NGLs, residue
gas, helium, condensate and sulfur, and for transporting natural gas and
liquids. Abraxas' 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
Abraxas. Smaller local distributors may enjoy a marketing advantage in their
immediate service areas.
Abraxas competes against other companies in its natural gas processing
business both for supplies of natural gas and for customers to which Abraxas
sells its products. Competition for natural gas supplies is based primarily on
location of natural gas gathering facilities and natural gas gathering plants,
operating efficiency and reliability and ability to obtain a satisfactory price
for products recovered. Competition for customers is based primarily on price
and delivery capabilities.
ABRAXAS' 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 ITS 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, Abraxas'
expenditures related to complying with these laws and for remediation of
existing environmental contamination have not been significant. Abraxas believes
that it is in substantial compliance with all applicable laws and regulations.
However, the requirements of such laws and regulations are frequently changed.
Abraxas cannot predict the ultimate cost of compliance with these requirements
or their effect on its operations.
25
THE ABRAXAS ANNUAL MEETING
DATE, TIME, AND PLACE OF ANNUAL MEETING
The annual meeting will be held at The Petroleum Club, 8620 North New
Braunfels, San Antonio, Texas 78217, on August 30, 2001, starting at 9:00 a.m.
(local time).
PURPOSES OF THE ANNUAL MEETING
At the annual meeting, Abraxas stockholders will be asked to vote upon the
following matters:
Proposal 1. CONSUMMATION OF EXCHANGE OFFER AND ISSUANCE OF
SHARES. Abraxas Acquisition Corporation, a newly
incorporated, wholly-owned Canadian subsidiary of
Abraxas,
has offered to acquire all of the outstanding common
shares
of Abraxas' 48.3%-owned subsidiary, Grey Wolf
Exploration Inc., which are not currently owned by
Abraxas
or any of its subsidiaries. Under the offer, Grey Wolf
shareholders have an opportunity to exchange each Grey
Wolf
common share for 0.6 of a share of Abraxas common stock.
If
the transaction is completed, up to 3,968,488 shares of
Abraxas common stock will be issued to the shareholders
of
Grey Wolf in exchange for all of the outstanding common
shares of Grey Wolf not owned by Abraxas or its
subsidiaries. Abraxas stockholders are being asked to
approve the consummation of the offer and the issuance
of
shares of Abraxas common stock in connection with the
offer
and any compulsory acquisition or subsequent acquisition
transaction completed under Alberta law in order to
acquire
Grey Wolf common shares not acquired in the offer.
Proposal 2. ELECTION OF DIRECTORS. Abraxas stockholders will have
the
opportunity to elect two members to the Abraxas board of
directors for a term of three years. The following two
persons are Abraxas' nominees for election:
Robert L.G. Watson
James C. Phelps
You can read more about Proposal 2 beginning on page
106.
Proposal 3. AMENDMENT OF THE 1994 LONG TERM INCENTIVE PLAN. Abraxas
stockholders are being asked to approve an amendment to
the
Abraxas Petroleum Corporation 1994 Long Term Incentive
Plan
to increase the number of shares of Abraxas common stock
reserved for issuance under the plan to 5,000,000 shares
if
Proposal 1 is approved and 4,350,000 shares if Proposal
1 is
not approved. Additional shares are required if Proposal
1
is approved in order to accommodate the grant of Abraxas
options to Grey Wolf option holders and additional
shares
are required if Proposal 1 is not approved because
Abraxas
intends to terminate its 2000 Long Term Incentive Plan
and
reissue the outstanding options under the 1994 Plan.
You can read more about Proposal 3 beginning on page
122.
Proposal 4. APPOINTMENT OF INDEPENDENT AUDITORS. Abraxas
stockholders
are being asked to ratify the selection of Deloitte &
Touche
LLP as Abraxas' independent auditors for the year ending
December 31, 2001.
You can read more about Proposal 4 beginning on page
126.
Proposal 5. OTHER BUSINESS. If other business is properly raised at
the
meeting or if Abraxas needs to adjourn the meeting,
Abraxas
stockholders will vote on these matters too.
THE ABRAXAS BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE CONSUMMATION OF
THE OFFER, ANY COMPULSORY ACQUISITION OR SUBSEQUENT ACQUISITION TRANSACTION AND
THE ISSUANCE OF ABRAXAS COMMON
26
STOCK TO THE GREY WOLF SHAREHOLDERS AND RECOMMENDS THAT ABRAXAS STOCKHOLDERS
VOTE FOR APPROVAL AND ADOPTION OF PROPOSAL 1. IN ADDITION, THE ABRAXAS BOARD OF
DIRECTORS RECOMMENDS THAT ABRAXAS STOCKHOLDERS VOTE FOR THE NOMINEES FOR
DIRECTOR, THE AMENDMENT TO THE ABRAXAS 1994 LONG TERM INCENTIVE PLAN AND THE
RATIFICATION OF THE APPOINTMENT OF ABRAXAS' INDEPENDENT AUDITORS.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
The Abraxas board of directors has fixed the close of business on July 16,
2001 as the record date for Abraxas stockholders entitled to notice of and to
vote at the annual meeting. Holders of Abraxas' common stock are entitled to
vote at the annual meeting. As of the record date, there were 25,988,832 shares
of Abraxas common stock outstanding, which were held by approximately 1,537
holders of record. Stockholders are entitled to one vote for each share of
Abraxas common stock held as of the record date.
The holders of a majority of the outstanding shares of Abraxas common stock
issued and entitled to vote at the annual meeting must be present in person or
by proxy to establish a quorum for business to be conducted at the annual
meeting. Abstentions and "non-votes" are treated as shares that are present and
entitled to vote for purposes of determining the presence of a quorum.
"Non-votes" occur when a proxy:
- is returned by a broker or other stockholder who does not have authority
to vote;
- does not give authority to a proxy to vote; or
- withholds authority to vote on one or more proposals.
VOTES REQUIRED
The votes required for each of the proposals is as follows:
OFFER AND ISSUANCE OF SHARES. The proposal to approve the consummation of
the offer and the issuance of shares in the offer and any Compulsory Acquisition
and Subsequent Acquisition Transaction must receive the affirmative vote of the
holders of a majority of the shares of Abraxas common stock represented and
voting at the meeting. If you are present in person or represented by proxy at
the meeting and abstain from voting or if you do not instruct your broker on how
to vote, it has no effect on the proposal because those shares for which you
abstain or for which brokers are not able to vote will not be considered voting
at the annual meeting.
ELECTION OF DIRECTORS. The two nominees for director who receive the most
votes will be elected. So, if you are an Abraxas stockholder and you do not vote
for a particular nominee or you indicate "withhold authority to vote" for a
particular nominee on your proxy card, your abstention will have no effect on
the election of directors.
AMENDMENT TO 1994 LONG TERM INCENTIVE PLAN. The proposal to approve the
amendment to the 1994 Long Term Incentive Plan must receive the affirmative vote
of the holders of a majority of the shares of Abraxas common stock represented
and voting at the meeting. If you are an Abraxas stockholder and you are present
in person or represented by proxy at the meeting and abstain from voting or if
you do not instruct your broker on how to vote, it will have no effect on the
proposal because those shares for which you abstain or for which brokers are not
able to vote will not be considered voting at the annual meeting and for
purposes of approving this proposal.
APPOINTMENT OF INDEPENDENT AUDITORS. The proposal to ratify the selection
of Abraxas' independent auditors must receive the affirmative vote of the
holders of a majority of the shares of Abraxas common stock represented and
voting at the meeting. If you are an Abraxas stockholder and you are present in
person or represented by proxy at the meeting and abstain from voting or if you
do not
27
instruct your broker on how to vote, it has no effect on the proposal because
those shares for which you abstain or for which brokers are not able to vote
will not be considered voting at the annual meeting and for purposes of
approving this proposal.
VOTING OF PROXIES
All valid, unrevoked proxies will be voted as directed. In the absence of
instructions to the contrary, properly executed proxies will be voted in favor
of each of the proposals listed in the notice of annual meeting and for the
election of the nominees for director set forth herein.
Votes cast in person or by proxy at the annual meeting will be tabulated at
the annual meeting.
If any matters other than those addressed on the proxy card are properly
presented for action at the annual meeting, the persons named in the proxy will
have the discretion to vote on those matters in their best judgment, unless
authorization is withheld.
HOW TO VOTE BY PROXY
Complete, sign, date and return the enclosed proxy card in the enclosed
postage-paid envelope.
THE MATTERS TO BE CONSIDERED AT THE ABRAXAS ANNUAL MEETING ARE OF GREAT
IMPORTANCE TO ABRAXAS STOCKHOLDERS. ABRAXAS STOCKHOLDERS ARE URGED TO READ AND
CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS DOCUMENT, AND TO COMPLETE,
DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
REVOCABILITY OF PROXIES
Any Abraxas stockholder who delivers a properly executed proxy may revoke
the proxy at any time before it is voted. Proxies may be revoked by:
- delivering a written revocation of the proxy to the Abraxas Secretary
before the annual meeting;
- signing and returning a later dated proxy to the Abraxas Secretary; or
- appearing at the annual meeting and voting in person.
Attendance at the annual meeting will not, in and of itself, constitute
revocation of a proxy. An Abraxas stockholder whose shares are held in the name
of its broker, bank or other nominee must bring a legal proxy from its broker,
bank or other nominee to the meeting in order to vote in person.
DEADLINE FOR VOTING BY PROXY
Votes cast by mail must be received prior to the annual meeting to be
counted.
SOLICITATION OF PROXIES
Proxies will be solicited by mail. Proxies may also be solicited personally,
or by telephone, fax, or other means by the directors, officers and employees of
Abraxas. Directors, officers and employees soliciting proxies will receive no
annual or extra compensation, but may be reimbursed for related out-of-pocket
expenses. In addition to solicitation by mail, Abraxas will make arrangements
with brokerage houses and other custodians, nominees and fiduciaries to send the
proxy materials to beneficial owners. Abraxas will, upon request, reimburse
these brokerage houses, custodians and other persons for their reasonable
out-of-pocket expenses in doing so. The cost of solicitation of proxies will be
paid by Abraxas.
28
DEFINITIONS
IN THIS DOCUMENT AND THE ACCOMPANYING LETTER OF ACCEPTANCE AND TRANSMITTAL
AND NOTICE OF GUARANTEED DELIVERY, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE
FOLLOWING TERMS SHALL HAVE THE MEANINGS SET FORTH BELOW:
"ABRAXAS INDEPENDENT COMMITTEE" means the independent committee of the
Abraxas board of directors consisting of Craig S. Bartlett, Jr., formed for
the purposes of, among other things, negotiating the terms of a potential
acquisition of Grey Wolf common shares and all matters incidental to
performing that duty.
"ACQUISITION TRANSACTION" means a Compulsory Acquisition or a Subsequent
Acquisition Transaction.
"AFFILIATE" has the meaning ascribed thereto in the SECURITIES ACT (Alberta)
as constituted on the date hereof.
"AMEX" means the American Stock Exchange.
"ANNEX" means an Annex attached to this document, each of which is deemed to
form part of this document.
"BUSINESS DAY" means any day, other than a Saturday, Sunday or a statutory
holiday, on which the commercial banks in Calgary, Alberta and San Antonio,
Texas are open for business during normal banking hours.
"CANADIAN DOLLAR EQUIVALENT" means the product obtained by multiplying the
relevant US dollar amount by the noon spot exchange rate on such date for US
dollars expressed in Canadian dollars as reported by the Bank of Canada.
"CANADIAN GAAP" means generally accepted accounting principles in Canada.
"CANADIAN TAX ACT" means the INCOME TAX ACT (Canada), as amended.
"COMPULSORY ACQUISITION" has the meaning set forth in the Circular, under
the heading "Description of the Offer--Possible Acquisition of Grey Wolf
Common Shares Not Deposited Under the Offer--Compulsory Acquisition and
Dissenters' Rights in a Compulsory Acquisition."
"CVMQ" means the Commission des valeurs mobilieres du Quebec.
"CVMQ POLICY Q-27" means Policy No. Q-27 of the CVMQ, together with the
notice of the CVMQ dated December 14, 1999, in which the CVMQ expressed its
intention to conform Policy Q-27 to OSC Rule 61-501.
"DEALER MANAGERS" means CIBC World Markets Corp. and CIBC World
Markets Inc.
"DEPOSITARY" means Valiant Corporate Trust Company, 510, 550-6th Avenue SW.,
Calgary, Alberta, Canada T2P 0S2.
"ELIGIBLE INSTITUTION" means a Canadian chartered bank, a trust company in
Canada, a commercial bank or trust company having an office, branch or
agency in Canada, a firm that is a member of a recognized stock exchange in
Canada, a member of the Investment Dealers Association of Canada, a national
securities exchange in the United States of America, a member firm of the
Securities Transfer Agent Medallion (Stamp) Program or the National
Association of Securities Dealers, Inc.
"EXCHANGE ACT" means the United States Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
29
"EXPIRY TIME" means 5:00 p.m. (Calgary Time) on September 5, 2001, or such
later time and date as may be fixed by AcquisitionCo from time to time
pursuant to Section 4 of the formal Offer to Purchase, "Extensions and
Variations of the Offer" beginning on page 33.
"GOING PRIVATE TRANSACTION" has the meaning given to such term in OSC Rule
61-501 and CVMQ Policy Q-27.
"GREY WOLF SPECIAL COMMITTEE" means the special committee of the Grey Wolf
board of directors consisting of Donald B. Copeland and John F. Curran,
formed for the purposes of, among other things, reviewing the offer and
making recommendations to the Grey Wolf board of directors in light thereof.
"IRS" means the United States Internal Revenue Service.
"NOON SPOT RATE" has the meaning ascribed to such term on the cover of this
document.
"OSA" means the SECURITIES ACT (Ontario), as amended, and the rules and
regulations made thereunder.
"OSC" means the Ontario Securities Commission.
"OSC RULE 61-501" means OSC Rule 61-501 entitled "Insider Bids, Going
Private Transactions and Related Party Transactions."
"SEC" means the United States Securities and Exchange Commission.
"SUBSEQUENT ACQUISITION TRANSACTION" has the meaning set forth in the
Circular under the heading "Description of the Offer--Possible Acquisition
of Grey Wolf Common Shares Not Deposited Under the Offer--Subsequent
Acquisition Transaction and Dissenters' Rights in a Subsequent Acquisition
Transaction."
"TSE" means The Toronto Stock Exchange.
"U.S. CODE" means the United States Internal Revenue Code of 1986, as
amended.
"U.S. GAAP" means generally accepted accounting principles in the United
States.
"U.S. SECURITIES ACT" means the United States Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
"VALUATION" means the formal valuation opinion of Raymond James &
Associates, Inc. dated May 29, 2001 as summarized in this document under the
heading "Description of the Offer--Valuation of Raymond James and Prior
Valuations" and as attached as Annex C.
30
OFFER TO PURCHASE
AUGUST 1, 2001
TO: HOLDERS OF GREY WOLF COMMON SHARES
THE ACCOMPANYING CIRCULAR CONTAINS IMPORTANT INFORMATION AND SHOULD BE READ
CAREFULLY BEFORE MAKING A DECISION WITH RESPECT TO THE OFFER. THIS OFFER TO
PURCHASE AND THE CIRCULAR WHICH IS INCORPORATED INTO AND FORMS PART OF THIS
OFFER TO PURCHASE CONSTITUTES THE TAKE-OVER BID CIRCULAR REQUIRED UNDER CANADIAN
PROVINCIAL SECURITIES LEGISLATION AND IS A PROSPECTUS FOR PURPOSES OF UNITED
STATES FEDERAL SECURITIES LAWS.
1. THE OFFER
Subject to the terms and conditions set forth in Section 5 below, the
attached Take-Over Bid Circular, the accompanying Letter of Acceptance and
Transmittal and the Notice of Guaranteed Delivery, AcquisitionCo hereby offers
to purchase all of the issued and outstanding Grey Wolf common shares, including
common shares which may become outstanding on the exercise of outstanding Grey
Wolf options prior to the Expiry Time, which are not currently owned by Abraxas
or its subsidiaries. Any exercise of Grey Wolf options must be made sufficiently
in advance of the Expiry Time to assure the holders of Grey Wolf options that
they will have sufficient time prior to the Expiry Time to obtain certificates
representing Grey Wolf common shares for deposit under the offer or sufficient
time to comply with the procedures referred to in Section 3 of this Offer to
Purchase, "Procedure for Guaranteed Delivery."
The offer is for the purchase of each outstanding Grey Wolf common share in
exchange for 0.6 of a share of Abraxas common stock. According to Grey Wolf's
shareholder list, as of July 24, 2001, there were 12,804,628 common shares
outstanding. Grey Wolf has outstanding options entitling holders to acquire
867,920 common shares at exercise prices ranging from C$1.15 to C$4.80. The
offer is made only for Grey Wolf common shares and is not made for any
securities convertible into or exercisable for Grey Wolf common shares.
Fractional shares of Abraxas common stock will not be issued. Instead of any
fractional share of Abraxas common stock, Grey Wolf shareholders will receive,
at the option of AcquisitionCo, either a cash payment or a whole share of
Abraxas common stock. For the purposes of determining the amount of any such
cash payment, the Grey Wolf common shares deposited by a holder in acceptance of
the offer will be aggregated. The amount of cash, if any, to be paid by
AcquisitionCo in lieu of a fractional share will be an amount equal to the
relevant fraction multiplied by the average closing price of a share of Abraxas
common stock on the AMEX for the ten trading days ending immediately prior to
the closing of the offer (the "Ten Day Average").
The offer will be open for acceptance until the Expiry Time, unless
withdrawn or extended at AcquisitionCo's sole discretion.
Depositing Grey Wolf shareholders will not be obligated to pay brokerage
fees or commissions if they accept the offer by depositing their Grey Wolf
common shares directly with the Depositary or if they use the services of the
applicable Dealer Manager or a member of the Soliciting Dealer Group in Canada
to accept the offers.
Holders of Grey Wolf common shares are urged to consult their own financial
and tax advisors and make their own decisions whether to deposit Grey Wolf
common shares pursuant to the offer.
31
2. TIME AND MANNER FOR ACCEPTANCE
The offer will expire, unless withdrawn or extended at the sole discretion
of AcquisitionCo, at the Expiry Time.
The offer may be accepted by holders of Grey Wolf common shares by
depositing the following documents with the Depositary at the offices specified
in the Letter of Acceptance and Transmittal at or before the Expiry Time:
(a) the certificate or certificates representing deposited Grey Wolf
common shares in respect of which the offer is being accepted;
(b) a properly completed and duly signed copy of the Letter of
Acceptance and Transmittal in the accompanying form (or a manually signed
facsimile copy), with the signature or signatures guaranteed in accordance
with the instructions set forth in the Letter of Acceptance and Transmittal;
and
(c) any other relevant document required by the instructions set forth
in the Letter of Acceptance and Transmittal.
If a Letter of Acceptance and Transmittal is executed by a person other than
the registered holder of deposited Grey Wolf common shares, then the
certificates must be endorsed, or accompanied by share transfer powers duly and
properly completed by the registered holder with the signature on the
endorsement panel or share transfer power guaranteed by an Eligible Institution.
The offer will be deemed to be accepted only if the Depositary actually has
received these documents at or before the Expiry Time. Holders of Grey Wolf
common shares who cannot comply on a timely basis with these procedures for
deposit of the requisite certificates for Grey Wolf common shares may deposit
certificates representing Grey Wolf common shares pursuant to the procedures for
guaranteed delivery described under Section 3 of this Offer to Purchase,
"Procedure for Guaranteed Delivery."
Participants in the Canadian Depositary For Securities Limited ("CDS") or
the Depositary Trust Company ("DTC") should contact the Depositary with respect
to the deposit of those Grey Wolf common shares under the offer. CDS and DTC
will be issuing instructions to these respective participants as to the method
of depositing shares under the offer.
3. PROCEDURE FOR GUARANTEED DELIVERY
If a holder wishes to accept the offer and either (i) the certificates
representing such holder's Grey Wolf common shares are not immediately available
or (ii) such holder cannot deliver the certificates and Letter of Acceptance and
Transmittal and all other required documents to the Depositary by the Expiry
Time, those Grey Wolf common shares may nevertheless be deposited pursuant to
the offer, provided that all of the following conditions are met:
(a) such deposit is made only at the principal office of the Depositary
in Calgary, Alberta by or through an Eligible Institution;
(b) a properly completed and duly executed Notice of Guaranteed Delivery
in the accompanying form (printed on blue paper) (or a manually signed
facsimile thereof) is received by the Depositary at its principal office in
Calgary, Alberta at or before the Expiry Time; and
(c) the certificate or certificates representing the deposited Grey Wolf
common shares, in proper form for transfer, together with a properly
completed and duly signed Letter of Acceptance and Transmittal (or a
manually signed facsimile copy) covering such shares with any required
signature guarantees and other documents required by such Letter of
Acceptance and Transmittal,
32
are received at the Calgary, Alberta office of the Depositary by 5:00 p.m.
Calgary time, on the third business day after the Expiry Time.
The Notice of Guaranteed Delivery may be delivered by hand, transmitted by
electronic facsimile or mailed to the Depositary only at its principal office in
Calgary, Alberta and must include a guarantee by an Eligible Institution in the
form set forth in the Notice of Guaranteed Delivery. Delivery to any office of
the Depositary other than its principal office in Calgary, Alberta does not
constitute delivery for the purpose of effecting a guaranteed delivery.
4. EXTENSIONS AND VARIATIONS OF THE OFFER
The offer will be open for acceptance at the place of deposit specified in
the Letter of Acceptance and Transmittal until, but not after, the Expiry Time,
unless withdrawn or extended.
AcquisitionCo expressly reserves the right, in its sole discretion, at any
time and from time to time while the offer is open for acceptance (or otherwise
as permitted by applicable law), to vary the terms of the offer or extend the
Expiry Time by giving notice in writing to the Depositary at its principal
office in Calgary, Alberta and by causing the Depositary to send as soon as
practicable thereafter, a copy of such notice to all shareholders in the manner
set forth under Section 13 of this Offer to Purchase, "Notice and Delivery."
Upon the giving of such notice to the Depositary, the Expiry Time shall be
deemed to be extended to the date specified in such notice or the offer shall be
deemed to be varied in the manner described in such notice, as the case may be.
AcquisitionCo will, as soon as practicable after giving any such notice to the
Depositary, publicly announce the extension or variation to the offer and cause
the Depositary to mail a copy of any such notice to holders of Grey Wolf common
shares as required by applicable securities legislation at their respective
addresses appearing in the applicable registers of Grey Wolf. In addition,
AcquisitionCo will provide a copy of such notice to the TSE. In the case of an
extension, such announcement shall be made not later than 9:00 a.m., Eastern
time, on the next business day after the previously scheduled Expiry Time. Any
notice of extension or variation will be deemed to have been given and be
effective on the day on which it is delivered or otherwise communicated to the
Depositary at its principal office in Calgary, Alberta.
An extension of the Expiry Time shall not in and of itself constitute a
waiver by AcquisitionCo of any of its rights under Section 5 of this Offer to
Purchase, "Conditions to the Offer." During any such extension or in the event
of any variation, all Grey Wolf common shares previously deposited and not taken
up or withdrawn will remain subject to the offer and, subject to applicable law,
may be accepted for purchase by AcquisitionCo on or before the Expiry Time in
accordance with the terms of the offer subject to Section 6 of this Offer to
Purchase, "Right to Withdraw Deposited Grey Wolf Common Shares."
Under applicable Canadian provincial securities legislation, if there is a
variation in the terms of an offer, the period during which securities may be
deposited pursuant to such offer shall not expire before the date which is 10
days after the notice of variation has been given to holders of shares, or such
later date as required by applicable law. If, prior to the Expiry Time,
AcquisitionCo in its sole discretion shall increase the consideration offered to
holders of Grey Wolf common shares under the offer, such increase shall be
applicable to all holders whose Grey Wolf common shares are or have been taken
up pursuant to the offer.
Notwithstanding the foregoing, the offer may not be extended by
AcquisitionCo if all the terms and conditions of the offer have been complied
with, except those waived by AcquisitionCo, unless AcquisitionCo first exchanges
shares of Abraxas common stock for all Grey Wolf common shares validly deposited
under the offer and not withdrawn.
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5. CONDITIONS TO THE OFFER
Notwithstanding any other provision of this Offer to Purchase, AcquisitionCo
reserves the right, subject to applicable law, to withdraw, terminate or cancel
the offer and not exchange shares of Abraxas common stock for any Grey Wolf
common shares deposited under the offer unless all of the following conditions
are satisfied or waived by AcquisitionCo in its sole and exclusive discretion,
prior to the Expiry Time:
(a) Grey Wolf shareholders shall have validly deposited under the offer
and not properly withdrawn, that number of Grey Wolf common shares which
represents not less than a majority of the Grey Wolf common shares not
currently held by Abraxas and Canadian Abraxas, calculated on a
fully-diluted basis, excluding those Grey Wolf common shares held by persons
whose shares may not be voted as part of the "minority" in connection with
any Subsequent Acquisition Transaction under OSC Rule 61-501 and CVMQ
Policy Q-27;
(b) there shall not have occurred, any change (or any condition, event
or development involving a prospective change) in the business, operations,
assets, capitalization, financial condition (including taxes), prospects,
licenses, permits, rights, privileges or liabilities, whether contractual or
otherwise, including as a result of the offer, of Grey Wolf which change
results from or arises out of any action or measure of Grey Wolf or taken by
its board of directors that, in the sole judgment of AcquisitionCo, acting
reasonably, is or would be materially adverse to the business of Grey Wolf
or to a purchaser of Grey Wolf common shares;
(c) all governmental or regulatory consents, confirmations or approvals
(including in Canada, the United States or elsewhere) that AcquisitionCo, in
its sole discretion, views as necessary or desirable in connection with the
offer, and the acquisition of Grey Wolf common shares pursuant to the offer
or pursuant to a Compulsory Acquisition or Subsequent Acquisition
Transaction shall have been received on terms and conditions satisfactory to
AcquisitionCo acting reasonably (including, without limitation, the
effectiveness of the registration statement relating to the issuance of
shares of Abraxas common stock to the Grey Wolf shareholders);
(d) without limiting the scope of the condition in paragraph (c) above,
all regulatory filings have been made, rulings and orders obtained and other
proceedings taken so that:
(i) the shares of Abraxas common stock may be issued and distributed
in accordance with, or on the basis of exemptions from, the registration
and prospectus requirements of applicable United States and Canadian
securities laws; and
(ii) all shares of Abraxas common stock issued will be, when issued,
"freely tradable" in the United States by the persons to whom they are
issued or delivered subject to restrictions applicable to trades by
affiliates and other customary restrictions under applicable United
States and state securities laws.
(e) the Abraxas stockholders shall have approved the consummation of the
offer and the issuance of shares of Abraxas common stock in the offer, any
Compulsory Acquisition or any Subsequent Acquisition Transaction;
(f) the shares of Abraxas common stock issuable pursuant to the offer
shall have been approved for listing on the AMEX, subject only to notice of
issuance;
(g) there shall not be (i) any threatened, instituted or pending act,
action, suit or proceeding taken before or by any domestic or foreign
arbitrator, court or tribunal or any governmental agency or entity or other
regulatory authority or any administrative agency or commission or by any
elected or appointed public official or private person (including, without
limitation, any individual, corporation, firm, group or other entity) in
Canada or elsewhere, whether or not having the force of law, or (ii) any
law, regulation, rule or policy proposed, enacted, promulgated or
34
applied, in each case: (A) to cease trade, enjoin, prohibit, impose material
limitations or conditions on or affect the purchase by or the sale to
AcquisitionCo of 100% of the Grey Wolf common shares or the right of
AcquisitionCo, directly or indirectly, to own or exercise full rights of
ownership over the Grey Wolf common shares or the consummation of any of the
transactions contemplated by the offer, including a Compulsory Acquisition
or a Subsequent Acquisition Transaction; (B) which has had or would have a
material adverse effect upon Grey Wolf; or (C) which would prevent or make
uncertain the completion of a Compulsory Acquisition or Subsequent
Acquisition Transaction of Grey Wolf common shares not deposited under the
offer or which could reasonably be expected to have such an effect; or (D)
to prohibit or materially limit the ownership or operation by Grey Wolf or
by AcquisitionCo or any of its affiliates, of all or any material portion of
the business or assets of Grey Wolf as a result of the transactions
contemplated by the offer, including a Compulsory Acquisition or a
Subsequent Acquisition Transaction;
(h) there shall not exist any prohibition at law against AcquisitionCo
exchanging shares of Abraxas common stock for the Grey Wolf common shares
pursuant to the offer or completing a Compulsory Acquisition or Subsequent
Acquisition Transaction;
(i) AcquisitionCo shall not have become aware of, in any document filed
by or on behalf of Grey Wolf with any securities commission or similar
securities regulatory authority in any of the provinces of Canada prior to
the date of the offer, any untrue statement of material fact or any omission
to state a material fact that is required to be stated or that is necessary
to make a statement not misleading in light of the circumstances in which it
was made and at the date it was made (after giving effect to all subsequent
filings in relation to all matters covered in earlier filings) including,
without limitation, as contained in any annual information form, financial
statements, material change reports or management proxy circulars or in any
document so filed or released by Grey Wolf to the public;
(j) the absence of any other agreement or transaction involving Grey
Wolf which would impair Abraxas' and AcquisitionCo's ability to acquire Grey
Wolf or otherwise diminish the expected economic value of the offer;
(k) Grey Wolf shall not have entered into any new agreements, nor
permitted any of its subsidiaries to have entered into any commitments or
undertakings of a material nature or undertaken any other material action
except in the ordinary course of business;
(l) Grey Wolf shall not have declared or paid any dividend, authorized
any redemption of securities or otherwise proposed a distribution of assets
to shareholders;
(m) Grey Wolf shall not have entered into any agreement for the issuance
of any securities other than with respect to the issuance of Grey Wolf
common shares by Grey Wolf pursuant to currently outstanding options;
(n) AcquisitionCo shall have determined in its discretion, acting
reasonably, that no material right, franchise or license of Grey Wolf has
been or may be impaired (which impairment has not been cured or waived) or
otherwise adversely affected, whether as a result of the making of the
offer, the taking up and paying for the Grey Wolf common shares deposited
under the offer or otherwise, which might make it inadvisable for
AcquisitionCo to proceed with the offer and/or the taking up and paying for
the Grey Wolf common shares under the offer and/or a Compulsory Acquisition
or a Subsequent Acquisition Transaction; and
(o) Grey Wolf shall have received waivers relating to any change of
control provisions in any note, bond, mortgage, indenture, license, lease,
contract, agreement or other instrument or obligation to which Grey Wolf is
a party or by which it or any of its properties or assets may be bound,
except such waivers the absence of which would not in the aggregate
materially and adversely affect Grey Wolf.
35
The foregoing conditions are for the exclusive benefit of AcquisitionCo and
may be asserted by AcquisitionCo regardless of the circumstances (including any
action or inaction by Abraxas and AcquisitionCo or any of their affiliates)
giving rise to any such condition, or, except for the conditions set forth in
paragraphs (c) and (d) above relating to the receipt of governmental or
regulatory consents, confirmations or approvals, may be waived by AcquisitionCo
in its sole discretion, in whole or in part, at any time and from time to time
prior to the Expiry Time without prejudice to any other rights which
AcquisitionCo may have under the offer. The failure by AcquisitionCo at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
rights and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time. Any determination by AcquisitionCo
concerning the events described in this Section 5 will be final and binding upon
all parties.
Any waiver of a condition or the withdrawal of the offer shall be effective
upon written notice or other communication confirmed in writing by AcquisitionCo
to that effect to the Depositary at its principal office in Calgary, Alberta.
AcquisitionCo, forthwith after giving any such notice, shall make a public
announcement of such waiver or withdrawal, shall cause the Depositary, if
required by law, as soon as practicable thereafter to notify Grey Wolf
shareholders in the manner set forth in Section 13 of this Offer to Purchase,
"Notice and Delivery" and shall provide a copy of such notice to the TSE. Any
waiver of a condition or withdrawal of the offer will be deemed to be effective
on the day on which it is delivered or otherwise communicated to the Depositary
at its principal office in Calgary, Alberta. In the event of any waiver, all
Grey Wolf common shares deposited previously and not taken up or withdrawn will
remain subject to the offer and may be accepted for purchase by AcquisitionCo in
accordance with the terms of the offer. If the offer is withdrawn, AcquisitionCo
shall not be obligated to exchange shares of Abraxas common stock for any Grey
Wolf common shares deposited under the offer and the Depositary will promptly
return all certificates representing deposited Grey Wolf common shares, Letters
of Acceptance and Transmittal, Notices of Guaranteed Delivery and related
documents to the parties by whom they were deposited.
6. RIGHT TO WITHDRAW DEPOSITED GREY WOLF COMMON SHARES
Except as otherwise provided in this Section 6, all deposits of Grey Wolf
common shares pursuant to the offer are irrevocable. Grey Wolf common shares may
be withdrawn by or on behalf of a depositing shareholder (unless otherwise
required or permitted by applicable law):
(a) at any time prior to the expiration of 35 days from the date hereof
and thereafter, if the shares have not been taken up by AcquisitionCo prior
to the receipt by the Depositary of the notice of withdrawal in respect of
such shares;
(b) at any time after 3 Business Days from the date AcquisitionCo takes
up the Grey Wolf common shares, if the shares have not been exchanged by
AcquisitionCo;
(c) at any time before the expiration of the tenth day after the date
upon which either:
(i) a notice of change relating to a change which has occurred in the
information contained in this document, which change is one that would
reasonably be expected to affect the decision of a holder of Grey Wolf
common shares to accept or reject this offer (other than a change that is
not within the control of AcquisitionCo or any affiliate of
AcquisitionCo) in the event that such change occurs before the Expiry
Time or after the Expiry Time but before the expiry of all rights of
withdrawal in respect of the offer, or
(ii) a notice of variation concerning a variation in the terms of the
offer is mailed, delivered or otherwise properly communicated, but only
if such deposited Grey Wolf common shares have not been taken up by
AcquisitionCo at the time of the notice.
36
A notice of withdrawal of deposited Grey Wolf common shares must:
(a) be made by a method that provides the Depositary with a written or
printed copy of such notice (which includes a telegraphic or electronic
facsimile communication);
(b) be made by or on behalf of the depositing holder;
(c) be signed by or on behalf of the person who signed the Letter of
Acceptance and Transmittal (or Notice of Guaranteed Delivery) that
accompanied the Grey Wolf common shares being withdrawn;
(d) specify such person's name, the number of Grey Wolf common shares to
be withdrawn, the name of the registered holder, the social security or tax
payer identification number of the registered holder (if the shareholder is
a U.S. person) and the certificate number shown on each certificate
evidencing the Grey Wolf common shares to be withdrawn; and
(e) actually be received by the Depositary at the place of deposit
within the applicable time specified above.
In addition, any signature in the withdrawal notice must be guaranteed in
the same manner as in the Letter of Acceptance and Transmittal or Notice of
Guaranteed Delivery, except where the Grey Wolf common shares were deposited for
the account of an Eligible Institution.
None of AcquisitionCo, the Depositary, the Dealer Managers or any other
person will be under any duty to give notice of any defect or irregularity in
any notice of withdrawal or shall incur any liability for failure to give such
notice.
A withdrawal of Grey Wolf common shares deposited pursuant to the offer can
only be accomplished in accordance with the foregoing procedure. The withdrawal
shall take effect only upon actual receipt by the Depositary of the properly
completed and executed notice of withdrawal in accordance with the foregoing.
Withdrawals may not be rescinded and any Grey Wolf common shares withdrawn
will thereafter be deemed not validly deposited for purposes of the offer.
However, withdrawn Grey Wolf common shares may be re-deposited at any time
before the Expiry Time by again following one of the procedures described in
Section 2 of this Offer to Purchase, "Time and Manner for Acceptance."
If AcquisitionCo is delayed in taking up or paying for Grey Wolf common
shares or is unable to take up or pay for Grey Wolf common shares for any
reason, then, without prejudice to AcquisitionCo's other rights, Grey Wolf
common shares may not be withdrawn except to the extent that depositing
shareholders are entitled to withdrawal rights set forth in this Section 6.
The laws of other jurisdictions may differ from the laws of the Province of
Alberta with respect to the withdrawal of deposited Grey Wolf common shares.
Residents in jurisdictions other than the Province of Alberta should consult
their investment dealer, lawyer or other advisor for further details. In
addition to the foregoing rights of withdrawal, holders of Grey Wolf common
shares in certain provinces of Canada are entitled to statutory rights of
rescission in certain circumstances. See the description in the Circular under
the heading "Description of the Offer--Offerees' Statutory Rights."
All questions as to the validity (including timely receipt) and form of
notices of withdrawal shall be determined by AcquisitionCo in its sole
discretion and such determinations shall be final and binding.
7. PAYMENT FOR DEPOSITED GREY WOLF COMMON SHARES
If all of the conditions referred to in Section 5 of this Offer to Purchase,
"Conditions to the Offer" have been fulfilled or waived by AcquisitionCo as of
the Expiry Time, AcquisitionCo will become obligated to exchange shares of
Abraxas common stock for the Grey Wolf common shares
37
validly deposited under the offer and not withdrawn not later than three
Business Days after the Expiry Time, and to pay for the Grey Wolf common shares
taken up as soon as possible, but in any event not later than three Business
Days after taking up the Grey Wolf common shares. In accordance with applicable
law, AcquisitionCo will take up and pay for Grey Wolf common shares deposited
under the offer after the date on which AcquisitionCo first takes up Grey Wolf
common shares deposited under the offer not later than three Business Days after
the deposit of such Grey Wolf common shares.
Subject to applicable laws, AcquisitionCo may, in its sole discretion, at
any time before the Expiry Time if the applicable rights to withdraw any
deposited Grey Wolf common shares have expired, exchange shares of Abraxas
common stock for all such Grey Wolf common shares then deposited under the
offer, provided that AcquisitionCo agrees to take up and pay for all additional
Grey Wolf common shares validly deposited under the offer thereafter.
Subject to applicable laws, AcquisitionCo expressly reserves the right in
its sole discretion to delay taking up and paying for any Grey Wolf common
shares or to terminate the offer and not exchange shares of Abraxas common stock
for any Grey Wolf common shares, if any condition specified in Section 5 of this
Offer to Purchase, "Conditions to the Offer," is not satisfied or waived, by
giving written notice thereof or other communication confirmed in writing to the
Depositary at its principal office in Calgary, Alberta. AcquisitionCo also
expressly reserves the right, in its sole discretion and notwithstanding any
other condition of the offer, to delay exchanging shares of Abraxas common stock
for Grey Wolf common shares in order to comply, in whole or in part, with any
applicable law. AcquisitionCo will not, however, take up and pay for any Grey
Wolf common shares deposited under the offer unless it simultaneously takes up
and pays for all Grey Wolf common shares then validly deposited under the offer.
AcquisitionCo will be deemed to have taken up and accepted for payment Grey
Wolf common shares properly deposited and not withdrawn pursuant to the offer
if, as and when AcquisitionCo gives written notice or other communication
confirmed in writing to the Depositary at its principal office in Calgary,
Alberta to that effect.
AcquisitionCo will pay for Grey Wolf common shares validly deposited
pursuant to the offer and not withdrawn by exchanging sufficient certificates
for shares of Abraxas common stock for transmittal to persons depositing Grey
Wolf common shares pursuant to the offer. Under no circumstances will interest
accrue or be paid by AcquisitionCo or the Depositary to persons depositing Grey
Wolf common shares on the purchase price of Grey Wolf common shares purchased by
AcquisitionCo pursuant to the offer, regardless of any delay in making such
payment. Fractional shares will not be issued. Instead of any fractional share,
shareholders will receive, at the option of AcquisitionCo, either a cash payment
or a whole share of Abraxas common stock. For the purposes of determining the
amount of any such payment, the Grey Wolf common shares beneficially owned by a
holder will be aggregated.
The Depositary will act as the agent of the persons who have deposited Grey
Wolf common shares pursuant to the offer for the purposes of receiving shares of
Abraxas common stock and cash, if any, from AcquisitionCo and transmitting
shares of Abraxas common stock and cash, if any, to such persons. Receipt of
payment by the Depositary shall be deemed to constitute receipt of payment by
persons depositing Grey Wolf common shares.
Settlement will be made by the Depositary forwarding to each person who has
validly deposited and not withdrawn Grey Wolf common shares under the offer a
certificate representing shares of Abraxas common stock to which such person is
entitled, together with, if AcquisitionCo elects to pay cash for fractional
interests, a cheque in Canadian dollars in payment of fractional shares of
Abraxas common stock that would otherwise be payable to such shareholder. Unless
otherwise directed by the Letter of Acceptance and Transmittal, the certificate
for such shares of Abraxas common stock and cheque, if any, will be issued in
the name of the registered holder of the Grey Wolf common shares so
38
deposited or to the order of such other person as identified by the person
signing such Letter of Acceptance and Transmittal by properly completing the
boxes under "Special Payment Instructions" in such Letter of Acceptance and
Transmittal.
Unless a shareholder depositing Grey Wolf common shares instructs the
Depositary to hold the certificate representing shares of Abraxas common stock
and the cheque, if any, for pick-up by checking the appropriate box on the
Letter of Acceptance and Transmittal, certificates and cheques, if any, will be
forwarded by first class insured mail to such holder at the address specified in
the Letter of Acceptance and Transmittal. If no such address is specified, the
certificate and cheque, if any, will be forwarded to the address of the holder
as shown on the share register maintained by or on behalf of Grey Wolf.
Certificates and cheques mailed in accordance with this Section 7 will be
deemed to be delivered at the time of mailing.
8. RETURN OF WITHDRAWN GREY WOLF COMMON SHARES
If any deposited Grey Wolf common shares are not exchanged for shares of
Abraxas common stock by AcquisitionCo pursuant to the terms and conditions of
the offer for any reason, or if certificates are submitted for more Grey Wolf
common shares than are deposited, certificates for Grey Wolf common shares that
are not exchanged will be returned, at the expense of AcquisitionCo, to the
depositing shareholder by first class registered or insured mail to the address
of the depositing shareholder specified in the Letter of Acceptance and
Transmittal or, if no such address is specified, to the address of such
shareholder as shown on the share register maintained by Grey Wolf. Certificates
and other relevant documents will be returned as promptly as practicable
following the Expiry Time or withdrawal or early termination of the offer.
9. MAIL SERVICE INTERRUPTION
Notwithstanding the provisions of this Offer to Purchase, the Circular, the
Letter of Acceptance and Transmittal and the Notice of Guaranteed Delivery,
share certificates and cheques (if any) and any other relevant documents for
shares of Abraxas common stock to be mailed by the Depositary will not be mailed
if AcquisitionCo determines that delivery thereof by mail may be delayed. A
person entitled to share certificates and cheques (if any) which are not mailed
for the foregoing reason may take delivery thereof at the office of the
Depositary at which the Grey Wolf common shares in respect of which the share
certificates and cheques (if any) are being issued were deposited, upon
application to the Depositary until such time as AcquisitionCo has determined
that delivery by mail will no longer be delayed. Notwithstanding Section 7 of
this Offer to Purchase, "Payment for Deposited Grey Wolf Common Shares," share
certificates and cheques (if any) and any other relevant documents not mailed
for the foregoing reason will be conclusively deemed to have been delivered on
the first day upon which they are available for delivery to the persons entitled
thereto at the appropriate office of the Depositary. Notice of any determination
regarding mail service delay or interruption made by AcquisitionCo shall be
given in accordance with Section 13 of this Offer to Purchase, "Notice and
Delivery."
10. COMPULSORY ACQUISITION
If, by the Expiry Time or within 120 days after the date of the offer,
whichever is earlier, the offer has been accepted by the holders of not less
than 90 percent of the Grey Wolf common shares (calculated on a fully diluted
basis) not already owned by Abraxas and its subsidiaries, and AcquisitionCo
takes up and pays for all of the Grey Wolf common shares deposited in the offer,
then Abraxas currently intends to acquire the Grey Wolf common shares held by
those Grey Wolf shareholders who have not accepted the offer either by extending
the Expiry Time of the offer or
39
pursuant to the Compulsory Acquisition provisions of Part 16 of the Alberta
Business Corporations Act.
11. ALTERNATE SUBSEQUENT ACQUISITION TRANSACTIONS
If less than 90 percent of the Grey Wolf common shares (calculated on a
fully diluted basis) not already owned by Abraxas and Canadian Abraxas have been
validly deposited under the offer and not withdrawn and AcquisitionCo is
therefore unable to effect a Compulsory Acquisition, then AcquisitionCo reserves
the right to convene a special meeting of holders of the Grey Wolf common shares
and/or initiate such corporate actions or proceedings as may be legally
available in order to effect a Subsequent Acquisition Transaction for the
purpose of acquiring all the Grey Wolf common shares. See "Description of the
Offer--Possible Acquisition of Grey Wolf Common Shares Not Deposited Under the
Offer--Subsequent Acquisition Transaction and Dissenters' Rights in a Subsequent
Acquisition Transaction" in the Circular beginning on page 82.
12. DIVIDENDS AND DISTRIBUTIONS; LIENS
If, on or after the date of the offer, Grey Wolf should subdivide,
consolidate or otherwise change any of the Grey Wolf common shares or its
capitalization, or shall disclose that it has taken any such action, then
AcquisitionCo may (in its sole discretion) make such adjustments as it deems
appropriate in the consideration and other terms of the offer (including,
without limitation, the type of securities offered to be purchased and the
amounts payable therefor) to reflect such subdivision, consolidation or other
change.
Purchased Securities (defined below) and Other Securities (defined below)
acquired by AcquisitionCo pursuant to the offer shall be acquired by
AcquisitionCo free and clear of all liens, charges, encumbrances, claims and
equities and together with all rights and benefits arising therefrom, including
the right to any and all dividends, distributions, payments, securities, rights,
assets or other interests which may be accrued, declared, paid, issued,
distributed, made or transferred on or after the date of the offer on or in
respect of those Securities (defined below) and which are made payable or
distributable to the holders of record of those Securities on a date on or after
the date of this Offer to Purchase. However, if AcquisitionCo is the holder of
Purchased Securities on the record date for any dividend, AcquisitionCo shall be
entitled to receive the dividend payable to holders of record on that date.
For purposes of this Offer to Purchase, the terms set forth below have the
meanings indicated:
"OTHER SECURITIES" means dividends, securities, rights, warrants or other
interests or distributions accrued, declared, paid, issued, transferred, made or
distributed on or in respect of the Grey Wolf common shares on or after the date
of the offer.
"PURCHASED SECURITIES" means Grey Wolf common shares purchased by
AcquisitionCo pursuant to the offer.
"SECURITIES" means, collectively, the Purchased Securities and Other
Securities.
If Grey Wolf should declare or pay any dividend, or declare, make or pay any
other distribution or payment on or declare, allot, reserve or issue any
securities, rights, or other interests or distributions in respect of the
Purchased Securities after the date of this Offer to Purchase, that dividend,
distribution or issue will be received and held by the depositing holder of
Purchased Securities for the account of AcquisitionCo and shall be required to
be promptly remitted and transferred by the depositing shareholder to the
Depositary for the account of AcquisitionCo, accompanied by appropriate
documentation of transfer. Pending such remittance, AcquisitionCo will be
entitled to all rights and privileges as owners of any such dividend,
distribution, payment, right or other interest and may withhold the entire
consideration payable by AcquisitionCo pursuant to the offer or deduct from the
40
consideration payable by AcquisitionCo pursuant to the offer the amount or value
thereof, as determined by AcquisitionCo in its sole discretion.
13. NOTICE AND DELIVERY
Without limiting any other lawful means of giving notice, any notice which
AcquisitionCo or the Depositary may give or cause to be given under the offer
will be deemed to have been properly given to holders of Grey Wolf common shares
if it is mailed by prepaid, first class mail to the registered holders of such
securities at their respective addresses appearing in the appropriate registers
maintained by or on behalf of Grey Wolf and will be deemed to have been received
on the first Business Day following the date of mailing. These provisions apply
notwithstanding any accidental omission to give notice to any one or more
holders of Grey Wolf common shares and notwithstanding any interruption of mail
service following mailing. In the event of any interruption of mail service
following mailing, AcquisitionCo intends to make reasonable efforts to
disseminate the notice by other means, such as publication. Except as otherwise
required or permitted by law, in the event that post offices are not open for
the deposit of mail, or there is reason to believe there is or could be a
disruption in all or any part of the postal service, any notice which
AcquisitionCo or the Depositary may give or cause to be given under the offer
will be deemed to have been properly given and to have been received by holders
of Grey Wolf common shares if it is given to the TSE for dissemination through
their facilities or if it is published once in a newspaper or newspapers of
general circulation in Calgary or if it is given to the Canada News Wire
Service.
At AquisitionCo's request, Grey Wolf has provided a list of the names and
addresses of the holders of Grey Wolf common shares for the purposes of
disseminating the offer and any required notices to such holders.
Unless post offices are not open for the deposit of mail, this Offer to
Purchase, the Circular, the Letter of Acceptance and Transmittal and the Notice
of Guaranteed Delivery will be mailed to registered holders of Grey Wolf common
shares. In addition, AcquisitionCo will use its reasonable efforts to furnish
such documents to brokers, banks and similar persons whose names, or the names
of whose nominees, appear on the security holder list, or, if applicable, who
are listed as participants in a clearing agency's security position listing, for
subsequent transmission to beneficial owners of Grey Wolf common shares when
such list or listing is received.
Wherever this Offer to Purchase calls for documents to be delivered to a
particular office of the Depositary, such documents will not be considered
delivered unless and until they have been received at one of the offices
specified in the Letter of Acceptance and Transmittal or Notice of Guaranteed
Delivery, as applicable.
14. OTHER TERMS OF THE OFFER
NO BROKER, DEALER OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR
TO MAKE ANY REPRESENTATION ON BEHALF OF ABRAXAS, ACQUISITIONCO OR THE DEPOSITARY
OTHER THAN AS CONTAINED IN THIS OFFER TO PURCHASE AND THE CIRCULAR, AND, IF ANY
SUCH INFORMATION OR REPRESENTATION IS GIVEN OR MADE, IT MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED.
The provisions of the Circular, the Letter of Acceptance and Transmittal and
the Notice of Guaranteed Delivery accompanying this Offer to Purchase, including
the instructions and rules contained therein, as applicable, form part of the
terms and conditions of this Offer to Purchase.
The offer and all contracts resulting from the acceptance thereof shall be
governed by and construed in accordance with the laws of the Province of Alberta
and the federal laws of Canada applicable therein. Each party to any agreement
resulting from the acceptance of the offer
41
unconditionally and irrevocably attorns to the exclusive jurisdiction of the
Courts of the Province of Alberta.
AcquisitionCo, in its sole discretion, shall be entitled to make a final and
binding determination of all questions relating to the interpretation of the
offer, the validity of any acceptance of the offer and the validity of any
withdrawals of Grey Wolf common shares.
This document does not constitute an offer or a solicitation to any person
in any jurisdiction in which such offer or solicitation is unlawful. The offer
is not being made to (nor will deposits be accepted from or on behalf of)
holders of Grey Wolf common shares residing in any jurisdiction in which the
making of the offer or the acceptance thereof would not be in compliance with
the laws of such jurisdiction. AcquisitionCo may, in its sole discretion, take
such action as it may deem necessary to make the offer in any such jurisdiction
and extend the offer to holders of Grey Wolf common shares in any such
jurisdiction.
15. MARKET PURCHASES DURING THE OFFER
AcquisitionCo has no present intention of acquiring beneficial ownership of
Grey Wolf common shares while the offer is outstanding other than as described
in this document.
16. GENERAL
The method of delivery of certificates representing Grey Wolf common shares
and all other documents is at the option and risk of each holder and delivery
will be effective only when such documents are actually received by the
Depositary. AcquisitionCo recommends that certificates and accompanying Letters
of Transmittal be delivered by hand to the Depositary and that a receipt be
obtained for their deposit. If the documents are mailed, AcquisitionCo
recommends that registered mail with return receipt or acknowledgment of receipt
be used and that proper insurance be obtained.
Holders of Grey Wolf common shares registered in the name of a broker,
investment dealer, bank, trust company or other nominee should contact that
nominee for assistance in depositing those Grey Wolf common shares under the
offer.
No fee or commission will be payable by a holder of Grey Wolf common shares
who delivers Grey Wolf common shares directly to the Depositary or uses the
facility of a soliciting dealer to accept the offer.
AcquisitionCo reserves the right to permit a holder of Grey Wolf common
shares to accept the offer in a manner other than as set out above.
The execution of a Letter of Acceptance and Transmittal by a holder of Grey
Wolf common shares irrevocably appoints certain senior officers of
AcquisitionCo, and each of them, and any other person designated by
AcquisitionCo in writing, as the true and lawful agent, attorney and
attorney-in-fact of that holder with respect to the holder's Purchased
Securities and with respect to all of the holder's Other Securities. This
appointment is effective from the date that AcquisitionCo takes up and pays for
the Purchased Securities and affords AcquisitionCo full power of substitution,
in the name and on behalf of such holders, (such power of attorney being deemed
to be an irrevocable power coupled with an interest) to register, record,
transfer and enter the transfer of such Purchased Securities and such Other
Securities on the books of Grey Wolf and to exercise any and all of the rights
of the holder in respect of the Purchased Securities and any Other Securities.
In addition, a holder of Grey Wolf common shares who executes a Letter of
Acceptance and Transmittal agrees, from and after the date on which
AcquisitionCo takes up and pays for the Purchased Securities:
(a) not to vote any of the Purchased Securities or Other Securities at
any meeting (whether annual, special or otherwise) of holders of those
securities;
42
(b) not to exercise any or all of the other rights or privileges
attached to any of those securities or to any or all instruments of proxy,
authorizations or consents in respect thereof; and
(c) to execute and deliver to AcquisitionCo any and all instruments of
proxy, authorizations or consents received in respect of all of those
securities.
As of the date on which AcquisitionCo purchases the Purchased Securities,
all prior proxies given by the holder of such Purchased Securities with respect
thereto and to any Other Securities shall be revoked and no subsequent proxies
may be given by that holder with respect thereto.
All questions as to validity, form, eligibility (including timely receipt)
and acceptance of any Purchased Securities or Other Securities deposited
pursuant to the offer, including the propriety and effect of the execution of
the Letter of Acceptance and Transmittal will be determined by AcquisitionCo in
its sole discretion, and depositing holders of Purchased Securities or Other
Securities agree that such determination shall be final and binding.
AcquisitionCo reserves the absolute right to reject any and all deposits which
it determines not to be in proper form, or which, in the opinion of counsel, it
may be unlawful to accept under the laws of any jurisdiction. AcquisitionCo's
interpretation of the terms and conditions of the offer, the Take-Over Bid
Circular, the Letter of Acceptance and Transmittal and Notice of Guaranteed
Delivery will be final and binding.
The deposit of Grey Wolf common shares pursuant to the procedures described
in this Offer to Purchase will constitute a binding agreement between the
depositing shareholder and AcquisitionCo and such agreement shall be subject to
the conditions of the offer and include representations and warranties of the
depositing shareholders that (i) such person has full power and authority to
deposit, sell, assign and transfer the Grey Wolf common shares (and any Other
Securities) being deposited; (ii) such person owns the Grey Wolf common shares
(and any Other Securities) being deposited; (iii) the deposit of such Grey Wolf
common shares (and any Other Securities) complies with applicable securities
laws; and (iv) when such Grey Wolf common shares are taken up and paid for by
AcquisitionCo, AcquisitionCo will acquire good title thereto free and clear of
all liens, restrictions, charges, encumbrances, claims and equities.
Dated: August 1, 2001 ABRAXAS ACQUISITION
CORPORATION
By: /s/ ROBERT
L. G. WATSON
-----------------------------------------
Robert L.
G. Watson,
PRESIDENT
43
TAKE-OVER BID CIRCULAR
The following information is supplied by Abraxas with respect to the
accompanying Offer to Purchase Grey Wolf common shares dated August 1, 2001. The
terms and provisions of the accompanying Offer to Purchase are incorporated into
and form part of this document and Grey Wolf shareholders and Abraxas
stockholders should refer to the Offer to Purchase for details of the terms and
conditions of the offer, including details as to payment and withdrawal rights.
THE INFORMATION CONCERNING GREY WOLF CONTAINED IN THIS DOCUMENT HAS BEEN
TAKEN FROM OR BASED UPON PUBLICLY AVAILABLE DOCUMENTS AND RECORDS ON FILE WITH
CANADIAN SECURITIES ADMINISTRATORS AND OTHER PUBLIC SOURCES OR PROVIDED BY GREY
WOLF. ALTHOUGH ABRAXAS HAS NO KNOWLEDGE THAT WOULD INDICATE THAT ANY STATEMENTS
CONTAINED HEREIN AND TAKEN FROM OR BASED ON SUCH DOCUMENTS AND RECORDS ARE
UNTRUE OR INCOMPLETE, ABRAXAS AND ITS AFFILIATES AND THEIR RESPECTIVE DIRECTORS
OR OFFICERS DO NOT ASSUME ANY RESPONSIBILITY FOR THE ACCURACY OR COMPLETENESS OF
THE INFORMATION CONTAINED IN SUCH DOCUMENTS AND RECORDS OR FOR ANY FAILURE BY
GREY WOLF TO DISCLOSE EVENTS WHICH MAY HAVE OCCURRED OR MAY AFFECT THE
SIGNIFICANCE OR ACCURACY OF ANY SUCH INFORMATION BUT WHICH ARE UNKNOWN TO
ABRAXAS AND ITS AFFILIATES.
INFORMATION ABOUT ABRAXAS, ACQUISITIONCO AND GREY WOLF
ABRAXAS
GENERAL
Abraxas is an independent energy company engaged primarily in the
acquisition, exploration, exploitation and production of crude oil and natural
gas. Since January 1, 1991, Abraxas' principal means of growth has been through
the acquisition and subsequent development and exploitation of producing
properties and related assets. As a result of Abraxas' historical acquisition
activities, Abraxas believes it has a substantial inventory of low risk
exploration and development opportunities, the development of which is critical
to the maintenance and growth of Abraxas' current production levels. Abraxas
seeks to complement its acquisition and development activities by selectively
participating in exploration projects with experienced industry partners.
Abraxas' principal areas of operation are Texas, Wyoming and western Canada.
Abraxas owns all of its United States properties directly and owns its Canadian
properties through its wholly-owned subsidiary, Canadian Abraxas, which is an
Alberta corporation. Canadian Abraxas' properties, wells and production are
located in Alberta and the Northwest Territories. Abraxas has formed
AcquisitionCo, a wholly-owned Canadian subsidiary, to consummate the offer.
After the offer, and assuming AcquisitionCo acquires 100% of the Grey Wolf
common shares, Abraxas will have two 100%-owned Canadian subsidiaries, Canadian
Abraxas and Grey Wolf (which will be the survivor of an amalgamation between
AcquisitionCo and Grey Wolf).
At December 31, 2000, Abraxas owned interests in 1,147,983 gross acres
(582,014 net acres) and operated properties accounting for 78% of its PV-10,
affording Abraxas substantial control over the timing and incurrence of
operating and capital expenditures. At December 31, 2000, estimated total proved
reserves of Abraxas, inclusive of its wholly-owned subsidiary, Canadian Abraxas,
were 218.6 Bcfe with an aggregate PV-10 of $866 million. As of December 31,
2000, Abraxas had net natural gas processing capacity of 120 MMcf per day
through its 12 natural gas processing plants and compression facilities in
Canada, giving it substantial control over its Canadian production and marketing
activities.
For more information on Abraxas, you should read the information included in
Abraxas' Annual Report on Form 10-K for the year ended December 31, 2000 and
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 incorporated
by reference in this document.
44
RECENT DEVELOPMENTS
The following is a summary of Abraxas' recent drilling activities:
- Abraxas completed its Dimon #1 well located in the Muy Bueno Field in
Goliad County, Texas. The well was drilled to a depth of 10,000 feet and
encountered pay in the Wilcox, Yegua and Frio formations. The well tested
the Wilcox formation with an absolute open flow potential of 16 MMcfpd.
Since March 1, 2001, the well has produced an average of 2 MMcfpd.
- EOG Resources, Inc., with whom Abraxas has a joint participation agreement
for five wells, with Abraxas having a carried interest, recently completed
the second well under the joint participation agreement, the Caprito 82
#1H, in the R.O.C. Field in Ward County, Texas. The well was drilled
horizontally to a measured depth of 17,800 feet and encountered pay in the
Devonian and Montoya formations. The well tested the Montoya formation and
came on-line at approximately 16 MMcfpd in late May 2001 while still
cleaning up.
- Abraxas successfully completed five wells in the Brooks Draw Field in
Converse / Niobrara Counties, Wyoming. The wells were drilled horizontally
to a measured depth of approximately 12,500 feet and encountered pay in
the Turner and Niobrara sandstones.
- In Caroline, Alberta, since mid-2000, five natural gas wells were
completed, construction of natural gas gathering lines was completed for
well tie-in, and compression was installed at Canadian Abraxas' natural
gas plant. During April 2001, Canadian Abraxas' net production from the
Caroline area averaged 5.4 MMcfpd and 250 BOPD during April 2001. A 3D
seismic program over this acreage was completed during the 2000/2001
winter season.
- In Pouce Coupe/Valhalla, Alberta, since mid-2000, seven new wells were
completed. During April 2001, Canadian Abraxas' net production from this
area averaged 4.2 MMcfpd and 95 BOPD. A 3D seismic program over this
acreage was completed during the 2000/2001 winter season.
- In the Ladyfern area of northeastern British Columbia, Canadian Abraxas
participated in a 3D seismic program on its acreage directly offsetting
the drilling programs being conducted by several companies.
Abraxas continued its past practice of selling non-core assets at
appropriate prices in May 2001. A Canadian oil and gas property was sold for
$9.8 million. Additional sales of non-core assets may continue.
On May 21, 2001, Abraxas' contingent value rights expired. Under the terms
of the contingent value rights, Abraxas issued a total of 3,386,488 shares of
its common stock to holders of the CVRs.
Since December 31, 2000, crude oil and natural gas prices have decreased. At
December 31, 2000, the commodity prices utilized by Abraxas' independent
petroleum engineers were $25.73 per Bbl of crude oil, $30.63 per Bbl of NGLs and
$9.21 per Mcf of natural gas. At July 1, 2001, prices on the NYMEX were $25.95
per Bbl of crude oil and $3.117 per Mcf of natural gas, and in June 2001,
Abraxas received an average of approximately $16.50 per Bbl of NGLs. As a result
of these price decreases, Abraxas and Grey Wolf could experience reduced
revenues as well as increased depreciation, depletion and amortization expense.
In addition, the estimated quantity and value of Abraxas' and Grey Wolf's
reserves could be significantly reduced, and Abraxas and Grey Wolf could have a
ceiling limitation write down during 2001. Finally, the net loss recorded in
January 2001 for hedging losses by Abraxas could be reduced.
45
DESCRIPTION OF ABRAXAS CAPITAL STOCK
COMMON STOCK
Abraxas is currently authorized to issue 200,000,000 shares of common stock,
par value $.01 per share.
As of July 24, 2001, there were 25,988,832 shares of Abraxas common stock
(including the 3,386,488 shares which were issued upon expiration of the CVRs)
issued and outstanding. Holders of the common stock are entitled to cast one
vote for each share held of record on all matters submitted to a vote of
stockholders and are not entitled to cumulate votes for the election of
directors. Holders of common stock do not have preemptive rights to subscribe
for additional shares of common stock issued by Abraxas.
Holders of the common stock are entitled to receive dividends as may be
declared by the Abraxas board of directors out of funds legally available
therefor. Under the terms of the first lien notes indenture and the second lien
notes indenture, Abraxas may not pay dividends on shares of its common stock. In
the event of liquidation, holders of the common stock are entitled to share PRO
RATA in any distribution of Abraxas' assets remaining after payment of
liabilities, subject to the preferences and rights of the holders of any
outstanding shares of preferred stock. All of the outstanding shares of the
common stock are fully paid and nonassessable.
References herein to Abraxas' common stock include the common share purchase
rights distributed by Abraxas to its stockholders on November 17, 1994, as long
as they trade with the common stock. See "--Stockholder Rights Plan" beginning
on page 48.
PREFERRED STOCK
Abraxas' Articles of Incorporation authorize the issuance of up to 1,000,000
shares of preferred Stock, par value $.01 per share, in one or more series. The
Abraxas board of directors is authorized, without any further action by the
stockholders, to determine the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences,
sinking fund terms and other rights, preferences, privileges and restrictions of
any series of preferred stock, the number of shares constituting any such
series, and the designation thereof. The rights of the holders of common stock
will be subject to, and may be adversely affected by, the rights of holders of
any preferred stock that may be issued in the future.
WARRANTS
Abraxas has warrants outstanding to purchase an aggregate of 950,000 shares
of Abraxas common stock. Basil Street Company has warrants to purchase 750,000
shares at an exercise price of $3.50 per share and Jesup & Lamont Holdings,
TNC, Inc. and Charles K. Butler (collectively "Jesup, et al") have warrants to
purchase 200,000 shares at $3.50 per share. Basil Street and Jesup, et al have
certain registration rights with respect to shares of the Abraxas common stock
issued pursuant to the exercise of such warrants. See "--Registration Rights"
beginning on page 47.
All outstanding warrants contain provisions that protect Basil Street and
Jesup, et al against dilution by adjusting the price at which the warrants are
exercisable and the number of shares of the Abraxas common stock issuable upon
exercise thereof upon the occurrence of certain events, including payment of
stock dividends and distributions, stock splits, recapitalizations,
reclassifications, mergers or consolidations. A holder of warrants has no rights
as a stockholder of Abraxas until the warrants are exercised. All warrants are
currently exercisable, although none have been exercised as of the date hereof.
46
OPTION PLANS
Pursuant to the Abraxas Petroleum Corporation 1984 Incentive Stock Option
Plan (the "ISO Plan"), the Abraxas Petroleum Corporation 1993 Key Contributor
Stock Option Plan (the "1993 Plan"), the Abraxas Petroleum Corporation 1994 Long
Term Incentive Plan (the "LTIP") and the Abraxas Petroleum Corporation 2000 Long
Term Incentive Plan (the "2000 Plan"), Abraxas grants to Abraxas' employees and
officers (including Abraxas' directors who are also employees) incentive stock
options and non-qualified stock options. The ISO Plan, the 1993 Plan, the LTIP
and the 2000 Plan are administered by the compensation committee which, based
upon the recommendation of the Chief Executive Officer, determines the number of
shares subject to each option. As of July 24, 2001, there were options to
purchase 4,257,024 shares of Abraxas common stock outstanding, of which
1,752,688 were fully vested, at an average exercise price of $3.47 per share.
REGISTRATION RIGHTS
Under the terms of their warrants, Basil Street and Jesup, et al have the
right to unlimited piggyback registrations. Abraxas has agreed to pay all
expenses in connection with piggyback registrations by Basil Street and Jesup,
et al, provided, however, all underwriting discounts and selling commissions
shall be borne by Basil Street and Jesup, et al.
Under the terms of a Registration Rights Agreement with Halcyon/Alan B.
Slifka Management Company LLC and Franklin Resources, Inc., in the event that
Abraxas proposes to register any shares of its common stock or debt securities
under the Securities Act for its own account, except in certain circumstances,
Halcyon and Franklin are entitled to unlimited incidental registrations, subject
to the right of the underwriters of any such offering to limit the number of
shares included in such registration. Halcyon and Franklin each have the
additional right to require Abraxas to effect one demand registration of all of
the second lien notes, Abraxas common stock and contingent value rights (and any
securities issuable pursuant to the terms thereof) issued to them pursuant to
the 1999 exchange offer relating to the old notes, subject to certain conditions
and limitations including the right of the underwriters of such an offering to
limit the number of shares included in such registration. In addition, Abraxas
has agreed to pay all expenses in connection with a demand or incidental
registration except for underwriting discounts and selling commissions which
shall be borne by Halcyon and Franklin. Abraxas has agreed to customary
indemnities including an agreement to indemnify, subject to certain limited
exceptions, Halcyon and Franklin in connection with a demand registration and an
incidental registration.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE ABRAXAS ARTICLES OF
INCORPORATION AND BYLAWS
Abraxas' Articles of Incorporation and Bylaws provide for the board of
directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the board of directors
will be elected each year. The Articles of Incorporation and Bylaws provide that
the board of directors will consist of not less than three nor more than twelve
members, with the exact number to be determined from time to time by the
affirmative vote of a majority of directors then in office. The board of
directors, and not the stockholders, has the authority to determine the number
of directors. This provision could prevent any stockholder from obtaining
majority representation on Abraxas' board of directors by enlarging the board of
directors and by filling the new directorships with the stockholder's own
nominees. In addition, directors may be removed by the stockholders only for
cause.
The Articles of Incorporation and Bylaws provide that special meetings of
stockholders of Abraxas may be called only by the Chairman of the Board, the
President or a majority of the members of the board of directors. This provision
may make it more difficult for stockholders to take actions opposed by the board
of directors.
47
The Articles of Incorporation and Bylaws provide that any action required to
be taken or which may be taken by holders of Abraxas common stock must be
effected at a duly called annual or special meeting of such holders, and may not
be taken by any written consent of such stockholders. These provisions may have
the effect of delaying consideration of a stockholder proposal until the next
annual meeting unless a special meeting is called by the persons set forth
above. The provisions of the Articles of Incorporation and Bylaws prohibiting
stockholder action by written consent could prevent the holders of a majority of
the voting power of Abraxas from using the written consent procedure to take
stockholder action and taking action by consent without giving all the
stockholders of Abraxas entitled to vote on a proposed action the opportunity to
participate in determining such proposed action.
STOCKHOLDER RIGHTS PLAN
On November 17, 1994, the Abraxas board of directors adopted a stockholder
rights plan (the "Stockholder Rights Plan"). Under the terms of the Stockholder
Rights Plan, the Abraxas board of directors declared a dividend of one common
share purchase right ("Stockholder Right") on each share of the Abraxas common
stock outstanding on November 17, 1994. Each Stockholder Right entitles the
holder thereof to buy one share of Abraxas common stock at an exercise price of
$40 per share, subject to adjustment.
The Stockholder Rights are not exercisable until the occurrence of specified
events. Upon the occurrence of such an event (which events are generally those
which would signify the commencement of a hostile bid to acquire Abraxas), the
Stockholder Rights then become exercisable (unless redeemed by the board of
directors) for a number of shares of Abraxas common stock having a market value
of two times the exercise price of the Stockholder Right. If the acquiror were
to conclude the acquisition of Abraxas, the Stockholder Rights would then become
exercisable for shares of the controlling/ surviving corporation having a value
of two times the exercise price of the Stockholder Rights. If the Stockholder
Rights were exercised at any time, significant dilution would result, thus
making the acquisition prohibitively expensive for the acquiror. In order to
encourage a bidder to negotiate with the board of directors, the Stockholder
Rights Plan provides that the Stockholder Rights may be redeemed under
prescribed circumstances by the board of directors.
The Stockholder Rights are not intended to prevent a takeover of Abraxas and
will not interfere with any tender offer or business combination approved by the
board of directors. The Stockholder Rights Plan is intended to protect the
stockholders in the event of (a) an unsolicited offer to acquire Abraxas,
including offers that do not treat all stockholders equally, (b) the acquisition
in the open market of shares constituting control of Abraxas without offering
fair value to all stockholders and (c) other coercive takeover tactics which
could impair the board of directors' ability to fully represent the interests of
the stockholders.
ANTI-TAKEOVER STATUTES
The Nevada General Corporation Law (the "Nevada GCL") contains two
provisions, described below as "Combination Provisions" and the "Control Share
Act," that may make more difficult the accomplishment of unsolicited or hostile
attempts to acquire control of a corporation through certain types of
transactions.
RESTRICTIONS ON CERTAIN COMBINATIONS BETWEEN NEVADA RESIDENT CORPORATIONS
AND INTERESTED STOCKHOLDERS. The Nevada GCL includes certain provisions (the
"Combination Provisions") prohibiting certain "combinations" (generally defined
to include certain mergers, disposition of assets transactions, and share
issuance or transfer transactions) between a resident domestic corporation and
an "interested stockholder" (generally defined to be the beneficial owner of 10%
or more of the voting power of the outstanding shares of the corporation),
except those combinations which are approved by the board of directors before
the interested stockholder first obtained a 10% interest in the corporation's
stock.
48
There are additional exceptions to the prohibition, which apply to combinations
if they occur more than three years after the interested stockholder's date of
acquiring shares. The Combination Provisions apply unless the corporation elects
against their application in its original articles of incorporation or an
amendment thereto, or in its bylaws. Abraxas' Articles of Incorporation and
Bylaws do not currently contain a provision rendering the Combination Provisions
inapplicable.
NEVADA CONTROL SHARE ACT. Nevada's Control Share Acquisition Act (the
"Control Share Act") imposes procedural hurdles on and curtails greenmail
practices of corporate raiders. The Control Share Act temporarily
disenfranchises the voting power of "control shares" of a person or group
("Acquiring Person") purchasing a "controlling interest" in an "issuing
corporation" (as defined in the Nevada GCL) not opting out of the Control Share
Act. In this regard, the Control Share Act will apply to an "issuing
corporation" unless, before an acquisition is made, the articles of
incorporation or bylaws in effect on the tenth day following the acquisition of
a controlling interest provide that it is inapplicable. Abraxas' Articles of
Incorporation and Bylaws do not currently contain a provision rendering the
Control Share Act inapplicable.
Under the Control Share Act, an "issuing corporation" is a corporation
organized in Nevada which has 200 or more stockholders, at least 100 of whom are
stockholders of record (which for this purpose includes registered and
beneficial owners) and residents of Nevada, and which does business in Nevada
directly or through an affiliated company. The status of Abraxas at the time of
the occurrence of a transaction governed by the Control Share Act (assuming that
Abraxas' Articles of Incorporation or Bylaws have not theretofore been amended
to include an opting out provision) would determine whether the Control Share
Act is applicable.
The Control Share Act requires an Acquiring Person to take certain
procedural steps before he or it can obtain the full voting power of the control
shares. "Control shares" are the shares of a corporation (1) acquired or offered
to be acquired which will enable the Acquiring Person to own a "controlling
interest," and (2) acquired within 90 days immediately preceding that date. A
"controlling interest" is defined as the ownership of shares which would enable
the Acquiring Person to exercise certain graduated amounts (beginning with
one-fifth) of all voting power of the corporation. The Acquiring Person may not
vote any control shares without first obtaining approval from the stockholders
not characterized as "interested stockholders" (as defined below).
To obtain voting rights in control shares, the Acquiring Person must file a
statement at the principal office of the issuer ("Offeror's Statement") setting
forth certain information about the acquisition or intended acquisition of
stock. The Offeror's Statement may also request a special meeting of
stockholders to determine the voting rights to be accorded to the Acquiring
Person. A special stockholders' meeting must then be held at the Acquiring
Person's expense within 30 to 50 days after the Offeror's Statement is filed. If
a special meeting is not requested by the Acquiring Person, the matter will be
addressed at the next regular or special meeting of stockholders.
At the special or annual meeting at which the issue of voting rights of
control shares will be addressed, "interested stockholders" may not vote on the
question of granting voting rights to control the corporation or its parent
unless the articles of incorporation of the issuing corporation provide
otherwise. Abraxas' Articles of Incorporation do not currently contain a
provision allowing for such voting power.
If full voting power is granted to the Acquiring Person by the disinterested
stockholders, and the Acquiring Person has acquired control shares with a
majority or more of the voting power, then (unless otherwise provided in the
articles of incorporation or bylaws in effect on the tenth day following the
acquisition of a controlling interest) all stockholders of record, other than
the Acquiring Person, who have not voted in favor of authorizing voting rights
for the control shares, must be sent a notice advising them of the fact and of
their right to receive "fair value" for their shares. Abraxas' Articles of
Incorporation and Bylaws do not provide otherwise. Within 20 days of the mailing
of the notice, any
49
such stockholder may demand to receive from the corporation the "fair value" for
all or part of the stockholder's shares. "Fair value" is defined in the Control
Share Act as "not less than the highest price per share paid by the Acquiring
Person in an acquisition."
The Control Share Act permits a corporation to redeem the control shares in
the following two instances, if so provided in the articles of incorporation or
bylaws of the corporation in effect on the tenth day following the acquisition
of a controlling interest: (1) if the Acquiring Person fails to deliver the
Offeror's Statement to the corporation within 10 days after the Acquiring
Person's acquisition of the control shares; or (2) an Offeror's Statement is
delivered, but the control shares are not accorded full voting rights by the
stockholders. Abraxas' Articles of Incorporation and Bylaws do not address this
matter.
ABRAXAS SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Based upon information received from the persons concerned, each person
known to Abraxas to be the beneficial owner of more than five percent of the
outstanding shares of Abraxas common stock, each director, each of the named
executive officers and all of Abraxas directors and officers as a group, owned
beneficially as of July 24, 2001, the number and percentage of outstanding
shares of Abraxas common stock indicated in the following table:
NAME AND ADDRESS OF
BENEFICIAL OWNER NUMBER OF SHARES(1)
PERCENTAGE
---------------- -------------------
----------
Longwood Investment Advisors, Inc. ............ 1,382,850
5.32
One International Place
Suite 2401
Boston, MA 02110
Driehaus Capital Management, Inc. ............. 1,365,054
5.25
25 East Erie Street
Chicago, IL 60611
Robert L. G. Watson............................ 948,514(2)
3.56
Franklin A. Burke.............................. 619,390(3)
2.74
James C. Phelps................................ 193,961(4)
*
Chris E. Williford............................. 262,428(5)
1.00
Lee T. Billingsley............................. 113,268(6)
*
Robert W. Carington, Jr........................ 436,304(7)
1.66
William H. Wallace............................. 51,893(8)
*
Craig S. Bartlett, Jr.......................... 33,000(9)
*
Ralph F. Cox................................... 125,000(9)
*
Frederick M. Pevow, Jr......................... 25,000(9)
*
Joseph A. Wagda................................ 25,000(9)
*
All Officers and Directors as a Group
2,833,758(2)(3)(4)(5)(6)(7)(8)(9) 10.32
(11 persons).................................
------------------------
* Less than 1%
(1) Unless otherwise indicated, all shares are held directly with sole voting
and investment power.
(2) Includes 34,209 shares issuable upon exercise of options granted pursuant to
the 1993 Plan, 390,791 shares issuable upon exercise of options granted
pursuant to the LTIP, and 210,640 shares issuable upon exercise of options
granted pursuant to the 2000 Plan. Does not include a total of
50
75,880 shares owned by the Robert L. G. Watson, Jr. Trust and the Carey B.
Watson Trust, the trustees of which are Mr. Watson's brothers and the
beneficiaries of which are Mr. Watson's children. Mr. Watson disclaims
beneficial ownership of the shares owned by these trusts.
(3) Includes 8,900 shares issuable upon exercise of options granted pursuant to
the Non-Qualified Plan and 15,750 shares issuable upon exercise of options
granted pursuant to the Amended and Restated Director Stock Option Plan (the
"Director Option Plan").
(4) Includes 150,000 shares owned by Marie Phelps, Mr. Phelps' wife, 15,750
shares issuable upon exercise of options granted pursuant to the Director
Option Plan and 1,500 shares issuable upon exercise of options granted
pursuant to an option agreement.
(5) Includes 1,786 shares issuable upon exercise of options pursuant to the ISO
Plan, 18,214 shares issuable upon exercise of options granted pursuant to
the 1993 Plan, 131,251 shares issuable upon exercise of options granted
pursuant to the LTIP and 88,175 shares issuable upon exercise of options
granted pursuant to the 2000 Plan.
(6) Includes 36,500 shares issuable upon exercise of options granted pursuant to
the LTIP, 1,000 shares in a retirement account and 24,493 shares issuable
upon exercise of options granted pursuant to the 2000 Plan.
(7) Includes 245,000 shares issuable upon exercise of options granted pursuant
to the LTIP and 127,364 shares issuable upon exercise of options granted
pursuant to the 2000 Plan.
(8) Includes 10,750 shares issuable upon exercise of options granted pursuant to
the LTIP.
(9) Includes 25,000 shares issuable upon exercise of certain option agreements.
POST-TRANSACTION ABRAXAS SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Assuming the consummation of the offer and the completion of any Compulsory
Acquisition and Subsequent Acquisition Transaction, the following table sets
forth the ownership of shares of Abraxas common stock by each director, each of
the named executive officers and all of the Abraxas directors and officers as a
group, upon completion of the transactions described herein.
NAME AND ADDRESS OF
BENEFICIAL OWNER NUMBER OF SHARES(1)
PERCENTAGE
---------------- -------------------
----------
Robert L. G. Watson............................ 1,096,821(2)
3.58
Franklin A. Burke.............................. 1,219,390(3)
4.07
James C. Phelps................................ 342,280(4)
1.15
Chris E. Williford............................. 262,428(5)
*
Lee T. Billingsley............................. 126,168(6)
*
Robert W. Carington, Jr........................ 465,704(7)
1.65
William H. Wallace............................. 51,893(8)
*
Craig S. Bartlett, Jr.......................... 33,000(9)
*
Ralph F. Cox................................... 185,000(9)
*
Frederick M. Pevow, Jr......................... 25,000(9)
*
Joseph A. Wagda................................ 25,000(9)
*
All Officers and Directors as a Group
3,832,684(2)(3)(4)(5)(6)(7)(8)(9) 12.17
(11 persons).................................
------------------------
* Less than 1%
51
(1) Unless otherwise indicated, all shares are held directly with sole voting
and investment power.
(2) Includes 34,209 shares issuable upon exercise of options granted pursuant to
the 1993 Plan, 390,791 shares issuable upon exercise of options granted
pursuant to the LTIP, and 210,640 shares issuable upon exercise of options
granted pursuant to the 2000 Plan. Also includes 65,545 shares issuable upon
exercise of options granted pursuant to the LTIP resulting from the proposed
exchange of Grey Wolf options into Abraxas options contemplated by the offer
and subject to the approval of Proposal 3 at the Abraxas annual meeting.
Does not include a total of 75,880 shares owned by the Robert L. G. Watson,
Jr. Trust and the Carey B. Watson Trust, the trustees of which are Mr.
Watson's brothers and the beneficiaries of which are Mr. Watson's children.
Mr. Watson disclaims beneficial ownership of the shares owned by these
trusts.
(3) Includes 8,900 shares issuable upon exercise of options granted pursuant to
the Non-Qualified Plan and 15,750 shares issuable upon exercise of options
granted pursuant to the Amended and Restated Director Stock Option Plan (the
"Director Option Plan").
(4) Includes 150,000 shares owned by Marie Phelps, Mr. Phelps' wife, 15,750
shares issuable upon exercise of options granted pursuant to the Director
Option Plan and 1,500 shares issuable upon exercise of options granted
pursuant to an option agreement. Also includes 5,557 shares issuable upon
exercise of options granted pursuant to the LTIP, resulting from the
proposed exchange of Grey Wolf options into Abraxas options contemplated by
the offer and subject to the approval of Proposal 3 at the Abraxas annual
meeting.
(5) Includes 1,786 shares issuable upon exercise of options pursuant to the ISO
Plan, 18,214 shares issuable upon exercise of options granted pursuant to
the 1993 Plan, 131,251 shares issuable upon exercise of options granted
pursuant to the LTIP and 88,175 shares issuable upon exercise of options
granted pursuant to the 2000 Plan.
(6) Includes 36,500 shares issuable upon exercise of options granted pursuant to
the LTIP, 1,000 shares in a retirement account and 24,493 shares issuable
upon exercise of options granted pursuant to the 2000 Plan.
(7) Includes 245,000 shares issuable upon exercise of options granted pursuant
to the LTIP and 127,364 shares issuable upon exercise of options granted
pursuant to the 2000 Plan.
(8) Includes 10,750 shares issuable upon exercise of options granted pursuant to
the LTIP.
(9) Includes 25,000 shares issuable upon exercise of certain option agreements.
TRADING IN SHARES OF ABRAXAS COMMON STOCK
The following table sets forth the price and volume ranges of shares of
Abraxas common stock on a monthly basis for the last two quarters and for the
current quarter through July 24, 2001, and on a quarterly basis for the
preceding seven quarters. Abraxas common stock began trading on the AMEX on
August 18, 2000, under the symbol "ABP." Abraxas common stock was formerly
listed on the NASDAQ Stock Market under the symbol "AXAS," however, effective
June 16, 1999, Abraxas common stock was delisted from quotation on the NASDAQ
Stock Market for failure to satisfy NASDAQ's
52
listing at maintenance standards. During the period beginning June 16, 1999 and
ending August 17, 2000, Abraxas common stock traded on the OTC Bulletin Board
under the symbol "AXAS."
PERIOD HIGH LOW
VOLUME
------ -------- --------
----------
2000
October................................................. $3.94 $3.00
1,557,200
November................................................ 3.50 2.81
1,793,200
December................................................ 4.56 3.00
1,785,800
2001
January................................................. $5.08 $3.69
6,259,900
February................................................ 4.94 4.55
2,421,400
March................................................... 5.32 4.50
4,121,700
April................................................... 4.85 4.13
1,764,700
May..................................................... 4.98 3.95
4,407,000
June.................................................... 4.39 3.10
2,516,300
July (through July 24, 2001)............................ 3.59 2.88
1,846,500
1999
First Quarter........................................... $3.19 $1.19
5,502,822
Second Quarter (NASDAQ through June 16, 1999)........... 2.82 0.88
3,237,039
Third Quarter........................................... 2.97 0.88
2,380,200
Fourth Quarter.......................................... 2.44 0.81
2,993,100
2000
First Quarter........................................... $2.81 $1.06
3,940,000
Second Quarter.......................................... 2.38 1.34
5,758,800
Third Quarter (OTC through August 17, 2000)............. 2.75 1.38
3,783,800
Third Quarter (AMEX through September 30, 2000)......... 4.00 2.75
3,300,800
Fourth Quarter.......................................... 4.56 2.81
5,136,200
2001
First Quarter........................................... $5.32 $3.69
12,803,000
Second Quarter.......................................... 4.98 3.10
8,688,000
Third Quarter (through July 24, 2001)................... 3.59 2.88
1,846,500
53
ACQUISITIONCO
AcquisitionCo is a wholly-owned subsidiary of Abraxas and was incorporated
under the Alberta Business Corporations Act on May 31, 2001 for the purpose of
making the offer. AcquisitionCo has no material assets or liabilities and no
operating history.
The names, municipalities of residence and principal occupation of the
directors and officers of AcquisitionCo are as follows:
NAME AND MUNICIPALITY OF RESIDENCE POSITION
PRINCIPAL OCCUPATION
---------------------------------- --------
--------------------
Robert L.G. Watson, ......................... President and Director Chairman
of the Board,
San Antonio, Texas
President and Chief
Executive Officer of
Abraxas
Chris E. Williford, ......................... Vice President,
Executive Vice President
San Antonio, Texas Secretary and Chief and
Chief Financial
Financial Officer Officer
of Abraxas
Mark Smith, ................................. Director Partner,
Osler, Hoskin &
Calgary, Alberta Harcourt
LLP
Further information with respect to AcquisitionCo is set forth in Annex F,
which is incorporated into and forms a part of this circular.
GREY WOLF
GENERAL
Grey Wolf is a crude oil and natural gas company which focuses its efforts
on exploring for, developing, acquiring and producing crude oil and natural gas
in western Canada and the Northwest Territories. Natural gas in central and
northern Alberta accounts for over 90% of Grey Wolf's reserves and production.
For more information on Grey Wolf, you should read the information included
in Annex B.
RECENT ACTIVITIES
The following is a summary of Grey Wolf's recent drilling activities
- In Caroline, Alberta, Grey Wolf drilled five natural gas wells,
completed construction of natural gas gathering lines for well tie-in
and installed compression at its natural gas plant in the area since
mid-2000. Grey Wolf's net production from the Caroline area averaged
4.4 MMcfpd and 200 BOPD during April 2001. A 3D seismic program over
this acreage was completed during the 2000/2001 winter season.
- In Pouce Coupe/Valhalla, Alberta, Grey Wolf completed the drilling of
seven new wells since mid-2000. During April 2001, Grey Wolf's net
production from this area averaged 1.8 MMcfpd and 70 BOPD. A 3D seismic
program over this acreage was completed during the 2000/2001 winter
season.
- In the Ladyfern area of northeastern British Columbia, Grey Wolf
participated in a 3D seismic program on its acreage directly offsetting
the drilling programs being conducted by several companies.
54
DESCRIPTION OF GREY WOLF SHARE CAPITAL
The authorized capital of Grey Wolf consists of an unlimited number of
common shares of which 12,804,628 common shares were issued and outstanding as
of July 24, 2001. The holders of the common shares are entitled to one vote per
share at all meetings of shareholders of Grey Wolf. The common shares are
entitled to dividends, when and if declared by the directors of Grey Wolf, and
to receive the remaining property of Grey Wolf on dissolution.
DIVIDEND RECORD OF GREY WOLF
Based on publicly available information, Abraxas believes that Grey Wolf has
not paid any dividends on the Grey Wolf common shares in the past two fiscal
years. Any future determination to pay dividends on the Grey Wolf common shares
will be in the discretion of the board of directors of Grey Wolf and will depend
on Grey Wolf's results of operations, financial condition, capital requirements,
credit-related obligations and other factors that the board of directors of Grey
Wolf may deem relevant in the circumstances.
BENEFICIAL OWNERSHIP OF SHARES OF GREY WOLF
Based upon information received from the persons concerned, each person
known to AcquisitionCo to be the beneficial owner of more than five percent of
the outstanding Grey Wolf common shares, each director, each of the named
executive officers and all of Grey Wolf's directors and officers as a group,
owned beneficially as of July 24, 2001, the number and percentage of outstanding
shares of Grey Wolf's Common Stock indicated in the following table:
NAME AND ADDRESS OF
BENEFICIAL OWNER NUMBER OF SHARES(1)
PERCENTAGE
---------------- -------------------
----------
Abraxas........................................ 6,190,482(2)
48.3
Franklin A. Burke ............................. 1,000,000
7.81
3725 Bristol Road
Doyleston, PA 18901
Robert L.G. Watson............................. 229,355(3)
1.78
Donald B. Copeland............................. 93,793(4)
*
John F. Curran................................. 51,510(5)
*
Orval K. Horn.................................. 42,188(6)
*
Richard M. Riggs............................... 191,847(7)
1.50
James C. Phelps................................ 251,654(8)
1.96
James K. Wilson................................ 173,918(9)
1.35
Vincent J. Tkachyk............................. 201,734(10)
1.56
All Officers and Directors as a Group
1,235,999(3)(4)(5)(6)(7)(8)(9)(10) 9.34
(8 persons)..................................
------------------------
Notes:
* Less than 1%
(1) Unless otherwise indicated, all shares are held directly with sole voting
and investment power.
(2) Includes the 345,279 common shares (or 2.7%) held by its wholly-owned
subsidiary, Canadian Abraxas.
(3) Includes 91,419 shares issuable upon exercise of options granted pursuant to
the Grey Wolf stock option plan.
55
(4) Includes 39,618 shares issuable upon exercise of options granted pursuant to
the Grey Wolf stock option plan.
(5) Includes 41,060 shares issuable upon exercise of options granted pursuant to
the Grey Wolf stock option plan.
(6) Includes 25,338 shares issuable upon exercise of options granted pursuant to
the Grey Wolf stock option plan.
(7) Includes 8,910 shares issuable upon exercise of options granted pursuant to
the Grey Wolf stock option plan.
(8) Includes 25,000 shares owned by Marie Phelps, Mr. Phelps' wife and 13,717
shares issuable upon exercise of options granted pursuant to the Grey Wolf
stock option plan.
(9) Includes 7,167 shares owned by Joanne Wallace, Mr. Wilson's wife and 100,000
shares issuable upon exercise of options granted pursuant to the Grey Wolf
stock option plan.
(10) Includes 20,582 shares owned by Ellen Tkachyk, Mr. Tkachyk's wife, and
115,074 shares issuable upon exercise of options granted pursuant to the
Grey Wolf stock option plan.
BENEFICIAL OWNERSHIP OF ABRAXAS DIRECTORS AND OFFICERS IN SHARES OF GREY
WOLF
Based upon information received from the persons concerned, each person
known to AcquisitionCo, each director, each of the named executive officers and
all of Abraxas directors and officers as a group, owned beneficially as of
July 24, 2001, the number and percentage of outstanding Grey Wolf common shares
indicated in the following table:
NAME NUMBER OF SHARES
PERCENTAGE
---- ----------------
----------
Robert L.G. Watson.......................................... 229,355(1)
1.78
Chris E. Williford.......................................... 0
*
Robert W. Carington, Jr..................................... 49,000
*
Craig S. Bartlett, Jr....................................... 0
*
Franklin A. Burke........................................... 1,000,000
7.81
Ralph F. Cox................................................ 100,000
*
Frederick M. Pevow, Jr...................................... 0
*
James C. Phelps............................................. 251,654(2)
1.96
Joseph A. Wagda............................................. 0
*
Richard M. Riggs............................................ 191,847(3)
1.50
All as a group..............................................
1,821,856(1)(2)(3) 14.10
------------------------
Notes:
* Less than 1%
(1) Includes 91,419 shares issuable upon exercise of options granted pursuant to
the Grey Wolf stock option plan.
(2) Includes 13,717 shares issuable upon exercise of options granted pursuant to
the Grey Wolf stock option plan.
(3) Includes 8,910 shares issuable upon exercise of options granted pursuant to
the Grey Wolf stock option plan.
56
TRADING IN SHARES OF GREY WOLF
The common shares of Grey Wolf's predecessor, Cascade Oil & Gas, Ltd, began
trading on the Alberta Stock Exchange under the symbol "COL" in August, 1987.
Grey Wolf's common shares were traded on the Alberta Stock Exchange beginning
June 22, 1998 under the symbol "GWX." On January 7, 1999, Grey Wolf's common
shares began trading on the Toronto Stock Exchange. On June 14, 1999, Grey Wolf
effected a one-for-ten reverse stock split.
The following table sets forth certain information as to the high and low
sales price and volume on the Alberta Stock Exchange of the Grey Wolf common
shares from January 1, 1998, until January 6, 1999 and on the Toronto Stock
Exchange from January 7, 1999 until July 24, 2001. As of July 24, 2001, Grey
Wolf had 12,804,628 common shares outstanding and had approximately 76
shareholders of record.
PERIOD HIGH LOW
VOLUME
------ -------- --------
---------
2000
October.............................................. C$2.25 C$1.95
371,300
November............................................. 2.13 1.60
328,898
December............................................. 2.25 1.80
380,274
2001
January.............................................. C$2.90 C$2.05
340,269
February............................................. 2.95 2.78
401,357
March................................................ 3.28 2.80
752,431
April................................................ 3.90 3.00
507,476
May.................................................. 4.15 3.45
456,534
June................................................. 4.01 2.60
109,000
July (through July 24, 2001)......................... 3.29 2.70
70,000
1999
First Quarter........................................ C$0.32 C$0.12
131,525
Second Quarter....................................... 0.28 0.11
320,185
Third Quarter........................................ 2.80 0.93
344,092
Fourth Quarter....................................... 2.70 1.12
230,778
2000
First Quarter........................................ C$1.80 C$1.20
314,715
Second Quarter....................................... 2.10 1.26
810,107
Third Quarter........................................ 2.45 1.45
2,585,964
Fourth Quarter....................................... 2.25 1.50
1,080,472
2001
First Quarter........................................ C$3.28 C$$1.95
1,494,057
Second Quarter....................................... 4.15 2.60
1,073,010
Third Quarter (through July 24, 2001)................ 3.29 2.70
70,000
COMMITMENTS TO ACQUIRE SECURITIES
No securities of Grey Wolf are covered by any commitments made by
AcquisitionCo or Abraxas or their respective directors or senior officers, nor
to the knowledge of AcquisitionCo and Abraxas, after reasonable inquiry, by any
associate of a director or senior officer of AcquisitionCo and Abraxas, any
person acting jointly or in concert with AcquisitionCo and Abraxas or by any
person or company who beneficially owns, directly or indirectly, more than 10%
of any class of equity securities of AcquisitionCo or Abraxas.
57
PREVIOUS DISTRIBUTIONS, SALES AND PURCHASES
Based on publicly available information, AcquisitionCo believes that the
only distributions of Grey Wolf common shares (not including distributions of
options granted under the stock option plan adopted for officers, directors and
certain employees of Grey Wolf) effected during the previous five completed
fiscal years of Grey Wolf (other than pursuant to the exercise of options
granted under the stock option plan) were as follows:
In December 1993, Cascade Oil & Gas Ltd. amalgamated with Index
Petroleums Ltd. to form Cascade, an Alberta-based corporation whose shares
traded on the Alberta Stock Exchange under the symbol "COL."
In January 1996, Abraxas purchased 40,910,000 common shares of Ltd at a
price of C$0.10 per share for a total investment of C$4.1 million, Ltd, in turn,
invested these proceeds in 40,910,000 newly-issued shares of Cascade at a price
of C$0.10 per share. This transaction gave Abraxas effective ownership of
approximately 52% of the common shares of Cascade.
In November 1996, Abraxas formed Canadian Abraxas, and Canadian Abraxas
acquired 100% of the outstanding capital stock of CGGS Canadian Gas Gathering
Systems Inc. ("CGGS") for C$130.5 million or approximately C$34.79 per share.
In June 1997, Cascade sold substantially all of its Saskatchewan properties,
which accounted for the majority of Cascade's operations at that time.
In July 1997, Cascade executed a contract to manage all of the assets of
Canadian Abraxas and further exercised an option to acquire 10% of the CGGS
interests owned by Canadian Abraxas for cash and issuance of common shares.
In September 1997, Cascade acquired 100% of the outstanding shares of
Pennant Petroleum Ltd. ("Pennant") for a total price of C$3,034,000 or C$0.40
per share in exchange for the issuance of 7,585,000 common shares.
In October 1997, Canadian Abraxas and Cascade acquired the Canadian assets
of Pacalta Resources Ltd. for cash and 4,000,000 special warrants which were
subsequently exchanged for an equal number of common shares at C$0.49 per share.
In November 1997, Cascade acquired 100% of the common shares of Ltd in
exchange for the issuance of 1,831,053 common shares to the Ltd shareholders at
a price of C$0.21 per share. Ltd was wound up into Cascade immediately
thereafter.
In June 1998, Cascade changed its name to Grey Wolf. Shares of Grey Wolf
traded on the Alberta Stock Exchange until January 1999 and currently trade on
The Toronto Stock Exchange under the symbol "GWX."
In August 1998, Grey Wolf successfully completed a prospectus offering of 50
million common shares at a price of C$0.32 per share with aggregate proceeds of
C$1.6 million. Concurrent with the closing of this offering, Grey Wolf acquired
Canadian Abraxas' share of the Pacalta assets.
In August 1998, Abraxas acquired an additional 25,000,000 common shares of
Grey Wolf for an aggregate purchase price of C$8.0 million. Immediately
thereafter, Canadian Abraxas sold an interest in certain producing properties to
Grey Wolf for C$8.5 million in cash and 2,051,282 common shares of Grey Wolf.
In January 1999, Canadian Abraxas acquired 100% of the outstanding common
shares of New Cache Petroleums Ltd. for cash at a price of C$6.50 per share and
assumption of debt. Grey Wolf subsequently acquired a portion of the New Cache
undeveloped acreage and seismic data from Canadian Abraxas.
58
In June 1999, Grey Wolf filed Articles of Amendment and a one for ten
consolidation of common shares was completed.
MATERIAL CHANGES AND OTHER INFORMATION
Except for the offer and except as otherwise disclosed publicly by Grey
Wolf, AcquisitionCo is not aware of any information which indicates that any
material change has occurred in the affairs of Grey Wolf since March 31, 2001,
the date of the last available published financial statements of Grey Wolf.
AcquisitionCo has no knowledge of any other matter that has not previously been
generally disclosed but which could reasonably be expected to affect the
decision of Grey Wolf shareholders to accept or reject AcquisitionCo's offer.
CERTAIN REPORTING AND DISCLOSURE REQUIREMENTS
Grey Wolf is subject to the information and reporting requirements of the
securities laws of certain provinces of Canada and the rules of the TSE. In
accordance therewith, Grey Wolf is required to file reports, financial
statements and other information with certain securities regulatory authorities
in Canada and with the TSE relating to its business, financial condition and
other matters. Information as of particular dates concerning Grey Wolf's
directors and officers, their remuneration, stock options granted to them, the
principal holdings of securities and any material interests of such persons in
transactions with Grey Wolf and other matters is required to be disclosed in
proxy statements distributed to shareholders and filed with certain of such
securities regulatory authorities and with the TSE and may be inspected at Grey
Wolf's offices or through the facilities of such securities regulatory
authorities and the TSE.
Pursuant to the provisions of the securities laws of certain provinces of
Canada, the directors of Grey Wolf must send a circular to all shareholders in
connection with the offer, which circular, together with other information, must
disclose any material changes in the affairs of Grey Wolf subsequent to the date
of the most recent published financial statements of Grey Wolf.
AGREEMENTS, ARRANGEMENTS OR UNDERSTANDINGS
Except as described in "Description of the Offer--Interests of Certain
Persons in the Offer" relating to the employment agreements of certain Grey Wolf
officers, there are no arrangements or agreements made or proposed to be made
between Abraxas or AcquisitionCo and any of the directors or senior officers of
Grey Wolf and no payments or other benefits are proposed to be made or given by
Abraxas or AcquisitionCo by way of compensation for loss of office or to such
directors or senior officers remaining in or retiring from office following the
completion of the offer. Except as described in "Description of the
Offer--Interests of Certain Persons in the Offer" relating to Grey Wolf stock
options, there are no agreements, arrangements or understandings, formal or
informal, between Abraxas or AcquisitionCo and any security holder of Grey Wolf
with respect to the offer or between Abraxas or AcquisitionCo and any person or
company with respect to any securities of Grey Wolf in relation to the offer.
59
DESCRIPTION OF THE OFFER
GENERAL
AcquisitionCo is hereby offering to exchange, subject to the terms set forth
in the formal Offer to Purchase beginning on page 31, 0.6 of a share of Abraxas
common stock for each of the issued and outstanding Grey Wolf common shares
which Grey Wolf shareholders validly deposit, and do not properly withdraw,
before the Expiry Time. No fractional shares of Abraxas common stock will be
issued in connection with the offer and any Grey Wolf shareholder who would be
entitled to receive a fractional share in the offer will receive, at the option
of AcquisitionCo, cash in lieu of such fractional share or a whole share of
Abraxas common stock.
For a summary of the offer, Grey Wolf shareholders and Abraxas stockholders
should read the summary beginning on page 1 of this document. For answers to
certain questions, Grey Wolf shareholders and Abraxas stockholders should read
the Questions and Answers beginning on page ix. For more detailed information,
Grey Wolf shareholders and Abraxas stockholders should read the formal Offer to
Purchase beginning on page 31.
BACKGROUND OF THE OFFER
Since January 1, 1991, Abraxas' principal means of growth has been through
the acquisition and subsequent development and exploitation of producing
properties and related assets. Since 1995, Abraxas has considered western Canada
to be an area of strategic importance in achieving its growth objectives.
Robert L.G. Watson, Abraxas' President, Chairman of the Board and Chief
Executive Officer, and Grey Wolf's Chairman of the Board and Chief Executive
Officer, James C. Phelps, a director of Abraxas and Grey Wolf, and Richard M.
Riggs, an advisory director of Abraxas and a director of Grey Wolf, were
founders of Grey Wolf Exploration, Ltd., a privately-held Canadian company
(which are referred to in this document as "Ltd"), and in April 1995 purchased
900,000 shares of the capital stock of Ltd (initially representing 39% of the
outstanding shares of Ltd) for an aggregate of C$90,000 (or C$0.10 per share) in
cash.
In January 1996, Abraxas invested C$4.1 million in Ltd which, in turn,
invested these proceeds in newly-issued shares of Cascade Oil & Gas, Ltd.
("Cascade"), an Alberta-based corporation whose common shares were traded on The
Alberta Stock Exchange. Abraxas' initial purchase was for 40,910,000 shares
of Ltd, representing 78% of the issued and outstanding shares of Ltd at that
time. In November 1997, Ltd merged into Cascade. At that time, Abraxas'
ownership position in Cascade was 52% of the capital stock of Cascade. In June
1998, Cascade changed its name to Grey Wolf Exploration Inc.
In pursuing its strategy in western Canada, Abraxas, through its
wholly-owned subsidiary, Canadian Abraxas, acquired all of the capital stock of
CGGS Canadian Gas Gathering Systems, Inc. in November 1996 for C$130.5 million.
Grey Wolf manages the operations of Canadian Abraxas pursuant to a management
agreement between Canadian Abraxas and Grey Wolf. For more information on the
amount paid by Canadian Abraxas to Grey Wolf under the management agreement, you
should read the information under "Proposal 2--Certain Transactions" beginning
on page 121. Under the management agreement, Canadian Abraxas reimburses Grey
Wolf for reasonable costs or expenses attributable to Canadian Abraxas and for
administrative expenses based upon the percentage that Canadian Abraxas' gross
revenue bears to the total gross revenue of Canadian Abraxas and Grey Wolf.
In August 1998, Abraxas acquired an additional 25,000,000 common shares of
Grey Wolf for an aggregate purchase price of C$ 8.0 million. Immediately
thereafter, Canadian Abraxas sold an interest in certain producing properties to
Grey Wolf for C$8.5 million in cash and 2,051,282 common shares of Grey Wolf. In
May 1999, Grey Wolf shareholders approved the consolidation of the capital
shares on
60
the basis of one common share for each ten common shares outstanding. Together,
Abraxas and Canadian Abraxas currently own approximately 48.3% of the common
shares of Grey Wolf.
In addition to common shares of Grey Wolf owned by Abraxas and Canadian
Abraxas, certain officers and directors of Abraxas own an aggregate of 1,714,810
Grey Wolf common shares (approximately 25.9% of the Grey Wolf common shares not
already owned by Abraxas and Canadian Abraxas) and options to purchase 114,046
Grey Wolf common shares at exercise prices ranging from C$3.20 to C$3.90.
For more information relating to the share and option ownership of the
directors and officers of Abraxas and Grey Wolf, you should read the information
under "--Interests of Certain Persons in the Offer" on page 79.
At a regular meeting of the Abraxas board of directors held on November 21,
2000, Mr. Watson presented and the board of directors discussed Abraxas' goals
and strategies for 2001 and the board of directors unanimously authorized Mr.
Watson to begin discussions with the appropriate individuals at Grey Wolf who
could negotiate Abraxas' proposed acquisition of the shares of Grey Wolf that
Abraxas and Canadian Abraxas did not already own.
During December 2000, Mr. Watson began a dialogue about a potential merger
with James K. Wilson, Senior Vice President and Chief Financial Officer of Grey
Wolf.
On January 25, 2001, the Abraxas board of directors appointed Craig S.
Bartlett, Jr. and Ralph F. Cox as members of the Independent Committee of the
board of directors of Abraxas and authorized them to negotiate the terms of a
potential acquisition of the remaining shares of Grey Wolf not currently held by
Abraxas and Canadian Abraxas on behalf of the public stockholders of Abraxas and
all matters incidental to performing that duty, including retaining financial
and legal advisors, reviewing relevant information and documents, and advising
the board of directors of Abraxas of its recommendation for or against the
proposed transaction.
On January 8, 2001, the Abraxas Independent Committee sent a letter to
Donald B. Copeland and John F. Curran, the members of the Grey Wolf board of
directors who were not also members of the Abraxas board of directors, offering
to acquire all of the outstanding shares of Grey Wolf that Abraxas and Canadian
Abraxas did not currently own in a stock for stock transaction utilizing a
relative net asset value calculation to determine the exchange ratio. Based on
then available reserve information and other financial data, the Abraxas
Independent Committee stated that it would propose an exchange ratio of 0.66 of
a share of Abraxas common stock for each outstanding common share of Grey Wolf,
subject to due diligence, confirmatory reserve valuation analysis, receipt of
corporate approvals, the effectiveness of a registration statement covering the
issuance of shares of Abraxas common stock in the offer, Abraxas' receipt of an
opinion from an investment banking firm that the exchange ratio was fair from a
financial point of view to the Abraxas stockholders and other customary
conditions.
In response to the January 8 letter, on January 15, 2001, the board of
directors of Grey Wolf officially appointed Donald B. Copeland and John F.
Curran as members of the Special Committee of the board of directors of Grey
Wolf.
On January 19, 2001, Abraxas and Grey Wolf issued a joint press release
announcing that they were in discussions concerning Abraxas' proposed stock for
stock acquisition of the remaining 51% ownership of Grey Wolf that Abraxas and
Canadian Abraxas did not already own.
At a joint meeting of the Abraxas Independent Committee and the Grey Wolf
Special Committee held on January 22, 2001, the committees discussed the basic
net asset valuation calculation to be utilized in arriving at the exchange ratio
and the status of the preparation of the December 31, 2000 Abraxas and Grey Wolf
independent petroleum engineers' reserve reports and audited financial
statements. The committees agreed in principle that the basis for the
calculation of the exchange ratio
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would be a relative net asset valuation of the two companies. The committees
further discussed the retention of financial and legal advisors by each
committee, the basic terms of an initial draft of a combination agreement, a
timeline, and other pertinent issues.
At a regular meeting of the board of directors of Abraxas held on January
25, 2001, the board received a status report from the Abraxas Independent
Committee regarding the Committee's planned process and Mr. Watson reiterated
Abraxas' desire to move ahead with the discussions with Grey Wolf.
On February 12, 2001, the Abraxas Independent Committee determined to retain
Hughes & Luce, LLP as its legal advisor and CIBC World Markets Corp. ("CIBC") as
its financial advisor. Although negotiation of the terms of the engagement of
CIBC continued until the engagement letter was executed on March 7, 2001, CIBC
commenced its financial and operational review of Grey Wolf soon after the
Abraxas Independent Committee determined to retain CIBC as its financial
advisor.
At a meeting held on February 13, 2001, the Abraxas Independent Committee
discussed with its financial advisors, legal advisors, counsel to Abraxas and
members of Abraxas management the current status of negotiations and draft
combination agreement, due diligence review for the proposed transaction, issues
under Canadian law including tax matters related to exchangeable shares, and the
proposed timeline of the potential transaction.
On February 15, 2001, Abraxas and Grey Wolf entered into a confidentiality
agreement in preparation of exchanging certain information concerning their
respective businesses, financial condition, operations, assets and liabilities.
At a joint meeting of the Abraxas Independent Committee and the Grey Wolf
Special Committee held on February 21, 2001, the committees discussed the status
of the various components of the relative net asset value calculation, including
the appropriate benchmark price to apply to the December 31, 2000 year-end
reserves for utilization in the calculation. Additional issues with respect to
exchangeable shares, change of control agreements, option agreements, commodity
price forecasts, financial/legal advisors and due diligence sessions were
discussed.
On February 22, 2001, the Abraxas Independent Committee met. At this
meeting, legal counsel to the Abraxas Independent Committee advised the Abraxas
Independent Committee of the fiduciary duties of boards of directors and special
committees' evaluating interested party transactions. In this meeting, Mr. Cox
informed legal counsel that he owned 100,000 common shares (less than 1%) of
Grey Wolf. The Abraxas Independent Committee and counsel discussed Mr. Cox's
ownership of Grey Wolf common shares, his significantly larger ownership of
Abraxas common stock, and whether his ownership of the two companies' securities
might have some impact on his ability to make independent judgments regarding
the proposed transaction. Mr. Cox and Mr. Bartlett agreed that even though they
believed that Mr. Cox was independent in fact, it may be appropriate that he
resign from the Abraxas Independent Committee to avoid any perceived conflict of
interest.
At a meeting of the board of directors of Abraxas held on February 26, 2001,
the board discussed a preliminary timetable as well as the terms of the proposed
transaction. The board discussed Mr. Cox's status as a shareholder of Grey Wolf
and potential conflict of interest. Mr. Cox then offered his resignation from
the Abraxas Independent Committee to avoid any appearance of a potential
conflict of interest and the board unanimously passed a resolution authorizing
Mr. Bartlett to serve as the sole director comprising the Abraxas Independent
Committee.
At a joint meeting of the Abraxas Independent Committee and the Grey Wolf
Special Committee held on March 1, 2001, the committees discussed the
engineering reports delivered by the parties' respective independent petroleum
engineering firms, the outstanding business and legal issues raised by the draft
combination agreement, the various components comprising the relative net asset
value calculation, and timetable issues.
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On March 2, 2001, Grey Wolf issued a press release announcing that the Grey
Wolf Special Committee had retained Raymond James & Associates, Inc. as its
financial advisors.
Joint due diligence meetings were held at the offices of Abraxas on March 5
and 6, 2001, at which time the management of both Abraxas and Grey Wolf
presented in detail the exploration and development activities, operating
results and financial condition and future prospects of each company. Several
components of the relative net asset value calculation were discussed and agreed
upon, including the value of each company's undeveloped acreage and the
benchmark pricing to apply to each company's year-end reserves. The Abraxas
Independent Committee met at this time with its financial and legal advisors to
discuss issues related to the terms of the proposed combination and valuation
issues.
On March 7, 2001, Abraxas issued a press release announcing that the Abraxas
Independent Committee had formally retained CIBC World Markets Corp. as its
financial advisor.
At a joint meeting of the Abraxas Independent Committee and Grey Wolf
Special Committee held on March 8, 2001, the committees discussed a specific
component of the net asset value calculation--gas plant valuation. The
committees also received confirmation that the independent petroleum engineers
for both companies were preparing year-end reserve reports utilizing the agreed
upon benchmark pricing and that the reserve reports would be available the
following week. Pending business issues related to the proposed transaction were
also discussed.
On March 8, 2001, the Abraxas Independent Committee met with its legal
counsel and financial advisor to discuss outstanding issues raised by the
discussions with the Grey Wolf Special Committee's legal counsel regarding the
combination agreement, and to discuss valuation issues raised in the March 5 and
6 due diligence meetings and subsequent conversations between Abraxas and Grey
Wolf representatives. The principal valuation issues related to the proper
approach in valuing "proved undeveloped properties" and the respective
companies' relative levels of long term debt, as well as the gas plant valuation
issue. Other matters included stock option plan issues raised by the proposed
combination, termination fees, shareholder approval requirements, and the proper
scope of representations and warranties and covenants.
On March 16, 2001, Abraxas engaged CIBC World Markets Corp. to act as one of
its advisors in determining Abraxas' financial alternatives. As a consequence of
this general engagement by Abraxas, in order to avoid any potential conflict of
interest in advising the Abraxas Independent Committee while advising Abraxas
generally, CIBC resigned its engagement as financial advisor to the Abraxas
Independent Committee. The Abraxas Independent Committee then commenced its
search for a replacement financial advisor.
At a joint meeting of the Abraxas Independent Committee and Grey Wolf
Special Committee held on March 19, 2001, the committees reviewed the
combination analysis prepared by the Abraxas Independent Committee. Additional
information concerning several specific calculations in the combination analysis
were requested and subsequently provided to the Grey Wolf Special Committee.
At a joint meeting of the Abraxas Independent Committee and Grey Wolf
Special Committee held on March 22, 2001, the Grey Wolf Special Committee,
having reviewed the combination analysis prepared by the Abraxas Independent
Committee, responded with three primary comparative valuation issues, stating
that although the process of the relative net asset value calculation was useful
as a quantitative analysis, the analysis did not address the qualitative
concerns of the Grey Wolf Special Committee, including:
- the companies' relative percentages of reserves held in different property
categories, that is, in "proven developed producing reserves," and "proven
developed non-producing reserves" versus "proved undeveloped and probable
reserves";
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- the companies' comparative levels of long-term debt; and
- Grey Wolf's cash flow multiple.
At the March 22 meeting, the Abraxas Independent Committee advised the Grey
Wolf Special Committee that CIBC World Markets Corp. had resigned as financial
advisors and that Jefferies & Company, Inc. had been retained as the replacement
financial advisor to the Abraxas Independent Committee. Jefferies &
Company, Inc. began its financial and operational review of Grey Wolf on March
20, 2001, and an engagement letter between Jefferies & Company, Inc. and the
Abraxas Independent Committee was executed on April 16, 2001.
At a regular meeting of the board of directors of Abraxas held later on
March 22, 2001, the board unanimously authorized the Abraxas Independent
Committee, in conjunction with Abraxas management, to formulate a final offer
for the exchange ratio based on the relative net asset value data that had been
collected and analyzed over the last three months, after applying the parties'
agreement on various valuation components and taking into account any other
valuation factors that the Abraxas Independent Committee believed appropriate.
At a special meeting of the board of directors of Abraxas held on March 28,
2001, the board discussed the recommendation of the Abraxas Independent
Committee regarding the calculation of the exchange ratio. The Abraxas
Independent Committee reported that based solely on a net asset value analysis
as completed by Abraxas' independent petroleum engineers, an exchange ratio of
0.47 of a share of Abraxas common stock for each issued and outstanding common
share of Grey Wolf would be implied. After taking into account the three
valuation factors raised in the March 22 meeting, however, the Abraxas
Independent Committee, after substantial discussion, recommended proposing an
exchange ratio of between 0.565 and 0.6 of a share of Abraxas common stock for
each issued and outstanding common share of Grey Wolf. The Abraxas Independent
Committee also reported that based on discussions with Jefferies &
Company, Inc., the Abraxas Independent Committee believed that Jefferies &
Company, Inc. would be able to conclude that an exchange ratio within the
described range would be fair from a financial point of view to the Abraxas
stockholders other than those Abraxas stockholders who also own Grey Wolf common
shares. Upon the Abraxas Independent Committee's recommendation, the Abraxas
board of directors unanimously authorized the Abraxas Independent Committee to
prepare and extend a formal written offer for 0.565 of a share of Abraxas common
stock for each outstanding common share of Grey Wolf. The board further
authorized the Abraxas Independent Committee to increase the exchange ratio up
to 0.6 if the Abraxas Independent Committee deemed it appropriate to do so.
On April 4, 2001, the Abraxas Independent Committee sent a letter to the
Grey Wolf Special Committee offering to acquire all of the outstanding shares of
Grey Wolf that Abraxas and Canadian Abraxas did not currently own for 0.565 of a
share of Abraxas common stock for each outstanding common share of Grey Wolf
that neither Abraxas nor Canadian Abraxas already owned. The Abraxas Independent
Committee requested a response within five business days.
At a joint meeting of the Abraxas Independent Committee and Grey Wolf
Special Committee held on April 6, 2001, the Grey Wolf Special Committee advised
the Abraxas Independent Committee that it had met with Raymond James to discuss
the Abraxas Independent Committee's proposal and that it would present Abraxas'
offer to the board of directors of Grey Wolf; but that, in the Grey Wolf Special
Committee's view, a 0.565 exchange ratio was not fair to the Grey Wolf
shareholders and, as a result, it would not recommend that the Grey Wolf board
accept the offer.
At a special meeting of the board of directors of Abraxas held on April 9,
2001, the board discussed the status of the proposed transaction and agreed to
reconvene and address the result of the Grey Wolf board of directors meeting to
be held that afternoon.
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At the April 9, 2001 meeting of the board of directors of Grey Wolf, the
Grey Wolf board elected to allow the offer made by the Abraxas Independent
Committee to expire in accordance with its terms. Messrs. Watson, Phelps and
Riggs participated in this meeting but recused themselves from voting on the
Abraxas proposal since Messrs. Watson and Phelps are also directors of Abraxas
and Mr. Riggs is an advisory director of Abraxas.
During the ensuing two days, after consulting with the Abraxas Independent
Committee regarding its valuation analysis and proposed exchange ratio, Mr.
Watson contacted the members of the board of directors of Abraxas to discuss and
obtain verbal authorization to formulate and ultimately commence the offer,
subject to the receipt of an opinion from Jefferies & Company, Inc. that the
proposed offer is fair from a financial point of view to Abraxas stockholders
other than Abraxas stockholders who also own Grey Wolf common shares.
On April 12, 2001, Abraxas issued a press release announcing that it
intended to propose an exchange offer to acquire any or all of the outstanding
common shares of Grey Wolf not currently owned by Abraxas in exchange for shares
of Abraxas common stock at an exchange ratio of 0.6 of a share of Abraxas common
stock for each share of Grey Wolf that Abraxas and Canadian Abraxas do not
already own.
On May 29, 2001, Raymond James delivered its OSC Rule 61-501 Valuation to
the Grey Wolf Special Committee.
On June 4, 2001, the Abraxas Independent Committee met with its financial
advisor, Jefferies & Company, at which time Jefferies reviewed in detail its
analysis of Abraxas and Grey Wolf, its valuations of both companies and
methodologies for arriving at such valuations, and Jefferies delivered its
opinion that the proposed exchange ratio of 0.6 of a share of Abraxas common
stock for each share of Grey Wolf to be offered in the proposed tender offer is
fair from a financial point of view to the shareholders of Abraxas other than
Abraxas shareholders who also own Grey Wolf stock. Jefferies & Company delivered
a written opinion to the same effect on June 7, 2001. See "--Opinion of
Financial Advisor to the Abraxas Independent Committee" beginning on page 66.
REASONS FOR THE OFFER
Abraxas believes that the proposed acquisition of Grey Wolf represents a
compelling opportunity to enhance value for Abraxas stockholders and Grey Wolf
shareholders. Specifically, Abraxas estimates that a complete combination of
Grey Wolf and Abraxas would result in cost savings. As Grey Wolf is already
consolidated for Abraxas' financial reporting purposes, these savings would be
effected by further integration of operational and administrative functions of
the combined companies.
In addition, Abraxas believes that the complete combination of Grey Wolf and
Abraxas will produce substantial benefits for Abraxas stockholders and Grey Wolf
shareholders, including the following:
- ELIMINATION OF MINORITY INTEREST. Assuming 100% acceptance of the offer,
Abraxas would eliminate the entry for minority interest in Abraxas'
consolidated balance sheet, which was $12.1 million at December 31, 2000,
and increase its stockholders' equity equal to the market value of the
shares that are issued. There will be an offsetting increase in property
and equipment. Similarly, the entry in Abraxas' consolidated statements of
operations for minority interest ($1.3 million for 2000) would be
eliminated. There would be no change in Abraxas' operating income (loss)
as reported on the consolidated statements of operations.
- EXCEPTIONAL STRATEGIC FIT. Abraxas believes that Grey Wolf provides an
exceptional strategic fit with Abraxas as a result of the common ownership
of producing properties and the fact that Grey Wolf manages Canadian
Abraxas' crude oil and natural gas holdings. Grey Wolf's
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employees have experience in managing Canadian Abraxas' assets and are
thoroughly familiar with these assets.
- SIGNIFICANT PREMIUM. Abraxas is offering a significant premium over the
price of Grey Wolf's common shares at the time a possible combination was
announced on January 19, 2001, of 34%, at the time that the exchange ratio
was first announced on April 12, 2001 of 35% and a premium of 44%
utilizing the 20-day average closing price of the Grey Wolf's common
shares prior to the announcement of the exchange ratio.
- BETTER LONG-TERM GROWTH PROSPECTS. Abraxas believes that combining Abraxas
and Grey Wolf would yield better long-term growth prospects than operating
the companies separately, potentially resulting in increased shareholder
value over the long-term.
- COST SAVINGS. Abraxas expects to realize cost savings resulting from the
elimination of Grey Wolf's reporting requirements to various Canadian
federal and provincial authorities and the TSE and eliminating separate
audit and engineering expenses.
- INCREASED LIQUIDITY. The offer will provide Grey Wolf shareholders with
increased investment liquidity as a shareholder of a company, the stock of
which is traded on the AMEX, with 25,988,832 shares of common stock
outstanding as of July 13, 2001, of which approximately 23,295,024 shares
are held by non-affiliates, with an average daily trading volume of
approximately 130,000 shares during the previous 52 weeks. This compares
to Grey Wolf's 12,804,628 common shares outstanding, of which
approximately 4,813,283 shares are held by non-affiliates, with an average
daily trading volume of approximately 25,000 shares during the previous 52
weeks.
- AVAILABILITY OF FINANCING. Abraxas believes the combined companies will be
better able to access capital markets on more favorable terms than would
be possible separately.
PURPOSE OF THE OFFER AND PLANS FOR GREY WOLF
The purpose of the offer is to provide increased liquidity to Grey Wolf
shareholders and to enable AcquisitionCo to acquire any and all of the Grey Wolf
common shares not currently owned by Abraxas and its subsidiaries. The effect of
the offer is to give all Grey Wolf shareholders the opportunity to receive 0.6
of a share of Abraxas common stock for each Grey Wolf common share, representing
a 44% premium to the 20-day average closing price of the Grey Wolf common shares
on the TSE prior to the announcement of the exchange ratio in April 2001.
If AcquisitionCo acquires less than 100% of the Grey Wolf common shares
under the offer, Abraxas intends to consider all of its options with respect to
Grey Wolf, including pursuing a Compulsory Acquisition or Subsequent Acquisition
Transaction. Depending upon the number of Grey Wolf common shares ultimately
acquired by AcquisitionCo, Abraxas intends to consider various courses of action
with respect to Grey Wolf, including the continuation of the Grey Wolf business
in its current form.
RECOMMENDATION OF THE ABRAXAS BOARD OF DIRECTORS
The members of the Abraxas board participating in the board decision on the
offer unanimously recommend that Abraxas stockholders vote for the consummation
of the offer and the issuance of shares of Abraxas common stock under the offer.
OPINION OF FINANCIAL ADVISOR TO THE ABRAXAS INDEPENDENT COMMITTEE
Because certain of the members of the Abraxas Board of Directors own Grey
Wolf common shares and/or options to purchase Grey Wolf common shares, the Board
established a committee comprised of
66
an independent director (Craig S. Bartlett, Jr.) to evaluate the fairness to the
Abraxas stockholders (other than Abraxas stockholders who also own Grey Wolf
common shares) of the Abraxas proposal to acquire the Grey Wolf common shares
that Abraxas and Canadian Abraxas did not already own. We call this committee
the "Abraxas Independent Committee." The Abraxas Independent Committee retained
an independent financial advisor, Jefferies & Company, Inc., to render an
opinion as to the fairness to Abraxas stockholders other than the Abraxas
stockholders who also own Grey Wolf common shares, from a financial point of
view, of the exchange ratio in the offer. The Abraxas Independent Committee
retained Jefferies & Company based on Jefferies & Company's experience as a
financial advisor in connection with exchange offers and in securities
valuations generally, as well as Jefferies & Company's familiarity with Grey
Wolf and Abraxas.
On June 4, 2001, Jefferies & Company rendered its oral opinion to the
Abraxas Independent Committee, which was later confirmed in writing to the
effect that, as of such date and based upon and subject to the assumptions,
limitations and qualifications set forth in the opinion, the exchange ratio was
fair from a financial point of view, to the Abraxas stockholders other than the
Abraxas stockholders who also own Grey Wolf common shares. The form and amount
of the consideration to be paid in the offer was determined by Abraxas, and
Jefferies & Company did not recommend to Abraxas that any specific consideration
was appropriate for the transaction.
THE FULL TEXT OF THE OPINION OF JEFFERIES & COMPANY, IS ATTACHED AS ANNEX D
TO THIS DOCUMENT AND IS INCORPORATED INTO THIS DOCUMENT BY REFERENCE. THE
OPINION IS DIRECTED TO THE ABRAXAS INDEPENDENT COMMITTEE, AND ADDRESSES ONLY THE
FAIRNESS TO THE ABRAXAS STOCKHOLDERS OTHER THAN THE ABRAXAS STOCKHOLDERS WHO
ALSO OWN GREY WOLF COMMON SHARES, FROM A FINANCIAL POINT OF VIEW, OF THE
EXCHANGE RATIO. JEFFERIES & COMPANY PROVIDED THE OPINION TO INFORM AND ASSIST
THE ABRAXAS INDEPENDENT COMMITTEE IN CONNECTION WITH ITS CONSIDERATION OF THE
OFFER. THE OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY ABRAXAS
STOCKHOLDER AS TO HOW THE STOCKHOLDER SHOULD VOTE, OR AS TO WHAT ACTION TO TAKE,
WITH RESPECT TO THE PROPOSED OFFER. THE OPINION DOES NOT ADDRESS THE RELATIVE
MERITS OF THE OFFER OR ANY OTHER TRANSACTIONS OR BUSINESS STRATEGIES THAT MAY
HAVE BEEN CONSIDERED BY THE ABRAXAS BOARD AS ALTERNATIVES TO THE OFFER, OR THE
UNDERLYING BUSINESS DECISION OF THE ABRAXAS BOARD TO PROCEED WITH THE OFFER.
JEFFERIES & COMPANY ALSO HAS NOT EXPRESSED ANY OPINION AS TO THE PRICES AT WHICH
ABRAXAS COMMON STOCK WILL TRADE FOLLOWING THE CONSUMMATION OF THE OFFER. THE
SUMMARY OF THE OPINION SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE FULL TEXT OF THE OPINION SET FORTH IN ANNEX D. STOCKHOLDERS ARE URGED TO
READ THE OPINION CAREFULLY AND IN ITS ENTIRETY.
In the course of performing its review and analyses for rendering its
opinion, Jefferies & Company, among other things:
- reviewed the offer to exchange and offering circular to be mailed to Grey
Wolf shareholders;
- reviewed certain financial and other information that was publicly
available or furnished to Jefferies & Company by Abraxas, including the
financial terms of the offer, certain internal financial analyses,
projections, budgets, reports and other information prepared by Abraxas'
management;
- held discussions with various members of senior management of Abraxas
concerning its historical and current operations, financial condition and
prospects, as well as the strategic and operating benefits anticipated
from the offer; and
- conducted other reviews, analyses and inquiries and considered other
financial, economic and market criteria as Jefferies & Company considered
appropriate in rendering its opinion.
No limitations were imposed by the Abraxas Independent Committee on
Jefferies & Company with respect to the investigations made or procedures
followed by it in rendering its opinion. Jefferies & Company utilized an
exchange rate of U.S.$0.66 to C$1.00.
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In its review and analysis, and in arriving at its opinion, Jefferies &
Company assumed and relied upon the accuracy and completeness of all of the
financial and other information provided to it including, without limitation,
information furnished to it orally or otherwise discussed with it by the
management of Abraxas, as well as publicly available information. Jefferies &
Company did not assume any responsibility for independent investigation or
verification of any of this information. Jefferies & Company relied upon the
assurances of management of Abraxas that they were not aware of any facts that
would make this information inaccurate or misleading. Furthermore, Jefferies &
Company did not assume any responsibility for obtaining or making any
independent evaluation or appraisal of the properties, assets or liabilities,
contingent or otherwise, of Abraxas or Grey Wolf. In addition, Jefferies &
Company assumed that the offer would be consummated upon the terms set forth in
the offer to purchase and offering circular to be delivered to Grey Wolf
shareholders without waiver or modification of these terms.
With respect to the reserve reports and financial forecasts and projections
and the assumptions and bases therefor of Abraxas and Grey Wolf that
Jefferies & Company reviewed, Jefferies & Company assumed that such reserve
reports, forecasts and projections:
- had been reasonably prepared in good faith on the basis of reasonable
assumptions;
- reflected the best available estimates and judgments as to the future
financial condition and performance of Abraxas and Grey Wolf; and
- will be realized in the amounts and in the time periods estimated.
The opinion is necessarily based upon market, economic and other conditions
as in effect on, and information made available to Jefferies & Company as of,
the date of the opinion. It should be understood that subsequent developments
may affect the conclusion expressed in the opinion and that Jefferies & Company
disclaims any undertaking or obligation to advise any person of any change in
any matter affecting the opinion which may come or be brought to its attention
after the date of the opinion. The opinion is limited to the fairness, from a
financial point of view, and as of the date of the opinion, of the exchange
ratio to the Abraxas stockholders other than the Abraxas stockholders who also
own Grey Wolf common shares.
The following is a summary of certain of the financial analyses performed by
Jefferies & Company in connection with rendering its opinion. The summary of the
financial analyses is not a complete description of all of the analyses
performed by Jefferies & Company.
DISCOUNTED CASH FLOW ANALYSIS. Jefferies & Company performed a discounted
cash flow analysis of the projected cash flow of Abraxas and Grey Wolf using
Abraxas' and Grey Wolf's independent petroleum engineers' reserve reports as of
December 31, 2000. The purpose of the discounted cash flow analysis was to
establish a range for the potential equity values of Abraxas and Grey Wolf by
determining a range for the net present value of Abraxas' and Grey Wolf's
projected future cash flows.
Jefferies & Company utilized two commodities price models in its analysis:
- NYMEX base prices in effect on the date of its opinion; and
- $25.00 per barrel of crude oil and $5.25 per Mcf of natural gas.
Realized prices were adjusted for Abraxas' hedging contracts in 2001. In one
model, all proved reserves were given 100% credit while, in a second model, 100%
credit was given to proved developed producing reserves and proved developed
non-producing reserves, and 75% credit was given to proved undeveloped reserves.
The calculated net present value of the after tax cash flows of Abraxas' crude
oil and natural gas reserves based on proved reserve estimates as set forth in
the reserve reports were discounted by 10%. Certain qualitative adjustments were
made based on reserve life, location, type of hydrocarbon, hedging contracts,
operational control and other factors deemed to be relevant.
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NET ASSET VALUE ANALYSIS. Jefferies & Company assigned a value to Abraxas'
and Grey Wolf's total proved PV-10 based upon the discounted cash flow analysis
discussed above and book or appraised values for non-reserve assets.
Jefferies & Company excluded any value for probable reserves for both companies.
Adjusting for pro forma debt, hedging losses and other adjustments, this
analysis indicated that Abraxas would contribute approximately 61-73% of the
equity value of the combined company based on total proved PV-10 and the
assigned net asset value. Assuming 100% acceptance of the offer, Abraxas
stockholders will own approximately 84% of the fully diluted equity interest in
the combined company and Grey Wolf shareholders will own approximately 16% of
the fully diluted equity interest in the combined company.
CONTRIBUTION ANALYSIS. Jefferies & Company analyzed the pro forma
contribution of each of Abraxas and Grey Wolf to the combined company. Such
analysis included, among other things, relative contributions of EBITDA less
interest expense, cash flow from operations and net income for 2000 and 2001.
Jefferies & Company utilized certain financial information projections in both
models and third party engineering reports provided by Abraxas. The relative
levels of cash flow from operations, EBITDA and net income were used to develop
implied enterprise value contributions on a leverage-adjusted basis to derive
implied equity market value contributions. The analysis indicated that Abraxas
would contribute 59%-71% of the equity value based on EBITDA less interest
expense, 64-70% of the equity value based on the cash flow from operations, and
54-81% of the equity value based on net income. Assuming 100% acceptance of the
offer, Abraxas stockholders will own approximately 84% of the fully diluted
equity interest in the combined company and Grey Wolf shareholders will own
approximately 16% of the fully diluted equity interest in the combined company.
RELATIVE TRADING ANALYSIS. Jefferies & Company analyzed the relative
trading prices of Abraxas and Grey Wolf common stock prior to the April 12, 2001
announcement of the proposed exchange ratio. Utilizing 1-day, 30-day, 45-day,
60-day, 90-day and 120-day trading averages for the respective stocks, the
exchange ratio implied by those trading averages ranges from 0.39 to 0.44
Abraxas shares for each Grey Wolf share.
While the foregoing summary describes certain analyses and factors that
Jefferies & Company deemed material in its presentation to the Abraxas
Independent Committee, it is not a comprehensive description of all analyses and
factors considered by Jefferies & Company. The preparation of a fairness opinion
is a complex analytical process that involves various determinations as to the
most appropriate and relevant methods of financial analysis and the application
of these methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to partial analysis or summary description.
Jefferies & Company believes that its analyses must be considered as a whole and
that selecting portions of its analyses and of the factors considered by it,
without considering all analyses and factors, would create an incomplete view of
the evaluation process underlying the opinion. Several analytical methodologies
were employed and no one method of analysis should be regarded as critical to
the overall conclusion reached by Jefferies & Company. Each of the analyses
conducted by Jefferies & Company was carried out in order to provide a different
perspective on the offer and add to the total mix of information available. Each
analytical technique has inherent strengths and weaknesses, and the nature of
the available information may further affect the value of particular techniques.
The conclusions reached by Jefferies & Company are based on all analyses and
factors taken as a whole and also on application of Jefferies & Company's own
experience and judgment. Its conclusions may involve significant elements of
subjective judgment and qualitative analysis. Jefferies & Company therefore
gives no opinion as to the value or merit standing alone of any one or more
parts of the analysis it performed. In performing its analyses, Jefferies &
Company considered general economic, market and financial conditions and other
matters, many of which are beyond the control of Abraxas. Accordingly, analyses
relating to the value of a business do not purport to be appraisals or to
reflect the prices at which the business actually may be purchased. Furthermore,
no opinion is being expressed as to the prices at which shares of Abraxas common
stock may be traded at any future time.
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As described above, Jefferies & Company's opinion to the Abraxas Independent
Committee was one of many factors taken into consideration by the Abraxas board
of directors in making its determination to approve the offer and should not be
considered as determinative of such decision.
The engagement letter between Jefferies & Company and the Abraxas
Independent Committee provides that, for its services, Jefferies & Company is
entitled to receive a fee of $200,000 for rendering a fairness opinion, all of
which was immediately due upon delivery of the opinion. Abraxas has also agreed
to reimburse Jefferies & Company for certain out-of-pocket expenses, including
legal fees, and to indemnify and hold harmless Jefferies & Company and its
affiliates and any director, employee or agent of Jefferies & Company or any of
its affiliates, or any person controlling Jefferies & Company or its affiliates
for certain losses, claims, damages, expenses and liabilities relating to or
arising out of services provided by Jefferies & Company in rendering its opinion
to the Abraxas Independent Committee. The terms of the fee arrangement with
Jefferies & Company, which Abraxas and Jefferies & Company believe are customary
in transactions of this nature, were negotiated at arm's length between the
Abraxas Independent Committee and Jefferies & Company, and the Abraxas board was
aware of these fee arrangements.
Jefferies & Company is a nationally recognized investment banking firm. As
part of its investment banking business, Jefferies & Company is frequently
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and other purposes. In the ordinary course of
Jefferies & Company's business it may actively trade the equity securities of
Abraxas for its own account and for the account of its customers and,
accordingly, may at any time hold a long or short position in such securities.
In the past, Jefferies & Company has provided financial advisory and financing
services to Abraxas and has received customary fees in connection with these
services.
In March 1999, Jefferies & Company was the initial purchaser of Abraxas'
first lien notes and received $2.2 million in fees and in December 1999
Jefferies acted as Abraxas' financial advisor in connection with Abraxas'
exchange offer to the holders of its old notes. Jefferies' received second lien
notes in the principal amount of $3.3 million as compensation.
VALUATION OF RAYMOND JAMES AND PRIOR VALUATIONS
By virtue of Abraxas' and its affiliates' ownership of Grey Wolf common
shares, Abraxas is an "issuer insider" (as defined in OSC Rule 61-501) of Grey
Wolf and an "insider" for the purposes of CVMQ Policy Q-27. Accordingly, the
offer is an "insider bid" for the purposes of such policies. Such policies
require that, unless the offer is an exempt transaction, a formal valuation of
Grey Wolf common shares and Abraxas common stock must be prepared in respect of
the offer, filed with OSC and the CVMQ (unless included in this document) and
summarized in this document.
The policies and regulations made under applicable securities legislation
also require that every prior valuation of Grey Wolf, its material assets or its
securities made in the 24 months preceding the date of the offer that is known
to Abraxas or its directors or senior officers be disclosed in this document.
The full OSC Rule 61-501 Valuation, dated May 29, 2001, is reproduced in its
entirety in Annex C of this document and incorporated into this document by
reference. The following description of the OSC Rule 61-501 Valuation is
qualified in all respects by reference to the full length document and you
should read the OSC Rule 61-501 Valuation in its entirety.
ENGAGEMENT AND CREDENTIALS OF RAYMOND JAMES
Pursuant to the engagement letter dated March 2, 2001, the Grey Wolf Special
Committee retained Raymond James to prepare a formal valuation of the Grey Wolf
common shares and to
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provide the Grey Wolf Special Committee with its opinion as to the fairness,
from a financial point of view, of the offer. Raymond James is an independent
investment banking firm providing advisory and capital market related services
to Canadian resource related and industrial companies and major financial
institutions and offers services including investment research, trading of
equity securities for major Canadian and foreign financial institutions and
corporate advisory services in the areas of mergers, acquisitions, divestments,
restructurings, valuations and fairness opinions. Raymond James and its
principals have been involved in a significant number of transactions involving
fairness opinions and valuations of Canadian private and publicly-traded
companies.
INDEPENDENCE OF RAYMOND JAMES
At the time of selecting Raymond James, the Grey Wolf Special Committee
reviewed Raymond James' qualifications and its prior relationship with Abraxas,
Grey Wolf and related parties. Raymond James believes it is independent of
Abraxas and Grey Wolf and is qualified to provide the valuation in accordance
with the policies. Raymond James is not an insider, associate, or affiliate of
Grey Wolf or Abraxas and is not an advisor to any person or company other than
Grey Wolf with respect to the offer. The Grey Wolf Special Committee was
satisfied that Raymond James was qualified to render the services required and
determined that Raymond James was an independent valuer for the purposes of OSC
Rule 61-501 and CVMQ Policy Q-27. A fixed fee of C$225,000 is payable to Raymond
James upon the delivery of the valuation to the Grey Wolf Special Committee. In
addition, Grey Wolf will reimburse Raymond James for its reasonable
out-of-pocket expenses and indemnify Raymond James in connection with certain
liabilities, which may be incurred by Raymond James in connection with its
engagement. The fees payable to Raymond James are not contingent in whole or in
part upon successful completion of the offer or upon the conclusions reached by
Raymond James nor does Raymond James have any understanding with Grey Wolf,
Abraxas or AcquisitionCo with respect to future business dealings. Raymond James
may, however, from time to time in the future perform financial advisory or
investment banking services to Grey Wolf, Abraxas or AcquisitionCo. In the
ordinary course of its business, Raymond James may trade the securities of Grey
Wolf or Abraxas for its own account or for the account of its customers and,
accordingly, may at any time hold a long or short position in such securities.
Raymond James did not structure the offer and did not negotiate its terms.
Pursuant to OSC Rule 61-501, AcquisitionCo is required to pay for the valuation,
and accordingly, AcquisitionCo will reimburse Grey Wolf for the fees paid to
Raymond James.
SCOPE OF REVIEW
The valuation was prepared in accordance with OSC Rule 61-501 and the
Disclosure Standards for Formal Valuations of the Investment Dealers Association
of Canada ("the Association") but the Association has not been involved in the
preparation or review of the valuation.
In preparing the valuation, Raymond James, among other things, reviewed and,
where it considered appropriate, relied upon certain financial and other
information relating to Grey Wolf, Abraxas and Canadian Abraxas, certain reports
and information prepared by independent advisors and other publicly available
information. The following, among other things, sets forth the principal
documents and key available information Raymond James reviewed, considered and,
where it considered appropriate, relied upon.
With respect to Grey Wolf:
a) the audited consolidated balance sheets, consolidated statements of
income and retained earnings, and consolidated statements of cash flows
for the years ended December 31, 2000, 1999 and 1998;
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b) the interim unaudited consolidated balance sheets, consolidated
statements of income and retained earnings and consolidated statements of
cash flows for the periods ended March 31, 2000, June 30, 2000, September
30, 2000 and March 31, 2001;
c) the Information Circulars relating to the Annual and Special Meetings of
Shareholders of Grey Wolf held April 6, 2000 and Annual Meeting of
Shareholders of Grey Wolf to be held June 28, 2001;
d) the Annual Information Form for the year ended December 31, 2000;
e) the financial and operating budgets for the 12 month periods ending
December 31, 2001 and December 31, 2000 as prepared by Grey Wolf's senior
management;
f) the engineering summary reserves reports dated January 1, 2001, prepared
by McDaniel & Associates Consultants Ltd. ("McDaniel") outlining its
evaluation of the crude oil, natural gas and natural gas products of Grey
Wolf at January 1, 2001 (based on escalating and constant price
assumptions);
g) information regarding Grey Wolf's undeveloped land holdings and an
independent land appraisal prepared by Supplementary Land Services
effective January 1, 2001 and dated February 25, 2001;
h) interviews and discussions with members of Grey Wolf's senior management
with regard to its production, reserves, financial and strategic plans,
and future prospects;
i) public information related to the business, operations, financial
performance and stock trading of Grey Wolf and other selected public oil
and gas companies;
j) press releases of Grey Wolf (and its predecessor company Cascade Oil &
Gas Ltd.) from April 11, 1997 to May 23, 2001;
k) publicly available information and certain confidential information
possessed by Raymond James with respect to recent transactions involving
the sale of oil and gas companies and properties of a comparable nature
considered to be relevant by Raymond James in the circumstances; and
l) such other information, investigations and analyses as Raymond James
considered necessary or appropriate in the circumstances to compile the
Valuation.
With respect to Abraxas:
a) the SEC Form 10-K reports and audited consolidated balance sheets,
consolidated statements of income and deficit and consolidated statements
of cash flows for the years ended December 31, 2000, 1999 and 1998;
b) the SEC 10-Q reports and interim unaudited consolidated balance sheets,
consolidated statements of income and retained earnings and consolidated
statements of cash flows for the periods ended March 30, 2000, June 30,
2000, September 30, 2000 and March 31, 2001;
c) the financial and operating budgets for the 12 month periods ending
December 31, 2000 and December 31, 2001 as prepared by Abraxas' senior
management;
d) the engineering summary reserves report dated January 1, 2001 prepared
by DeGolyer and MacNaughton ("D&M"), independent oil and gas reservoir
engineering consultants outlining its determination of Abraxas' reserve
value and related cash flow as at January 1, 2001 pertaining to certain
oil and gas properties owned by the Corporation in the United States;
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e) the engineering summary reserves report dated January 2001, prepared by
McDaniel outlining its evaluation of the crude oil, natural gas and
natural gas products of Canadian Abraxas at January 1, 2001 (based on
escalating and constant price assumptions);
f) information regarding Canadian Abraxas' undeveloped land holdings and an
independent land appraisal prepared by Supplementary Land Services
effective January 1, 2001 and dated February 25, 2001;
g) interviews and discussions with members of Abraxas' senior management
with regard to its production, reserves, financial and strategic plans,
and future prospects;
h) public information related to the business, operations, financial
performance and stock trading of Abraxas and other selected public oil
and gas companies;
i) press releases of Abraxas from January 1, 1998 to May 23, 2001;
j) publicly available information and certain confidential information
possessed by Raymond James with respect to recent transactions involving
the sale of oil and gas companies and properties of a comparable nature
considered to be relevant by Raymond James in the circumstances; and
k) such other information, investigations and analyses as Raymond James
considered necessary or appropriate in the circumstances to compile the
Valuation.
Raymond James conducted such analyses, investigations, research and testing
of assumptions as it considered appropriate in the circumstances. Raymond James
was granted access to the managements of Grey Wolf and Abraxas and was not, to
its knowledge, denied any type of requested information which might be material
to the conclusions reached in the valuation.
Raymond James advised the Grey Wolf Special Committee of the results of the
valuation on May 29, 2001 and the valuation is dated as of that date.
VALUATION OF GREY WOLF COMMON SHARES AND ABRAXAS COMMON STOCK
For the purpose of the valuation, fair market value is defined as the
highest price that a willing and informed buyer would pay in an open and
unrestricted market to a willing and informed seller, with each acting at arm's
length and with neither party being under any compulsion to enter into the
transaction, expressed in terms of money or money's worth and without any
adjustment for a non-controlling interest.
In preparing the valuation it was necessary to estimate the fair market
value of the common shares of each of Grey Wolf and Abraxas. Raymond James
employed accepted valuation methodologies used to estimate the value of the
assets or common shares of natural resource firms such as Grey Wolf and Abraxas.
Raymond James utilized the net asset value approach ("RJ NAV") as the
primary valuation technique whereby the value of each of Grey Wolf's and
Abraxas' assets and liabilities are estimated with the aggregate estimated value
used to determine a range of estimated value per share for each of Grey Wolf and
Abraxas. In Raymond James' opinion, based on its knowledge of the oil and gas
industry and on valuation practices commonly used within the industry, the net
asset value approach is the most appropriate method for estimating the relative
value of Grey Wolf and Abraxas because each asset and liability can be valued
using a method which is appropriate to the particular asset or liability. The
net asset value approach is a fundamental approach used in estimating the value
of resource companies such as Grey Wolf and Abraxas.
The basis for the net asset value approach is to evaluate, on a segmented
basis, all of the operating assets, financial assets and all liabilities of each
of Grey Wolf and Abraxas. This approach
73
values only the existing proved and probable reserves, as evaluated by
independent engineers, and does not provide for additional reserves which may
develop from the reinvestment of future available cash flow. This approach to
reserve evaluation, in which established reserves are produced to exhaustion, is
known as a blowdown evaluation (the "Blowdown Scenario"). It is a common method
of reserve evaluation in the oil and gas industry. The rationale for the net
asset value approach, including the allocation of capital expenditures and
general and administrative expenses on a blowdown basis, is the responsibility
for, and hence the value of, the future ability of an oil and gas company to
locate, develop and produce new reserves belongs to the notional buyer, not
existing security holders.
In addition to the RJ NAV approach, and among other supporting valuation
methodologies, the Engineering & Exchange Analysis was conducted by Grey Wolf's
and Abraxas' respective independent engineering consultants based on a mutually
agreed to price deck in order to arrive at a share value and resultant implied
exchange ratio. Both approaches employed the discounted cash flow ("DCF") method
as outlined below, in order to estimate the value of the crude oil and natural
gas reserves of Grey Wolf and Abraxas. The RJ NAV approach utilized the reserve
volumes stated in the respective engineering reports provided by Grey Wolf and
Abraxas. These volumes were then subjected to the then current commodity futures
prices. The resultant cash flows were discounted at an after tax rate of 9%. The
Engineering & Exchange Analysis approach employed a pre-tax calculation for both
Grey Wolf and Abraxas that was based on the summary reserve information provided
by Grey Wolf and Abraxas. A mutually agreed to price deck was applied to the
reserve volumes. A 10% discount rate was applied to the cash flows under this
approach. Under the Engineering & Exchange Analysis, three scenarios were used:
(i) Least-Risked Case; (ii) Base Case; and (iii) Risked Case.
The Least-Risked Case received 100% value to proven reserves and 50% to
probable reserves. Undeveloped land and related third party processing
(collectively "Primary Additions"), were given 100% of the stated value provided
by Grey Wolf and Abraxas. Tax pools, seismic, estimated 2001 incremental
production and reserve additions to date (collectively "Secondary Additions"),
were given 25% of stated value. The Base Case received 100% value to proven
developed reserves, 90% to proven undeveloped reserves and 33% to probable
reserves. Primary Additions received 90% of total value and Secondary Additions
received 10% of total value. The Risked Case gave 100% value to proven developed
reserves, 90% to proven developed non-producing reserves, 75% to proven
undeveloped reserves and 25% to probable reserves. Primary Additions received
75% of stated value and no value was attributed to Secondary Additions.
In addition to using the Engineering & Exchange Analysis to confirm the
conclusion of the RJ NAV approach, two other approaches were used to value Grey
Wolf's and Abraxas' shares and thus the implied exchange ratio: (i) an analysis
of Grey Wolf and Abraxas relative to their respective peer groups in terms of
certain market parameters ("Peer Group Analysis"); and (ii) an analysis of the
consideration to be received by the Grey Wolf shareholders relative to recent
public acquisitions in terms of price paid for production and reserves
("Comparable Acquisition Analysis"). The results of these approaches is included
in the Raymond James valuation attached as Annex C.
VALUATION CONCLUSION
In Raymond James' opinion, based on its scope of review, the valuation
methodologies applied and subject to the assumptions and limitations noted in
the valuation, on May 29, 2001, the fair market value of the Grey Wolf Common
Shares ranges from $2.57 to $3.37 per share and the fair market value of the
Abraxas common stock ranges from $0.75 to $7.92 per share.
PRIOR VALUATIONS
To the knowledge of Abraxas, its directors and senior officers, there are no
prior valuations, as that term is defined in OSC Rule 61-501 and CVMQ Policy
Q-27, of Grey Wolf or Abraxas or their
74
material assets or securities prepared in the last 24 months other than the
valuation prepared in connection with this proposed transaction. Notwithstanding
the foregoing, in response to a letter dated May 28, 2001 from the Grey Wolf
Special Committee requesting from Raymond James an opinion as to whether it was
reasonable to expect to obtain another offer for the 51% of Grey Wolf shares not
owned by Abraxas, Raymond James concluded in a letter to the Grey Wolf Special
Committee, dated May 29, 2001, that such an offer, at a similar price and on
similar terms, was unlikely. This conclusion was predicated on the assumption
that Abraxas would continue to hold 49% of the shares of Grey Wolf and was
subject to the caveat that Raymond James had not undertaken a formal
solicitation for a bid.
ABRAXAS' COMMENTS TO THE VALUATION OF RAYMOND JAMES
The valuation of Raymond James was prepared under the supervision of the
Grey Wolf Special Committee and Abraxas was not able to review the findings
prior to being submitted to the Grey Wolf Special Committee. The valuation was
prepared in accordance with OSC Rule 61-501 and CVMQ Policy Q-27. These rules
require the valuator, Raymond James, to determine the fair market value of the
securities, but prohibit taking into account downward adjustments to reflect the
liquidity of the securities, the effect of the transaction proposed, or the fact
that the securities do not form part of the controlling interest.
Abraxas believes that to assess the fairness of the offer, however, these
factors must be taken into account.
Furthermore, Abraxas has the following comments regarding each of the four
valuation methodologies employed by Raymond James:
RJ NAV ANALYSIS
The RJ NAV analysis employed by Raymond James appears to be the foundation
of the valuation and is calculated on an after-tax basis. Abraxas believes that
the complexities of the U.S. and Canadian tax laws, applied to an operating
exploration and production company, render any after-tax estimate extremely
unreliable. Abraxas believes that Raymond James did not adequately consider the
value of gas gathering and processing facilities in Canada. In Canada, control
of gas plants and associated gathering systems can be extremely important and
therefore, of significant value. Abraxas' recalculation of the RJ NAV analysis,
including the net book value for the gas plants, yields an implied exchange
ratio of 0.598.
ENGINEERING & EXCHANGE ANALYSIS
The Engineering & Exchange analysis appears to simulate the relative net
asset valuation calculation which Abraxas utilized in determining the
appropriate exchange ratio for the offer (see "Background of the Offer"
beginning on page 60); however, Raymond James did not include the results from
the Engineering & Exchange analysis in formulating its conclusions as to the
estimated fair market share value of Grey Wolf or Abraxas. Raymond James did,
however, include the resulting implied exchange ratio of one selected case in
one of the three exchange ratio averages. Abraxas believes that the Engineering
& Exchange analysis is extremely relevant and should have been given greater
consideration. Raymond James calculated an implied exchange ratio range of 0.547
to 0.708 in calculating the net asset value per share, which includes proven and
risked probable reserves and value for undeveloped land and related third party
processing, at varying risk and contribution profiles.
PEER GROUP ANALYSIS
The Peer Group analysis employed by Raymond James is considered an
alternative valuation technique. Given Abraxas' low valuation based upon proven
reserves coupled with the high potential value of Abraxas' probable reserves,
which are not quantifiable through a peer group analysis because
75
U.S. companies do not typically publish probable reserves, Abraxas believes the
AEV/EBITDA comparison is the most relevant and broadly accepted measurement in
any peer group analysis; this comparison takes into account the respective
balance sheet issues, including leverage, of Abraxas and the peer group. Raymond
James calculated an implied exchange ratio of 0.577 for the AEV/EBITDA
comparison.
COMPARABLE ACQUISITION ANALYSIS
The Comparable Acquisition analysis is a useful tool to compare the offer
with other similar recent transactions. Utilizing the range of Grey Wolf's
implied share price calculated by Raymond James of $2.91 to $3.35 and utilizing
the 10-day average closing share price of Abraxas prior to the announcement of
the 0.6 exchange ratio on April 12, 2001 of $4.87, Abraxas calculated an implied
exchange ratio range of 0.598 to 0.688.
CONCLUSION
Using the recalculations made by Abraxas yields an implied exchange ratio
range of 0.547 to 0.708 as compared to the implied exchange ratio range of 0.620
to 0.799 in the conclusion of the Raymond James valuation. Additionally, the
Raymond James valuation shows the estimated fair market value range of Grey Wolf
is between $2.57 and $3.37 per share. When compared to the 10-day average
closing share price of Abraxas prior to the announcement of the exchange ratio
on April 12, 2001 of $4.87, yields an implied exchange ratio range of 0.528 to
0.692. Abraxas believes that the valuation must be read in the context of the
foregoing comments in determining the fairness of the offer.
QUALIFIED INVESTMENTS
Provided that the shares of Abraxas common stock received under the offer
are listed on the AMEX, the shares will, on the date of issue, be "qualified
investments" under the Canadian Tax Act for trusts governed by "registered
retirement savings plans," "registered retirement income funds," "deferred
profit sharing plans" or "registered education savings plans."
FOREIGN PROPERTY
Trusts governed by "registered pension plans," "registered retirement
savings plans," "registered retirement income funds" or "deferred profit sharing
plans" and certain other persons described in Part XI of the Canadian Tax Act
are subject to a penalty tax on the "cost amount" of "foreign property" that
they own in excess of 30% of the "cost amount" of all property owned. The
penalty tax is imposed at a rate of 1%, per month, of the "cost amount" of
"foreign property" that exceeds this limit. Shares of Abraxas common stock
received under the offer will be "foreign property" for this purpose.
DEALER MANAGERS AND SOLICITING DEALER GROUP
AcquisitionCo has engaged the services of CIBC World Markets Inc. and CIBC
World Markets Corp. to act as Dealer Managers in connection with this offer.
CIBC World Markets Inc. has undertaken to form the Soliciting Dealer Group in
Canada comprised of members of the Investment Dealers Association of Canada and
members of the stock exchanges in Canada to solicit acceptances of the offer.
CIBC World Markets Corp. will solicit acceptances of the offer in the United
States. Each member of the Soliciting Dealer Group including CIBC World
Markets Inc., is referred to herein as a "Soliciting Dealer." AcquisitionCo has
agreed to pay to each Soliciting Dealer whose name appears in the appropriate
space in the Letter of Acceptance and Transmittal accompanying a deposit of
shares a fee of C$.04 for each such Grey Wolf common share deposited and
exchanged for shares of Abraxas common stock by AcquisitionCo under the offer.
The aggregate amount payable to a Soliciting Dealer with respect to any single
depositing holder of shares will be not less than C$85 nor more than
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C$1,500, provided that no fees will be payable with respect to any Letter of
Acceptance and Transmittal representing less than 500 shares. Where shares
deposited and registered in a single name are beneficially owned by more than
one person, the minimum and maximum amounts will be applied separately in
respect of each such beneficial owner. Solicitation fees will be payable by
AcquisitionCo to the Dealer Manager with respect to Grey Wolf common shares
deposited with a Letter of Acceptance and Transmittal if no member of the
Soliciting Dealer Group is identified in the Letter of Acceptance and
Transmittal. AcquisitionCo may require each Soliciting Dealer to furnish
evidence of such beneficial ownership satisfactory to AcquisitionCo at the time
of the deposit.
The Dealer Managers will also be reimbursed by AcquisitionCo for their
reasonable out-of-pocket expenses in connection with the offer and will be
indemnified against certain liabilities.
No fee or commission will be payable by any holder of Grey Wolf common
shares who transmits shares directly to the Depositary or who makes use of the
facilities of a Soliciting Dealer to accept the offer. Except as set forth
above, AcquisitionCo will not pay any fees or commissions to any broker, dealer
or other person for soliciting deposits of shares pursuant to the offer.
Brokers, dealers, commercial banks and trust companies and other nominees will,
upon request, be reimbursed by AcquisitionCo for customary clerical and mailing
expenses incurred by them in forwarding materials to their customers.
In Canada, questions and requests for assistance concerning the offer should
be made directly to a Dealer Manager or the Depositary. In the United States,
questions and requests for assistance concerning the offer should be made
directly to the Dealer Manager.
EXPENSES OF THE OFFER
Abraxas and AcquisitionCo expect to incur approximately $1.25 million of
costs related to the offer. These expenses will include investment banking fees,
legal, accounting and reserve engineering fees, printing costs and other related
charges.
OFFEREES' STATUTORY RIGHTS
Securities legislation in certain of the provinces and territories of Canada
provides holders of shares with, in addition to any other rights they may have
at law, rights of rescission or to damages, or both, if there is a
misrepresentation in a circular or notice that is required to be delivered to
such holders of shares. However, such rights must be exercised within prescribed
time limits. Holders of Grey Wolf common shares should refer to the applicable
provisions of the securities legislation of their province or territory for the
particulars of those rights or consult with a lawyer.
ANTICIPATED ACCOUNTING TREATMENT
The acquisition of the minority interest of Grey Wolf will be accounted for
by Abraxas under the purchase method. The aggregate purchase price of the
acquisition (including the value of Abraxas common shares issued, and potential
equivalent stock options assumed by Abraxas, as well as direct costs of the
acquisition) will be allocated based upon the fair values of the assets acquired
and liabilities assumed. Any excess purchase price will be recorded as goodwill.
The results of the final valuation of fair value have not yet been completed.
Under current generally accepted accounting principles in the United States,
goodwill will be reviewed periodically for impairment.
LISTING OF ABRAXAS COMMON STOCK
The Abraxas common stock currently trades on the AMEX. Abraxas will apply to
list the shares of Abraxas common stock issuable at the effective time, and upon
the exercise of the options to be held by Grey Wolf option holders, on the AMEX.
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OWNERSHIP OF AND TRADING IN GREY WOLF COMMON SHARES BY ABRAXAS
Abraxas owns, directly or indirectly, 6,190,482 Grey Wolf common shares (or
approximately 48.3% of the outstanding Grey Wolf common shares). Abraxas does
not beneficially own directly or indirectly, nor does it exercise direction
over, or have the right to acquire, any other securities of Grey Wolf. Certain
executive officers, directors and advisory directors of Abraxas own a total of
approximately 1,714,810 common shares of Grey Wolf (approximately 25.9% of the
Grey Wolf common shares not already owned by Abraxas and Canadian Abraxas).
Although there is no formal agreement with these individuals, Abraxas expects
that all of these individuals will deposit their shares in the offer.
There is no person or company acting jointly or in concert with Abraxas and
its subsidiaries in connection with the transactions described in this document.
No securities of Grey Wolf have been traded during the twelve-month period
preceding the date of the offer by Abraxas, the directors or senior officers of
Abraxas or its subsidiaries, or, to the knowledge of directors and senior
officers of Abraxas, by any associate of any such director or senior officer, or
by any person or company who beneficially owns, directly or indirectly, more
than 10% of any class of equity securities of Abraxas, except the following:
NUMBER OF
GREY PRICE PER
NAME DATE NATURE OF TRADE WOLF
SHARES SHARE
---- ---- ---------------
-------------- ---------
James C. Phelps............ 02/01 Exercise of Options
50,000 C$2.00
Richard M. Riggs........... 02/01 Exercise of Options
50,000 2.00
Robert L.G. Watson......... 10/00 Open Market Purchase
10,000 2.26
Robert W. Carington, Jr.... 08/00 Open Market Purchase
4,000 1.86
Franklin A. Burke.......... 6/00-11/00 Open Market Purchases
736,900 1.62-2.31
Ralph F. Cox............... 12/00 Open Market Purchase
100,000 2.05-2.08
COMMITMENTS TO ACQUIRE SECURITIES
None of Abraxas, AcquisitionCo, any of their respective directors and senior
officers, or, to the knowledge of such directors and senior officers, any
associates of any such directors or senior officers or any person holding more
than 10% of any class of equity securities of Abraxas or AcquisitionCo, has
entered into any commitments to acquire any securities of Grey Wolf, except for
the Grey Wolf common shares pursuant to the offer.
MATERIAL CHANGES AND OTHER INFORMATION CONCERNING GREY WOLF
Abraxas and its affiliates have no information which indicates any material
change in the affairs of Grey Wolf since the date of the last published
financial statements of Grey Wolf. Abraxas and its affiliates have no knowledge
of any other matter that has not previously been generally disclosed but which
would reasonably be expected to affect the decision of shareholders to accept or
reject the offer.
EFFECT OF THE OFFER ON MARKETS FOR SHARES AND STOCK EXCHANGE LISTINGS
The Grey Wolf common shares are currently listed on the TSE. The purchase of
the Grey Wolf common shares by AcquisitionCo pursuant to the offer will reduce
the number of shares that might otherwise trade publicly, as well as the number
of shareholders, and, depending on the number of holders depositing and the
number of shares purchased under the offer, could adversely affect the liquidity
and market value of the remaining shares held by the public.
78
The rules and regulations of the TSE establish certain criteria which, if
not met, could lead to the delisting of the Grey Wolf common shares from the
TSE. Among such criteria are the number of shareholders, the number of shares
publicly held and the aggregate market value of the shares publicly held.
Depending on the number of shares purchased pursuant to the offer, it is
possible that the Grey Wolf common shares would fail to meet the criteria for
continued listing on the TSE. In addition, it is the intention of AcquisitionCo
to apply to delist the Grey Wolf common shares from such exchange as soon as
practicable after completion of the offer if all the issued and outstanding
shares are deposited, or after effecting a Compulsory Acquisition or a
Subsequent Acquisition Transaction, if any.
REGULATORY APPROVALS
AcquisitionCo's obligation to exchange shares of Abraxas common stock for
Grey Wolf common shares deposited under the offer is conditional upon obtaining
all governmental or regulatory consents or approvals that AcquisitionCo, in its
sole discretion, views as necessary or desirable to enable AcquisitionCo to
consummate the offer, on terms and conditions satisfactory to AcquisitionCo.
INTERESTS OF CERTAIN PERSONS IN THE OFFER
ABRAXAS
In considering the recommendation of the Abraxas board of directors with
respect to the offer and any Acquisition Transaction, Abraxas stockholders
should be aware that certain directors and officers of Abraxas have interests
that are separate and apart from and in addition to the interests of Abraxas
stockholders generally. The Abraxas board was aware of these interests and took
them into account in approving the offer, the Acquisition Transactions and the
share issuance in connection with the offer and the Acquisition Transactions.
STOCK AND OPTION OWNERSHIP. Mr. Watson, the Chairman of the Board,
President and Chief Executive Officer of Abraxas and Chairman of the Board and
Chief Executive Officer of Grey Wolf, owns 137,936 Grey Wolf common shares and
options to purchase 91,419 Grey Wolf common shares. As a result of the offer,
Mr. Watson will receive 82,761 shares of Abraxas common stock and options to
purchase 68,564 shares of Abraxas common stock at exercise prices ranging from
$2.09 per share to $2.55 per share of which 65,544 will be immediately vested,
2,141 will vest in 2002 and 879 will vest in 2003. In addition to Mr. Watson,
certain directors and officers of Abraxas own a total of 1,576,874 Grey Wolf
common shares and options to purchase 22,627 Grey Wolf common shares. As a
result of the offer, these individuals will receive a total of 946,124 shares of
Abraxas common stock and options to purchase 13,576 shares of Abraxas common
stock at exercise prices ranging from $2.09 to $2.55 per share, all of which
will be immediately vested. For more information regarding this stock ownership,
you should read the information in this document under the caption "--Background
of the Offer."
GREY WOLF
STOCK OPTIONS
At the effective time of a Compulsory Acquisition or Subsequent Acquisition
Transaction, each outstanding Grey Wolf option shall be assumed by Abraxas and
thereafter deemed to constitute an option to acquire, on the same terms and
conditions as were applicable under the Grey Wolf stock option, the same number
of shares, of Abraxas common stock as the holder of the Grey Wolf option would
have been entitled to receive in the offer had the holder exercised the Grey
Wolf option in full immediately prior to the effective time of a Compulsory
Acquisition or Subsequent Acquisition Transaction, rounded down to the nearest
whole number. The price per share shall equal the per share exercise price at
which the Grey Wolf option was exercisable immediately prior to the effective
time, divided by the exchange ratio. All such options shall automatically vest
and become immediately exercisable one day prior to the date upon which the
offer is consummated.
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In addition to an assumption of the Grey Wolf options described in the
preceding paragraph, Abraxas has offered, in consideration of the waiver of the
accelerated vesting provided in the Grey Wolf option plan upon a change of
control, to grant a total of 110,891 additional Abraxas options to Grey Wolf
option holders (other than directors of Grey Wolf who are not also employees of
Grey Wolf), subject to the approval of proposals 1 and 3 at the Abraxas annual
meeting.
Abraxas will take all action necessary to implement the above, including the
reservation, issuance and listing of a sufficient number of shares of Abraxas
common stock for delivery upon exercise of these assumed options. Abraxas shall
prepare and file a registration statement on an appropriate form, or a
post-effective amendment to a previously filed registration statement, with
respect to the shares of Abraxas common stock subject to the above options and,
where applicable, shall use its reasonable efforts to have the registration
statement declared effective as soon as is reasonably practicable after the
effective time of a Compulsory Acquisition or Subsequent Acquisition
Transaction, to maintain its effectiveness and to maintain the current status of
the prospectus contained in it for so long as the options remain outstanding.
EMPLOYMENT AGREEMENTS
Under the terms of employment agreements between Grey Wolf and James K.
Wilson, Vincent J. Tkachyk, Tom Zuorro and Douglas Carter (the "Grey Wolf
Officers"), the Grey Wolf Officers are each entitled to certain payments upon
occurrence of a change of control if, within 180 days of a change of control, if
a Grey Wolf Officer's employment is terminated other than for Just Cause (as
defined in the employment agreements), disability or death or is terminated by a
Grey Wolf Officer for Good Reason (as defined in the employment agreements). The
payment to Messrs. Wilson and Tkachyk would be two times his annual salary, to
Mr. Zuorro one year's salary and to Mr. Carter one-half of his annual salary.
POSITIONS WITH ABRAXAS
Mr. Watson, the Chairman of the Board and Chief Executive Officer of Grey
Wolf, is Chairman of the Board, President and Chief Executive Officer of
Abraxas. Mr. Phelps, a director of Grey Wolf, is a director of Abraxas. Mr.
Riggs, a director of Grey Wolf, is an advisory director of Abraxas.
ACCEPTANCE OF THE OFFER
Certain executive officers, directors and advisory directors of Abraxas own
a total of approximately 1,714,810 common shares of Grey Wolf (approximately
25.9% of the Grey Wolf common shares not already owned by Abraxas and Canadian
Abraxas). Although none of such persons has agreed to deposit their shares in
the offer, Abraxas expects that all of these individuals will deposit their
shares.
DEPOSITARY ARRANGEMENTS
AcquisitionCo has engaged Valiant Corporate Trust Company to act as the
Depositary for the receipt of certificates in respect of the Grey Wolf common
shares, Letters of Acceptance and Transmittal and Notices of Guaranteed Delivery
deposited under the offer and for the payment for shares purchased by
AcquisitionCo pursuant to the offer. The address for the Depositary is 510, 550
-6th Avenue, S.W., Calgary, Alberta, T2P 0S2 and the telephone number for the
Depositary is 403-233-2801. The Depositary will receive reasonable and customary
compensation from AcquisitionCo for its services in connection with the offer,
will be reimbursed for certain out-of-pocket expenses and will be indemnified
against certain liabilities, including liabilities under applicable securities
laws and expenses in connection therewith.
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LEGAL MATTERS
Certain Canadian legal matters on behalf of Abraxas and AcquisitionCo will
be passed upon by Osler, Hoskin & Harcourt LLP, Calgary, Canadian counsel to the
companies. As of July 24, 2001, the partners of Osler, Hoskin and Harcourt LLP,
as a group, owned less than 1% of any class of securities of Abraxas.
POSSIBLE ACQUISITION OF GREY WOLF COMMON SHARES NOT DEPOSITED UNDER THE OFFER
COMPULSORY ACQUISITION AND DISSENTERS' RIGHTS IN A COMPULSORY ACQUISITION
If by the Expiry Time, or within 120 days after the date of the offer,
whichever occurs first, the offer has been accepted by holders of not less than
90% of Grey Wolf common shares, calculated on a fully-diluted basis
(approximately 6,733,859 shares), other than Grey Wolf common shares held on the
date hereof by or on behalf of AcquisitionCo and Abraxas and Canadian Abraxas,
and such shares have been exchanged for shares of Abraxas common stock by
AcquisitionCo, AcquisitionCo intends to acquire pursuant to the provisions of
Section 188 of the Alberta Business Corporations Act the remaining Grey Wolf
common shares on the same terms as such shares were acquired under the offer (a
"Compulsory Acquisition").
To exercise this statutory right and effect a Compulsory Acquisition,
AcquisitionCo must give notice (the "Offeror's Notice") to each holder of Grey
Wolf common shares who did not accept the offer (and each person who
subsequently acquires any such Grey Wolf common shares) (in each case, a
"Dissenting Offeree") of such proposed acquisition on or before the earlier of
60 days from the expiration date of the offer and 180 days from the date hereof.
Within 20 days of giving the Offeror's Notice, AcquisitionCo must pay or
transfer to the Depositary the consideration AcquisitionCo would have had to pay
or transfer to the Dissenting Offerees if they had elected to accept the offer,
to be held in trust for the Dissenting Offerees. In accordance with Section 188
of the Alberta Business Corporations Act, within 20 days after receipt of the
Offeror's Notice, each Dissenting Offeree must send the certificates
representing the Grey Wolf common shares held by such Dissenting Offeree to the
Depositary, and may elect either to transfer such Grey Wolf common shares to
AcquisitionCo on the terms of the offer or to demand payment of the fair value
of such Grey Wolf common shares held by such holder by so notifying
AcquisitionCo. If a Dissenting Offeree has elected to demand payment of the fair
value of such Grey Wolf common shares, AcquisitionCo may apply to a court having
jurisdiction to hear an application to fix the fair value of such Grey Wolf
common shares of that Dissenting Offeree. If AcquisitionCo fails to apply to
such court within 20 days after it made the payment or transferred the
consideration to the Depositary referred to above, the Dissenting Offeree may
then apply to the court within a further period of 20 days to have the court fix
the fair value of such Grey Wolf common shares. If there is no such application
made by the Dissenting Offeree within such period, the Dissenting Offeree will
be deemed to have elected to transfer such Grey Wolf common shares to
AcquisitionCo on the terms of the offer. Any judicial determination of the fair
value of the Grey Wolf common shares could be more or less than the value of the
consideration received pursuant to the offer.
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THE FOREGOING IS A SUMMARY ONLY. REFERENCE IS MADE TO PART 16 OF THE ALBERTA
BUSINESS CORPORATIONS ACT FOR THE TEXT OF THE RELEVANT STATUTORY PROVISIONS, A
COPY OF WHICH IS ATTACHED TO THIS DOCUMENT AS ANNEX E. PART 16 OF THE ALBERTA
BUSINESS CORPORATIONS ACT IS COMPLEX AND MAY REQUIRE STRICT ADHERENCE TO NOTICE
AND TIMING PROVISIONS, FAILING WHICH SUCH RIGHTS MAY BE LOST OR ALTERED. GREY
WOLF SHAREHOLDERS WHO WISH TO BE BETTER INFORMED ABOUT THESE PROVISIONS SHOULD
CONSULT THEIR LEGAL ADVISORS.
SUBSEQUENT ACQUISITION TRANSACTION AND DISSENTERS' RIGHTS IN A SUBSEQUENT
ACQUISITION TRANSACTION
SUBSEQUENT ACQUISITION TRANSACTION. If AcquisitionCo exchanges shares of
Abraxas common stock for Grey Wolf common shares validly deposited under the
offer, and if, for any reason a Compulsory Acquisition is not available,
AcquisitionCo intends to acquire, directly or indirectly, all of the issued and
outstanding Grey Wolf common shares in accordance with applicable law, which
could take the form of an amalgamation, reclassification, statutory arrangement,
consolidation or other transaction (each, a "Subsequent Acquisition
Transaction"). The timing and details of any such transaction will necessarily
depend on a variety of factors, including the number of Grey Wolf common shares
acquired pursuant to the offer. AcquisitionCo has not had any discussions with
Grey Wolf or any Grey Wolf shareholder as to the terms of any such transaction
or whether any shareholders would approve a Subsequent Acquisition Transaction.
In order to effect a Subsequent Acquisition Transaction, AcquisitionCo may seek
to cause a special meeting of shareholders of Grey Wolf to be called to consider
any proposed amalgamation, statutory arrangement or other transaction involving
Grey Wolf and AcquisitionCo or one or more affiliates of AcquisitionCo for the
purposes of enabling AcquisitionCo to acquire all of the Grey Wolf common shares
not acquired under the offer. If AcquisitionCo acquires a majority of Grey Wolf
common shares, calculated on a fully-diluted basis, excluding those Grey Wolf
common shares held by persons whose shares may not be voted as part of the
"minority" in connection with any Subsequent Acquisition Transaction, then
Abraxas and AcquisitionCo together will own sufficient Grey Wolf common shares
to carry out the acquisition of all of the remaining Grey Wolf common shares.
In connection with a Subsequent Acquisition Transaction, shareholders may
have the right to dissent under the Alberta Business Corporations Act and to be
paid the fair value for their Grey Wolf common shares, with such fair value to
be determined by a court. The fair value so determined could be more or less
than the amount paid per Grey Wolf common share pursuant to such transaction or
pursuant to the offer.
Each of the methods of acquiring the remaining outstanding Grey Wolf common
shares described above, other than a Compulsory Acquisition, would be a "going
private transaction" within the meaning of the regulations to securities
legislation in certain provinces of Canada (the "Regulations"), OSC Rule 61-501
and CVMQ Policy Q-27 if such method would result in the interest of a holder of
Grey Wolf common shares (the "affected securities") being terminated without the
consent of the holder, and in the case of CVMQ Policy Q-27 and the Regulations,
without the substitution therefor of an interest of equivalent value in a
participating security of Grey Wolf, a successor to the business of Grey Wolf or
a person who controls Grey Wolf or a person who controls a successor to the
business of Grey Wolf.
OSC Rule 61-501 and CVMQ Policy Q-27 also provide that, unless exempted, a
corporation proposing to carry out a going private transaction is required to
prepare a valuation of the affected securities (and any non-cash consideration
being offered therefor) and provide to the holders of the affected securities a
summary of such valuation. As a result of the Valuation prepared in connection
with the offer, AcquisitionCo intends to rely on exemptions that any subsequent
going private transaction will be exempt from the Valuation requirements of OSC
Rule 61-501 and CVMQ Policy Q-27.
In the event an Acquisition Transaction were to be consummated, under the
Alberta Business Corporations Act, holders of Grey Wolf common shares may have
the right to dissent and demand payment of the fair value of their Grey Wolf
common shares. This right, if the statutory procedures are
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complied with, would lead to a judicial determination of the fair value required
to be paid to such dissenting holders for their Grey Wolf common shares. The
fair value of Grey Wolf common shares so determined could be more or less than
the value of the consideration offered per Grey Wolf common share pursuant to
the Subsequent Acquisition Transaction or the offer. Any such judicial
determination of the fair value of the Grey Wolf common shares could be based
upon considerations other than, or in addition to, the current market price of
the Grey Wolf common shares.
Depending on the nature and terms of the Subsequent Acquisition Transaction,
the provisions of the Alberta Business Corporations Act may require the approval
of at least 66 2/3% of the votes cast by holders of the outstanding Grey Wolf
common shares at a meeting duly called and held for the purpose of approving the
Subsequent Acquisition Transaction. OSC Rule 61-501 and CVMQ Policy Q-27 will
also require that, in addition to any other required security holder approval,
in order to complete a going private transaction, the approval of a simple
majority of the votes cast by "minority" shareholders of the affected securities
must be obtained.
In relation to the offer and any going private transaction, the "minority"
holders will be, unless an exemption is available or discretionary relief is
granted by the OSC and CVMQ, all Grey Wolf shareholders other than Abraxas and
AcquisitionCo, their respective directors and senior officers or any associate
or any affiliate of Abraxas or their respective directors or senior officers or
any person or company acting jointly or in concert with Abraxas and
AcquisitionCo or any of their respective directors or senior officers in
connection with the offer or any subsequent related party or going private
transaction. OSC Rule 61-501 and CVMQ Policy Q-27 also provide that
AcquisitionCo may treat Grey Wolf common shares acquired pursuant to the offer,
including the shares owned by Abraxas' directors and senior officers acquired in
the offer, as "minority" shares and to vote them, or to consider them voted, in
favor of such related party or going private transaction if, among other things,
the consideration per security in the related party or going private transaction
is at least equal in value to and in the same form as the consideration paid
under the offer and if Abraxas' directors and senior officers participating in
the offer do not receive any consideration other than shares of Abraxas' common
stock at the same exchange ratio received by all Grey Wolf shareholders.
AcquisitionCo currently intends that the consideration offered under any
Subsequent Acquisition Transaction proposed by it would be identical to the
consideration offered under the offer and Abraxas' directors and senior officers
participating in the offer will receive no additional consideration.
AcquisitionCo intends to cause Grey Wolf common shares acquired under the offer
to be voted in favor of any such transaction and to be counted as part of any
"minority" approval required in connection with any such transaction.
In addition, under OSC Rule 61-501, if, following the offer, Abraxas and its
affiliates are the registered holders of 90% or more of the Grey Wolf common
shares, calculated on a fully-diluted basis, at the time the Subsequent
Acquisition Transaction is initiated, the requirement for minority approval
would not apply to the transaction if an enforceable appraisal right or
substantial equivalent right is made available to minority shareholders.
Any Subsequent Acquisition Transaction by AcquisitionCo will likely be by
way of an amalgamation or statutory arrangement pursuant to which AcquisitionCo
or a successor corporation would acquire Grey Wolf common shares not deposited
in the offer and all securities convertible into or exercisable for Grey Wolf
common shares which were not converted into or exercised for Grey Wolf common
shares prior to the expiration of the offer and deposited in the offer.
The details of any such Subsequent Acquisition Transaction, including the
timing of its implementation and the consideration to be received by the
minority holders of Grey Wolf common shares, would necessarily be subject to a
number of considerations, including the number of Grey Wolf common shares
acquired pursuant to the offer. There can be no assurance that any such
transaction will be proposed or, if proposed, effected.
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Grey Wolf shareholders should consult their legal advisors for a
determination of their legal rights with respect to a Subsequent Acquisition
Transaction, if and when proposed.
See "United States and Canadian Income Tax Consequences" beginning on page
92 for a discussion of the tax considerations relevant to Grey Wolf shareholders
in the event of a Subsequent Acquisition Transaction.
Certain judicial decisions may be considered relevant to any proposed
Subsequent Acquisition Transaction. Prior to the adoption of OSC Rule 61-501 (or
its predecessor OSC Policy 9.1) and CVMQ Policy Q-27, Canadian courts had, in a
few instances, granted preliminary injunctions to prohibit transactions which
constituted a "going private transaction" within the meaning of OSC Rule 61-501
and CVMQ Policy Q-27. The current trend both in legislation and in the Canadian
jurisprudence indicates a willingness to permit "going private transactions" to
proceed, subject to compliance with procedures designed to ensure procedural and
substantive fairness to minority shareholders. AcquisitionCo intends to comply
with all applicable requirements, or obtain relief from such requirements, in
respect of any Subsequent Acquisition Transaction. Statutory rights of dissent
and appraisal or an oppression remedy are generally only available to registered
shareholders and Grey Wolf common shareholders whose shares are registered in
the name of a broker.
Grey Wolf common shareholders should consult their legal advisors for a
determination of their legal rights with respect to any transaction which may
constitute a "going private transaction."
DISSENTERS' RIGHTS. The following description of dissenters' rights is not
a comprehensive statement of the procedures to be followed by a dissenting Grey
Wolf shareholder who seeks payment of the fair value of such shareholder's Grey
Wolf common shares in connection with a Subsequent Acquisition Transaction.
Where a Subsequent Acquisition Transaction is made by way of a plan of
arrangement under the Alberta Business Corporations Act, the rights of the
dissenting shareholders and the procedures to be followed may be amended or
supplemented by the terms of any order issued in connection therewith. This
statement of procedures is qualified in its entirety by the reference to the
full text of Section 184 of the Alberta Business Corporations Act which is
attached to this Circular as Annex I and the terms of any such order.
If the Subsequent Acquisition Transaction is by way of plan of arrangement
under Alberta law, the court hearing the application for any order issued in
connection with such Subsequent Acquisition Transaction has the discretion to
alter the rights of dissent described herein based on the evidence presented at
such hearing.
Where a Subsequent Acquisition Transaction is accomplished by way of a plan
of arrangement or other special resolutions of shareholders in which dissenters'
rights arise, a Grey Wolf shareholder is entitled, in addition to any other
rights the shareholder may have, to dissent from the transaction and to be paid
the fair value of the shareholder's Grey Wolf common shares in respect of which
the shareholder dissents, determined as of the close of business on the last
business day before the day on which the resolution from which the shareholder
dissents was adopted. A GREY WOLF SHAREHOLDER MAY DISSENT ONLY WITH RESPECT TO
ALL OF THE SHARES HELD BY THE SHAREHOLDER OR ON BEHALF OF ANY ONE BENEFICIAL
OWNER AND REGISTERED IN THE DISSENTING SHAREHOLDER'S NAME. PERSONS WHO ARE
BENEFICIAL OWNERS OF GREY WOLF COMMON SHARES REGISTERED IN THE NAME OF A BROKER,
CUSTODIAN, NOMINEE OR OTHER INTERMEDIARY WHO WISH TO DISSENT, SHOULD BE AWARE
THAT ONLY THE REGISTERED OWNER OF SUCH SHARES IS ENTITLED TO DISSENT.
A DISSENTING GREY WOLF SHAREHOLDER MUST SEND TO GREY WOLF A WRITTEN
OBJECTION TO THE SPECIAL RESOLUTION, WHICH WRITTEN OBJECTION MUST BE RECEIVED BY
THE CORPORATE SECRETARY OF GREY WOLF AT THE REGISTERED OFFICE OF GREY WOLF
BEFORE THE MEETING AT WHICH THE RESOLUTIONS WILL BE CONSIDERED, OR BY THE
CHAIRMAN OF SUCH MEETING AT OR BEFORE THE MEETING. A GREY WOLF SHAREHOLDER
WISHING TO EXERCISE THE RIGHT TO DISSENT WITH RESPECT TO SUCH SHAREHOLDER'S GREY
WOLF COMMON SHARES SHALL NOT VOTE THOSE SHARES AT THE MEETING, EITHER BY THE
SUBMISSION OF A PROXY OR BY PERSONALLY VOTING, IN FAVOUR OF THE SPECIAL
RESOLUTION. A VOTE AGAINST THE SPECIAL RESOLUTION, AN ABSTENTION OR THE
EXECUTION OF A PROXY TO
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VOTE AGAINST THE SPECIAL RESOLUTION DOES NOT CONSTITUTE SUCH WRITTEN OBJECTION,
BUT A GREY WOLF SHAREHOLDER NEED NOT VOTE HIS OR HER COMMON SHARES AGAINST THE
SPECIAL RESOLUTION IN ORDER TO DISSENT.
An application may be made to the court by Grey Wolf or by a dissenting Grey
Wolf shareholder to fix the fair value of the dissenting shareholder's common
shares. If such an application to the court is made by either Grey Wolf or a
dissenting Grey Wolf shareholder, Grey Wolf must, unless the court otherwise
orders, send to each dissenting Grey Wolf shareholder a written offer to pay the
shareholder an amount considered by the Grey Wolf board of directors to be the
fair value of the common shares. Such offer, unless the court otherwise orders,
will be sent to each dissenting Grey Wolf shareholder at least 10 days before
the date on which the application is returnable, if Grey Wolf is the applicant,
or within 10 days after Grey Wolf is served with notice of the application, if a
Grey Wolf shareholder is the applicant. The offer will be made on the same terms
to each dissenting Grey Wolf shareholder and will be accompanied by a statement
showing how the fair value was determined.
A dissenting Grey Wolf shareholder may make an agreement with Grey Wolf for
the purchase of the shareholder's common shares by Grey Wolf in the amount of
Grey Wolf's offer (or otherwise) at any time before the court pronounces an
order fixing the fair value of the Grey Wolf common shares.
A dissenting Grey Wolf shareholder is not required to give security for
costs in respect of an application and, except in special circumstances, will
not be required to pay the costs of the application or appraisal. On the
application, the court will make an order fixing the fair value of the Grey Wolf
common shares of all dissenting Grey Wolf shareholders who are parties to the
application, giving judgment in that amount against Grey Wolf and in favour of
each of those dissenting Grey Wolf shareholders, and fixing the time within
which Grey Wolf must pay that amount payable to the dissenting Grey Wolf
shareholders. The court may in its discretion allow a reasonable rate of
interest on the amount payable to each dissenting Grey Wolf shareholder
calculated from the date on which the shareholder ceases to have any rights as a
Grey Wolf shareholder until the date of payment.
Upon the plan of arrangement becoming effective, or upon the making of an
agreement between Grey Wolf and the dissenting Grey Wolf shareholder as to the
payment to be made by Grey Wolf to the dissenting Grey Wolf shareholder, or upon
the pronouncement of a court order, whichever first occurs, the shareholder will
cease to have any rights as a Grey Wolf shareholder other than the right to be
paid the fair value of such shareholder's Grey Wolf common shares in the amount
agreed to between Grey Wolf and the shareholder or in the amount of the
judgment, as the case may be. Until one of these events occurs, the Grey Wolf
shareholder may withdraw the shareholder's dissent, or Grey Wolf may rescind the
special shareholder resolution, and in either event the dissent and appraisal
proceedings in respect of that shareholder will be discontinued.
Grey Wolf shall not make a payment to a dissenting Grey Wolf shareholder
under Section 184 if there are reasonable grounds for believing that Grey Wolf
is or would after the payment be unable to pay its liabilities as they become
due, or that the realizable value of the assets of Grey Wolf would thereby be
less than the aggregate of its liabilities. In such event, Grey Wolf shall
notify each dissenting Grey Wolf shareholder that it is unable lawfully to pay
dissenting Grey Wolf shareholders for their shares, in which case the dissenting
Grey Wolf shareholder may, by written notice to Grey Wolf within 30 days after
receipt of such notice, withdraw the shareholder's written objection, in which
case such shareholder shall be reinstated to his full rights as a Grey Wolf
shareholder, failing which he retains a status as a claimant against Grey Wolf
to be paid as soon as Grey Wolf is lawfully entitled to do so or, in a
liquidation, to be subordinate to creditors but prior to shareholders of Grey
Wolf.
All Grey Wolf common shares held by shareholders who exercise their right of
dissent will, if the holders are ultimately entitled to be paid the fair value
thereof, be deemed to be transferred to Grey Wolf for cancellation on the
effective date of the transaction contemplated by the special resolution in
exchange for such fair value or will, if such Grey Wolf shareholders ultimately
are not so entitled to be paid the fair value thereof, be deemed to be
transferred to AcquisitionCo in exchange for shares of Abraxas common stock on
the same basis as all other Grey Wolf shareholders.
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COMPARISON OF SHAREHOLDER RIGHTS
If the offer and any Acquisition Transaction are consummated, holders of
Grey Wolf common shares will transfer their Grey Wolf common shares to
AcquisitionCo in consideration for shares of Abraxas common stock. Grey Wolf is
a corporation governed by Alberta law. Abraxas is a corporation organized under
Nevada law. While the rights and privileges of shareholders of an Alberta
corporation are, in many instances, comparable to those of stockholders of a
Nevada corporation, there are certain differences. These differences arise from
differences between Alberta and Nevada law, and between the Grey Wolf articles
of amalgamation and bylaws and the Abraxas articles of incorporation and bylaws.
For a description of the rights of the holders of Abraxas common stock, see
"Information About Abraxas, AcquisitionCo and Grey Wolf--Abraxas--Description of
Abraxas Capital Stock" beginning on page 46 and for a description of the rights
of holders of Grey Wolf common shares, see "Information About Abraxas,
AcquisitionCo and Grey Wolf--Grey Wolf--Description of Grey Wolf Share Capital"
beginning on page 55.
VOTE REQUIRED FOR EXTRAORDINARY TRANSACTIONS
Alberta Law. Under Alberta law, the approval of at least two-thirds of votes
cast at the meeting is required for extraordinary corporate actions, including
- amalgamations;
- continuances;
- sales, leases or exchanges of all or substantially all of the property of
a corporation;
- liquidations and dissolutions; and
- arrangements (if ordered by a court).
Alberta law may also require the separate approval by the holders of a class
or series of shares for extraordinary corporate actions.
Nevada Law. Under Nevada law, the affirmative vote of the holders of a
majority of the voting power is required for:
- mergers;
- exchanges;
- dissolutions; or
- sale, lease or exchange of all of the property and assets of the
corporation; provided that the articles of incorporation may require a
higher vote.
AMENDMENT TO GOVERNING DOCUMENTS
Alberta Law. Under Alberta law, the approval of at least two-thirds of the
votes cast at the meeting is required to amend the articles of the corporation.
If the amendment would affect the rights of any holders of a class or series
of shares differently than other shares the amendment also requires the approval
of a majority of the shares of the class or series.
Under Alberta law, the creation, amendment or repeal of bylaws requires
that, after being approved by the directors of the corporation, the creation,
amendment or repeal of the bylaws must be approved by a majority of the votes of
the shareholders of the corporation at the next shareholder meeting.
86
Nevada Law. Under Nevada law, the affirmative vote of the holders of a
majority of the voting power is required to approve a proposed amendment to the
articles of incorporation, following the adoption of the amendment by the board
of directors of the corporation, provided that the articles of incorporation may
provide for a greater vote. If the amendment would alter or change any
preference or any relative or other right given any holders of a class or series
of stock, the amendment also requires the approval of the holders of a majority
of the shares of the class or series.
The Abraxas articles of incorporation provide that the affirmative vote of
not less than 80% of the voting stock is required to amend, alter or repeal the
provisions of article fifth (board of directors), or article thirteenth (action
by stockholders without a meeting).
Under Nevada law, stockholders may adopt bylaws that supercede those adopted
by the directors.
Abraxas' articles of incorporation provide that the Abraxas board may make
and alter the by-laws, subject to the provisions of the by-laws. The by-laws
provide that they may be altered or repealed:
- by the affirmative vote of the holders of a majority of the shares of
Abraxas common stock; or
- by the affirmative vote of a majority of the whole board of directors.
provided, however, that the provisions in the bylaws relating to calling
special meetings of the stockholders, actions by stockholders without a meeting,
number, election and terms of directors, newly created directorships, vacancies
in the board and removal of directors require a vote of at least 80% of the
voting power of the then outstanding shares of Abraxas.
DISSENTERS' RIGHTS
Alberta Law. Under Alberta law, each of the matters listed below will
entitle shareholders to exercise rights of dissent and to be paid the fair value
of their shares;
- any amalgamation with another corporation (other than with certain
affiliated corporations);
- an amendment to the corporation's articles to add, change or remove any
provisions restricting or constraining the issue or transfer of that class
of shares;
- an amendment to the corporation's articles to add, change or remove any
restriction upon the business or businesses that the corporation may carry
on;
- a continuance under the laws of another jurisdiction;
- a sale, lease or exchange of all or substantially all the property of the
corporation other than in the ordinary course of business;
- a court may permit shareholders to dissent in connection with an
application to the court for an order approving an arrangement; or
- amendments to the articles of a corporation which require a separate class
or series vote, provided that a shareholder is not entitled to dissent if
an amendment to the articles is effected by a court order approving a
reorganization or by a court order made in connection with an action for
an oppression remedy.
Alberta law provides these dissent rights for both listed and unlisted
shares.
Nevada Law. Under Nevada law, holders of shares may dissent from a merger or
share exchange that requires shareholder approval by demanding payment equal to
the fair value of their shares. These rights of dissent and appraisal only apply
in the event of a merger or exchange and not in the case of a sale or transfer
of assets or a purchase of assets for stock. Under Nevada law, no dissent or
appraisal rights are available with respect to a plan of merger or exchange in
favor of stockholders of any class or series which at the record date fixed to
determine stockholders entitled to receive notice and to vote
87
at the meeting at which the plan of merger or exchange is to be acted on, were
either listed on a national securities exchange, included in the national market
system by the National Association of Securities Dealers, Inc. or were held of
record by at least 2,000 stockholders, unless:
- the articles of incorporation of the corporation issuing the shares
provide otherwise; or
- the holders of the class or series are required under the plan of merger
or exchange to accept for the shares anything except:
(1) cash, owner's interests or owner's interests and cash in lieu of
fractional owner's interests of:
(A) the surviving or acquiring entity; or
(B) any other entity which, at the effective date of the plan of
merger or exchange, were either listed on a national securities
exchange, included in the national market system by the National
Association of Securities Dealers, Inc. or held of record by at
least 2,000 holders of owner's interests of record; or
(2) a combination of cash and owner's interests of the kind described in
(A) and (B) above.
OPPRESSION REMEDY
Alberta Law. Alberta law provides an oppression remedy that allows a
complainant who is:
- a present or former shareholder;
- a present or former director or officer of the corporation or its
affiliates; and
- any other person who in the discretion of the court is a proper person to
make the application, to apply to court for relief where:
(1) any act or omission of the corporation or an affiliate effects a
result;
(2) the business or affairs of the corporation or an affiliate are or
have been carried on or conducted in a manner; or
(3) the powers of the directors of the corporation or an affiliate are or
have been exercised in the manner,
that is oppressive or unfairly prejudicial to or that unfairly disregards the
interest of a shareholder, creditor, director or officer.
Nevada Law. Nevada law does not have a similar remedy.
DERIVATIVE ACTION
Alberta Law. Under Alberta law, a complainant may not bring an action in the
name of, or on behalf of a corporation, or intervene in an existing action on
behalf of the corporation, unless the complainant has given reasonable notice to
the directors of the corporation and the complainant satisfies the court that:
- the directors of the corporation will not bring, diligently prosecute or
defend or discontinue the action;
- the complainant is acting in good faith; and
- it appears to be in the interest of the corporation that the action be
brought, prosecuted, defended or discontinued.
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Nevada Law. Under Nevada law, a stockholder may bring a derivative action in
Nevada on behalf of, and for the benefit of, the corporation, provided that:
- the stockholder must state in his complaint that he was a stockholder of
the corporation at the time of the transaction that is the subject of the
complaint; and
- the stockholder must first make demand on the corporation that it bring an
action and the demand be refused, unless it is shown that the demand would
have been futile.
SHAREHOLDER CONSENT IN LIEU OF MEETING
Alberta Law. Under Alberta law, a written resolution signed by all the
shareholders of the corporation who would have been entitled to vote on the
resolution at a meeting, is effective to approve the resolution.
Nevada Law. Under Nevada law, unless otherwise provided in the corporation's
articles of incorporation or bylaws, a written consent signed by holders of
stock having sufficient votes to approve the matter at a meeting is effective to
approve the matter. Abraxas' articles of incorporation provide that any action
by Abraxas stockholders must be taken at a meeting of the Abraxas stockholders
and no action may be taken by the written consent of the Abraxas stockholders.
DIRECTOR QUALIFICATIONS
Alberta Law. Under Alberta law, at least half of the directors of a
corporation governed by the Business Corporations Act (Alberta) must be resident
Canadians. Alberta law also requires that a corporation whose securities are
publicly traded must have not fewer than three directors, at least two of whom
are not officers or employees of the corporation or any of its affiliates.
Nevada Law. Nevada law does not have comparable requirements.
FIDUCIARY DUTIES OF DIRECTORS
Alberta Law. Under Alberta law, directors have a duty of care and loyalty to
the corporation. The duty of care requires that the directors exercise the care,
diligence and skill that a reasonably prudent person would exercise in
comparable circumstances. The duty of loyalty requires directors to act honestly
and in good faith with a view to the best interests of the corporation.
Nevada Law. Under Nevada law, directors have a duty of care and loyalty to
the corporation and its stockholders. The duty of care requires that the
directors exercise the care that a reasonably prudent person in a similar
position would use under similar circumstances. The duty of loyalty requires
directors to act in good faith and, where a director is shown to have a
self-interest in a transaction, the burden shifts to that director to
demonstrate that the transaction is fair and serves the best interests of the
corporation and its stockholders.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Alberta Law. Under Alberta law, except in respect of an action by or on
behalf of a corporation to procure a judgment in its favor, which would require
court approval, a corporation may indemnify present and former directors and
officers against costs, charges and expenses (including settlements and
judgments) provided that:
- they acted honestly and in good faith with a view to the best interests of
the corporation; and
- in the case of a criminal or administrative action, they had reasonable
grounds for believing that their conduct was lawful.
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The Grey Wolf bylaws provide for indemnification of directors and officers
to the fullest extent authorized by Alberta law. Neither Alberta law nor the
Grey Wolf bylaws expressly provide for advance payment of an indemnitee's
expenses.
Nevada Law. Nevada law provides that a corporation may indemnify its present
and former directors, officers, employees and agents against all reasonable
expenses (including amounts paid in settlement and attorneys fees) and, except
in actions initiated by or in the right of the corporation, against all
judgments and fines, provided that they:
- acted in good faith and in a manner which he or she reasonably believed to
be in, or not opposed to, the best interests of the corporation; and
- in the case of a criminal proceeding, had no reasonable cause to believe
his or her conduct was unlawful.
The Abraxas articles of incorporation provide for indemnification of
directors and officers to the fullest extent authorized by Nevada law. Nevada
law allows for the advance payment of an indemnitee's expenses prior to the
final disposition of an action, provided that the indemnitee undertakes to repay
any such amount advanced if it is later determined that the indemnitee is not
entitled to indemnification with regard to the action for which the expenses
were advanced.
Abraxas has entered into indemnity agreements with each of its directors and
certain of its executive officers.
DIRECTOR LIABILITY
Alberta Law. Alberta law does not permit the limitation of a director's
liability as Nevada law does.
Nevada Law. Nevada law provides that the charter of a corporation may
include a provision which limits or eliminates the liability of directors to the
corporation or its stockholders for monetary damages for breach of a fiduciary
duty, provided such liability does not involve acts or omissions which involve
intentional misconduct, fraud or a knowing violation of the law or the payment
of improper distributions. The Abraxas articles of incorporation contain a
provision limiting the liability of its directors to the fullest extent
permitted by Nevada law.
ANTI-TAKEOVER PROVISIONS AND INTERESTED STOCKHOLDER TRANSACTIONS
Alberta Law. Alberta law does not contain specific anti-takeover provisions
with respect to business transactions. However, the policies of Canadian
securities regulatory authorities, including OSC Rule 61-501 and CVMQ Policy
Q-27 contain requirements in connection with any transaction by which an issuer,
directly or indirectly:
- acquires or transfers an asset;
- acquires or issues securities; or
- assumes or transfers a liability,
from or to, as the case may be, a director, senior officer or holder of 10% or
more of the voting securities of the issuer, or an affiliate thereof.
OSC Rule 61-501 and CVMQ Policy Q-27 requires more detailed disclosure in
the proxy material sent to security holders in connection with a transaction as
described above, including, subject to certain exceptions, the inclusion of a
formal valuation of the subject matter of the transaction and any non-cash
consideration offered therefore. OSC Rule 61-501 and CVMQ Policy Q-27 also
require,
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subject to certain exceptions, that the minority shareholders of the issuer
separately approve the transaction, by a simple majority of the votes cast.
Nevada Law. FOR A DESCRIPTION OF THE ANTI-TAKEOVER AND INTERESTED
STOCKHOLDER TRANSACTIONS PROVISIONS UNDER NEVADA LAW, YOU SHOULD READ THE
DESCRIPTION UNDER "INFORMATION ABOUT ABRAXAS, ACQUISITIONCO AND GREY
WOLF--ABRAXAS--DESCRIPTION OF ABRAXAS CAPITAL STOCK--ANTI-TAKEOVER STATUTES"
BEGINNING ON PAGE 48.
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UNITED STATES AND CANADIAN INCOME TAX CONSEQUENCES
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Osler, Hoskin & Harcourt LLP, Canadian counsel to Abraxas,
the summary that follows sets out the material consequences under the Canadian
Tax Act that will generally apply to Grey Wolf shareholders who accept the offer
and who, for purposes of the Canadian Tax Act, at all relevant times:
- hold their Grey Wolf common shares as "capital property," and
- deal at arm's length with, and are not "affiliated" with, Grey Wolf or
Abraxas.
For purposes of this summary, terms which appear in quotation marks (other
than headings of sections of this document) have the meanings given to them by
the relevant provisions of the Canadian Tax Act.
"Financial institutions" are generally deemed not to hold shares as "capital
property" under the mark-to-market rules in the Canadian Tax Act. Shares held by
other Grey Wolf shareholders will generally be considered to be held as "capital
property" unless they are held as part of a business of buying and selling
securities or have been acquired in a transaction considered to be an adventure
in the nature of trade. Canadian resident shareholders whose Grey Wolf common
shares might not otherwise qualify as "capital property" may be entitled to
obtain this qualification by making the irrevocable election under subsection
39(4) of the Canadian Tax Act.
This summary is based on the current provisions of the Canadian Tax Act and
the regulations thereunder, the administrative and assessing policies and
practices published by the Canada Customs and Revenue Agency prior to today, and
specific proposals to amend the Canadian Tax Act and regulations thereunder
publicly announced by or on behalf of the Minister of Finance prior to today. No
assurances can be given that any such proposals will be enacted in the form
announced or at all.
This summary does not take into account or anticipate any changes in law or
administrative practice, other than any proposals referred to in the preceding
paragraph, nor does it take into account provincial or territorial taxes or
taxes of countries other than Canada.
THIS DISCUSSION IS A GENERAL DESCRIPTION OF THE CANADIAN FEDERAL INCOME TAX
CONSIDERATIONS MATERIAL TO A HOLDER OF GREY WOLF COMMON SHARES WHO ACCEPTS THE
OFFER. IT DOES NOT DEAL WITH ALL POSSIBLE TAX CONSEQUENCES. THIS DOCUMENT DOES
NOT TAKE INTO ACCOUNT YOUR PARTICULAR CIRCUMSTANCES AND DOES NOT ADDRESS
CONSEQUENCES WHICH MAY BE PARTICULAR TO YOU UNDER PROVISIONS OF CANADIAN INCOME
TAX LAW. THEREFORE, IF YOU ARE A GREY WOLF SHAREHOLDER YOU SHOULD CONSULT YOUR
OWN TAX ADVISOR REGARDING THE PARTICULAR TAX CONSEQUENCES TO YOU OF ACCEPTING
THE OFFER.
In particular, this summary does not take into account the mark-to-market
rules applicable to "financial institutions." It also assumes that Abraxas will
not qualify as a "foreign affiliate" of the holder.
For purposes of the Canadian Tax Act, all amounts relating to shares of
Abraxas common stock must be expressed in Canadian dollars. Amounts denominated
in U.S. dollars must be converted into Canadian dollars based on the U.S. dollar
exchange rate generally prevailing at the time such amounts arise.
GREY WOLF SHAREHOLDERS RESIDENT IN CANADA
The following portion of this summary applies to a Grey Wolf shareholder
who, at all relevant times, is a Canadian resident. A Canadian resident is any
person who, for the purposes of the Canadian Tax Act and any bilateral tax
treaty, is or is deemed to be a Canadian resident at all relevant times.
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TRANSFER OF GREY WOLF COMMON SHARES TO ACQUISITIONCO FOR SHARES OF ABRAXAS
COMMON STOCK
Subject to the comments below under the heading "Economic Statement of
October 18, 2000," the exchange of Grey Wolf common shares for shares of Abraxas
common stock will be a taxable event to a Canadian resident. A Canadian resident
who transfers Grey Wolf common shares to AcquisitionCo in exchange for Abraxas
common stock under the offer will be considered:
- to have disposed of those Grey Wolf common shares for proceeds of
disposition equal to the fair market value at the time of the exchange of
the Abraxas common stock received on the exchange plus any cash received
in lieu of a fractional share of Abraxas common stock;
- to have realized a capital gain (or capital loss) equal to the amount by
which those proceeds of disposition exceed (or are less than) the sum of
the Canadian resident's "adjusted cost base" of those Grey Wolf common
shares determined immediately before the exchange plus any reasonable
costs of disposition; and
- to have acquired those shares of Abraxas common stock at a cost equal to
their fair market value at the time of the exchange (which cost must be
averaged with the "adjusted cost base" of any other shares of Abraxas
common stock held by the Canadian resident as "capital property" at that
time).
For a description of the tax treatment of capital gains and losses, see
"Capital Gains and Capital Losses."
DIVIDENDS ON SHARES OF ABRAXAS COMMON STOCK
Dividends received on shares of Abraxas common stock, including the amount
of any U.S. taxes withheld therefrom, must be included in a Canadian resident's
income when received and are not eligible for:
- the gross-up and dividend tax credit, in the case of recipients who are
"individuals," or
- the deduction in computing taxable income, in the case of recipients that
are corporations.
A "Canadian-controlled private corporation" may be liable to pay a
refundable tax of 6 2/3% on such amounts. U.S. withholding tax on such amounts
may be credited against the Canadian resident's income tax payable or deducted
from the Canadian resident's income, subject to limitations in the Canadian Tax
Act.
DISPOSITION OF SHARES OF ABRAXAS COMMON STOCK
On a disposition of shares of Abraxas common stock, a Canadian resident will
realize a capital gain (or capital loss) equal to the amount by which the
proceeds of disposition exceed (or are less than) the sum of the Canadian
resident's "adjusted cost base" of those Abraxas common shares determined
immediately before the disposition plus any reasonable costs of disposition.
CAPITAL GAINS AND CAPITAL LOSSES
Under the current provisions of the Canadian Tax Act, one-half of any
capital gain (the "taxable capital gain") is required to be included in a
Canadian resident's income for the taxation year in which a disposition of
capital property occurs, and one-half of any capital loss (the "allowable
capital loss") may generally be deducted against the Canadian resident's
"taxable capital gains" for the taxation year in which the disposition occurs.
"Allowable capital losses" in excess of "taxable capital gains" in a
particular taxation year can generally be deducted against the net "taxable
capital gains" of the three immediately preceding taxation years or any later
taxation year, subject to certain limitations in the Canadian Tax Act.
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When an "individual" (other than certain trusts) realizes a capital gain,
alternative minimum tax may arise, depending on the "individual's" particular
circumstances. A "Canadian controlled private corporation" may be liable to pay
an additional refundable tax of 6 2/3% on "taxable capital gains."
The amount of any capital loss realized by a corporation on the disposition
of a share may be reduced by the amount of dividends received or deemed to be
received on that share. Similar rules may apply where a corporation is a member
of a partnership or a beneficiary of a trust that owns shares, directly or
indirectly through a partnership or trust.
FOREIGN INVESTMENT ENTITY DRAFT LEGISLATION
On June 22, 2000, the Minister of Finance released draft legislation to
amend the Canadian Tax Act to implement a proposal concerning the taxation of
holdings in "foreign investment entities." On September 7, 2000, the Minister of
Finance issued a release announcing that the implementation date and the
consultation period for the draft legislation would be extended, that certain
modifications to the draft legislation would be made, and that revised draft
legislation would be released early in 2001. In general terms, the draft
legislation would apply to a share in or a right to acquire a share of a
"foreign investment entity."
Abraxas would be a "foreign investment entity" if the "carrying value" of
its "investment property" is more than 50% of the "carrying value" of all of its
property, determined in accordance with detailed rules in the draft legislation.
If Abraxas were a "foreign investment entity" (and certain exceptions did
not apply), a Canadian resident would be required to take into account in
computing income, on an annual basis, any increase (or decrease) in the value of
the shares of Abraxas common stock owned by that resident during each taxation
year, subject to a deferral of gains accrued prior to January 1, 2002. A
Canadian resident would be required to mark-to-market the resident's shares of
Abraxas common stock or, if the Canadian resident so elects and the relevant
information is made available, to take into account in computing income the
resident's share in the underlying income of Abraxas, calculated in accordance
with Canadian tax rules (whether or not cash distributions were received by the
Canadian resident).
The proposed new rules would generally apply for taxation years after 2001
and would require a determination, on an annual basis, as to whether or not
Abraxas is a "foreign investment entity" (and, if so, whether certain other
exceptions to the rules might apply).
Based on the draft legislation as it is proposed to be amended and a
preliminary review of certain currently available financial information, Abraxas
believes, based in part on information provided by Grey Wolf, that if the
arrangement were completed today, it is unlikely that Abraxas would, as of
today's date, be a "foreign investment entity" and, although no assurances can
be given in that regard, Abraxas is not aware of any circumstance that would
cause this conclusion to change in the future. The draft legislation is complex
and if applicable may affect both the timing and in certain cases the character
of amounts included in income in respect of holding shares of Abraxas common
stock. In addition, there is considerable uncertainty as to whether the draft
legislation will be implemented in its current form. Accordingly, Canadian
residents should consult their tax advisors regarding the possible application
of these rules.
ECONOMIC STATEMENT OF OCTOBER 18, 2000
In the Economic Statement released on October 18, 2000, the Minister of
Finance announced a proposal to formulate and introduce a rule to permit shares
of a Canadian corporation held by a Canadian resident to be exchanged for shares
of a foreign corporation on a tax-deferred basis. This statement included no
details of the circumstances in which such a tax-deferred share-for-share
exchange could occur but rather indicated that these rules would be developed in
consultation with the
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private sector. The Minister's statement indicated that any such rule would not
be effective before the public release of draft legislation including such rule.
Based on the time frame in which the offer is expected to be completed and
the typical time frame in which draft legislation involving private sector
consultation is developed and introduced, it is unlikely that draft legislation
containing the proposed rule described above will be released in time to affect
the exchange by Grey Wolf shareholders of their Grey Wolf common shares for
shares of Abraxas common stock pursuant to the offer. In any case, until such a
rule is developed and released, it is not possible to state whether it would
apply to a Grey Wolf shareholder on the exchange of Grey Wolf common shares for
Abraxas common stock pursuant to the offer. Grey Wolf shareholders should
consult their own tax advisors once the draft legislation is released to
determine how it might apply to their particular circumstances.
SUBSEQUENT TRANSACTIONS
As described under "Description of the Offer--Possible Acquisition of Grey
Wolf Common Shares Not Deposited Under the Offer--Compulsory Acquisition and
Dissenters' Rights in a Compulsory Acquisition" and "--Subsequent Acquisition
Transaction and Dissenters' Rights in a Subsequent Acquisition Transaction,"
Abraxas and AcquisitionCo may consider means of acquiring, directly or
indirectly, all of the Grey Wolf common shares not deposited under the offer by
way of a Subsequent Acquisition Transaction. The consequences under the Canadian
Tax Act to a holder of Grey Wolf common shares of any Subsequent Acquisition
Transaction would depend upon the nature of the transaction.
If in the course of a Subsequent Acquisition Transaction, all of a Grey Wolf
shareholder's common shares are exchanged solely for Abraxas common stock, the
tax consequences to the shareholder would be the same as if the shareholder had
accepted the offer.
If a Subsequent Acquisition Transaction results in a different form of
transaction, Grey Wolf shareholders should consult their own tax advisors for
advice with respect to the income tax consequences to them of having their
common shares of Grey Wolf acquired pursuant to such a transaction.
QUALIFIED INVESTMENTS
Provided that the shares of Abraxas common stock received under the offer
are listed on the AMEX, the shares will, on the date of issue, be "qualified
investments" under the Canadian Tax Act for trusts governed by "registered
retirement savings plans," "registered retirement income funds," "deferred
profit sharing plans" or "registered education savings plans."
FOREIGN PROPERTY
Trusts governed by "registered pension plans," "registered retirement
savings plans," "registered retirement income funds" or "deferred profit sharing
plans" and certain other persons described in Part XI of the Canadian Tax Act
are subject to a penalty tax on the "cost amount" of "foreign property" that
they own in excess of 30% of the "cost amount" of all property owned. The
penalty tax is imposed at a rate of 1% per month, of the "cost amount" of
"foreign property" that exceeds this limit. Shares of Abraxas common stock
received under the offer will be "foreign property" for this purpose.
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GREY WOLF SHAREHOLDERS NOT RESIDENT IN CANADA
The following portion of this summary applies to a Grey Wolf shareholder,
referred to herein as a non-resident, who, at all relevant times:
- is not a resident of Canada;
- does not hold or use Grey Wolf common shares or shares of Abraxas common
stock in connection with carrying on a business in Canada; and
- is not an insurer carrying on business in Canada and elsewhere.
On a transfer of Grey Wolf common shares to AcquisitionCo for Abraxas common
stock pursuant to the offer, a non-resident will not be subject to tax under the
Canadian Tax Act unless the Grey Wolf common shares are "taxable Canadian
property" to the non-resident.
Generally, Grey Wolf common shares will not be "taxable Canadian property"
to a non-resident at a particular time provided that the non-resident and
persons not dealing at "arm's length" with the non-resident did not collectively
own 25% or more of the shares of any class or series of Grey Wolf (including
interests in and options to acquire such shares) at any time during the 60-month
period ending at the particular time.
SUBSEQUENT TRANSACTIONS
As described under "Description of the Offer--Possible Acquisition of Grey
Wolf Common Shares Not Deposited Under the Offer--Compulsory Acquisition and
Dissenters' Rights in a Compulsory Acquisition" and "--Subsequent Acquisition
Transaction and Dissenters' Rights in a Subsequent Acquisition Transaction,"
Abraxas and AcquisitionCo may consider means of acquiring, directly or
indirectly, all of the Grey Wolf common shares not deposited under the offer by
way of a Subsequent Acquisition Transaction. The consequences under the Canadian
Tax Act to a non-resident holder of Grey Wolf common shares of any Subsequent
Acquisition Transaction would depend upon the nature of the transaction.
If in the course of a Subsequent Acquisition Transaction, all of a
non-resident Grey Wolf shareholder's common shares are exchanged solely for
Abraxas common stock, the tax consequences to the non-resident shareholder would
be the same as if the shareholder had accepted the offer.
If a Subsequent Acquisition Transaction results in a different form of
transaction, non-resident holders of Grey Wolf common shares should consult
their own tax advisors for advice with respect to the income tax consequences to
them of having their common shares of Grey Wolf acquired pursuant to such a
transaction.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO GREY WOLF SHAREHOLDERS
The following discussion summarizes the anticipated material U.S. federal
income tax consequences of the offer and any Acquisition Transaction to Grey
Wolf shareholders who exchange their Grey Wolf common shares for Abraxas common
stock pursuant to the offer or the Acquisition Transactions. This discussion
does not purport to be a complete analysis or discussion of all potential tax
effects relevant to the offer or any Acquisition Transactions.
This summary does not address aspects of U.S. taxation other than U.S.
federal income taxation, nor does it address all aspects of U.S. federal income
taxation that may be applicable to particular holders. In addition, this summary
does not address the U.S. state or local tax consequences or the tax
consequences in jurisdictions other than the U.S. of the transaction. This
summary is based on:
- the U.S. Internal Revenue Code of 1986, as amended;
96
- income tax regulations, proposed and final, issued under the U.S. Code;
and
- judicial and administrative interpretations of the U.S. Code and
regulations;
in each case as in effect and available as of the date of this offer to
exchange.
These income tax laws, regulations and interpretations, however, may change
at any time, and any change could be retroactive to the date of this document.
These income tax laws, regulations and judicial and administrative
interpretations are also subject to various interpretations, and the U.S.
Internal Revenue Service or the U.S. courts could later disagree with the
explanations or conclusions contained in this summary. No advance income tax
ruling has been sought or obtained from the IRS regarding any of the tax
consequences of the offer or any Acquisition Transactions and neither this
summary nor the tax opinion described below will be binding on the IRS or any
court. The IRS could adopt a contrary position, and such contrary position could
be sustained by a court.
For purposes of this summary and the opinions described below, a U.S. holder
is a beneficial owner of Grey Wolf common shares, that, for U.S. federal income
tax purposes, is:
- a citizen or resident of the U.S., including some former citizens or
residents of the U.S.;
- a partnership or corporation created or organized in or under the laws of
the U.S. or any state thereof, including the District of Columbia;
- an estate if its income is subject to U.S. federal income taxation
regardless of its source; or
- a trust if it has validly elected to be treated as a United States person
for U.S. federal income tax purposes or if a U.S. court can exercise
primary supervision over its administration, and one or more United States
persons have the authority to control all of its substantial decisions.
A non-U.S. holder is a beneficial owner of Grey Wolf common shares, other
than a U.S. holder.
The tax consequences to the following parties are not addressed in this
summary or the opinion described below:
- persons that may be subject to special tax treatment such as financial
institutions, real estate investment trusts, tax-exempt organizations,
qualified retirement plans, individual retirement accounts, regulated
investment companies, insurance companies, and brokers and dealers or
traders in securities or currencies;
- Grey Wolf option holders and persons who acquired Grey Wolf common shares
pursuant to an exercise of employee stock options or rights or otherwise
as compensation;
- persons having a functional currency for U.S. federal income tax purposes
other than the U.S. dollar;
- persons that hold or will hold Grey Wolf common shares, as part of a
position in a straddle or as part of a hedging or conversion transaction;
- persons that own, or are deemed to own, 5% or more, by voting power or
value, of the outstanding stock of Grey Wolf, AcquisitionCo or Abraxas, as
the case may be; and
- persons subject to the alternative minimum tax.
U.S. holders who do not maintain a substantial presence, permanent home or
habitual abode in the U.S. or whose personal and economic relations are not
closer to the U.S. than to any other country (other than Canada) may be unable
to benefit from the provisions described herein of the Convention Between the
United States of America and Canada with Respect to Taxes on Income and on
Capital, signed September 26, 1980, as amended. These holders should consult
their own tax advisors concerning the availability of benefits under the
Canada-U.S. Tax Convention.
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Abraxas expects to be advised by Cox & Smith Incorporated, U.S. tax counsel
to Abraxas, that in their opinion, although the matter is not free from doubt,
it is more likely than not that for U.S. federal income tax purposes the offer
and the Acquisition Transactions should constitute a reorganization within the
meaning of Section 368(a) of the Code. This tax opinion, when given, will be
attached as Exhibit 8.1 to the registration statement on Form S-4 filed with the
SEC of which this document is a part. The tax opinion described above and the
consequences summarized below under "--United States Holder--Federal Income Tax
Consequences if the Offer and Acquisition Transactions Qualify as a
Reorganization" will be conditioned upon, among other things, all of the
following factual assumptions (referred to as the supporting conditions):
- there being validly deposited under the offer and not properly withdrawn,
that number of Grey Wolf common shares which represents not less than a
majority of Grey Wolf common shares, calculated on a fully-diluted basis,
excluding those Grey Wolf common shares held by persons whose shares may
not be voted as part of the "minority" in connection with any Subsequent
Acquisition Transaction;
- the Acquisition Transactions are completed promptly after the offer; and
- the offer and Acquisition Transactions are completed under the terms as
described in this document.
In addition to these primary supporting conditions, the opinion of Cox &
Smith Incorporated will rely upon, and the consequences summarized below under
"United States Holder--Federal Income Tax Consequences if the Offer and
Acquisition Transactions Qualify as a Reorganization" are based upon,
representations and covenants made by Abraxas and AcquisitionCo and certain
other assumptions including the absence of changes in facts or in law between
the date of this document and the effective time of the offer and Acquisition
Transactions. In addition, for purposes of the tax opinion described above and
the tax consequences described in this Summary, and based upon representations
of Abraxas and AcquisitionCo, it has been assumed that Grey Wolf is not a
controlled foreign corporation as defined in Section 957(a) of the United States
tax code. If any of those representations, covenants or assumptions are
inaccurate or if the supporting conditions are not satisfied, the tax opinion of
Cox & Smith Incorporated described above cannot be relied upon.
GREY WOLF SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO
THE U.S. FEDERAL, STATE, AND LOCAL TAX CONSEQUENCES AND THE NON-U.S. TAX
CONSEQUENCES OF THE OFFER AND ACQUISITION TRANSACTIONS.
UNITED STATES HOLDER--FEDERAL INCOME TAX CONSEQUENCES IF THE OFFER AND
ACQUISITION TRANSACTIONS QUALIFY AS A REORGANIZATION
Assuming that the offer and Acquisition Transactions qualify as a
reorganization, and subject to the assumptions, limitations and qualifications
described above, for federal income tax purposes:
- A U.S. holder of Grey Wolf common shares will not recognize any gain or
loss upon the exchange of the U.S. holder's Grey Wolf common shares for
Abraxas shares in the offer or Acquisition Transactions.
- A U.S. holder of Grey Wolf common shares will have an aggregate tax basis
in the Abraxas shares received in the offer or Acquisition Transactions
equal to (1) the aggregate tax basis in the Grey Wolf common shares
surrendered by that U.S. holder in the offer or Acquisition Transactions,
reduced by (2) any tax basis in such Grey Wolf common shares that is
allocable to a fraction of an Abraxas common share for which cash is
received.
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- The holding period for Abraxas shares received in exchange for Grey Wolf
common shares in the offer or Acquisition Transactions will include the
holding period for Grey Wolf common shares surrendered for them in the
offer or Acquisition Transactions.
- Cash payments in lieu of a fractional share of Abraxas common stock will
be treated as if a fractional share of Abraxas common stock had been
received by the U.S. holder in the offer or Acquisition Transactions and
then redeemed by Abraxas.
The redemption of any fractional shares should qualify as a distribution in
full payment in exchange for the fractional share rather than as a distribution
of a dividend. Accordingly, a Grey Wolf shareholder receiving cash in lieu of a
fractional share will recognize gain or loss upon payment equal to the
difference, if any, between the shareholder's tax basis in the fractional share,
as described in the second bullet point above, and the amount of cash received.
The gain or loss, if any, will be capital gain or loss. In the case of an
noncorporate U.S. holder of Grey Wolf common shares who receives cash in lieu of
a fractional share, generally the maximum U.S. federal income tax rate
applicable to any capital gain recognized on the receipt of the cash will be
lower than the maximum U.S. federal income tax rate applicable to ordinary
income if the holder's holding period for the Grey Wolf common shares exceeds
one year. The deductibility of capital losses is subject to limitations.
For U.S. federal income tax purposes, any gain recognized by a U.S. holder
on the receipt of cash in lieu of a fractional share generally will be treated
as U.S. source gain, except that, under the terms of the Canada-U.S. Tax
Convention, the gain may be treated as sourced in Canada. Any Canadian tax
imposed on the gain generally will be available as a credit against U.S. federal
income taxes, subject to applicable limitations. A U.S. holder that is
ineligible for a foreign tax credit with respect to any Canadian tax paid may be
entitled to deduct the Canadian tax in computing U.S. taxable income.
FEDERAL INCOME TAX CONSEQUENCES IF THE ACQUISITION TRANSACTIONS ARE NOT
COMPLETED
In addition to the limitations, assumptions and qualifications described
above, this tax summary does not address, and no opinion has been given
concerning, any tax consequences of the offer if the Acquisition Transactions
are not completed. If the Acquisition Transactions are not completed, the
federal income tax consequences of the exchange of Grey Wolf common shares in
the offer will depend on facts and circumstances that are not yet known. Such
facts and circumstances include who is deemed to be the holder of the Grey Wolf
common shares exchanged in the offer and the percentage of Grey Wolf common
shares deposited in the offer. Grey Wolf shareholders are urged to consult their
tax advisors regarding the tax consequences of participating in the offer if the
Acquisition Transactions are not completed.
In general, if the Acquisition Transactions are not completed, each U.S.
holder of Grey Wolf common shares realizing gain on the exchange of Grey Wolf
common shares for Abraxas shares in the offer, will recognize capital gain or
loss, measured by the difference between the fair market value of the Abraxas
shares received by such U.S. holder (together with any cash received by such
U.S. holder instead of a fraction of an Abraxas share) and the U.S. holder's
aggregate tax basis in such Grey Wolf common shares exchanged therefore, and
capital gain or loss will be long-term capital gain or loss if such U.S. holder
held such Grey Wolf common shares for more than one year at the time such Grey
Wolf common shares are exchanged in the offer.
For U.S. federal income tax purposes, any gain recognized by a U.S. holder
as a result of the exchange of Grey Wolf common shares for Abraxas shares in the
offer or Acquisition Transactions (including any gain recognized by a U.S.
holder on the receipt of cash in lieu of a fractional share) generally will be
treated as U.S. source gain, except that, under the terms of the Canada--U.S.
Tax Convention, the gain may be treated as sourced in Canada. Any Canadian tax
imposed on the gain generally will be available as a credit against U.S. federal
income taxes, subject to applicable
99
limitations. A U.S. holder that is ineligible for a foreign tax credit with
respect to any Canadian tax paid may be entitled to deduct the Canadian tax in
computing U.S. taxable income.
NON-U.S. HOLDERS
Subject to the discussion below under "Backup Withholding Tax and
Information Reporting Requirements," a non-U.S. holder generally will not be
subject to U.S. federal income tax on gain, if any, recognized on the receipt of
the Abraxas shares, unless the gain is effectively connected with a U.S. trade
or business of the holder or, in the case of gains recognized by an individual,
the individual is present in the U.S. for 183 days or more in the taxable year
of disposition, and some other conditions are satisfied.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING REQUIREMENTS
U.S. backup withholding tax and information reporting requirements generally
apply to some payments to holders of stock other than specified exempt
recipients. Information reporting generally will apply to proceeds from the sale
of Grey Wolf common shares by a payor middleman within the U.S. to a holder of
Grey Wolf common shares, other than an exempt recipient. Exempt recipients
include corporations, payees that are not United States persons and that provide
an appropriate certification and certain other persons. A payor or middleman
within the U.S. will be required to withhold 31% of any payments to a holder of
shares of the proceeds from the sale of the shares within the U.S., unless the
holder is an exempt recipient, if the holder fails to furnish its correct
taxpayer identification number or otherwise fails to comply with the backup
withholding tax requirements. A payor or middleman will be required to withhold
31% of any proceeds from the sale of Grey Wolf common shares, unless the holder
is an exempt recipient, if the holder fails to furnish its correct taxpayer
identification number or otherwise fails to comply with the backup withholding
tax requirements. In the case of payments by a payor or middleman within the
U.S. to a foreign partnership, other than payments to a foreign partnership that
qualifies as a withholding foreign partnership within the meaning of income tax
regulations and payments to a foreign partnership that are effectively connected
with the conduct of a trade or business in the U.S., the partners of the
partnership will be required to provide the certification discussed above in
order to establish an exemption from backup withholding tax and information
reporting requirements. Moreover, a payor or middleman may rely on a
certification provided by a non-U.S. holder only if the payor or middleman does
not have actual knowledge or a reason to know that any information or
certification stated in the certificate is unreliable.
The summary of anticipated material federal income tax consequences set
forth above is intended to provide only a general summary and is not intended to
be a complete analysis or description of all potential U.S. federal income tax
consequences of the offer and subsequent transactions. In addition, the summary
does not address tax consequences that may vary with, or are contingent on,
individual circumstances. Moreover, the summary does not address any non-income
tax or any foreign, state, local or other tax consequences of the offer and
Acquisition Transactions, other than as specifically stated. The summary does
not address the tax consequences of any transaction other than the offer and the
Acquisition Transactions. Accordingly, each Grey Wolf shareholder is strongly
urged to consult with a tax advisor to determine the particular federal, state,
local or foreign income, reporting or other tax consequences of the offer or
Acquisition Transactions to such shareholder.
100
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following summary unaudited pro forma condensed consolidated financial
information for Abraxas gives effect to the proposed acquisition by
AcquisitionCo of the remaining common stock of Grey Wolf that Abraxas and
Canadian Abraxas do not already own (6.6 million shares) plus stock options
anticipated to be assumed (0.5 million shares). Abraxas plans to issue
approximately 4.5 million shares of common stock to acquire such minority
interest in Grey Wolf and related stock options. The purchase price of $20.6
million is based on the market price of Abraxas common shares over a reasonable
period of time around the announcement on April 12, 2001 ($4.58 per share). The
book value of such Grey Wolf minority interest is $13.2 million at March 31,
2001. The purchase price value above such book value is allocated to oil and gas
properties. The results of the final valuation of fair value is not yet complete
and subject to stock options to be assumed. The summary unaudited pro forma
financial information is presented for illustrative purposes only and is not
necessarily indicative of the actual results that would have occurred had the
minority interest been acquired on these respective dates or of future results
of operations. The historical financial information has been adjusted for
amortization of the oil and gas properties based on the purchase price and
related changes in deferred income taxes.
The Abraxas historical consolidated financial information includes Grey Wolf
as a consolidated entity with related minority interests.
See Annex A-5 for Independent Accountants' Compilation Report related to the
unaudited pro forma condensed consolidated financial statements.
The historical book value per common share of Abraxas at December 31, 2000
assumed the issuance of 9.5 million shares pursuant to Abraxas' contingent value
rights, and the historical book value per common share of Abraxas at March 31,
2001 assumed the issuance of 3.2 million shares pursuant to the CVRs. On May 21,
2001, Abraxas' CVRs expired. Under the terms of the CVRs, Abraxas issued a total
of 3,386,488 shares of its common stock to holders of CVRs.
101
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2001
HISTORICAL
ABRAXAS GREY
PETROLEUM WOLF
CORPORATION ADJUSTMENTS
PRO FORMA
-----------
------------ ---------
(DOLLARS IN
THOUSANDS)
Assets:
Cash............................................... $ 2,068 $
-- $ 2,068
Accounts receivable................................ 14,357
-- 14,357
Other.............................................. 4,917
-- 4,917
---------
------------ ---------
Total current assets............................. 21,342
-- 21,342
Property and equipment............................... 562,763
11,462 (a) 574,225
Less accumulated DD&A................................ (257,686)
-- (257,686)
---------
------------ ---------
Net property and equipment......................... 305,077
11,462 316,539
Deferred financing fees.............................. 5,087
-- 5,087
Other assets......................................... 2,468
-- 2,468
---------
------------ ---------
Total assets..................................... $ 333,974 $
11,462 $ 345,436
=========
============ =========
Liabilities and stockholders' equity (deficit):
Total current liabilities........................ $ 52,377 $
-- $ 52,377
Long-term debt....................................... 266,786
-- 266,786
Deferred income taxes................................ 22,696
4,067 (b) 26,763
Minority interest.................................... 13,215
(13,215)(c) --
Other liabilities.................................... 11,884
-- 11,884
Stockholders' equity (deficit):
Common stock....................................... 227
45 (d) 272
Additional paid-in capital......................... 131,350
20,565 (e) 151,915
Accumulated deficit................................ (131,121)
-- (131,121)
Accumulated other comprehensive loss............... (32,476)
-- (32,476)
Treasury stock..................................... (964)
-- (964)
---------
------------ ---------
Total stockholders' equity (deficit)............. (32,984)
20,610 (12,374)
---------
------------ ---------
Total liabilities and stockholders' equity
(deficit)........................................ $ 333,974 $
11,462 $ 345,436
=========
============ =========
See notes to unaudited pro forma financial information.
102
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
HISTORICAL
ABRAXAS
GREY
PETROLEUM
WOLF
CORPORATION
ADJUSTMENTS PRO FORMA
-------------
------------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Revenue:
Oil and gas production revenues....................... $ 72,973 $
-- $ 72,973
Gas processing revenues............................... 2,717
-- 2,717
Rig revenues.......................................... 505
-- 505
Other revenues........................................ 405
-- 405
-----------
------- -----------
Total revenue..................................... 76,600
-- 76,600
Operating costs and expenses:
Lease operating and production taxes.................. 18,783
-- 18,783
Depreciation, depletion and amortization.............. 35,857
1,451 (a) 37,308
Rig operations........................................ 717
-- 717
General and administrative expense.................... 6,893
-- 6,893
General and administrative (Stock-based
Compensation)....................................... 2,767
-- 2,767
-----------
------- -----------
Total operating expenses.......................... 65,017
1,451 66,468
-----------
------- -----------
Operating income (loss)................................. 11,583
(1,451) 10,132
Other (income) expense:
Interest income....................................... (530)
-- (530)
Amortization of deferred financing fee................ 2,091
-- 2,091
Interest expense...................................... 31,140
-- 31,140
Gain on sale of equity investment..................... (33,983)
-- (33,983)
Other................................................. 1,203
-- 1,203
-----------
------- -----------
(79)
-- (79)
-----------
------- -----------
Income (loss) before tax and extraordinary item......... 11,662
(1,451) 10,211
Income tax expense (benefit):
Current............................................... (1,233)
-- (1,233)
Deferred.............................................. 4,938
(515)(b) 4,423
Minority interest....................................... (1,281)
1,281 (c) --
-----------
------- -----------
Net income before extraordinary item.................... 6,676 $
345 $ 7,021
===========
======= ===========
Net income before extraordinary item-basic............ $ 0.29
$ 0.26
Weighted average shares outstanding..................... 22,615,777
27,115,777
Net income before extraordinary item-diluted............ $ 0.21
$ 0.19
Weighted average shares outstanding..................... 32,627,764
37,127,764
See notes to unaudited pro forma financial information.
103
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
HISTORICAL
ABRAXAS
GREY
PETROLEUM
WOLF
CORPORATION
ADJUSTMENTS PRO FORMA
-------------
------------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Revenue:
Oil and gas production revenues....................... $ 28,249 $
-- $ 28,249
Gas processing revenues............................... 436
-- 436
Rig revenues.......................................... 183
-- 183
Other revenues........................................ 218
-- 218
-----------
----- -----------
Total revenue..................................... 29,086
-- 29,086
Operating costs and expenses:
Lease operating and production taxes.................. 4,859
-- 4,859
Depreciation, depletion and amortization.............. 8,841
305 (a) 9,146
Rig operations........................................ 153
-- 153
General and administrative expense.................... 2,109
-- 2,109
General and administrative (Stock-based
Compensation)....................................... 931
-- 931
-----------
----- -----------
Total operating expenses.......................... 16,893
305 17,198
-----------
----- -----------
Operating income (loss)................................. 12,193
(305) 11,888
Other (income) expense:
Interest income....................................... (16)
-- (16)
Amortization of deferred financing fee................ 455
-- 455
Interest expense...................................... 7,781
-- 7,781
Other................................................. 16
-- 16
-----------
----- -----------
8,236
-- 8,236
-----------
----- -----------
Income from operations before income tax................ 3,957
(305) 3,652
Income tax expense...................................... 2,776
(108)(b) 2,668
Minority interest....................................... (926)
926 (c) --
-----------
----- -----------
Net income.............................................. $ 255 $
729 $ 984
===========
===== ===========
Earnings per common share:
Net income per common share--basic...................... $ 0.01
$ 0.04
Weighted average shares outstanding..................... 22,595,969
27,095,969
Net income per common share--diluted.................... $ 0.01
$ 0.03
Weighted average shares outstanding..................... 27,277,356
31,777,356
See notes to unaudited pro forma financial information.
104
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
NOTE 1. The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
March 31, 2001 reflects the acquisition of Grey Wolf as if it had occurred as of
March 31, 2001.
(a) Increase basis in oil and gas properties for difference in
preliminary purchase price and book value of minority
interest and related deferred income taxes................. $ 11,462
(b) Increase deferred income taxes attributable to excess of
purchase price allocated to oil & gas properties over their
historical basis........................................... (4,067)
(c) Reverse minority interest in equity of Grey Wolf............ 13,215
(d) Record issuance of common shares at par..................... (45)
(e) Record additional paid-in capital on issuance of common
shares..................................................... (20,565)
NOTE 2. The Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 2000, reflects the acquisition of
Grey Wolf as if it were consummated on January 1, 2000.
a. Adjust depreciation for increase in basis of oil and gas properties.
b. Record change in deferred taxes.
c. Reverse minority interest in earnings of Grey Wolf.
NOTE 3. The Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the three months ended March 31, 2001 reflects the acquisition of
Grey Wolf as if it were consummated on January 1, 2001.
a. Adjust depreciation for increase in basis of oil and gas properties.
b. Record change in deferred taxes.
c. Reverse minority interest in earnings of Grey Wolf.
105
ADDITIONAL PROPOSALS FOR THE ABRAXAS ANNUAL MEETING
PROPOSAL 2
ELECTION OF ABRAXAS DIRECTORS
The Articles of Incorporation of Abraxas divide the board of directors into
three classes of directors serving staggered three-year terms, with one class to
be elected at each annual meeting of stockholders. At this year's meeting, two
directors (Messers. Watson and Phelps) are to be elected for a term of three
years, to hold office until the expiration of their terms in 2004 or until
successors shall have been elected and shall have qualified. The term of the
Class I director (Mr. Burke) expires in 2003 and the term of the Class II
directors (Messers. Bartlett, Cox, Pevow and Wagda) expires in 2002.
DIRECTORS AND EXECUTIVE OFFICERS
NAME AND MUNICIPALITY
OF RESIDENCE AGE OFFICE
CLASS
------------ -------- ------
--------
Robert L. G. Watson, ........................... 50 Chairman of the
Board, President III
San Antonio, Texas............................ and Chief Executive
Officer
Chris E. Williford, ............................ 50 Executive Vice
President, Chief --
San Antonio, Texas............................ Financial Officer
and Treasurer
Robert W. Carington, Jr., ...................... 40 Executive Vice
President --
San Antonio, Texas............................
Craig S. Bartlett, Jr., ........................ 68 Director
II
Montclair, New Jersey.........................
Franklin A. Burke, ............................. 67 Director
I
Doyleston, Pennsylvania.......................
Ralph F. Cox, .................................. 68 Director
II
Ft. Worth, Texas..............................
Frederick M. Pevow, Jr., ....................... 38 Director
II
Houston, Texas................................
James C. Phelps, ............................... 78 Director
III
San Antonio, Texas............................
Joseph A. Wagda, ............................... 57 Director
II
Danville, California..........................
ROBERT L. G. WATSON has served as Chairman of the Board, President, Chief
Executive Officer and a director of Abraxas since 1977. 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, Abraxas' wholly-owned Canadian subsidiary. 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
MacNaughton, an independent petroleum engineering firm, from 1970 to 1972. Mr.
Watson received a Bachelor of Science degree in Mechanical Engineering from
Southern Methodist University in 1972 and a Master of Business Administration
degree from the University of Texas at San Antonio in 1974.
CHRIS E. WILLIFORD was elected Vice President, Treasurer and Chief Financial
Officer of Abraxas in January 1993, and as Executive Vice President and a
director of Abraxas in May 1993. In November 1996, Mr. Williford was elected
Vice President and Assistant Secretary of Canadian Abraxas. In December 1999,
Mr. Williford resigned as a director of Abraxas. Prior to joining Abraxas, Mr.
Williford
106
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. was elected Executive Vice President and a director
of Abraxas in July 1998. In December 1999, Mr. Carington resigned as a director
of Abraxas. Prior to joining Abraxas, Mr. Carington was a Managing Director with
Jefferies & Company, Inc. Prior to joining Jefferies & Company, Inc. in January
1993, Mr. Carington was a Vice President at Howard, Weil, Labouisse,
Friedrichs, Inc. Prior to joining Howard, Weil, Labouisse, Friedrichs, Inc., Mr.
Carington was a petroleum engineer with Unocal Corporation from 1983 to 1990.
CRAIG S. BARTLETT JR., a director of Abraxas since December 1999, has over
forty years of commercial banking experience, the most recent being with
National Westminster Bank USA, rising to the position of Executive Vice
President, Senior Lending Officer and Chairman of the Credit Policy Committee.
Mr. Bartlett continues to serve on numerous boards and is active in securities
arbitration. Mr. Bartlett attended Princeton University, and has a certificate
in Advanced Management from Pennsylvania State University.
FRANKLIN A. BURKE, a director of Abraxas since June 1992, has served as
President and Treasurer of Venture Securities Corporation since 1971, where he
is in charge of research and portfolio management. He has also been a general
partner and director of Burke, Lawton, Brewer & Burke, a securities brokerage
firm, since 1964, where he is responsible for research and portfolio management.
Mr. Burke also serves as a director of NB Instruments, Inc., an instrument
products company, Omega Institute, a job training entity, Suburban Community
Bank, and Starkey Chemical Process Co., a chemical processing company. Mr. Burke
received a Bachelor of Science degree in Finance from Kansas State University in
1955, a Master's degree in Finance from University of Colorado in 1960 and
studied at the graduate level at the London School of Economics from 1962 to
1963.
RALPH F. COX, a director of Abraxas since December 1999, has over 45 years
of oil and gas industry experience, over thirty of which was with Arco. Mr. Cox
retired from Arco in 1985 after having become Vice Chairman. Mr. Cox then joined
what is now Union Pacific Resources, retiring in 1989 as President and Chief
Operating Officer. Mr. Cox then joined Greenhill Petroleum Corporation as
President until leaving in 1994 to pursue his consulting business. Mr. Cox has
in the past and continues to serve on many boards including Arco, Fidelity
Investments, and the Kansas City Federal Reserve Board. Mr. Cox earned Petroleum
and Mechanical Engineering degrees from Texas A&M University with advanced
studies at Emory University.
FREDERICK M. PEVOW, JR., a director of Abraxas since December 1999, has
almost fifteen years of investment banking experience with firms such as Smith
Barney, Dillon Read, Salomon Smith Barney, and most recently CIBC World Markets
where he was Managing Director and headed the worldwide Investment Banking
practice covering the oilfield services and equipment industries. Mr. Pevow
currently pursues capital market transactions through Pevow & Associates, a
boutique investment and merchant-banking firm. Mr. Pevow holds an undergraduate
degree from the University of Texas with further studies at Rice University.
JAMES C. PHELPS, a director of Abraxas since December 1983, has been a
consultant to crude oil and natural gas exploration and production companies
such as Panhandle Producing Company and Tesoro Petroleum Corporation since April
1981. Mr. Phelps has served as a director of Grey Wolf since January 1996. From
April 1995 to May 1996, Mr. Phelps served as Chairman of the Board and Chief
Executive Officer of Grey Wolf, and from January 1996 to May 1996, he served as
President of Grey Wolf. From March 1983 to September 1984, he served as
President of Osborn Heirs Company, a privately owned crude oil exploration and
production company based in San Antonio. Mr. Phelps was
107
President and Chief Operating Officer of Tesoro Petroleum Corporation from 1971
to 1981 and prior to that was Senior Vice President and Assistant to the
President of Continental Oil Company. He received a Bachelor of Science degree
in Industrial Engineering and a Master of Science degree in Industrial
Engineering from Oklahoma State University.
JOSEPH A. WAGDA, a director of Abraxas since December 1999, has had a varied
twenty-five year career involving the financial and legal aspects of private and
corporate business transactions. Currently Mr. Wagda is Chairman, Chief
Executive Officer and a director of BrightStar Information Technology
Group, Inc., and is also an attorney and president of Altamont Capital
Management, Inc. Mr. Wagda's business expertise emphasizes special situation
consulting and investing, including involvement in distressed investments and
venture capital opportunities. Previously, Mr. Wagda was a senior managing
director and co-founder of the Price Waterhouse corporate finance practice. He
also served with the finance staff of Chevron Corporation and in the general
counsel's office at Ford Motor Company. Mr. Wagda received an undergraduate
degree from Fordham College, a Masters of Business Administration, with
distinction, from the Johnson Graduate School of Management, Cornell University,
and a JD, with honors, from Rutgers University.
INFORMATION CONCERNING DIRECTORS
During the fiscal year ended December 31, 2000, the Abraxas board of
directors held twelve meetings. All directors attended each of these meetings
except Mr. Pevow who missed one meeting. During 2000, Abraxas' directors other
than Mr. Watson received compensation for service to Abraxas as a director. See
"--Compensation Summary--Compensation of Directors" beginning on page 116.
Directors also received reimbursement of travel expenses to attend meetings of
the board of directors.
Neither the nominees for director nor any of the continuing directors of
Abraxas has a family relationship with any of the other executive officers or
other nominees for director. Except for Craig S. Bartlett, Jr., who is a
director of NVR, Inc., Janus Hotels & Resorts, Inc., New ICO Global
Communications (Holdings) Limited and Purina Mills Inc., Ralph F. Cox, who is a
director of Waste Management, Inc., CH2M Hill Companies and a trustee of the
Fidelity Funds, and Joseph A. Wagda, who is Chairman, CEO and a director of
BrightStar Information Technology Group, Inc., neither the nominees nor any of
the continuing directors is a director of any other company which has a class of
securities registered under, or is required to file reports under, the
Securities Exchange Act of 1934 or of any company registered under the
Investment Company Act of 1940.
Abraxas believes, based solely on its review of the copies of Section 16(a)
forms furnished to it and written representations from executive officers and
directors, that all Section 16(a) filing requirements have been fulfilled. In
making this disclosure, Abraxas has relied solely on written representations of
its directors and executive officers (and its ten percent stockholders) and
copies of the reports that they have filed with the United States Securities and
Exchange Commission.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee of the Abraxas board of directors, which consists of
Messrs. Bartlett, Burke, Phelps, and Wagda, met three times during 2000. The
functions of the Audit Committee are to recommend the appointment of Abraxas'
independent auditors, to review the arrangements for and the scope of the annual
audit and to review internal accounting controls.
The Compensation Committee of the board of directors, which consists of
Messrs. Phelps, Cox and Pevow, met twice during 2000. The functions of the
Compensation Committee are to review and make recommendations concerning the
compensation of Abraxas' executive and non-executive officers. The Compensation
Committee also administers Abraxas' 1984 Incentive Stock Option Plan, 1984
Nonqualified Stock Option Plan, 1993 Key Contributor Stock Option Plan, 1994
Long Term Incentive Plan and 2000 Long Term Incentive Plan.
108
The Nominating Committee of the board of directors did not meet during 2000.
In connection with Abraxas' exchange offer in 1999, the members of the
Nominating Committee resigned from the board of directors. Since that time, the
board of directors has not appointed members to the Nominating Committee. The
function of the Nominating Committee is to seek out, evaluate and recommend to
the board qualified nominees for election as directors of Abraxas and to
consider other matters pertaining to the size and composition of the board. The
Nominating Committee will give appropriate consideration to qualified persons
recommended by stockholders for nomination as directors of Abraxas provided that
such recommendations are accompanied by information sufficient to enable the
Nominating Committee to evaluate the qualifications of the nominee.
EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the board of directors (the "Committee") is
composed entirely of directors who are not employees of Abraxas. The Committee
is responsible for establishing and administering the compensation levels for
Abraxas' executive and non-executive officers. The members of the Committee
believe that the ability to attract and retain qualified executive and
non-executive officers and provide appropriate incentives to Abraxas' executive
and non-executive officers is essential to the long-term success of Abraxas.
In determining executive compensation, the Committee reviews the
compensation programs, pay levels and business results of Abraxas as compared to
those crude oil and natural gas exploration and production companies included in
the William M. Mercer 2000 Energy Compensation Survey (the "Mercer Survey").
COMPENSATION PHILOSOPHY AND OBJECTIVES
The philosophy underlying the development and administration of Abraxas'
annual and long-term compensation plans is to align the interests of management
with those of Abraxas' stockholders. Key elements of this philosophy are:
- Establishing compensation plans that deliver base salaries which are
competitive with the companies included in the Mercer Survey, within
Abraxas' budgetary constraints and commensurate with Abraxas'
performance as measured by operating, financial and strategic
objectives.
- Providing equity-based incentives for executive and non-executive
officers to ensure that they are motivated over the long-term to
respond to Abraxas' business challenges and opportunities as owners
rather than just as employees.
- Rewarding executive and non-executive officers for outstanding
performance particularly where such performance is reflected by an
increase in the value of Abraxas common stock.
The compensation currently paid to Abraxas' executive and non-executive
officers consists of base salary, various employee benefits (including medical
and life insurance and 401(k) plan benefits generally available to all employees
of Abraxas), annual cash bonuses and grants of stock options and awards under
Abraxas' 1994 Long Term Incentive Plan (the "LTIP") and 2000 Long Term Incentive
Plan (the "2000 Plan").
ELEMENTS OF THE EXECUTIVE COMPENSATION PROGRAM
BASE SALARIES. The Committee believes that Abraxas' base salary levels for
executive officers are consistent with the practices of the companies included
in the Mercer Survey. Increases in base salary
109
levels from time to time are designed to reflect competitive practices in the
industry, Abraxas' financial performance and individual performance of the
officer.
In the first quarter of each year, the Chief Executive Officer submits to
the Committee recommendations for salary adjustments based upon his subjective
evaluation of individual performance and his subjective judgment regarding
setting each executive and non-executive officer's salary within Abraxas' salary
range. This range is set by reference to the salaries paid by the companies
included in the Mercer Survey while remaining within Abraxas' budgetary
constraints. The companies included in the Mercer Survey are used to compare
Abraxas' salary structure to that of other companies that compete with Abraxas
for executives but without targeting salaries to be higher, lower or
approximately the same as those of the companies included in the Mercer Survey.
The Committee does not consider the performance of any of the companies included
in the Mercer Survey in setting Abraxas' salary structure.
ANNUAL CASH BONUSES. In 1994, the board of directors adopted an annual cash
bonus plan which established certain criteria for the payment of annual cash
bonuses to all officers of Abraxas at or above the Vice President level. The
plan was amended in 1997 and again in 1999. Under the plan as amended, each
participant is given an annual bonus opportunity based on the achievement of
certain goals. For Messrs. Watson, Williford and Carington, the base bonus could
be as high as 35% of base salary if all goals are attained. For Messrs. Wallace
and Dr. Billingsley, the bonus could be as high as 25% of base salary if all
goals are attained. The amount of the bonuses to be paid to Messrs. Watson,
Williford, Carington and Wallace and Dr. Billingsley, if any, will be based upon
attaining goals set by the board of directors after assessing the
recommendations of management for earnings per share, cash flow per share and
general and administrative expenses per barrel of oil equivalent produced ("G &
A"), with each factor being weighted equally in the calculation. With respect to
officers responsible for Abraxas' operations, including Mr. Wallace, earnings
per share, cash flow per share and G & A will account for 50% of the calculation
and performance factors unique to Abraxas' operations will account for the
remaining 50% of the calculation. With respect to officers responsible for
Abraxas' exploration and geological activities, including Dr. Billingsley, all
of the goals described above are included and account for 50% of the calculation
and a goal for incremental proved (booked) reserves from certain properties
accounts for the remaining 50%. If all performance goals are met or exceeded,
additional bonuses of up to 25% of base salary can be earned by each
participant. The board has the prerogative to adjust the bonus earned by any
participant, including Messrs. Watson, Williford, Carington and Wallace and Dr.
Billingsley, to take into account extraordinary factors not contemplated by the
bonus plan when the impact of such contributions or factors cannot be adequately
reflected by the bonus determined under the methodology described above. In
2000, the goals for cash flow and reserve additions were met and the following
bonuses were paid:
NAME BONUS AMOUNT
---- ------------
Robert L.G. Watson.......................................... $29,175
Chris E. Williford.......................................... 17,505
Robert W. Carington, Jr..................................... 23,340
Lee T. Billingsley.......................................... 22,004
William H. Wallace.......................................... 9,425
LONG-TERM INCENTIVES. In 1994, the board adopted the LTIP in order to
compensate executive and non-executive officers and employees who contribute
significantly to the operation of Abraxas. In 1997 and 1998, the board amended
the LTIP in order to increase the number of shares of common stock which may be
issued thereunder to an aggregate of 1,550,000 shares. In 2000, the board
adopted the 2000 Plan. The LTIP and the 2000 Plan make available to the
Committee a number of incentive devices such as incentive stock options and
non-qualified stock options, stock appreciation rights, restricted stock,
performance units, performance shares and dividend units. The Committee adopts
110
administrative guidelines from time to time which define specific eligibility
criteria, the types of awards to be employed and the value of such awards.
Specific terms of each award, including minimum performance criteria which must
be met to receive payment, are provided in individual award agreements granted
to each award recipient. Award agreements also contain change in control
provisions. Option holdings and previous awards are not taken into account.
The board believes that the LTIP and the 2000 Plan have given Abraxas the
flexibility to structure awards to meet Abraxas' business needs. In making
long-term incentive awards under the LTIP and the 2000 Plan, the Committee seeks
to ensure that the total compensation package, including cash compensation, is
competitive with the compensation paid by the companies included in the Mercer
Survey, yet substantially contingent upon the conclusion of individual and
corporate efforts to produce attractive long-term returns to Abraxas
stockholders.
CEO COMPENSATION. Mr. Watson's salary in 2000 was based on the Committee's
evaluation of his performance and Abraxas' performance, after reviewing
competitive salary data from the companies included in the Mercer Survey and
Abraxas' budgetary constraints. The Committee's determination of Mr. Watson's
total salary was based upon the salaries paid to chief executive officers of the
companies included in the Mercer Survey and the salary structure of Abraxas.
POLICY ON DEDUCTIBILITY OF COMPENSATION. In 1993, the federal tax laws were
amended to limit the deduction a publicly-held company is allowed for
compensation paid to the chief executive officer and to the four most highly
compensated executive officers other than the chief executive officer.
Generally, amounts paid in excess of $1 million to a covered executive, other
than performance-based compensation, cannot be deducted. In order to constitute
performance-based compensation for purposes of the tax law, the performance
measures must be approved by the stockholders. Since Abraxas does not anticipate
that the compensation for any executive officer will exceed the $1 million
threshold in the near term, stockholder approval necessary to maintain the tax
deductibility of compensation at or above that level is not being requested. The
Committee will reconsider this matter if compensation levels approach this
threshold, in light of the tax laws then in effect. The Committee will consider
ways to maximize the deductibility of executive compensation, while retaining
the discretion the Committee deems necessary to compensate executive officers in
a manner commensurate with performance and the competitive environment for
executive talent.
This report is submitted by the members of the Committee:
James C. Phelps, Chairman
Ralph F. Cox
Frederick M. Pevow, Jr.
111
COMPENSATION SUMMARY
The following table sets forth a summary of compensation for the fiscal
years ended December 31, 1998, 1999 and 2000 paid by Abraxas to Robert L.G.
Watson, Abraxas' Chairman of the Board, President and Chief Executive Officer,
Chris E. Williford, Abraxas' Executive Vice President, Chief Financial Officer
and Treasurer, Robert W. Carington, Jr., Abraxas' Executive Vice President, Lee
T. Billingsley, Abraxas' Vice President--Exploration, and to William H. Wallace,
Abraxas' Vice President--Operations.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
----------
AWARDS
----------
ANNUAL COMPENSATION
OPTIONS
NAME AND PRINCIPAL
------------------------------ /SARS
POSITION YEAR SALARY($)
BONUS($) (#)
------------------------------------------------------ -------- --------
-------- ----------
Robert L. G. Watson, ................................. 1998 $253,367 $
0 140,000(1)
Chairman of the Board, 1999 $259,615
$43,750 6,731(2)
President and Chief 2000 $259,615
$29,175 4,688(3)
Executive Officer
962,562
Chris E. Williford, .................................. 1998 $155,770 $
0 35,000
Executive Vice 1999 $155,769
$26,250 0
President, 2000 $155,769
$17,505 392,701
Chief Financial Officer
and Treasurer
Robert W. Carington, Jr., ............................ 1998 $103,846 $
0 320,000
Executive Vice President 1999 $207,629
$35,000 0
2000 $207,629
$23,340 549,456
Lee T. Billingsley ................................... 1998 $ 31,154 $
0 0
Vice President-- 1999 $124,615
$22,500 30,000
Exploration 2000 $134,077
$22,004 97,972
William H. Wallace, .................................. 1998 $ 94,404 $
8,850 12,500
Vice President-- 1999 $109,440
$13,750 30,000
Production 2000 $131,577 $
9,425 97,972
------------------------
(1) Options to purchase Abraxas common stock.
(2) On March 23, 1998, Mr. Watson was granted options to purchase 6,731 Grey
Wolf common shares, at an exercise price of C$3.90 per share.
(3) On January 7, 1999, Mr. Watson was granted options to purchase 4,688 Grey
Wolf common shares at an exercise price of C$3.20 per share.
GRANTS OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS DURING THE FISCAL YEAR
ENDED DECEMBER 31, 2000
Pursuant to the Abraxas Petroleum Corporation 1984 Incentive Stock Option
Plan (the "ISO Plan"), the Abraxas Petroleum Corporation 1993 Key Contributor
Stock Option Plan (the "1993 Plan"), the Abraxas Petroleum Corporation 1994 Long
Term Incentive Plan (the "LTIP"), and the Abraxas Petroleum Corporation 2000
Long Term Incentive Plan (the "2000 Plan"), Abraxas grants to its employees and
officers (including its directors who are also employees) incentive stock
options and
112
non-qualified stock options. The ISO Plan, the 1993 Plan, the LTIP and 2000 Plan
are administered by the Compensation Committee which, based upon the
recommendation of the Chief Executive Officer, determines the number of shares
subject to each option.
The table below contains certain information concerning stock options
granted to Messrs. Watson, Williford, Carington and Wallace and Dr. Billingsley
during 2000:
OPTION GRANTS IN FISCAL YEAR
-----------------------------------
POTENTIAL REALIZABLE
EXERCISE
VALUE AT ASSUMED
PRICE
ANNUAL RATES OF STOCK
% OF TOTAL PER
PRICE APPRECIATION FOR
OPTIONS OPTIONS SHARE
OPTION TERM
GRANTED GRANTED TO (PRICE AT EXPIRATION
--------------------------
NAME (1) EMPLOYEES GRANT) DATE
5% 10%
---- -------- ---------- --------- ----------
---------- -------------
Robert L.G. Watson............. 842,562 37.61 $5.03 3/1/10
0 0
120,000 5.36 $1.38 5/26/10
$104,400 $ 264,000
Chris E. Williford............. 352,701 15.74 $5.03 3/1/10
0 0
40,000 1.79 $1.38 5/26/10
$ 34,800 $ 88,000
Robert W. Carington, Jr........ 509,456 22.74 $5.03 3/1/10
0 0
40,000 1.79 $1.38 5/26/10
$ 34,800 $ 88,000
Lee T. Billingsley............. 97,972 4.37 $5.03 3/1/10
0 0
William H. Wallace............. 97,972 4.37 $5.03 3/1/10
0 0
------------------------
(1) One-fourth of the options become exercisable on each of the first four
anniversaries of the date of grant.
AGGREGATED OPTION EXERCISES IN FISCAL 2000 AND FISCAL YEAR END OPTION VALUES
The table below contains certain information concerning exercises of stock
options during the fiscal year ended December 31, 2000, by Messrs. Watson,
Williford, Carington and Wallace and Dr. Billingsley and the fiscal year end
value of unexercised options held by Messrs. Watson, Williford, Carington and
Wallace and Dr. Billingsley.
113
OPTION EXERCISES IN FISCAL YEAR
NUMBER OF
VALUE OF
UNEXERCISED
UNEXERCISABLE IN-
OPTIONS ON
THE-MONEY OPTIONS
DECEMBER 31, ON
DECEMBER 31,
SHARES VALUE 2000(#)
2000 ($)
ACQUIRED BY REALIZED EXERCISABLE/
EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISED
UNEXERCISABLE
---- ----------- -------- -------------
-----------------
370,000/(1)
Robert L. G. Watson............ 0 0 1,032,562
0/0(1)(3)
84,538/(2)
6,881
0/0(2)
131,250/
Chris E. Williford............. 0 0 416,451
0/0(3)
160,000/
Robert W. Carington, Jr........ 0 0 709,456
0/0(3)
36,500/
Lee T. Billingsley............. 0 0 149,472 $
89,555/$134,105
21,750/
William H. Wallace............. 0 0 126,722 $
55,335/$81,325
------------------------
(1) Options held by Mr. Watson to purchase shares of Abraxas common stock.
(2) Options held by Mr. Watson to purchase Grey Wolf common shares.
(3) On March 25, 1999, all existing Abraxas options with exercise prices greater
than $2.06 were reduced to $2.06 under a plan approved by the Abraxas board
of directors. However, all Abraxas options repriced for Messrs. Watson,
Williford and Carington were not exercisable until Abraxas' common stock
closed daily trading at a price greater than or equal to $4.12 per share for
10 days out of any 30 day trading period. This $4.12 threshold was not
achieved by December 31, 2000; thus at that date, none of Messrs. Watson,
Williford or Carington's repriced options were exercisable. The $4.12
threshold was achieved on January 4, 2001.
LONG TERM INCENTIVE PLAN AWARDS DURING THE FISCAL YEAR ENDED DECEMBER 31,
2000
Abraxas did not make any awards to any of Messrs. Watson, Williford,
Carington and Wallace and Dr. Billingsley under a long-term incentive plan
during the fiscal year ended December 31, 2000.
EMPLOYMENT AGREEMENTS
Abraxas has entered into employment agreements with each of Messrs. Watson,
Williford, Carington and Wallace and with Dr. Billingsley pursuant to which each
of Messrs. Watson, Williford, Carington and Wallace and Dr. Billingsley will
receive compensation as determined from time to time by the board in its sole
discretion.
The employment agreements for Messrs. Watson, Williford, and Carington are
scheduled to terminate on December 21, 2002, and shall be automatically extended
for additional one-year terms unless Abraxas gives Messrs. Watson, Williford,
and Carington 120 days notice prior to the expiration of the original term or
any extension thereof of its intention not to renew the employment agreement.
If, during the term of Messrs. Watson's, Williford's or Carington's employment
agreements, Messrs. Watson's, Williford's or Carington's employment is
terminated by Abraxas other than for cause or disability, by Messrs. Watson,
Williford or Carington other than by reason of Messrs. Watson's, Williford's or
Carington's death or retirement, or by Messrs. Watson, Williford or Carington,
as the
114
case may be, for "good reason" (as defined in their employment agreements), then
Messrs. Watson, Williford or Carington, as applicable, will be entitled to
receive a lump sum payment equal to the greater of (a) his annual base salary
for the last full year during which he was employed by Abraxas or (b) his annual
base salary for the remainder of the term of each of their respective employment
agreements.
If a change of control occurs during the term of Messrs. Watson's,
Williford's or Carington's employment agreements, and if subsequent to such
change of control, Messrs. Watson's, Williford's, or Carington's employment is
terminated by Abraxas other than for cause or disability, by reason of Messrs.
Watson's, Williford's or Carington's death or retirement or by Messrs. Watson,
Williford or Carington, as the case may be, for good reason, then Mr. Watson
will be entitled to the following:
(1) if such termination occurs prior to the end of the first year of the
initial term of his employment agreement, a lump sum payment equal to
five times his annual base salary;
(2) if such termination occurs after the end of the first year of the
initial term of his employment agreement but prior to the end of the
second year of the initial term of his employment agreement, a lump sum
payment equal to four times his annual base salary;
(3) if such termination occurs after the end of the second year of the
initial term of his employment agreement but prior to the end of the
third year of the initial term of his employment agreement, a lump sum
payment equal to three times his annual base salary; and
(4) if such termination occurs after the end of the third year of the
initial term of his employment agreement a lump sum payment equal to 2.99
times his annual base salary.
Under such circumstances, Messrs. Williford and Carington will be entitled
to the following:
(1) if such termination occurs prior to the end of the first year of the
initial term of his respective employment agreement, a lump sum payment
equal to four times his annual base salary;
(2) if such termination occurs after the end of the first year of the
initial term of his respective employment agreement but prior to the end
of the second year of the initial term of his respective employment
agreement, a lump sum payment equal to three times his annual base
salary; and
(3) if such termination occurs after the end of the second year of the
initial term of his respective employment agreement, a lump sum payment
equal to 2.99 times his annual base salary.
Abraxas has entered into employment agreements with Mr. Wallace and Dr.
Billingsley pursuant to which each of Mr. Wallace and Dr. Billingsley will
receive compensation as determined from time to time by the board in its sole
discretion. The employment agreements, originally scheduled to terminate on
December 31, 1998 for Dr. Billingsley and December 31, 2000 for Mr. Wallace,
were automatically extended for one year and will terminate on December 31,
2001, and may be automatically extended for an additional year if by December 1
of the prior year neither Abraxas nor Mr. Wallace or Dr. Billingsley, as the
case may be, has given notice that he or it, as the case may be, does not wish
to extend the term. Except in the event of a change in control, at all times
during the term of the employment agreements, each of Mr. Wallace's and Dr.
Billingsley's employment is at will and may be terminated by Abraxas for any
reason without notice or cause. If a change in control occurs during the term of
the employment agreement or any extension thereof, the expiration date of Mr.
Wallace's and Dr. Billingsley's employment agreement is automatically extended
to a date no earlier than three years following the effective date of such
change in control. If, following a change in control, Mr. Wallace's or Dr.
Billingsley's employment is terminated other than for Cause (as defined in each
of the employment agreements) or Disability (as defined in each of the
Employment Agreements), by reason of Mr. Wallace's or Dr. Billingsley's death or
retirement or by Mr. Wallace or Dr. Billingsley, as the case may be, for good
reason (as defined in each of the employment agreements), then Mr. Wallace
115
and Dr. Billingsley will each be entitled to receive a lump sum payment equal to
three times his annual base salary.
If any lump sum payment to Messrs. Watson, Williford, Carington, Wallace or
Dr. Billingsley would individually or together with any other amounts paid or
payable constitute an "excess parachute payment" within the meaning of Section
280G of the Internal Revenue Code of 1986, as amended, and applicable
regulations there under, the amounts to be paid will be increased so that
Messrs. Watson, Williford, Carington, Wallace or Dr. Billingsley, as the case
may be, will be entitled to receive the amount of compensation provided in his
contract after payment of the tax imposed by Section 280G.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In January 1996, Abraxas invested $3.0 million in Grey Wolf
Exploration Ltd. ("Ltd"), a privately held Canadian corporation, which, in turn,
invested these proceeds in newly-issued shares of Cascade Oil & Gas, Ltd.
("Cascade"), an Alberta-based corporation whose common shares were traded on The
Alberta Stock Exchange. In November 1997, Ltd. merged with Cascade, which later
changed its name to Grey Wolf Exploration Inc. Grey Wolf manages the operations
of Canadian Abraxas pursuant to a management agreement between Canadian Abraxas
and Grey Wolf. See "Proposal 2--Certain Transactions" beginning on page 121.
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.
Mr. Phelps, a member of the Compensation Committee of the Abraxas board of
directors during 2000, served as a director of Grey Wolf during 2000. Mr. Phelps
served as Chief Executive Officer of Ltd from April 1995 to May 1996 and as
President of Cascade from January 1996 to May 1996. Mr. Phelps also served as a
director of Ltd until 1997 when Ltd was merged into Cascade. Mr. Phelps has
served as a director of Grey Wolf and its predecessor, Cascade, since 1997.
Mr. Watson, Abraxas' President, Chief Executive Officer and Chairman of the
Board, served as Chairman of the board, Chief Executive Officer and a director
of Grey Wolf during 2000.
COMPENSATION OF DIRECTORS
NON-QUALIFIED STOCK OPTION PLAN. Messrs. Burke and Phelps have previously
been granted options to purchase 8,900 shares of common stock under the Abraxas
1984 Non-Qualified Stock Option Plan (the "Non-Qualified Plan"). There are
currently outstanding options to purchase 8,900 shares of Abraxas common stock
under the Non-Qualified Plan. Mr. Burke holds an option to purchase 8,900
Abraxas shares of common stock at an exercise price of $2.06 per share.
STOCK OPTIONS. In 1999, each of Messrs. Bartlett, Cox, Pevow and Wagda were
each granted options to purchase 75,000 shares of common stock at an exercise
price of $0.98 per share.
OTHER COMPENSATION. During 2000, each director who was not an employee of
Abraxas or its affiliates, received an annual fee of $8,000 plus $1,000 for each
board meeting attended and $500 for each committee meeting attended. Aggregate
fees paid to directors in 2000 were $127,500. Except for the foregoing, the
directors of Abraxas received no other compensation for services as directors,
except for reimbursement of travel expenses to attend board meetings.
116
REPORT ON REPRICING OF OPTIONS
On March 25, 1999, the board of directors approved a plan pursuant to which
the price of each outstanding stock option granted to employees and directors of
Abraxas with an exercise price greater than $2.06 per share was reduced to $2.06
per share. However, all options repriced for Messrs. Watson, Williford, and
Carington were not exercisable until Abraxas' common stock closed daily trading
at a price greater than or equal to $4.12 per share for 10 days out of any 30
day trading period. This threshold was satisfied on January 10, 2001.
On March 25, 1998, the board of directors approved a plan pursuant to which
the price of each outstanding stock option granted to employees and directors of
Abraxas with an exercise price greater than $7.44 per share was reduced to $7.44
per share.
On March 7, 1996, the Committee approved a plan pursuant to which the
exercise price of each outstanding stock option granted to employees of Abraxas
prior to January 1, 1996, including options granted to Messrs. Watson, Williford
and Wendel, were reduced to $6.75 per share.
The Committee believed that repricing the existing options was in the best
interests of Abraxas and its stockholders. In the view of the Committee, the
decline of the market price of the Abraxas common stock substantially impaired
the effectiveness of the existing options as a means of attracting and retaining
qualified executive and non-executive officers and providing appropriate
incentives to the Abraxas executive and non-executive officers. In addition, the
Committee believed that a significant portion of the decline in the market price
was the result of market factors that affected the stocks of the companies
included in the Mercer Survey.
The following table sets forth certain information concerning repricing of
stock options held by any current executive officer during the period commencing
on May 7, 1991 (the date on which Abraxas became a reporting company pursuant to
the Securities Exchange Act of 1934, as amended), and ending on December 31,
2000.
OPTION REPRICING TABLE
NUMBER OF
LENGTH OF
SECURITIES
ORIGINAL OPTION
UNDERLYING OPTINOS MARKET PRICE
EXERCISE TERM
REPRICED OF STOCK AT
PRICE AT REMAINING AT
OR AMENDED TIME OF
TIME OF NEW DATE OF
DATE OF ---------- REPRICING OR
REPRICING OR EXERCISE REPRICING OR
NAME REPRICING OLD NEW AMENDMENT
AMENDMENT PRICE AMENDMENT
---- --------- --- --- ------------
------------ -------- ---------------
Robert L.G. 03/07/96 60,000 60,000 $6.75 $
9.50 $6.75 95 Mos
Watson, 03/25/98 100,000 100,000 $7.44 $
7.50 $7.44 104 Mos
Chairman of the 03/25/98 100,000 100,000 $7.44
$10.75 $7.44 108 Mos
Board, President 03/25/98 100,000 100,000 $7.44
$14.38 $7.44 116 Mos
and Chief 03/25/99 60,000 60,000 $2.06 $
6.75 $2.06 71 Mos
Executive Officer 03/25/99 40,000 40,000 $2.06 $
5.00 $2.06 84 Mos
03/25/99 100,000 100,000 $2.06 $
7.44 $2.06 92 Mos
03/25/99 100,000 100,000 $2.06 $
7.44 $2.06 96 Mos
03/25/99 100,000 100,000 $2.06 $
7.44 $2.06 105 Mos
03/25/99 40,000 40,000 $2.06 $
5.56 $2.06 116 Mos
Chris E. 03/07/96 6,252 6,252 $6.75 $
7.50 $6.75 75 Mos
Williford, 03/07/96 13,748 13,748 $6.75 $
9.75 $6.75 76 Mos
Executive Vice 03/07/96 20,000 20,000 $6.75 $
9.50 $6.75 95 Mos
President, Chief 03/25/98 20,000 20,000 $7.44 $
7.50 $7.44 104 Mos
Financial Officer 03/25/98 40,000 40,000 $7.44
$10.75 $7.44 108 Mos
and Treasurer 03/25/98 5,000 45,000 $7.44
$14.38 $7.44 116 Mos
03/25/99 20,000 20,000 $2.06 $
6.75 $2.06 51 Mos
03/25/99 20,000 20,000 $2.06 $
6.75 $2.06 71 Mos
117
NUMBER OF
LENGTH OF
SECURITIES
ORIGINAL OPTION
UNDERLYING OPTINOS MARKET PRICE
EXERCISE TERM
REPRICED OF STOCK AT
PRICE AT REMAINING AT
OR AMENDED TIME OF
TIME OF NEW DATE OF
DATE OF ---------- REPRICING OR
REPRICING OR EXERCISE REPRICING OR
NAME REPRICING OLD NEW AMENDMENT
AMENDMENT PRICE AMENDMENT
---- --------- --- --- ------------
------------ -------- ---------------
03/25/99 20,000 20,000 $2.06 $
5.00 $2.06 84 Mos
03/25/99 20,000 20,000 $2.06 $
7.44 $2.06 92 Mos
03/25/99 40,000 40,000 $2.06 $
7.44 $2.06 96 Mos
03/25/99 15,000 15,000 $2.06 $
7.44 $2.06 105 Mos
03/25/99 20,000 20,000 $2.06 $
5.56 $2.06 116 Mos
Robert W. 03/25/99 300,000 300,000 $2.06 $
8.75 $2.06 110 Mos
Carington, Jr., 03/25/99 20,000 20,000 $2.06 $
5.56 $2.06 114 Mos
Executive Vice
President
Lee T. 03/25/99 50,000 50,000 $2.06 $
8.75 $2.06 115 Mos
Billingsley, Vice 03/25/99 8,000 8,000 $2.06 $
5.56 $2.06 116 Mos
President --
Exploration
William H. 03/25/99 2,000 2,000 $2.06 $
6.25 $2.06 82 Mos
Wallace, 03/25/99 2,000 2,000 $2.06 $
5.00 $2.06 84 Mos
Vice President -- 03/25/99 4,000 4,000 $2.06 $
7.44 $2.06 92 Mos
Production 03/25/99 2,500 2,500 $2.06 $
7.44 $2.06 106 Mos
03/25/99 10,000 10,000 $2.06 $
5.56 $2.06 116 Mos
This report is submitted by the members of the Committee:
James C. Phelps, Chairman
Ralph F. Cox
Frederick M. Pevow, Jr.
PERFORMANCE GRAPH
Set forth below is a performance graph comparing yearly cumulative total
stockholder return on the Abraxas common stock with (a) the monthly index of
stocks included in the Standard and Poor's 500 Index and (b) the CIBC World
Markets Index (the "CIBC Index") of stocks of crude oil and natural gas
exploration and production companies with a market capitalization of less than
$300 million (the "Comparable Companies"). The Comparable Companies are: Adams
Resources & Energy, Inc.; Basin Exploration, Inc.; Bellwether Exploration
Company; Callon Petroleum Company; Columbus Energy Corporation; Goodrich
Petroleum Corporation; Howell Corporation; Key Production Company, Inc.; Magnum
Hunter Resources, Inc.; Maynard Oil Company; The Meridian Resource Corporation;
PetroCorp Incorporated; Plains Resources, Inc.; Prima Energy Corporation; Unit
Corporation; Venus Exploration, Inc.; and Wiser Oil Company.
All of these cumulative total returns are computed assuming the value of the
investment in Abraxas common stock and each index as $100.00 on December 31,
1995, and the reinvestment of dividends at the frequency with which dividends
were paid during the applicable years. The years compared are 1996, 1997, 1998,
1999 and 2000.
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PERFORMANCE GRAPH
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
ABRAXAS S&P CIBC
December 31, 1995 100 100 100
March 31, 1996 86 105 102
June 30, 1996 104 109 111
September 30, 1996 92 112 123
December 31, 1996 158 120 152
March 31, 1997 176 123 140
June 30, 1997 205 144 154
September 30, 1997 232 154 165
December 31, 1997 236 158 144
March 31, 1998 126 179 146
June 30, 1998 146 184 132
September 30, 1998 110 165 100
December 31, 1998 70 200 76
March 31, 1999 28 209 81
June 30, 1999 19 223 105
September 30, 1999 34 208 117
December 31, 1999 15 239 100
March 31, 2000 34 243 104
June 30, 2000 24 236 141
September 30, 2000 62 233 165
December 31, 2000 70 214 178
119
AUDIT COMMITTEE REPORT
The Audit Committee of the Abraxas board of directors is responsible for
providing independent, objective oversight of Abraxas' accounting functions and
internal controls. The Audit Committee is composed of four directors, each of
whom is independent as defined by the American Stock Exchange's listing
standards. The Audit Committee operates under a written charter approved by the
Board of Directors. A copy of the charter is attached to this document as
Annex G.
Management is responsible for Abraxas' internal controls and financial
reporting process. The independent auditors are responsible for performing an
independent audit of Abraxas' consolidated financial statements in accordance
with generally accepted auditing standards and to issue a report thereon. The
Audit Committee's responsibility is to monitor and oversee these processes.
In connection with these responsibilities, the Audit Committee met with
management and Deloitte & Touche LLP, Abraxas' independent auditors, to review
and discuss the December 31, 2000 financial statements. The Audit Committee also
discussed with Deloitte & Touche LLP the matters required by Statement on
Auditing Standards No. 61 (Communication with Audit Committees). The Audit
Committee also received written disclosures from Deloitte & Touche LLP required
by Independence Standards Board Standard No. 1 (Independence Discussions with
Audit Committees), and the Audit Committee discussed with Deloitte & Touche LLP
that firm's independence.
AUDIT FEES. The aggregate fees billed for professional services rendered by
Deloitte & Touche LLP for the audit of Abraxas' annual financial statements for
the year ended December 31, 2000, and the reviews of the condensed financial
statements included in Abraxas' quarterly Reports on Forms 10-Q for the year
ended December 31, 2000, were $227,500.
ALL OTHER FEES. The aggregate fees billed for all other services, exclusive
of the fees disclosed above relating to financial statement audit services,
rendered by Deloitte & Touche LLP during the year ended December 31, 2000, were
$46,600, related primarily to various tax issues, potential merger activities
and hedge accounting treatment.
CONSIDERATION OF NON-AUDIT SERVICES PROVIDED BY THE INDEPENDENT
AUDITORS. The Audit Committee has considered whether the services provided for
non-audit services are compatible with maintaining Deloitte & Touche LLP's
independence, and has concluded that independence of such firm has been
maintained.
Based upon the Audit Committee's discussions with management and Deloitte &
Touche LLP, and the Audit Committee's review of the representations of
management and such firm, the Audit Committee recommended that the board of
directors include the audited consolidated financial statements in Abraxas'
Annual Report on Form 10-K for the year ended December 31, 2000, to be filed
with the United States Securities and Exchange Commission
Dated: March 30, 2001
Audit Committee
Craig S. Bartlett, Jr., Chairman
James C. Phelps
Frank A. Burke
Joseph A. Wagda
120
CERTAIN TRANSACTIONS
Wind River Resources Corporation ("Wind River"), all of the capital stock of
which is owned by Mr. Watson, owns a twin-engine airplane. The airplane is
available for business use by employees of Abraxas from time to time at Wind
River's cost. Abraxas paid Wind River a total of $336,000 for use of the plane
during 2000.
Grey Wolf owns a 10% interest in certain producing properties owned by
Canadian Abraxas and in Canadian Abraxas' natural gas processing plants 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. In 2000, Canadian Abraxas paid C$3,456,023 to Grey Wolf
pursuant to the management agreement.
Abraxas has adopted a policy that transactions, including loans, between
Abraxas and its officers, directors, principal stockholders, or affiliates of
any of them, will be on terms no less favorable to Abraxas than can be obtained
on an arm's length basis in transactions with third parties and must be approved
by the vote of at least a majority of the disinterested directors.
121
PROPOSAL 3
APPROVAL OF AMENDMENT TO THE
1994 LONG TERM INCENTIVE PLAN
In 1994, the Abraxas board of directors adopted, and the stockholders
approved, the Abraxas Petroleum Corporation 1994 Long Term Incentive Plan or
LTIP, which authorized 400,000 shares of common stock for issuance thereunder.
In 1997 and 1998, the board of directors authorized an additional 1,150,000
shares of common stock for issuance thereunder. As of July 24, 2001, options to
purchase 1,550,000 shares of Abraxas common stock have been granted.
On June 5, 2001, the board of directors amended the LTIP, subject to
stockholder approval, to increase the number of shares of common stock reserved
for issuance under the LTIP to 5,000,000 shares if Proposal 1 is approved,
relating to the approval of the issuance of the shares of the Abraxas common
stock in the offer and the consummation of the offer (as more particularly
described therein), and 4,350,000 shares if Proposal 1 is not approved.
REASONS FOR THE AMENDMENT OF THE LTIP
The board of directors believes that the LTIP is necessary to aid Abraxas
and its affiliates in employing and retaining qualified and competent personnel
and to encourage significant contributions by such personnel to the success of
Abraxas by providing additional incentive to those employees who contribute
significantly to the successful and profitable operations of Abraxas and its
affiliates. It is believed that this purpose will be furthered through the
granting of awards, as authorized under the LTIP, so that such employees will be
encouraged and enabled to acquire a substantial personal interest in the
continued success of Abraxas and its affiliates. Abraxas believes the addition
of the shares to be reserved pursuant to the amendment to the LTIP is necessary
for Abraxas to continue its policy of emphasizing equity compensation and to
remain competitive with industry equity grant practices.
In addition, the increase in the number of shares to be reserved under the
LTIP will enable Abraxas to cancel the equity incentive awards granted under the
Abraxas Petroleum Corporation 2000 Long Term Incentive Plan (the "2000 Plan")
and reissue such awards under the LTIP. Abraxas intends to terminate the 2000
Plan, thereby streamlining the issuance of incentive awards to key employees of
Abraxas. Instead of maintaining two separate incentive plans, Abraxas will be
able to consolidate the issuance of incentive awards under the LTIP.
VOTE REQUIRED
Approval of the amendment to the LTIP requires the affirmative vote of the
holders of a majority of the shares of common stock present or represented by
proxy and entitled to vote at the meeting.
SUMMARY OF THE LTIP
Following is a summary of the principal provisions of the LTIP, qualified by
reference to the complete text of the LTIP, a copy of which is attached to this
document as Annex H.
GENERAL. The LTIP makes available to the Compensation Committee of the
board of directors a number of incentive devices such as incentive stock options
("ISOs") and non-qualified stock options ("NSOs"), stock appreciation rights
("SARs"), restricted stock, performance units, performance shares and dividend
units. Currently, not more than 1,550,000 shares of common stock may be issued
with respect to all awards granted under the LTIP, subject to the adjustment
provisions of the LTIP.
ADMINISTRATION. The LTIP and all awards granted pursuant thereto shall be
administered by the Compensation Committee of the board of directors, the
requisite number of which shall qualify as
122
"disinterested persons" within the meaning of Rule 16b-3 of the Exchange Act or
any successor provision.
ELIGIBILITY AND PARTICIPATION. Key employees (including officers and
employee directors) of Abraxas and its affiliates shall be eligible to
participate in the LTIP. An award may not be granted to a member of the board of
directors who is not also an employee of Abraxas or an affiliate. The
Compensation Committee of the board of directors will adopt administrative
guidelines from time to time which will define specific eligibility criteria,
the types of awards to be employed and the value of such awards. Specific terms
of each award, including minimum performance criteria which must be met to
receive payment, will be provided in individual award agreements granted each
award recipient. Award agreements may contain change in control provisions.
PRICE AND EXERCISABILITY. Under the LTIP, options to purchase shares of
common stock will be granted at no less than 100% of the fair market value of
the common stock on the date of grant. Such "fair market value" is the average
of the high and low prices of a share of common stock traded on the relevant
date as reported on the AMEX (or such other reporting system as shall be
selected by the Committee).
AMENDMENT AND TERMINATION. The Compensation Committee may at any time
amend, suspend, or discontinue the LTIP to the extent permitted by law. However,
no such amendment, suspension or termination of the LTIP, may adversely alter or
change any of the rights or obligations under any awards or other rights
previously granted to any participant under the LTIP. In addition, certain
actions of the Compensation Committee may require approval of the board of
directors and the stockholders of Abraxas.
ADJUSTMENT PROVISIONS. In the event Abraxas common stock shall be changed
into or exchanged for a different number or kind of shares of stock or other
securities or property of Abraxas or of another corporation (whether by reason
of merger, consolidation, recapitalization, reclassification, split up,
combination of shares or otherwise) or if the number of such shares of common
stock shall be increased by a stock dividend or stock split, adjustments shall
be made to the shares of common stock subject to the LTIP and the shares subject
to any outstanding awards as may be necessary or appropriate to reflect any of
the foregoing events. In addition, the board of directors shall have the power,
in the event of any merger or consolidation of Abraxas with or into any other
corporation, or the merger or consolidation of any other corporation with or
into Abraxas, to amend all outstanding awards to permit the exercise thereof and
to terminate each such award.
U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the principal Federal income tax
effects under current law to employee award recipients and to Abraxas in
connection with the various awards which may be granted under the LTIP. These
descriptions do not purport to cover all of the potential tax consequences with
respect to such awards.
NSOS. A NSO is a right to purchase a specified number of shares of common
stock at a fixed option price over a specified period of time. An optionee will
realize no income for Federal income tax purposes upon the grant of a NSO under
the LTIP, but will recognize income upon the exercise of the NSO in an amount
equal to the excess of the fair market value of the shares received upon
exercise over the option price of such shares. Abraxas will be entitled to a
deduction for Federal income tax purposes in the same year as and in an amount
equal to income recognized by the optionee after satisfying federal income tax
withholding requirements. The optionee's adjusted basis for the shares of common
stock received upon exercise will be the fair market value on the date of
exercise.
ISOS. An ISO is a right to purchase at a fixed option price, over a period
not to exceed ten years, a specified number of shares of common stock, that
complies with Section 422 of the Revenue
123
Code. An optionee who receives an ISO under the LTIP will recognize no income
for Federal income tax purposes upon either the grant or the exercise of such
ISO. Income will be taxable to the optionee upon the sale of the shares
acquired. In general, the adjusted basis for the shares of common stock received
upon exercise will be the option price paid with respect to such shares. Abraxas
will not be entitled to a deduction upon the grant or exercise of an ISO.
However, if the shares are sold within a period of one year from the date of
exercise or two years from the date of grant, the optionee will recognize
compensation income in an amount equal to the lesser of the excess of the fair
market value on the date of exercise over the option exercise price, or the
excess of the price received upon sale over the option exercise price, and
Abraxas would be entitled to a corresponding deduction. The amount by which the
fair market value of the shares of common stock received upon the exercise of an
ISO exceeds the exercise price is an item of tax adjustment under the Revenue
Code and is included in alternative minimum taxable income.
SARS. A SAR is a right to receive, without payment, an amount not in excess
of the fair market value on the exercise date of the number of shares of common
stock for which the SAR is exercised less the exercise price of the SAR. SARs
will be payable in cash, common stock, or a combination thereof. Upon the
exercise of any SAR the employee will recognize ordinary income in the amount of
any cash received plus the fair market value on the exercise date of any common
stock received. Abraxas will be entitled to a deduction in the same year and in
the same amount.
RESTRICTED STOCK. Restricted stock is common stock that is subject to
restrictions on transfer of ownership. Awards of restricted stock may be made
with or without cash payment by the employee. An employee who receives a grant
of restricted stock who does not elect to be taxed at the time of grant will not
recognize income upon an award of shares of common stock, and Abraxas will not
be entitled to a deduction until the termination of the restrictions. Upon such
termination, the employee will recognize ordinary income in an amount equal to
the fair market value of the common stock at the time (less any amount paid by
the employee for such shares), and Abraxas will be entitled to a deduction in
the same amount after satisfying federal income tax withholding requirements.
However, the employee may elect to recognize ordinary income in the year the
restricted stock is granted in an amount equal to the fair market value of the
shares at that time, determined without regard to the restrictions. In that
event, Abraxas will be entitled to a deduction in such year and in the same
amount. Any gain or loss recognized by the employee upon subsequent disposition
of the stock will be capital in nature.
PERFORMANCE AWARDS. A performance award is a promise by Abraxas to make
payment to the employee, contingent upon the achievement of one or more
performance targets. Performance units are payable in cash and performance
shares are payable in common stock. A dividend equivalent is the right to
receive an amount equal to the dividends paid on a specified number of shares of
common stock and is payable in cash. For performance units, performance shares,
and dividend equivalents, any cash plus the fair market value of any common
stock received as payments under the LTIP will be considered ordinary income to
the employee in the year in which paid and Abraxas will be entitled to a
deduction in the same year and in the same amount.
In general, special tax timing rules apply to officers and directors subject
to Rule 16(b) under the Securities Exchange Act of 1934, as amended.
NEW PLAN BENEFITS
The following table sets forth the benefits to be received by each of the
following individuals upon the termination of the 2000 Plan and the reissuance
of such awards under the LTIP. As of July 24, 2001, no additional awards have
been granted on the basis of the share increase which is subject to stockholder
approval at the annual meeting.
124
NEW PLAN BENEFITS
ABRAXAS PETROLEUM CORPORATION
1994 LONG TERM INCENTIVE PLAN
NAME AND POSITION DOLLAR VALUE($)
NUMBER OF UNITS
----------------- ---------------
---------------
Robert L.G. Watson,
CEO and President......................................... 0
842,562
Robert W. Carington, Jr.,
Executive Vice President.................................. 0
509,456
Chris E. Williford,
CFO and Executive Vice President.......................... 0
352,701
Lee T. Billingsley,
Vice President, Exploration............................... 0
97,972
William H. Wallace,
Vice President, Operations................................ 0
97,972
Canada Employees............................................ 0
67,000
U.S. Employees.............................................. 0
206,436
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" PROPOSAL 3 TO
APPROVE THE AMENDMENT TO THE LTIP.
125
PROPOSAL 4
RATIFICATION OF SELECTION OF
INDEPENDENT AUDITORS
The Abraxas board of directors has selected Deloitte & Touche LLP to serve
as independent auditors of Abraxas for the fiscal year ending December 31, 2001.
Although stockholder ratification is not required, the board of directors has
directed that such appointment be submitted to the stockholders of Abraxas for
ratification at the annual meeting. Deloitte & Touche LLP has served as the
independent auditors of Abraxas since August 17, 2000. A representative of
Deloitte & Touche LLP will be present at the annual meeting, will have an
opportunity to make a statement if he or she desires to do so and will be
available to respond to appropriate questions.
On August 17, 2000, the Board of Directors of Abraxas engaged the accounting
firm of Deloitte & Touche LLP as Abraxas' certifying accountant for the year
ended December 31, 2000. The decision to approve the dismissal of Ernst & Young
LLP and engagement of Deloitte & Touche LLP was approved by the Audit Committee
of the Board of Directors and the Board of Directors of Abraxas. Ernst & Young
LLP was notified of their dismissal on August 18, 2000.
The reports of Ernst & Young LLP on Abraxas' financial statements for the
two fiscal years ended December 31, 1998 and 1999 did not contain any adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.
In connection with the audits of Abraxas' financial statements for each of
the two fiscal years ended December 31, 1998 and 1999, and in the subsequent
interim periods through August 18, 2000, there were no disagreements with
Ernst & Young LLP on any matters of accounting principles, financial statement
disclosure or audit scope and procedures which, if not resolved to the
satisfaction of Ernst & Young LLP, would have caused the firm to make reference
to the matter in their report.
Assuming the presence of a quorum, the affirmative vote of the holders of a
majority of the shares of common stock present in person or by proxy and
entitled to vote on this item at the annual meeting is necessary to ratify the
selection of Abraxas' independent auditors. The enclosed form of proxy provides
a means for stockholders to vote for the ratification of selection of
independent auditors, to vote against it or to abstain from voting with respect
to it. IF A STOCKHOLDER EXECUTES AND RETURNS A PROXY, BUT DOES NOT SPECIFY HOW
THE SHARES REPRESENTED BY SUCH STOCKHOLDER'S PROXY ARE TO BE VOTED, SUCH SHARES
WILL BE VOTED FOR THE RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS. Under
applicable Nevada law, in determining whether this item has received the
requisite number of affirmative votes, abstentions and broker non-votes will not
be counted and will have no effect.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
SELECTION OF DELOITTE & TOUCHE LLP AS INDEPENDENT AUDITORS OF ABRAXAS FOR THE
FISCAL YEAR ENDING DECEMBER 31, 2001.
126
LEGAL MATTERS
The validity of the shares of Abraxas common stock offered hereby will be
passed upon for AcquisitionCo and Abraxas by Cox & Smith Incorporated, San
Antonio, Texas, the opinion contained under the heading "United States and
Canadian Income Tax Consequences--Canadian Federal Income Tax Considerations"
has been provided by Osler, Hoskin & Harcourt LLP, Canadian counsel to Abraxas
and AcquisitionCo and the opinion contained under the heading "United States and
Canadian Income Tax Consequences--Material United States Federal Income Tax
Consequences to Grey Wolf Shareholders" has been provided by Cox & Smith
Incorporated, San Antonio, Texas.
EXPERTS
The Abraxas Petroleum Corporation consolidated financial statements as of
and for the year ended December 31, 2000, incorporated in this prospectus by
reference from the Abraxas Annual Report on Form 10-K, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of Abraxas Petroleum Corporation at
December 31, 1999, and for each of the two years in the period ended December
31, 1999, included and incorporated by reference in the Proxy Statement of
Abraxas Petroleum Corporation, which is referred to and made a part of this
Prospectus and Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
The historical reserve information prepared by DeGolyer and MacNaughton and
McDaniel & Associates Consultants Ltd. included in this document or the Annexes
hereto has been included herein in reliance upon the authority of those firms as
experts with respect to matters contained in such reserve reports.
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
Abraxas is a Nevada corporation, certain of its officers and directors may
be residents of various jurisdictions outside of Canada, and United States
counsel to Abraxas, Cox & Smith Incorporated, are residents of the United
States. All or a substantial portion of the assets of Abraxas and of such
persons may be located outside of Canada. As a result, it may be difficult for
investors to effect service of process within Canada upon those directors or
officers who are not residents of Canada, or to enforce judgments predicated
upon the civil liability provisions of Canadian securities law which are
obtained against such persons in Canadian Courts.
Canadian Abraxas and AcquisitionCo are Alberta corporations, certain of
their officers and directors may be residents of various jurisdictions outside
the United States, and Canadian counsel to the Alberta corporations, Osler,
Hoskin & Harcourt, LLP, are residents of Canada. All or a substantial portion of
the assets of Canadian Abraxas and AcquisitionCo and of such persons may be
located outside the United States. As a result, it may be difficult for
investors to effect service of process within the United States upon those
directors or officers who are not residents of the U.S., or to enforce judgments
predicated upon the civil liability provisions of the Securities Act which are
obtained against such persons in United States Courts. Notwithstanding the
foregoing, Canadian Abraxas and AcquisitionCo have irrevocably agreed that they
may be served with process with respect to actions based on offers and sales of
securities made hereby in the United States by serving Chris E. Williford, c/o
Abraxas Petroleum Corporation, 500 North Loop 1604 East, Suite 100, San Antonio,
Texas 78232, the United States agent appointed by Canadian Abraxas and
AcquisitionCo for that purpose. Canadian Abraxas and AcquisitionCo have been
advised by their Canadian counsel, Osler, Hoskin & Harcourt, LLP, that there is
substantial doubt as to the enforceability in Canada against Canadian Abraxas
and
127
AcquisitionCo or against any of its directors, controlling persons, officers or
experts who are not residents of the United States, in original actions for
enforcement of judgments of United States Courts, of liabilities predicated
solely upon United States federal securities laws.
STOCKHOLDER PROPOSALS FOR 2002 ABRAXAS ANNUAL MEETING
Abraxas intends to hold its next annual meeting in May of 2002, according to
its normal schedule. Proposals of stockholders intended to be presented at the
2002 annual meeting must be received in writing by Abraxas at its principal
executive offices within a reasonable time before Abraxas begins to print and
mail its proxy materials. Abraxas requests that such proposals be submitted and
received by Abraxas by no later than January 28, 2002. Abraxas' principal
executive offices are located at 500 North Loop 1604 East, Suite 100, San
Antonio, Texas 78232.
PROXY SOLICITATION
The cost of soliciting proxies will be borne by Abraxas. Proxies may be
solicited through the mail and through telephonic or telegraphic communications
to, or meetings with, stockholders, or their representatives by directors,
officers and other employees of Abraxas who will receive no additional
compensation therefor.
Abraxas requests persons such as brokers, nominees and fiduciaries holding
stock in their names for others, or holding stock for others who have the right
to give voting instructions, to forward proxy materials to their principals and
to request authority for the execution of the proxy, and Abraxas will reimburse
such persons for their reasonable expenses.
OTHER MATTERS
No business other than the matters set forth in this document is expected to
come before the meeting, but should any other matters requiring a stockholder's
vote arise, including a question of adjourning the meeting, the persons named in
the accompanying Proxy will vote thereon according to their best judgment in the
interests of Abraxas. If any of the nominees for office of director should
withdraw or otherwise become unavailable for reasons not presently known, the
persons named as proxies may vote for another person in his place in what they
consider the best interests of Abraxas.
UPON THE WRITTEN REQUEST OF ANY PERSON WHOSE PROXY IS SOLICITED HEREUNDER,
ABRAXAS WILL FURNISH WITHOUT CHARGE TO SUCH PERSON A COPY OF ITS ANNUAL REPORT
FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION ON FORM 10-K,
INCLUDING FINANCIAL STATEMENTS AND SCHEDULES THERETO, FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2000. SUCH WRITTEN REQUEST IS TO BE DIRECTED TO THE ATTENTION OF
STEPHEN T. WENDEL, 500 NORTH LOOP 1604 EAST, SUITE 100, SAN ANTONIO, TEXAS
78232.
128
WHERE YOU CAN FIND MORE INFORMATION
Abraxas files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements or
other information Abraxas files at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms.
Abraxas' SEC filings are also available to the public from commercial document
retrieval services and at the web site maintained by the SEC at
"http://www.sec.gov."
Abraxas filed a registration statement on Form S-4 to register with the SEC
the offer and exchange of the shares of Abraxas common stock to be issued
pursuant to the offer and any Compulsory Acquisition or Subsequent Acquisition
Transaction. This document is a part of that registration statement. As allowed
by SEC rules, this document does not contain all of the information you can find
in the registration statement or the exhibits to the registration statement. You
may read and copy the Form S-4 and any amendments at the SEC's public reference
room or website referred to above.
The SEC allows Abraxas to "incorporate by reference" information in this
document, which means that Abraxas can disclose important information to you by
referring to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this document, except for any
information superseded by information in this document.
This document incorporates by reference the Abraxas documents set forth
below:
1. Annual Report on Form 10-K for the fiscal year ended December 31, 2000,
filed April 2, 2001;
2. Amendment No. 1 to Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, filed April 25, 2001; and
3. Quarterly Report on Form 10-Q, for the quarter ended March 31, 2001,
filed May 15, 2001.
You may request a copy of Abraxas' annual, quarterly and current reports,
proxy statements and other information, at no cost, by writing or telephoning
Abraxas at the following address:
Abraxas Petroleum Corporation
500 North Loop 1604 East
Suite 100
San Antonio, Texas 78232
1-888-227-2927
Copies of Abraxas' Annual Report on Form 10-K for the year ended December
31, 2000 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2001
are included with this document as Annex A. Canadian shareholders should be
aware that the financial statements of Abraxas included in the 2000 Annual
Report and the Form 10-Q have not been prepared in accordance with Canadian GAAP
and may not be comparable to the financial statements of Canadian public
companies.
In addition, the following Grey Wolf documents have been included in Annex
B:
1. Annual Information Form for the year ended December 31, 2000;
2. Audited Annual Financial Statements for the years ended and at December
31, 1998 and 1999;
3. Management's Discussion and Analysis from 1999 Annual Report;
4. First Quarter Report dated May 17, 2001; and
5. Management Proxy/Information Circular dated May 17, 2001.
129
U.S. shareholders should be aware that in the Grey Wolf material included in
Annex B, all references to $ refer to Canadian dollars and all references to the
"Company" or the "Corporation" refer to Grey Wolf.
If you would like to request documents from us, please do so by August 25,
2001 so that you may receive them before the expiration of the offer and the
Abraxas annual meeting.
Grey Wolf files reports, proxy statements and other information with the
Canadian securities administrators in each of the provinces of Canada. The
Canadian securities administrators maintain a web site that contains all public
information filed electronically with any Canadian securities administrator. The
address of the web site is www.sedar.com.
Abraxas has supplied all information contained in this document relating to
Abraxas and Grey Wolf has supplied all such information relating to Grey Wolf.
All documents that Abraxas files pursuant to Section 13(a), 13(d), 14 or
15(d) of the Securities Exchange Act of 1934 from the date of this document to
the date that the offer is terminated and, if later, until the earlier of the
date on which a meeting of Grey Wolf shareholders to approve a Subsequent
Acquisition Transaction or the date a Compulsory Acquisition or Subsequent
Acquisition Transaction is completed, shall also be deemed incorporated in this
document by reference.
You should rely only on the information contained in this document to vote
on the Abraxas proposals. Abraxas has not authorized anyone to provide you with
information that is different from what is contained in this document. This
document is dated August 1, 2001. You should not assume that the information
contained in this document is accurate as of any date other than that date, and
neither the mailing of this document to stockholders nor the issuance of Abraxas
common stock in the merger shall create any implication to the contrary.
130
GLOSSARY OF TERMS
Unless otherwise indicated in this document natural gas volumes are stated
at the legal pressure base of the state or area in which the reserves are
located at 60 degrees Fahrenheit. Natural gas equivalents are determined using
the ratio of six Mcf of natural gas to one barrel of crude oil, condensate or
NGLs.
The following definitions shall apply to the technical terms used in this
document.
"Bcf" means 1,000,000,000 cubic feet of natural gas.
"Bcfe" means 1,000,000,000 cubic feet of natural gas equivalent.
"BOPD" means barrels of crude oil per day.
"Charge" means an encumbrance, lien, claim or other interest in property
securing payment or performance of an obligation.
"DD&A" means depletion, depreciation and amortization.
"Developed acreage" means acreage which consists of acres spaced or
assignable to productive wells.
"Development well" means a well drilled within the proved area of a crude
oil or natural gas reservoir to the depth of stratigraphic horizon (rock layer
or formation) known to be productive for the purpose of extraction of proved
crude oil or natural gas reserves.
"Dry hole" means an exploratory or development well found to be incapable of
producing either crude oil or gas in sufficient quantities to justify completion
as a crude oil or natural gas well.
"Exploratory well" means a well drilled to find and produce crude oil or
natural gas in an unproved area, to find a new reservoir in a field previously
found to be producing crude oil or natural gas in another reservoir, or to
extend a known reservoir.
"Gross" natural gas and crude oil wells or "gross" wells or acres is the
number of wells or acres in which a party has an interest.
"LOE" means lease operating expenses and production taxes.
"MBbls" means 1,000 barrels of crude oil, condensate and natural gas
liquids.
"Mcf" means 1,000 cubic feet of natural gas.
"Mcfe" means 1,000 cubic feet of natural gas equivalent using a ratio of 1
barrel=6,000 cubic feet of natural gas.
"MMBTU" means million British Thermal Units.
"MMBTUpd" means million British Thermal Units per day.
"MMcf" means 1,000,000 cubic feet of natural gas.
"MMcfe" means 1,000,000 cubic feet of natural gas equivalent.
"MMcfpd" means million cubic feet per day.
"Net" natural gas and crude oil wells or "net" acres are determined by
multiplying "gross" wells or acres by the working interest in such wells or
acres.
"Productive wells" mean producing wells and wells capable of production.
"Proved reserves" or "reserves" means natural gas and crude oil, condensate
and NGLs on a net revenue interest basis, found to be commercially recoverable.
131
"Proved undeveloped reserves" includes those proved reserves expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for recompletion.
"PV-10" means estimated future net revenue, discounted at 10% per annum,
before income taxes and with no price escalation or de-escalation.
"Service Well" is a well used for water injection in secondary recovery
projects or for the disposal of produced water.
"Undeveloped acreage" means leased acres on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of crude oil and natural gas, regardless whether or not such acreage
contains proved reserves.
132
APPROVAL AND CERTIFICATE
August 1, 2001
The contents of the offer to purchase/circular/proxy statement/prospectus
(including the Annexes thereto which are incorporated therein by reference)
dated August 1, 2001 have been approved, and the sending, communication or
delivery thereof to the Grey Wolf common shareholders has been authorized by the
board of directors of Abraxas Acquisition Corporation and the board of directors
of Abraxas Petroleum Corporation. The foregoing contains no untrue statement of
a material fact and does not omit to state a material fact that is required to
be stated or that is necessary to make a statement not misleading in the light
of the circumstances in which it was made. In addition, the foregoing does not
contain any misrepresentation likely to affect the value or the market price of
the Grey Wolf common shares which are the subject of the offer.
ABRAXAS ACQUISITION CORPORATION ABRAXAS PETROLEUM
CORPORATION
By: /s/ ROBERT L.G.
WATSON
By: /s/ ROBERT L.G. WATSON
----------------------------------------
-------------------------------------- Robert L.G. Watson
Robert L.G. Watson President, Chief
Executive Officer and
President Chairman of the
Board
By: /s/ CHRIS E. WILLIFORD By: /s/ CHRIS E.
WILLIFORD
--------------------------------------
----------------------------------------
Chris E. Williford Chris E. Williford
Vice President, Secretary and Executive Vice
President and
Chief Financial Officer Chief Financial
Officer
ON BEHALF OF THE BOARD ON BEHALF OF THE
BOARD
By: /s/ MARK SMITH
-------------------------------------- By: /s/ JAMES C.
PHELPS
Mark Smith,
----------------------------------------
Director Director
By: /s/ CRAIG S.
BARTLETT, JR.
----------------------------------------
Director
133
ANNEX A
INFORMATION CONCERNING ABRAXAS
TABLE OF CONTENTS
Page
-------
A-1. Annual Report on Form 10-K for the fiscal year ended
December 31, 2000........................................ A-2
A-2. Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001........................................... A-82
A-3. Additional Information entitled "Reconciliation
With Canadian Generally Accepted Accounting
Principles" and Independent Auditors' Report............. A-110
A-4. Report of Independent Auditors on Additional
Financial Information.................................... A-118
A-5. Unaudited Pro Forma Condensed Consolidated
Financial Statements and Independent Accountants'
Compilation Report....................................... A-120
A-6. Unaudited Pro Forma Condensed Consolidated Financial
Statements (Prepared on Canadian Reporting Standards)
and Independent Accountants' Compilation Report.......... A-122
A-7. Summary Quarterly Financial Information.................. A-127
A-8. Abraxas Information Regarding Option Ownership........... A-129
A-9. Estimated Quantities and Discounted Future Net Cash
Flows Relating to Probable Reserves...................... A-131
A-1
ANNEX A-1
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
A-2
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 Identification Number)
Incorporation or Organization)
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).
A-3
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............................................... 24
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
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................... 39
A-4
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
A-5
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.
A-6
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.
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.
A-7
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
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.
A-8
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;
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.
A-9
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
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
A-10
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.
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.
A-11
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.
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.
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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
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
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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.
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.
A-14
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
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.
A-15
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.
(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.
A-16
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
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
A-17
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%.
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,
A-18
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.
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.
A-19
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
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.
A-20
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.
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
A-21
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.
A-22
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
========= =========
========= =========
---------------
(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.
A-23
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:
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.
A-24
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.
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.
A-25
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
==== ==== ==== ====
==== ====
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.
A-26
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.
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
A-27
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.
A-28
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.
A-29
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 2,616
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.
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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.
A-31
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
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.
A-32
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.
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
A-33
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.
A-34
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.
A-35
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.
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.
A-36
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,
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%
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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
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(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
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
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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.
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
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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 gas Fixed
price swap $2.60-$2.95 $(38.0) million
natural
gas or [$(27) in 2001, $(11)]
or 1,000 Bbl/day of crude oil $18.90
Crude oil in 2002]
A-41
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."
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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")).
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3.5 Articles of Amendment to the Articles of Incorporation of Abraxas dated
as of August 12, 2000 (Filed herewith)
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).
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*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).
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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.
A-46
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
A-47
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
A-48
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
A-49
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
A-50
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.
A-51
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.
A-52
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.
A-53
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands except share amounts)
COMMON STOCK
TREASURY STOCK ADDITIONAL
-------------------------
------------------------ PAID-IN
SHARES AMOUNT SHARES
AMOUNT CAPITAL
----------- ----------- ----------
------------ -----------
Balance at January 1, 1998 ...... 6,422,540 $ 63 53,023
$ (281) $ 51,118
Comprehensive income (loss)
Net loss .................. -- --
-- --
Other comprehensive income:
Foreign currency
translation adjustment -- -- --
-- --
Comprehensive income (loss) ..
Issuance of common stock for
compensation .............. 4,838 (18,263)
94 144
Purchase of treasury stock ... -- -- 136,255
(980) --
Options exercised ............ 3,000 -- --
-- 16
Issuance of common stock for
acquisition of oil and gas
properties ................ 71,063 2 --
-- 447
---------- ----------- ----------
----------- -----------
Balance at December 31, 1998 .... 6,501,441 $ 65 171,015
$ (1,167) $ 51,695
Comprehensive income (loss):
Net loss .................. -- --
-- --
Other comprehensive income:
Foreign currency
translation
adjustment ........... -- -- --
-- --
Comprehensive income (loss) ..
Issuance of common stock for
compensation .............. 3,314 -- (18,932)
96 (43)
Issuance of common stock in
connection with Exchange
Offer (Note 2, 5 and 6) ... 16,242,344 162 --
-- 75,910
-----------
Balance at December 31, 1999 .... 22,747,099 $ 227 152,083
$ (1,071) $ 127,562
---------- ----------- ----------
----------- -----------
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE
DEFICIT INCOME (LOSS) TOTAL
------------- ------------- -----------
Balance at January 1, 1998 ...... $ (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 .............. -- -- 208
Purchase of treasury stock ... -- -- (980)
Options exercised ............ -- -- 16
Issuance of common stock for
acquisition of oil and gas
properties ................ -- -- 449
----------- ----------- -----------
Balance at December 31, 1998 .... $ (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 .............. -- -- 53
Issuance of common stock in
connection with Exchange
Offer (Note 2, 5 and 6) ... -- -- 76,072
----------- ----------- -----------
Balance at December 31, 1999 .... $ (139,825) $ 3,602 $ (9,505)
----------- ----------- -----------
(continued)
A-54
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(continued)
(In thousands except share amounts)
COMMON STOCK
TREASURY STOCK ADDITIONAL
---------------------------
------------------------- PAID-IN
SHARES AMOUNT SHARES
AMOUNT CAPITAL
------------ ------------ ----------
------------ -----------
Balance at December 31, 1999 .... 22,747,099 $ 227 152,083
$ (1,071) $ 127,562
Comprehensive income (loss):
Net income ................... -- -- --
-- --
Other comprehensive income:
Foreign currency
translation
adjustment ........... -- -- --
-- --
Comprehensive income (loss) ..
Stock-based compensation ..... -- -- --
-- 2,767
Issuance of common stock and
warrants for compensation . 12,753 -- (25,000)
185 80
Purchase of treasury stock ... -- -- 38,800
(78) --
----------- ----------- ---------
----------- -----------
Balance at December 31, 2000 .... 22,759,852 $ 227 165,883
$ (964) $ 130,409
=========== =========== =========
=========== ===========
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE
DEFICIT INCOME (LOSS) TOTAL
------------ --------------
------------
Balance at December 31, 1999 .... $ (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
Issuance of common stock and
warrants for compensation . -- -- 265
Purchase of treasury stock ... -- --
(78)
----------- ----------- -----------
Balance at December 31, 2000 .... $ (131,376) $ (4,799) $
(6,503)
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
A-55
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)
A-56
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.
A-57
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.
A-58
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.
A-59
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 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
A-60
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
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.
A-61
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:
DECEMBER
31
ESTIMATED
--------------------------
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
=========
=========
A-62
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
Creditfacility 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%
A-63
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.
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.
A-64
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,
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.
A-65
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.
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-66
A summary of the Company's stock option activity, and related information
for the years ended December 31, follows:
1998
1999 2000
---------------------------
-------------------------- ----------------------------
WEIGHTED-
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS AVERAGE EXERCISE OPTIONS
EXERCISE OPTIONS EXERCISE
(000s) PRICE(1) (000s)
PRICE(2) (000s) PRICE
--------- ----------------- ---------
--------------- --------- ----------------
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
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 compensation).
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.
A-67
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
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.
A-68
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:
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
A-69
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
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
============== ============== ==============
A-70
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.
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 ......................... $ .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 .................................. $ .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.
A-71
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, DECEMBER
31, DECEMBER 31,
1998 1999
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.
A-72
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
=========
========= =========
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
=========
A-73
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
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.
A-74
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
======= ======= ======= ======= =======
======= ======= ======= =======
A-75
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
-------- -------- -------- --------
-------- -------- -------- -------- --------
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
======== ======== ======== ========
======== ======== ======== ======== ========
A-76
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.
A-77
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
======= ======= =======
======= ======= =======
A-78
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.
A-79
Set forth below is the Standardized Measure relating to proved oil and gas
reserves for:
YEARS ENDED
DECEMBER 31
--------------------------------------------------------------------------------
-------
1998
1999
-----------------------------------------
-----------------------------------------
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
Future production and development
costs ........................ (169,736) (99,187) (70,549)
(181,109) (96,302) (84,807)
Future income tax expense ....... (20,655) -- (20,655)
(6,319) -- (6,319)
----------- ----------- -----------
----------- ----------- -----------
Future net cash flows ........... 283,872 169,634 114,238
389,979 213,307 176,672
Discount ........................ (102,291) (75,389) (26,902)
(151,528) (90,024) (61,504)
----------- ----------- -----------
----------- ----------- -----------
Standardized Measure of
discounted future net cash
relating to proved reserves .. $ 181,581 $ 94,245 $ 87,336
$ 238,451 $ 123,283 $ 115,168
=========== =========== ===========
=========== =========== ===========
YEARS ENDED DECEMBER 31
-----------------------------------------
2000
-----------------------------------------
TOTAL U.S. CANADA (1)
----------- ----------- -----------
Future cash inflows ............. $ 2,046,039 $ 1,274,871 $ 771,168
Future production and development
costs ........................ (318,130) (254,667) (63,463)
Future income tax expense ....... (230,987) (65,421) (165,566)
----------- ----------- -----------
Future net cash flows ........... 1,496,922 954,783 542,139
Discount ........................ (721,388) (468,663) (252,725)
----------- ----------- -----------
Standardized Measure of
discounted future net cash
relating to proved reserves .. $ 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.
A-80
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
=========
========= =========
A-81
ANNEX A-2
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
A-82
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2001
( ) 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) (Zip Code)
Registrant's telephone number, including area code (210) 490-4788
Not Applicable
-------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF
CHANGED SINCE LAST REPORT)
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 such shorter period that the restraint
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] or No [ ]
The number of shares of the issuer's common stock outstanding as of May
10, 2001, was:
CLASS SHARES OUTSTANDING
----------- --------------------
Common Stock, $.01 Par Value 22,599,219
A-83
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
FORM 10 - Q
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2001
and December 31, 2000................................. 3
Consolidated Statements of Operations -
Three Months Ended March 31, 2001 and 2000............ 5
Consolidated Statement of Stockholders Equity (Deficit)
March 31, 2001 and December 31, 2000.................. 6
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2001 and 2000............ 7
Notes to Consolidated Financial Statements.................. 9
ITEM 2 - Managements Discussion and Analysis of Financial
Condition and Results of Operations................... 17
ITEM 3 - Quantitative and Qualitative Disclosure about Market Risks.. 23
PART II
OTHER INFORMATION
ITEM 1 - Legal proceedings.............................................. 25
ITEM 2 - Changes in Securities.......................................... 25
ITEM 3 - Defaults Upon Senior Securities................................ 25
ITEM 4 - Submission of Matters to a Vote of Security Holders............ 25
ITEM 5 - Other Information.............................................. 25
ITEM 6 - Exhibits and Reports on Form 8-K............................... 25
Signatures..................................................... 26
A-84
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
PART 1- FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
MARCH 31,
DECEMBER 31,
2001
2000
(UNAUDITED)
----------- -------------
(In
Thousands)
ASSETS:
Current assets:
Cash ........................................................ $ 2,068
$ 2,004
Accounts receivable, less allowances for doubtful accounts:
Joint owners ......................................... 2,737
3,771
Oil and gas production ............................... 11,070
16,106
Other ................................................ 550
841
--------
--------
14,357
20,718
Equipment inventory .......................................... 1,353
1,411
Other current assets ......................................... 212
179
Deferred tax asset ........................................... 3,352
--
--------
--------
Total current assets ........................................... 21,342
24,312
Property and equipment:
Oil and gas properties, full cost method of accounting:
Proved ................................................... 486,632
481,802
Unproved, not subject to amortization .................... 12,079
12,831
Other property and equipment ................................ 64,052
63,720
--------
--------
Total ............................................... 562,763
558,353
Less accumulated depreciation, depletion, and amortization 257,686
253,569
--------
--------
Total property and equipment - net ....................... 305,077
304,784
Deferred financing fees, net of accumulated amortization
of $7,372 and $6,917 at March 31, 2001 and
December 31, 2000, respectively .............................. 5,087
5,556
Other assets ................................................... 2,468
908
--------
--------
Total assets ................................................. $333,974
$335,560
========
========
See accompanying notes to consolidated financial statements
A-85
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
PART 1- FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (CONTINUED)
MARCH 31,
DECEMBER 31,
2001
2000
(UNAUDITED)
------------
------------
(In
Thousands)
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................. $ 13,213
$ 22,721
Oil and gas production payable ................... 9,899
6,281
Accrued interest ................................. 9,524
6,079
Other accrued expenses ........................... 1,133
1,932
Hedge liability .................................. 17,724
--
Current maturities of long-term debt ............. 884
1,128
---------
---------
Total current liabilities .............. 52,377
38,141
Long-term debt ..................................... 266,786
266,441
Deferred income taxes .............................. 22,696
21,079
Hedge liability .................................... 7,666
--
Future site restoration ............................ 4,218
4,305
Minority interest in foreign subsidiary ............ 13,215
12,097
Shareholders' equity (deficit):
Common Stock, par value $.01 per share-
Authorized 50,000,000 shares; issued,
22,765,102 and 22,759,852 shares at
March 31, 2001 and December 31, 2000,
respectively ................................... 227
227
Additional paid-in capital ....................... 131,350
130,409
Accumulated deficit .............................. (131,121)
(131,376)
Treasury stock, at cost, 165,883 shares
at March 31, 2001 and December 31, 2000 ........ (964)
(964)
Accumulated other comprehensive loss ............... (32,476)
(4,799)
---------
---------
Total shareholders' equity (deficit) ............... (32,984)
(6,503)
---------
---------
Total liabilities and shareholders' equity (deficit) $ 333,974
$ 335,560
=========
=========
See accompanying notes to consolidated financial statements
A-86
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE
MONTHS ENDED
MARCH 31,
-----------------------------
2001
2000
-----------
----------
(In thousands
except per share data)
Revenue:
Oil & gas production revenues ............................. $ 28,249
$ 15,626
Gas processing revenue .................................... 436
757
Rig revenues .............................................. 183
131
Other ..................................................... 218
203
--------
--------
29,086
16,717
Operating costs and expenses:
Lease operating and production taxes ...................... 4,859
4,629
Depreciation, depletion and amortization .................. 8,841
8,948
Rig operations ............................................ 153
188
General and administrative ................................ 2,109
1,439
General and administrative (Stock-based Compensation) ..... 931
--
--------
--------
16,893
15,204
--------
--------
Operating Income ............................................. 12,193
1,513
Other (income) expense
Interest income ........................................... (16)
(59)
Interest expense .......................................... 7,781
7,773
Amortization of deferred financing fees ................... 455
507
Gain on sale of equity investment ......................... --
(33,983)
Other ..................................................... 16
436
--------
--------
8,236
(25,326)
--------
--------
Income from operations before taxes .......................... 3,957
26,839
Income tax expense (benefit) ................................. 2,776
(328)
Minority interest in income of consolidated foreign subsidiary (926)
(11)
--------
--------
Net income ................................................... $ 255
$ 27,156
========
========
Earnings per share:
Net income per common share - basic ...................... $ .01
$ 1.20
========
========
Net income per common - diluted .......................... $ .01
$ .52
========
========
See accompanying notes to consolidated financial statements
A-87
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
Common Stock
Treasury Stock
-------------------------------------------------
Shares Amount Shares
Amount
-------------------------------------------------
Balance at December 31, 2000 .............. 22,759,852 $ 227
165,883 $ (964)
Comprehensive income (loss) - Note 8
Net Income .............................. -- -- --
--
Other comprehensive income:
Hedge loss ............................ -- -- --
--
Foreign currency translation adjustment -- -- --
--
Comprehensive income (loss) ........ -- -- --
--
Stock-based compensation .................. -- -- --
--
Options exercised ......................... 5,250 -- --
--
---------- ----------
---------- ----------
Balance at March 31, 2001 ................. 22,765,102 $ 227
165,883 $ (964)
========== ==========
========== ==========
Accumulated
Additional
Other
Paid-In Accumulated
Comprehensive
Capital Deficit Income
(Loss) Total
----------------------------------------------------
Balance at December 31, 2000 .............. $ 130,409 $ (131,376) $
(4,799) $ (6,503)
Comprehensive income (loss) - Note 8
Net Income .............................. -- 255
-- 255
Other comprehensive income:
Hedge loss ............................ -- --
(20,588) (20,588)
Foreign currency translation adjustment -- --
(7,089) (7,089)
----------
Comprehensive income (loss) ........ -- --
-- (27,422)
Stock-based compensation .................. 931 --
-- 931
Options exercised ......................... 10 --
-- 10
---------- ----------
---------- ----------
Balance at March 31, 2001 ................. $ 131,350 $ (131,121) $
(32,476) $ (32,984)
========== ==========
========== ==========
See accompanying notes to consolidated financial statements
A-88
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE
MONTHS ENDED
MARCH 31,
---------------------
2001
2000
--------- ----------
(In
thousands)
OPERATING ACTIVITIES
Net income .......................................................... $ 255
$ 27,156
Adjustments to reconcile net income to net cash provided by operating
activities:
Minority interest in income of foreign subsidiary .................. 926
11
Gain on sale of equity investment .................................. --
(33,983)
Depreciation, depletion, and amortization .......................... 8,841
8,948
Deferred income tax (benefit) expense .............................. 2,695
(453)
Amortization of deferred financing fees ............................ 455
507
Stock-based compensation ........................................... 931
--
Issuance of common stock for compensation .......................... --
46
Changes in operating assets and liabilities:
Accounts receivable ........................................... 6,585
(2,404)
Equipment inventory ........................................... 44
(326)
Other .........................................................
(54) 382
Accounts payable and accrued expenses .........................
(3,254) 2,881
--------
--------
Net cash provided by operating activities ........................... 17,424
2,765
--------
--------
INVESTING ACTIVITIES
Capital expenditures, including purchases and development of
properties .......................................................
(17,861) (11,840)
Proceeds from sale of oil and gas producing properties .............. 44
118
Proceeds from sale of equity investment ............................. --
33,983
--------
--------
Net cash (used in) provided by investing activities .................
$(17,817) $ 22,261
--------
--------
(Continued)
See accompanying notes to consolidated financial statements
A-89
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------
2001 2000
-------- --------
(In Thousands)
FINANCING ACTIVITIES
Proceeds from long term borrowings ................... $ 3,320 $ 3,052
Exercise of stock options ............................ 10 --
Payments on long-term borrowings ..................... (2,827) (1,024)
Deferred financing fees .............................. -- (376)
-------- --------
Net cash provided by financing activities ............ 503 1,652
-------- --------
Effect of exchange rate changes on cash .............. (46) (18)
-------- --------
Increase in cash ..................................... 64 26,660
Cash, at beginning of period ......................... 2,004 3,799
-------- --------
Cash, at end of period ............................... $ 2,068 $ 30,459
======== ========
Supplemental disclosures of cash flow information:
Interest paid ........................................ $ 4,414 $ 4,232
======== ========
See accompanying notes to consolidated financial statements
A-90
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2001
NOTE 1. BASIS OF PRESENTATION
The accounting policies followed by Abraxas Petroleum Corporation and its
subsidiaries (the "Company" or "Abraxas") are set forth in the notes to the
Company's audited financial statements in the Annual Report on Form 10-K
filed for the year ended December 31, 2000. Such policies have been continued
without change. Also, refer to the notes to those financial statements for
additional details of the Company's financial condition, results of
operations, and cash flows. All the material items included in those notes
have not changed except as a result of normal transactions in the interim, or
as disclosed within this report. The accompanying interim consolidated
financial statements have not been audited by independent accountants, but in
the opinion of management, reflect all adjustments necessary for a fair
presentation of the financial position and results of operations. Any and all
adjustments are of a normal and recurring nature.
The consolidated financial statements include the accounts of the Company,
its wholly-owned foreign subsidiary Canadian Abraxas Petroleum Limited
("Canadian Abraxas") and its 49% owned foreign subsidiary Grey Wolf
Exploration Inc. ("Grey Wolf"). Minority interest represents the minority
shareholders' proportionate share of the equity and income of Grey Wolf. The
Company is negotiating to purchase additional ownership interest in Grey
Wolf.
Canadian Abraxas' and Grey Wolf's assets and liabilities are translated to
U.S. dollars at period-end exchange rates. Income and expense items are
translated at average rates of exchange prevailing during the period.
Translation adjustments are accumulated as a separate component of
shareholders' equity.
NOTE 2. LONG-TERM DEBT
Long-term debt consists of the following:
MARCH 31 DECEMBER 31
2001 2000
--------------------------
(In thousands)
11.5% Senior Secured Notes due 2004 ("Old Notes") ......................
$ 801 $ 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") .................
190,178 190,178
Credit facility payable to a Canadian bank (due 2002), providing for
borrowings to approximately $15,870,000 at the bank's prime rate plus
.125%, 7.50% at March 31, 2001, secured by the assets of Grey Wolf .....
8,287 7,859
Production Payment .....................................................
4,904 5,231
-------- --------
267,670 267,569
Less current maturities ................................................
884 1,128
-------- --------
$266,786 $266,441
======== ========
A-91
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
------ -------------
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 Sandia. The
guarantee is a general unsecured obligation of Sandia Oil & Gas Company, a
wholly owned subsidiary of the Company 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.
A-92
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 Holdings, Inc., a wholly owned
subsidiary of the Company. 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.
TheFirst 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
----- ----------
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.
A-93
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,
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.
NOTE 3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
----------- -----------
Numerator:
Numerator for basic and diluted earnings per
share - income (in thousands) .............. $ 255 $ 27,156
Denominator:
Denominator for basic earnings per share -
weighted-average shares .................... 22,595,969 22,627,136
Effect of dilutive securities:
Stock options, Warrants and CVR's .......... 4,681,387 29,945,081
----------- -----------
Dilutive potential common shares
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed
Conversions ................................ 27,277,356 52,572,217
Basic earnings per share: ..................... $ 0.01 $ 1.20
=========== ===========
Diluted earnings per share: ................... $ 0.01 $ 0.52
=========== ===========
A-94
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 March 31,
2001, based on the Abraxas common stock market price at that time, CVR
holders would have been entitled to receive approximately 3.2 million shares.
NOTE 4. SUMMARY FINANCIAL INFORMATION OF CANADIAN ABRAXAS PETROLEUM LTD.
The following is summary financial information at March 31, 2001 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.
BALANCE SHEET
ASSETS LIABILITIES AND SHAREHOLDERS EQUITY
(In Thousands)
Total current assets .. $ 1,888 Total current liabilities ....... $
3,143
Oil and gas, and
processing Second Lien Notes
properties ....... 144,122 due 2004.......................
52,629
Notes payable to
Abraxas Petroleum
Other assets .......... 6,906 Corporation ...................
24,493
---------
$ 152,916 Other liabilities ...............
25,268
=========
Stockholder's equity.............
47,383
--------
$152,916
========
STATEMENT OF OPERATIONS
Revenues ............. $ 10,139
Operating costs and
expenses .......... 6,399
Interest expense ..... 1,887
Other expense......... 108
Income tax expense ... 1,179
-----------
Net income ......... $ 566
===========
A-95
NOTE 5. BUSINESS SEGMENTS
Business segment information about our first quarter operations in different
geographic areas is as follows:
THREE MONTHS
ENDED MARCH 31, 2001
-----------------------------------------
U.S.
CANADA TOTAL
---------
--------- ---------
(In
thousands)
Revenues ............................................ $ 13,217 $
15,869 $ 29,086
=========
========= =========
Operating profit .................................... $ 7,246 $
7,283 $ 14,529
=========
=========
General corporate ...................................
(2,336)
Interest expense and amortization of deferred
financing fees ...................................
(8,220)
Other income ........................................
(16)
---------
Income before income taxes .......................
$ 3,957
=========
Identifiable assets at March 31, 2001 ............... $ 131,646 $
192,525 $ 324,171
=========
=========
Corporate assets ....................................
9,803
---------
Total assets .....................................
$ 333,974
=========
THREE MONTHS
ENDED MARCH 31, 2000
-----------------------------------------
U.S.
CANADA TOTAL
---------
--------- ---------
(In
thousands)
Revenues ............................................ $ 6,153 $
10,564 $ 16,717
=========
========= =========
Operating profit .................................... $ 1,414 $
945 $ 2,359
=========
=========
General corporate ...................................
(846)
Interest expense and amortization of deferred
financing fees ...................................
(8,221)
Other income ........................................
33,548
---------
Income before income taxes .......................
$ 26,840
=========
YEAR ENDED
DECEMBER 31, 2000
-----------------------------------------
U.S.
CANADA TOTAL
---------
--------- ---------
Identifiable assets ................................. $ 132,327 $
197,229 $ 329,556
=========
=========
Corporate assets ....................................
6,004
---------
Total assets .....................................
$ 335,560
=========
NOTE 6. HEDGING PROGRAM AND DERIVATIVES
On January 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS 137 and SFAS 138. Under
SFAS 133, all derivative instruments are recorded on the balance sheet at fair
value. If the derivative does not qualify as a hedge or is not designated as a
hedge, the gain or loss on the derivative is recognized currently in earnings.
To qualify for hedge accounting, the derivative must qualify either as a fair
value hedge, cash flow hedge or foreign currency hedge. Currently, the Company
uses only cash flow hedges and the remaining discussion will relate exclusively
to this type of derivative instrument. If the derivative qualifies for hedge
accounting, the gain or loss on the derivative is deferred in Other
Comprehensive Income/Loss, a component of Stockholders' Equity, to the extent
that the hedge is effective.
A-96
The relationship between the hedging instrument and the hedged item must be
highly effective in achieving the offset of changes in cash flows attributable
to the hedged risk both at the inception of the contract and on an ongoing
basis. Hedge accounting is discontinued prospectively when a hedge instrument
becomes ineffective. Gains and losses deferred in accumulated Other
Comprehensive Income/Loss related to a cash flow hedge that becomes ineffective,
remain unchanged until the related production is delivered. If the Company
determines that it is probable that a hedged transaction will not occur,
deferred gains or losses on the hedging instrument are recognized in earnings
immediately.
Gains and losses on hedging instruments related to accumulated Other
Comprehensive Income/Loss and adjustments to carrying amounts on hedged
production are included in natural gas or crude oil production revenue in the
period that the related production is delivered.
The following table sets forth the Company's hedge position as of March 31,
2001.
Time Period Notional Quantities
Price Fair Value
--------------------------------------------------------------------------------
--------------------------------------
April 1, 2001 - October 31, 2002 20,000 Mcf/day of natural Fixed
price swap $2.60- $(25) million
gas or 1,000 Bbl/day of $2.95
natural gas or
crude oil $18.90
Crude oil
On January 1, 2001, in accordance with the transition provisions of SFAS 133,
the Company recorded $31.0 million, net of tax, in Other Comprehensive
Income/Loss representing the cumulative effect of an accounting change to
recognize the fair value of cash flow derivatives. The Company recorded cash
flow hedge derivative liabilities of $38.2 million on that date and a deferred
tax asset of $7.2 million.
During the first quarter of 2001 losses before tax of $7.4 million were
transferred from Other Comprehensive Income/Loss to revenue and the fair value
of outstanding liabilities decreased by $5.4 million. For the three months ended
March 31, 2001, the ineffective portion of the cash flow hedges were not
material
As of March 31, 2001, $20.6 million of deferred net losses on derivative
instruments were recorded in other comprehensive income, of which $14.4 million
is expected to be reclassified to earnings during the next twelve-month period.
All hedge transactions are subject to the Company's risk management policy,
approved by the Board of Directors. The Company formally documents all
relationships between hedging instruments and hedged items, as well as its risk
management objectives and strategy for undertaking the hedge. This process
includes specific identification of the hedging instrument and the hedged
transaction, the nature of the risk being hedged and how the hedging
instrument's effectiveness will be assessed. Both at the inception of the hedge
and on an ongoing basis, the Company assesses whether the derivatives that are
used in hedging transactions are highly effective in offsetting changes in cash
flows of hedged items.
The fair value of the hedging instrument was determined based on the base
price of the hedged item and NYNEX forward price quotes. As of March 31, 2001, a
commodity price increase of 10% would have resulted in an unfavorable change in
the fair market value of $5.7 million and a commodity price decrease of 10%
would have resulted in a favorable change in fair market value of $5.7 million.
NOTE 7. CONTINGENCIES
LITIGATION - From time to time, the Company is involved in litigation
relating to claims arising out of our operations in the normal course of
business. At March 31, 2001, we were not engaged in any legal proceedings that
are expected, individually or in the aggregate, to have a material adverse
effect on us.
A-97
NOTE 8. COMPREHENSIVE INCOME
Comprehensive income includes net income, losses and certain items recorded
directly to Stockholder's Equity and classified as Other Comprehensive Income.
The following table illustrates the calculation of comprehensive income
(loss) for the quarter ended March 31, 2001:
Three Months Ending
March 31, 2001
(In thousands)
---------------------------
Accumulated other comprehensive loss at December 31, 2000 ...............
$ (4,799)
Net Income ...........................................................
$ 255
Other Comprehensive loss :
Hedging derivatives (net of tax) - See Note 6
Cumulative effect of change in accounting principal January 1, 2001
(30,980)
Reclassification adjustment for settled hedge contracts ...........
6,013
Change in fair market value of outstanding hedge positions ........
4,379
--------
(20,588)
Foreign currency translation adjustment ..............................
(7,089)
--------
Other comprehensive loss ................................................
(27,677) (27,677)
--------
Comprehensive loss ......................................................
(27,422)
======== --------
Accumulated other comprehensive loss at March 31, 2001 ..................
$(32,476)
========
A-98
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of our financial condition, results of
operations, liquidity and capital resources. This discussion should be read in
conjunction with our consolidated financial statements and the notes thereto,
included in our Annual Report on Form 10-K filed for the year ended December 31,
2000.
RESULTS OF OPERATIONS
The factors which most significantly affect our results of operations are (1)
the sales prices of crude oil and natural gas, (2) the level of total sales
volumes of crude oil and natural gas, and (3) the level and success of
exploration and development activity.
SELECTED OPERATING DATA. The following table sets forth certain of our
operating data for the periods presented.
Three Months Ended
March 31,
---------------------
2001 2000
------- -------
Operating Revenue (in thousands):
Crude Oil Sales ............................... $ 3,602 $ 2,651
Natural Gas Sales ............................. 22,426 11,201
Natural Gas Liquids Sales ..................... 2,221 1,774
Processing Revenue ............................ 436 757
Rig Operations ................................ 183 131
Other ......................................... 218 203
------- -------
$29,086 $16,717
======= =======
Operating Income (in thousands) ............... $12,193 $ 1,513
Crude Oil Production (MBBLS) .................. 132.3 168.5
Natural Gas Production (MMCFS) ................ 4,626.8 5,439.9
Natural Gas Liquids Production (MBBLS) ........ 78.1 82.5
Average Crude Oil Sales Price ($/BBL) ......... $ 27.22 $ 15.73
Average Natural Gas Sales Price ($/MCF) ....... $ 4.85 $ 2.06
Average Liquids Sales Price ($/BBL) ........... $ 28.44 $ 21.51
OPERATING REVENUE. During the three months ended March 31, 2001, operating
revenue from crude oil, natural gas and natural gas liquid sales increased to
$28.2 million compared to $15.6 million in the three months ended March 31,
2000. The increase in revenue was primarily due to increased prices realized
during the period, offset by a decline in production volumes. Increased prices
contributed $15.0 million in revenue after deducing losses, before tax, from
hedging activities of $7.4 million while reduced production volumes had a $2.3
million negative impact on revenue.
Average sales prices net of hedging losses for the quarter ended March 31,
2001 were:
o $ 27.22 per Bbl of crude oil,
o $ 28.44 per Bbl of natural gas liquid, and
o $ 4.85 per Mcf of natural gas
A-99
Average sales prices net of hedging losses for the quarter ended March 31, 2000
were:
o $15.73 per Bbl of crude oil,
o $21.51 per Bbl of natural gas liquid, and
o $ 2.06 per Mcf of natural gas
Crude oil production volumes declined from 168.5 MBbls during the quarter ended
March 31, 2000 to 132.3 MBbls for the same period of 2001, primarily as a result
of the de-emphasis on crude oil drilling in prior periods, a natural decline in
production and the sale of non-core properties in 2000. Natural gas production
volumes declined to 4,626.8 MMcf for the three months ended March 31, 2001 from
5,108.2 MMcf for the same period of 2000. This decline was primarily due to the
sale of non-core properties in late 2000 and the natural decline in production,
partially offset by production from current drilling activities.
LEASE OPERATING EXPENSES. Lease operating expenses and natural gas processing
costs ("LOE") for the three months ended March 31, 2001 increased slightly to
$4.9 million from $4.6 million for the same period in 2000. The increase in LOE
is primarily due to an increase in production tax expense due to higher
commodity prices in the quarter ended March 31, 2001 compared to the same period
of 2000. Our LOE on a per MCFE basis for the three months ended March 31, 2001
was $0.82 per MCFE compared to $0.67 for the same period of 2000. The increase
in the per MCFE expense was due to a decline in production volumes in the first
quarter of 2001 compared to the same period in 2000 as well as the increase in
overall LOE.
GENERAL AND ADMINSITRATIVE ("G&A") EXPENSES. G&A expenses increased from $1.4
million for the first three months of 2000 to $2.1 million for the first three
months of 2001. G&A expense on a per MCFE basis was $0.36 for the first quarter
of 2001 compared to $0.21 for the same period of 2000. The increase in the per
MCFE G&A cost is due to higher cost and the decline in production volumes during
the first quarter of 2001 compared to the same period in 2000. Increased
expenses included the loss of overhead reimbursement from a partnership, the
assets of which were sold in March 2000 of approximately $150,000 and increases
in contract labor and professional fees in 2001 as compared to 2000. The three
months ended March 31, 2000 also included insurance refunds of approximately
$104,000, which did not occur in 2001.
G&A - STOCK-BASED COMPENSATION. Effective July 1, 2000, the Financial
Accounting Standards Board ("FASB") issued FIN 44, "Accounting for Certain
Transactions Involving Stock Compensation", an interpretation of Accounting
Principles Board Opinion No. ("APB") 25. Under the interpretation, certain
modifications to fixed stock option awards which were made subsequent to
December 15, 1998, and not exercised prior to July 1, 2000, require that the
awards be accounted for as variable until they are exercised, forfeited, or
expired. In March 1999, we amended the exercise price to $2.06 per share on all
options with an existing exercise price greater than $2.06 per share. We
recognized approximately $931,000 as stock-based compensation expense during the
quarter ended March 31, 2001 related to these repricings.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSES. Depreciation, depletion
and amortization ("DD&A") expense decreased slightly to $8.8 million for the
three months ended March 31, 2001 from $8.9 million for the same period of 2000.
Our DD&A on a per MCFE basis for the three months ended March 31, 2001 was $1.50
per MCFE compared to $1.29 in 2000. The per MCFE increase is due to higher
finding costs added to the full cost pool in 2000 and the first quarter of 2001
as well as reduced production volumes in 2001.
INTEREST EXPENSE . Interest expense remained constant at $7.8 million for the
first three months of 2001 and 2000. An increase in the interest expense in
connection with our production payment financing was offset by a reduction in
interest expense related to our repurchase of certain Old Notes and Second Lien
Notes, during 2000.
A-100
MINORITY INTEREST. Minority interest in the net income of our 49% owned
subsidiary, Grey Wolf, increased to $926,000 for the three months ended March
31, 2001 compared to $11,000 for the same period of 2000. This increase is due
to increased profitability of Grey Wolf, primarily due to higher commodity
prices received in 2001 compared to 2000.
INCOME TAXES. Income taxes increased to an expense of $2.8 million for the
first three months of 2001 compared to a benefit of $328,000 for the same period
of 2000. This increase is due to increased profitability in our Canadian
operations, primarily as a result of higher commodity prices.
GENERAL. 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. The
average natural gas price that we realized during the first quarter of 2001
increased by 135% from $2.06 per MCF during the first three months of 2000 to
$4.85 during the first three months of 2001, including the impact of a loss from
hedging activities of $7.4 million during the quarter ended March 31, 2001.
Crude oil prices increased to $27.22 per BBL during the first three months of
2001 from $15.73 per BBL during the first three months of 2000. Natural gas
liquids prices increased to $28.44 per BBL in the first quarter of 2001 compared
to $21.51 per BBL in the first quarter of 2000. In addition, 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
conducts successful exploration and development activities. In the event crude
oil, natural gas and natural gas liquids decline from their current levels or if
our production levels decrease, our revenues, cash flow from operations and
profitability will be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Capital expenditures excluding property divestitures during the
first three months of 2001 were $17.8 million compared to $11.8 million during
the same period of 2000. The table below sets forth the components of these
capital expenditures on a historical basis for the three months ended March 31,
2001 and 2000.
THREE MONTHS ENDED
MARCH 31
----------------------
2001 2000
------- -------
Expenditure category (in thousands):
Acquisitions ............................ $ 22 $ 22
Development ............................. 17,726 11,451
Facilities and other .................... 88 367
------- -------
Total ............................... $17,836 $11,840
======= =======
At March 31, 2001, we had current assets of $21.3 million and current
liabilities of $52.4 million resulting in a working capital deficit of $31.1
million. This included a net deficit of $14.4 million related to hedging
activities. This compares to a working capital deficit of $13.8 million at
December 31, 2000 and working capital of $20.3 million at March 31, 2000. The
material components of our current liabilities at March 31, 2001 include trade
accounts payable of $13.2 million, revenues due third parties of $9.9 million,
hedge liability of $17.7 million and accrued interest of $9.5 million.
Operating activities during the three months ended March 31, 2001 provided us
$17.4 million cash compared to $2.8 million in the same period in 2000. Net
income plus non-cash expense items during 2001 and net changes in operating
assets and liabilities accounted for most of these funds. Investing activities
used $17.8 million net during the first three months of 2001, which was utilized
primarily for the development of crude oil and natural gas properties and other
facilities. This compares to providing $22.3 million net during the first three
months of 2000, $34.0 million of which were proceeds from the sale of the assets
of Abraxas Wamsutter, L.P., a partnership of which one of our subsidiaries is
the general partner, and certain contiguous assets we owned, and $11.8 million
of which was utilized for the development of crude oil and natural gas
properties and other facilities. Financing activities provided $503,000 for the
first three months of 2001 compared to providing $1.7 million for the same
period of 2000.
A-101
Our current budget for capital expenditures for the last nine months of 2001
other than acquisition expenditures is approximately $24.5 million. Such
expenditures will be made primarily for the development of existing properties.
Additional capital expenditures may be made for acquisitions of producing
properties 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.
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 and during 2000, we sold additional production payments for $6.4 million
relating to additional natural gas wells in the Edwards Trend. In 2001, we have
received $10.5 million ($2.5 million in March and an additional $8.0 million in
April) relating to additional south Texas gas wells and facilities. We have the
ability to sell up to $50 million to Mirant for drilling opportunities in the
Edwards Trend.
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.
In March 2000, we sold our interest in certain crude oil and natural gas
properties that we owned and operated in Wyoming. Simultaneously, a 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 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.
We will have three principal sources of liquidity going forward: (i) cash on
hand, (ii) cash flow from operations, and (iii) the production payment. 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 the prior year 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.
A-102
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 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
------ ------------
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 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.
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.
A-103
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
----- ----------
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.
A-104
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,
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.
HEDGING ACTIVITIES.
On January 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS 137 and SFAS 138. Under
SFAS 133, all derivative instruments are recorded on the balance sheet at fair
value. If the derivative does not qualify as a hedge or is not designated as a
hedge, the gain or loss on the derivative is recognized currently in earnings.
To qualify for hedge accounting, the derivative must qualify either as a fair
value hedge, cash flow hedge or foreign currency hedge. Currently, the Company
uses only cash flow hedges and the remaining discussion will relate exclusively
to this type of derivative instrument. If the derivative qualifies for hedge
accounting, the gain or loss on the derivative is deferred in Other
Comprehensive Income/Loss, a component of Stockholder's Equity, to the extent
that the hedge is effective.
The relationship between the hedging instrument and the hedged item must be
highly effective in achieving the offset of changes in cash flows attributable
to the hedged risk both at the inception of the contract and on an ongoing
basis. Hedge accounting is discontinued prospectively when a hedge instrument
becomes ineffective. Gains and losses deferred in accumulated Other
Comprehensive Income/Loss related to a cash flow hedge that becomes ineffective,
remain unchanged until the related production is delivered. If the Company
determines that it is probable that a hedged transaction will not occur,
deferred gains or losses on the hedging instrument are recognized in earnings
immediately.
Gains and losses on hedging instruments related to accumulated Other
Comprehensive Income and adjustments to carrying amounts on hedged production
are included in natural gas or crude oil production revenue in the period that
the related production is delivered.
The following table sets forth the Company's position as of March 31, 2001.
Time Period Notional Quantities
Price Fair Value
--------------------------------------------------------------------------------
---------------------------------------------
April 1, 2001 - October 31, 2002 20,000 Mcf/day of natural
Fixed price swap $2.60- $(25) million
gas or 1,000 Bbl/day of
$2.95 natural gas or
crude oil
$18.90 Crude oil
On January 1, 2001, in accordance with the transition provisions of SFAS 133,
the Company recorded $31.0 million, net of tax, in other comprehensive loss
representing the cumulative effect of an accounting change to recognize the fair
value of cash flow derivatives. The Company recorded cash flow hedge derivative
liabilities of $38.2 million on that date and a deferred tax asset of $7.2
million.
A-105
During the first quarter of 2001 losses before tax of $7.4 million were
transferred from Other Comprehensive Income/Loss to revenue and the fair value
of outstanding liabilities decreased by $5.4 million. For the three months ended
March 31, 2001, the ineffective portion of the cash flow hedges were not
material.
As of March 31, 2001, $20.6 million of deferred net losses on derivative
instruments were recorded in Other Comprehensive Income/Loss, of which $14.4
million is expected to be reclassified to earnings during the next twelve-month
period.
All hedge transactions are subject to the Company's risk management policy,
approved by the Board of Directors. The Company formally documents all
relationships between hedging instruments and hedged items, as well as its risk
management objectives and strategy for undertaking the hedge. This process
includes specific identification of the hedging instrument and the hedged
transaction, the nature of the risk being hedged and how the hedging
instrument's effectiveness will be assessed. Both at the inception of the hedge
and on an ongoing basis, the Company assesses whether the derivatives that are
used in hedging transactions are highly effective in offsetting changes in cash
flows of hedged items.
The fair value of the hedging instrument was determined based on the base
price of the hedged item and NYMEX forward price quotes. As of March 31, 2001, a
commodity price increase of 10% would have resulted in an unfavorable change in
the fair market value of $5.7 million and a commodity price decrease of 10%
would have resulted in a favorable change in fair market value of $5.7 million.
NET OPERATING LOSS CARRYFORWARDS.
At December 31, 2000, the Company had, subject to the limitation discussed
below, $101.8 million 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 $11.4 million 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 $4.9 million 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 $8.3 million 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 $34.8 million for deferred tax assets at December 31,
2000 and March 31, 2001.
A-106
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
COMMODITY PRICE RISK
Our exposure to market risk 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources". Assuming the production
levels we attained during the three months ended March 31, 2001, a 10% decline
in crude oil, natural gas and natural gas liquids prices would have reduced our
operating revenue, cash flow and net income (loss) by approximately $2.8 million
for the three months ended March 31, 2001.
HEDGING SENSITIVITY
The fair value of our hedge instrument was determined based on NYMEX
forward price quotes as of March 31, 2001. As of March 31, 2001, a commodity
price increase of 10% would have resulted in an unfavorable change in the fair
market value of our hedging instrument of $5.7 million and a commodity price
decrease of 10% would have resulted in a favorable change in the fair value of
our hedge instrument of $5.7 million.
The following table sets forth our hedge position as of March 31, 2001.
Time Period Notional Quantities
Price Fair Value
--------------------------------------------------------------------------------
--------------------------------------------
April 1, 2001 - October 31, 2002 20,000 Mcf/day of
Fixed price swap $2.60- $(25) million
natural gas or 1,000
$2.95 natural gas or
Bbl/day of crude oil
$18.90 Crude oil
INTEREST RATE RISK
At March 31, 2001, substantially all of our long-term debt is at fixed
interest rates 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 could be affected by changes in foreign currency
exchange rates or weak economic conditions in the foreign markets. Canadian
operations reported a pre tax earnings of $2.1 million for the three months
ended March 31, 2001. It is estimated that a 5% change in the value of the U.S.
dollar to the Canadian dollar would have changed our pre tax income by
approximately $105,000. 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.
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this report
regarding our financial position, business strategy, budgets and plans and
objectives of management for future operations are forward-looking statements.
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from our expectations ("Cautionary Statements") are disclosed
under "Risk Factors" in our Annual Report on Form 10-K which is incorporated by
reference herein and this report. All subsequent written and oral
forward-looking statements attributable to us, or persons acting on our behalf,
are expressly qualified in their entirety by the Cautionary Statements.
A-107
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 27 Financial data
schedule (b) Reports on Form 8-K:
NONE
A-108
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ABRAXAS PETROLEUM CORPORATION
(Registrant)
DATE: MAY 15, 2001 BY: /s/
-------------- -------------------------------
ROBERT L.G. WATSON,
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
DATE: MAY 15, 2001 BY: /s/
-------------- -------------------------------
CHRIS WILLIFORD,
EXECUTIVE VICE PRESIDENT AND
PRINCIPAL ACCOUNTING OFFICER
A-109
ANNEX A-3
ADDITIONAL INFORMATION ENTITLED "RECONCILIATION WITH CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES" AND INDEPENDENT AUDITORS' REPORT
A-110
INDEPENDENT AUDITORS' REPORT ON ADDITIONAL INFORMATION
To the Board of Directors and Stockholders of
Abraxas Petroleum Corporation
San Antonio, Texas
We have audited the consolidated financial statements of Abraxas Petroleum
Corporation as of December 31, 2000 and for the year then ended, and have issued
our report thereon dated March 22, 2001 (included elsewhere in the registration
statement on Form S-4 (File No. 333-62934) and the Take-Over Bid Circular). Our
audit was conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying additional information for the
fiscal year 2000 entitled "Reconciliation With Canadian Generally Accepted
Accounting Principles" is presented for the purpose of additional analysis for
Canadian reporting standards and is not a required part of the basic financial
statements for United States of America reporting standards. This additional
information is the responsibility of the Company's management. Such information
has been subjected to the auditing procedures applied in our audit of the basic
financial statements and, in our opinion, is fairly stated in all material
respects when considered in relation to the basic financial statements taken as
a whole.
The prior years' consolidated financial statements as of and for the years ended
December 31, 1999 and 1998 were reported on by another firm of independent
accountants, who issued an unqualified opinion thereon.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
San Antonio, Texas
March 22, 2001
A-111
ADDITIONAL INFORMATION
"RECONCILIATION WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES"
The consolidated financial statements of Abraxas Petroleum Corporation
("Abraxas" or "the Company") have been prepared in accordance with accounting
principles generally accepted in the United States of America ("U.S. GAAP").
Differences from Canadian generally accepted accounting principles ("Canadian
GAAP") having a significant effect on the Company's consolidated balance sheets
and consolidated statements of operations, stockholders' equity (deficit) and
cash flows are described and quantified below for the periods indicated:
(a) Under U.S. GAAP, interest costs associated with certain capital
expenditures are required to be capitalized as part of the historical
cost of the oil and gas assets. Under Canadian GAAP, the calculation of
interest costs eligible for capitalization differs from the calculation
under U.S. GAAP in certain respects and is optional at the discretion
of the entity. For purposes of this reconciliation to Canadian GAAP, it
has been assumed that no interest costs would have been capitalized to
the historical cost of the related assets, rather, all interest costs
would have been expensed in the period incurred. Accordingly, the
carrying value of oil and gas properties has been reduced and interest
expense increased for all periods presented, and the opening
accumulated deficit has been adjusted by $1.8 million for the
cumulative impact on prior periods.
(b) Under U.S. GAAP, the carrying value of oil and gas properties and
related facilities, net of deferred income taxes, is limited to the
present value of after-tax future net revenues from proven reserves,
discounted at 10 percent (based on prices and costs at the balance
sheet date), plus the lower of cost and fair value of unproved oil and
gas properties. Under Canadian GAAP, the "ceiling test" calculation is
performed using undiscounted after-tax future net revenues, less future
estimated general and administrative and financing costs plus the cost
of unproved properties. Under Canadian GAAP, an additional write-down
of $75.9 million before tax offset of $18.9 million would have been
recorded for years prior to the year ended December 31, 1998, in
addition to the cumulative write-downs recorded under U.S. GAAP. In
addition, the application of the full cost ceiling test under Canadian
GAAP would have resulted in a further additional write-down of $132
million and $99.1 million at December 31, 1998 and 1999, respectively,
before tax. At March 31, 2001 and 2000 and December 31, 2000, the
application of the full cost ceiling test under Canadian GAAP did not
result in a write-down of capitalized costs.
(c) For periods where the amount of the ceiling test write-down under
Canadian GAAP differs from the amount of the write-down under U.S.
GAAP, the charge for depreciation, depletion and amortization will
differ in subsequent years. As a result of the additional ceiling test
write-downs in prior years as described in note (b) and the decrease in
capitalized interest as described in note (a), depreciation, depletion
and amortization expense has been reduced for Canadian GAAP purposes by
$33.1 million, $22.4 million and $10.2 million for the years ended
December 31, 2000, 1999 and 1998,
A-112
respectively, and by $7.1 million and $8.5 million for the three
months ended March 31, 2001 and 2000, respectively. The cumulative
reduction to depreciation, depletion and amortization expense for
years prior to the year ended December 31, 1998 was not significant.
(d) Under U.S. GAAP, Accounting Principles Board Opinion No. 25, as
interpreted by Financial Accounting Standards Board Interpretation No.
44, requires variable plan accounting and recognition of compensation
cost effective July 1, 2000 with respect to changes in intrinsic value
for certain modifications to fixed stock option awards which were made
subsequent to December 15, 1998. Under Canadian GAAP, recognition of
compensation cost is currently not required, resulting in an increase
in net income of $2.8 million for the year ended December 31, 2000 and
$.9 million for the three months ended March 31, 2001.
(e) Under U.S. GAAP, cumulative foreign exchange gains (losses) on
translation of self-sustaining foreign subsidiaries for purposes of
consolidation are required to be reported as a component of accumulated
other comprehensive income (loss) in stockholders' equity (deficit). No
similar standards for reporting of accumulated other comprehensive
income (loss) or comprehensive income (loss) exist under Canadian GAAP.
Accordingly, such cumulative translation gains (losses) are reported in
a cumulative translation adjustment account as a separate component of
shareholders' equity. As the differences relate to reclassification
only, total stockholders' equity as at March 31, 2001 and 2000 and
December 31, 2000 and 1999 would be the same under both U.S. and
Canadian GAAP.
In addition to the above-noted reclassification, as a result of the
additional ceiling test write-downs in prior years as described in note
(b), the decrease in depreciation, depletion and amortization expense
as described in note (c) and the related income tax effects as
described in note (h), the cumulative translation loss adjustment
account has been decreased by $4.4 million for the year ended December
31, 2000, increased by $5 million for the year ended December 31, 1999,
decreased by $3.8 million for the year ended December 31, 1998, and
decreased by $5 million and $.5 million respectively, for the three
months ended March 31, 2001 and 2000. There was no cumulative
adjustment to the cumulative translation loss adjustment account for
years prior to the year ended December 31, 1998.
(f) Under U.S. GAAP, Statement of Financial Accounting Standards ("SFAS")
No. 133 "Accounting for Derivative Instruments and Hedging Activities",
as amended by SFAS No. 137 and SFAS No. 138, requires all derivative
instruments to be recorded at fair value at the balance sheet date and
the resulting unrealized gain or loss on the derivative instrument to
be deferred as a component of accumulated other comprehensive income in
stockholders' equity. There is no equivalent accounting standard in
Canada, therefore unrealized gains and losses on such instruments are
not recorded under Canadian GAAP. Accordingly, as of March 31, 2001
stockholders' equity has been increased by $20.6 million, the hedge
liability decreased by $25.4 million ($17.7 million reduction in
short-term hedge liability, and $7.7 million reduction in long-term
hedge liability), and the deferred tax asset reduced by $4.8 million
($3.4 million reduction in short-term deferred tax asset, and
$1.4 million increase in long-term deferred tax liability).
A-113
(g) During the year ended December 31, 2000, the Company recorded an
extraordinary gain of $1.8 million related to retirement of long-term
debt. U.S GAAP requires that gains realized on debt extinguishments be
classified as extraordinary items in the consolidated statement of
operations. Canadian GAAP permits disclosure as a separate line item
within income (loss) from operations, however, classification as an
extraordinary item is not permitted. Total net income for 2000 would be
the same under both U.S. and Canadian GAAP.
(h) Prior to 2000, Canadian GAAP required the use of the deferral method of
accounting for income taxes. For fiscal periods beginning on or after
January 1, 2000, retroactive adoption of the liability method of
accounting for income taxes was required, which is substantially the
same as SFAS No. 109 under U.S. GAAP. Accordingly, had the liability
method been adopted retroactively with restatement of prior periods, no
adjustments are required to conform the consolidated financial
statements to Canadian GAAP, except for the tax effect of the
above-noted Canadian - U.S. GAAP differences identified. A valuation
allowance has been recorded for the full amount of the tax benefits
arising from the write-downs recorded for 1997 and a partial valuation
allowance recorded for the write-downs recorded in 1998 and 1999 as
described in note (b). In addition, a reduction in the valuation
allowance has been recorded for the adjustments relating to stock
compensation expense for the year ended December 31, 2000 and the three
months ended March 31, 2001 as described in note (d).
(i) Prior to 2001, Canadian GAAP required the use of the imputed earnings
method for purposes of the calculation of fully diluted earnings (loss)
per share. For fiscal periods beginning on or after January 1, 2001,
retroactive application of the treasury stock method with restatement
of prior periods is required, which is substantially the same as SFAS
No. 128 under U.S. GAAP. Accordingly, no adjustments are required to
conform the diluted earnings (loss) per share figures to Canadian GAAP,
except for the income (loss) effect of the above-noted Canadian - U.S.
GAAP differences identified.
A-114
CONSOLIDATED STATEMENTS OF OPERATIONS
The application of Canadian GAAP would have the following effect on the
Consolidated Statements of Operations:
THREE
MONTHS ENDED
MARCH 31,
------------------
2001
2000
(UNAUDITED)
--------------------------------------------------------------------------------
----------------
Net income, as reported......................................... 255
27,156
Capitalized interest (a)........................................
(78) (46)
General and administrative (stock-based compensation) (d)....... 931
-
Depreciation, depletion and amortization (c).................... 7,118
8,483
Deferred income tax (expense) benefit (h).......................
(1,850) (2,050)
------
------
Net income, Canadian GAAP....................................... 6,376
33,543
------
------
Basic earnings per share, as reported........................... 0.01
1.20
Effect of increase in net income under Canadian GAAP............ 0.27
0.28
------
------
Basic earnings per share, Canadian GAAP......................... 0.28
1.48
------
------
Diluted earnings per share, as reported......................... 0.01
0.52
Effect of increase in net income under Canadian GAAP............ 0.22
0.12
------
------
Diluted earnings per share, Canadian GAAP...................... 0.23
0.64
------
------
YEARS ENDED DECEMBER 31,
----------------------------
2000
1999 1998
--------------------------------------------------------------------------------
------------------------
Net income (loss), as reported.................................. 8,449
(36,680) (83,960)
Capitalized interest (a).....................................
(589) (193) (414)
General and administrative (stock-based compensation) (d).... 2,767
- -
Write-down of property, plant and equipment (b).............. -
(99,148) (131,972)
Depreciation, depletion and amortization (c)................. 33,089
22,432 10,225
Deferred income tax (expense) benefit (h)....................
(5,500) 30,636 7,353
------
------- --------
Net income (loss), Canadian GAAP................................ 38,216
(82,953) (198,768)
------
------- --------
Basic earnings (loss) per share, as reported.................... 0.37
(5.41) (13.26)
Effect of increase (decrease) in net income under
Canadian GAAP ............................................. 1.32
(6.82) (18.13)
------
------- --------
Basic earnings (loss) per share, Canadian GAAP *................ 1.69
(12.23) (31.39)
------
------- --------
Diluted earnings (loss) per share, as reported.................. 0.26
(5.41) (13.26)
Effect of increase (decrease) in net income under
Canadian GAAP.............................................. 0.91
(6.82) (18.13)
------
------- --------
Diluted earnings (loss) per share, Canadian GAAP................ 1.17
(12.23) (31.39)
------
------- --------
* Separate per share figures for the extraordinary item and net income
before extraordinary item as reported for 2000 would not be reported
under Canadian GAAP (g)
A-115
CONSOLIDATED BALANCE SHEETS
The application of Canadian GAAP would have the following effect on the
Consolidated Balance Sheets:
AS AT MARCH 31,
2001 AS AT MARCH 31, 2000
CUMULATIVE
CUMULATIVE
AS INCREASE
CANADIAN AS INCREASE CANADIAN
REPORTED (DECREASE)
GAAP REPORTED (DECREASE) GAAP
(UNAUDITED)
(UNAUDITED)
--------------------------------------------------------------------------------
-----------------------------------------------
CURRENT ASSETS
Deferred tax asset (f)........................ 3,352 (3,352)
- - - -
LONG-TERM ASSETS
Property and equipment (a), (b), (c), (e)..... 305,077 (221,396)
83,681 294,131 (268,527) 25,604
Deferred income tax asset (h), (e)............ - 18,186
18,186 - 35,080 35,050
CURRENT LIABILITIES
Hedge liability (f)........................... 17,724 (17,724)
- - - -
LONG-TERM LIABILITIES
Deferred income taxes (f), (h)................ 22,696 (22,696)
- 19,702 (19,702) -
Hedge liability (f)........................... 7,666 (7,666)
- - - -
STOCKHOLDERS' DEFICIT
Additional paid-in capital (d)................ 131,350 (3,698)
127,652 127,423 - 127,423
Accumulated deficit........................... (131,121) (183,635)
(314,756) (112,669) (213,136) (325,805)
Accumulated other comprehensive income
(loss) (e),(f).............................. (32,476) 32,476
- 1,711 (1,711) -
Cumulative translation adjustment (e)......... - (3,619)
(3,619) - 1,102 1,102
AS AT DECEMBER 31,
2000 AS AT DECEMBER 31, 1999
CUMULATIVE
CUMULATIVE
AS INCREASE
CANADIAN AS INCREASE CANADIAN
REPORTED (DECREASE)
GAAP REPORTED (DECREASE) GAAP
--------------------------------------------------------------------------------
-----------------------------------------------
LONG-TERM ASSETS
Property and equipment (a), (b), (c), (e)..... 304,784 (237,489)
67,295 294,666 (277,908) 16,758
Deferred income tax asset (h), (e)............ - 27,141
27,141 - 40,319 40,319
LONG-TERM LIABILITIES
Deferred income taxes (h)..................... 21,079 (21,079)
- 16,935 (16,935) -
STOCKHOLDERS' DEFICIT
Additional paid-in capital (d)................ 130,409 (2,767)
127,642 127,562 - 127,562
Accumulated deficit........................... (131,376) (189,756)
(321,132) (139,825) (219,523) (359,348)
Accumulated other comprehensive
income (loss) (e)........................... (4,799) 4,799
- 3,602 (3,602) -
Cumulative translation adjustment (e)......... - (1,545)
(1,545) - 2,471 2,471
A-116
CONSOLIDATED STATEMENT OF CASH FLOWS
The application of Canadian GAAP would have the following effect on the
Consolidated Statements of Cash Flows:
THREE
MONTHS ENDED MARCH 31,
----------------------------
2001 2000
(UNAUDITED)
--------------------------------------------------------------------------------
--------------
OPERATING ACTIVITIES
Net cash provided by operating activities, as reported...........
17,424 2,765
Increase (decrease) in:
Net income....................................................
6,121 6,387
Depreciation, depletion and amortization (c)..................
(7,118) (8,483)
Deferred income taxes (h).....................................
1,850 2,050
Stock-based compensation (d)..................................
(931) -
------ ------
Net cash provided by operating activities, Canadian GAAP.........
17,346 2,719
------ ------
INVESTING ACTIVITIES
Net cash (used) provided by investing activities, as reported....
(17,817) 22,261
Increase in capital expenditures (a)..........................
78 46
------ ------
Net cash (used) provided by investing activities, Canadian GAAP..
(17,739) 22,307
------ ------
YEARS ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
-------------------------
OPERATING ACTIVITIES
Net cash provided by operating activities, as reported..........
21,372 3,882 4,845
Increase (decrease) in:
Net income (loss)............................................
29,767 (46,273) (114,808)
Depreciation, depletion and amortization (c).................
(33,089) (22,432) (10,225)
Write-down of property and equipment (b).....................
- 99,148 131,972
Deferred income taxes (h)....................................
5,500 (30,636) (7,353)
Stock-based compensation (d).................................
(2,767) - -
-------- -------- ---------
Net cash provided by operating activities, Canadian GAAP........
20,783 3,689 4,431
-------- -------- ---------
INVESTING ACTIVITIES
Net cash (used) provided by investing activities, as reported...
(18,773) (111,214) 1,977
Increase in capital expenditures (a).........................
589 193 414
-------- -------- ---------
Net cash (used) provided by investing activities, Canadian GAAP.
(18,184) (111,021) 2,391
-------- -------- ---------
A-117
ANNEX A-4
REPORT OF INDEPENDENT AUDITORS ON ADDITIONAL FINANCIAL INFORMATION
A-118
Report of Independent Auditors on
Additional Financial Information
To the Board of Directors and Stockholders
Abraxas Petroleum Corporation
We have audited, in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Abraxas Petroleum
Corporation as of December 31, 1999 and for the two years then ended
(included in the Abraxas Petroleum Corporation 2000 Form 10-K which is
included and incorporated by reference in this Form S-4 dated July 16, 2001)
and have issued our unqualified opinion thereon dated March 17, 2000, except
for notes 2 and 18 as to which the date is March 31, 2000.
The accompanying additional financial information entitled "Reconciliation
With Canadian Generally Accepted Accounting Principles" is the responsibility
of the Company's management and is presented for purposes of additional
analysis and is not a required part of the consolidated financial statements.
Such information, as of December 31, 1999 and for the two years then ended,
has been subjected to the auditing procedures applied in our audits of the
consolidated financial statements and, in our opinion, is fairly stated in
all material respects in relation to the consolidated financial statements
taken as whole.
ERNST & YOUNG LLP
San Antonio, Texas
July 16, 2001
A-119
ANNEX A-5
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT ACCOUNTANTS' COMPILATION REPORT
A-120
Independent Accountants' Compilation Report
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
Abraxas Petroleum Corporation
San Antonio, Texas
We have reviewed, as to compilation only, the unaudited pro forma condensed
consolidated balance sheet of Abraxas Petroleum Corporation as of March 31, 2001
and the unaudited pro forma condensed consolidated statements of operations for
the three months ended March 31, 2001 and the year ended December 31, 2000,
appearing on pages 102 -105, prepared for inclusion in the registration
statement on Form S-4 (File No. 333-62934) and the Take-Over Bid Circular. In
our opinion, the unaudited pro forma condensed consolidated financial statements
have been properly compiled to give effect to the proposed transaction and the
assumptions described in the notes thereto.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
San Antonio, Texas
July 17, 2001
COMMENTS FOR UNITED STATES READERS
ON DIFFERENCES BETWEEN CANADIAN
AND UNITED STATES REPORTING STANDARDS
The above opinion, provided solely pursuant to Canadian requirements, is
expressed in accordance with standards of reporting generally accepted in
Canada. Such standards contemplate the expression of an opinion with respect to
the compilation of pro forma financial statements. United States standards do
not provide for the expression of an opinion on the compilation of pro forma
financial statements. To report in conformity with United States standards on
the reasonableness of the pro forma adjustments and their application to the pro
forma financial statements would require an examination or review which would be
substantially greater in scope than the review as to compilation only that we
have conducted. Consequently, under United States standards, we would be unable
to express any opinion with respect to the compilation of the accompanying
unaudited pro forma condensed consolidated balance sheet and the unaudited pro
forma condensed consolidated statements of operations.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
San Antonio, Texas
July 17, 2001
A-121
ANNEX A-6
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (PREPARED ON
CANADIAN REPORTING STANDARDS) AND INDEPENDENT ACCOUNTANTS' COMPILATION REPORT
A-122
INDEPENDENT ACCOUNTANTS' COMPILATION REPORT
To the Board of Directors and Stockholders of
Abraxas Petroleum Corporation
San Antonio, Texas
We have reviewed, as to compilation only, the accompanying unaudited pro forma
condensed consolidated balance sheet - Canadian reporting standards of Abraxas
Petroleum Corporation as of March 31, 2001 and the unaudited pro forma
condensed consolidated statements of operations - Canadian reporting
standards for the three months ended March 31, 2001 and the year ended
December 31, 2000, prepared for inclusion in the registration statement on
Form S-4 (File No. 333-62934)and the Take-Over Bid Circular. In our opinion,
the unaudited pro forma condensed consolidated financial statements -
Canadian reporting standards have been properly compiled to give effect to
the assumption described in the note thereto.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
San Antonio, Texas
July 17, 2001
COMMENTS FOR UNITED STATES READERS
ON DIFFERENCES BETWEEN CANADIAN
AND UNITED STATES REPORTING STANDARDS
The above opinion, provided solely pursuant to Canadian requirements, is
expressed in accordance with standards of reporting generally accepted in
Canada. Such standards contemplate the expression of an opinion with respect to
the compilation of pro forma financial statements. United States standards do
not provide for the expression of an opinion on the compilation of pro forma
financial statements. To report in conformity with United States standards on
the reasonableness of the pro forma adjustments and their application to the pro
forma financial statements would require an examination or review which would be
substantially greater in scope than the review as to compilation only that we
have conducted. Consequently, under United States standards, we would be unable
to express any opinion with respect to the compilation of the accompanying
unaudited pro forma condensed consolidated balance sheet - Canadian reporting
standards and the unaudited pro forma condensed consolidated statements of
operations - Canadian reporting standards.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
San Antonio, Texas
July 17, 2001
A-123
NOTE TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
PREPARED WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The following unaudited pro forma condensed consolidated financial information -
Canadian reporting standards for Abraxas gives effect to the proposed
acquisition by Abraxas of the remaining common shares of Grey Wolf that it does
not already own (6.6 million shares) plus stock options anticipated to be
assumed (0.5 million shares). Abraxas plans to issue approximately 4.5 million
shares of common stock to acquire such minority interest in Grey Wolf and
related stock options. The purchase price of $20.6 million is based on the
market price of Abraxas common stock over a reasonable period of time around the
announcement on April 12, 2001 ($4.58 per share). The book value of such Grey
Wolf minority interest is $13.2 million at March 31, 2001. The purchase price
value above such book value is allocated to oil and gas properties. The results
of the final valuation of fair value is not yet complete and subject to stock
options to be assumed. The unaudited pro forma condensed consolidated financial
information - Canadian reporting standards is presented for illustrative
purposes only and is not necessarily indicative of the actual results that would
have occurred had the minority interest been acquired on these respective dates
or of future results of operations.
The unaudited pro forma condensed consolidated financial statements - Canadian
reporting standards of Abraxas Petroleum Corporation have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("U.S. GAAP"). Differences from Canadian generally accepted accounting
principles ("Canadian GAAP") having a significant effect on the Company's pro
forma condensed consolidated balance sheet and pro forma condensed consolidated
statements of operations are quantified below for the periods indicated.
(Tabular amounts are in thousands of U.S. dollars except per share amounts)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS - CANADIAN REPORTING STANDARDS
The application of Canadian GAAP would have the following effect on the
Unaudited Condensed Consolidated Statements of Operations:
------------------------------
THREE
MONTHS
ENDED,
YEAR ENDED
MARCH
31, DECEMBER 31,
2001
2000
(UNAUDITED) (UNAUDITED)
--------------------------------------------------------------------------------
------------
Pro forma net income before extraordinary items, as reported..... 984
7,021
Extraordinary item...............................................
1,773
Capitalized interest ............................................
(78) (589)
General and administrative (stock-based compensation)............ 931
2,767
Depreciation, depletion and amortization......................... 7,118
33,089
Deferred income tax expense......................................
(1,850) (5,500)
------- -------
Pro forma net income before extraordinary item, Canadian GAAP.... 7,105
38,561
------- -------
Basic pro forma earnings before extraordinary item per share,
A-124
as reported...................................................... 0.04
0.26
Effect of increase in pro forma net income before extraordinary
item under Canadian GAAP......................................... 0.22
1.16
------- -------
Basic pro forma earnings before extraordinary item per share,
Canadian GAAP.................................................... 0.26
1.42
------- -------
Diluted pro forma earnings before extraordinary item per share,
as reported...................................................... 0.03
0.19
Effect of increase in pro forma net income before extraordinary
item under Canadian GAAP......................................... 0.19
0.85
------- -------
Diluted pro forma earnings before extraordinary item per share,
Canadian GAAP.................................................... 0.22
1.04
------- -------
A-125
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -
CANADIAN REPORTING STANDARDS
The application of Canadian GAAP would have the following effect on the
Unaudited Pro Forma Condensed Consolidated Balance Sheet:
AS AT MARCH 31, 2001
(UNAUDITED)
CUMULATIVE
US PRO INCREASE
CANADIAN
FORMA (DECREASE)
GAAP
-------------------------------------------------------------------------------
CURRENT ASSETS
Other assets (deferred tax asset)....... 4,917 (3,352)
1,565
LONG-TERM ASSETS
Property and equipment.................. 316,539 (221,396)
95,143
Deferred income tax asset............... - 14,119
14,119
CURRENT LIABILITIES
Total current liabilities (hedge
liability).............................. 52,377 (17,724)
34,653
LONG-TERM LIABILITIES
Deferred income taxes .................. 26,763 (26,763)
-
Other liabilities (hedge liability)..... 11,884 (7,666)
4,218
STOCKHOLDERS' DEFICIT
Additional paid-in capital.............. 151,915 (3,698)
148,217
Accumulated deficit..................... (131,121) (183,635)
(314,756)
Accumulated other comprehensive loss ... (32,476) 32,476
-
Cumulative translation adjustment....... - (3,619)
(3,619)
A-126
ANNEX A-7
SUMMARY QUARTERLY FINANCIAL INFORMATION
A-127
ABRAXAS SUPPLEMENTAL QUARTERLY FINANCIAL
INFORMATION
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE
30, MARCH 31,
2001 2000 2000
2000 2000
---- ---- ----
---- ----
REVENUES $ 29,086 $ 27,219 $ 16,377 $
16,287 $ 16,717
INCOME FROM OPERATIONS:
TOTAL $ 12,193 $ 9,404 $ (963) $
1,629 $ 1,513
BASIC PER SHARE $ 0.54 $ 0.32 $ (0.04) $
0.07 $ 0.07
FULLY DILUTED PER SHARE $ 0.54 $ 0.32 $ (0.04) $
0.07 $ 0.05
INCOME BEFORE INCOME TAXES $ 3,957 $ 496 $ (9,169) $
(6,504) $ 26,839
PROVISION FOR INCOME TAXES $ 2,776 $ (33) $ 4,035 $
31 $ (328)
NET INCOME:
TOTAL $ 255 $ 292 $ (13,586) $
(5,413) $ 27,156
BASIC PER SHARE $ 0.01 $ 0.01 $ (0.60) $
(0.24) $ 1.20
FULLY DILUTED PER SHARE $ 0.01 $ 0.01 $ (0.60) $
(0.24) $ 0.52
DECEMBER 31, SEPTEMBER 30, JUNE 30,
MARCH 31,
1999 1999 1999
1999
---- ---- ----
----
REVENUES $ 17,066 $ 16,958 $ 16,776 $
15,970
INCOME FROM OPERATIONS:
TOTAL $ (16,250) $ 2,982 $ 1,692 $
604
BASIC PER SHARE $ (2.00) $ 0.47 $ 0.27 $
0.95
FULLY DILUTED PER SHARE $ (2.00) $ 0.47 $ 0.27 $
0.95
INCOME BEFORE INCOME TAXES $ (25,312) $ (7,190) $ (8,296) $
(8,238)
PROVISION FOR INCOME TAXES $ (8,683) $ (418) $ (1,587) $
(1,937)
NET INCOME:
TOTAL $ (16,726) $ (6,919) $ (6,741) $
(6,294)
BASIC PER SHARE $ (2.06) $ (1.09) $ (1.06) $
(0.99)
FULLY DILUTED PER SHARE $ (2.06) $ (1.09) $ (1.06) $
(0.99)
Note: Canadian shareholders should be aware that the financial statements of
Abraxas included in this table have not been prepared in accordance with
Canadian GAAP and may not be comparable to the financial statements of Canadian
public companies. A reconciliation between United States GAAP and Canadian GAAP
has been set forth in this Annex A beginning on page A-110.
See the Abraxas 2000 Annual Report on Form 10-K which is incorporated by
reference in this document for the "Selected Financial Data" Part II, Item 6.
for five years of summary historical information. Abraxas is providing the
foregoing additional information to aid Grey Wolf shareholders and Abraxas
stockholders in their analysis of the financial aspects of the offer. Abraxas
also derived this information from the audited financial statements of Abraxas
for the years 1998 through 2000 and the unaudited financial statements of
Abraxas for each of the three month periods ended March 31, 2000 and March 31,
2001 included in Abraxas' Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001 incorporated by reference in this document and the March 31, 2000
Form 10-Q not included herein. This information is only a summary, and you
should read it together with Abraxas' historical financial statements and
related notes contained in the annual reports and other information that Abraxas
has filed with the Securities and Exchange Commission, or SEC, and incorporated
by reference in this document.
A-128
ANNEX A-8
ABRAXAS
INFORMATION REGARDING OPTION OWNERSHIP
A-129
INFORMATION REGARDING OPTION OWNERSHIP
ABRAXAS
TYPE OF OPTIONEE OPTIONS EXPIRATION OPTION
MARKET VALUE AS
GRANTED DATE PRICE
OF JULY 13, 2001
Executive Officers / Past Officers, Directors / Past Directors of Abraxas:
13 persons as a group 3,389,519 Jun-2002 - $3.50
$12,032,792
(3 are executive officers) Mar-2011
Executive Officer / Past Officers, Directors / Past Directors of Subsidiaries:
2 persons as a group 25,000 Sep-2008 - $2.81
$88,750
(both are executive officers) Oct-2010
Employees / Past Employees of Abraxas:
44 persons as a group 801,505 Jul-2003 - $3.39
$2,845,343
Mar-2011
Employees / Past Employees of Subsidiaries
10 persons as a group 52,000 Oct-2010 $3.00
$184,600
Consultants of Abraxas:
1 person as a group 6,500 Apr-2007 - $2.06
$321,275
Jan-2008
Any other person or company (naming)
None 0
A-130
ANNEX A-9
ESTIMATED QUANTITIES AND DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROBABLE RESERVES
A-131
ESTIMATED QUANTITIES AND DISCOUNTED FUTURE NET CASH FLOWS RELATING TO
PROBABLE RESERVES
The following table presents Abraxas' and Canadian Abraxas' estimate of their
net probable crude oil and natural gas reserves as of December 31, 2000.
Abraxas' management emphasizes that reserve estimates are inherently
imprecise and that estimates of probable oil and gas reserves are more
imprecise than those of proven oil and gas reserves. Accordingly, the
estimates are expected to change as future information becomes available.
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 probable reserves. Future cash flows were
reduced by estimated future production and development costs based on
year-end costs to determine pre-tax cash inflows. Future net cash inflows
were discounted using a 10% annual discount rate. The estimates have been
prepared by independent petroleum reserve engineers.
Total United States
Canada
--------------------------------------------------------------------------------
---------------
Probable Liquid Natural Liquid Natural Liquid
Natural
Reserves Hydrocarbons Gas Hydrocarbons Gas
Hydrocarbons Gas
--------------------------------------------------------------------------------
---------------
(Thousands) (Barrels) (Mcf) (Barrels) (Mcf)
(Barrels) (Mcf)
--------------------------------------------------------------------------------
---------------
Balance at
December 31,
2000 2,107 134,041 1,835 120,717 272
13,324
--------------------------------------------------------------------------------
---------------
--------------------------------------------------------------------------------
---------------
Probable Reserves Total United States Canada
(1)
--------------------------------------------------------------------------------
---------------
(Thousands)
--------------------------------------------------------------------------------
---------------
Discounted future net
cash (pre-tax) $515,811 $459,196 $56,615
--------------------------------------------------------------------------------
---------------
(1) US$/Canadian$ exchange assumed at 0.666
A-132
ANNEX B
INFORMATION CONCERNING GREY WOLF
TABLE OF CONTENTS
Page
----
B-1. Grey Wolf Annual Information Form for the
Year ended December 31, 2000....................................... B-2
(a) Business of the Corporation................................... B-7
(b) Selected Financial Information............................... B-21
(c) Management's Discussion and Analysis......................... B-22
(d) Market for Securities........................................ B-26
(e) Directors and Officers....................................... B-27
(f) Financial Statements......................................... B-28
(g) Additional Information....................................... B-37
B-2. Grey Wolf Audited Annual
Financial Statements for the years
ended and at December 31, 1998 and 1999........................... B-38
B-3. Grey Wolf Management's Discussion and
Analysis from 1999 Annual Report ................................. B-48
B-4. Grey Wolf First Quarter Report
dated May 17, 2001 ............................................... B-53
B-5. Management Proxy/Information Circular dated
May 17, 2001 ..................................................... B-59
B-6. Grey Wolf Information Regarding Option Ownership.................. B-76
B-1
ANNEX B-1
GREY WOLF ANNUAL INFORMATION FORM
FOR THE YEAR ENDED DECEMBER 31, 2000
B-2
GREY WOLF EXPLORATION INC.
ANNUAL INFORMATION FORM
FOR THE YEAR ENDED DECEMBER 31, 2000
March 14, 2001
B-3
TABLE OF CONTENTS
INCORPORATION..............................................................6
GENERAL DEVELOPMENT OF THE BUSINESS........................................6
BUSINESS OF THE CORPORATION................................................7
PRINCIPAL PROPERTIES....................................................7
PRODUCTION BY PRINCIPAL PROPERTIES.....................................10
WELLS DRILLED..........................................................10
GAS PRODUCTION FACILITIES..............................................10
PRODUCING AND NON-PRODUCING WELLS......................................11
UNDEVELOPED LAND HOLDINGS..............................................11
PETROLEUM AND NATURAL GAS RESERVES.....................................11
RECONCILIATION OF RESERVES.............................................16
CAPITAL EXPENDITURES...................................................17
MARKETING ARRANGEMENTS.................................................17
SEASONALITY............................................................17
INDUSTRY CONDITIONS....................................................17
CANADIAN GOVERNMENT REGULATION......................................17
PRICING AND MARKETING - OIL.........................................18
PRICING AND MARKETING - NATURAL GAS.................................18
PIPELINE CAPACITY...................................................18
THE NORTH AMERICAN FREE TRADE AGREEMENT.............................18
LAND TENURE.........................................................19
ROYALTIES AND INCENTIVES............................................19
CANADIAN ENVIRONMENTAL REGULATION...................................20
FUTURE SITE RESTORATION................................................20
SELECTED FINANCIAL INFORMATION............................................21
DIVIDEND POLICY........................................................21
MANAGEMENT'S DISCUSSION AND ANALYSIS......................................22
MARKET FOR SECURITIES.....................................................22
DIRECTORS AND OFFICERS....................................................27
FINANCIAL STATEMENTS......................................................24
ADDITIONAL INFORMATION....................................................37
B-4
GLOSSARY OF ABBREVIATIONS AND TERMS
In this Annual Information Form, the following abbreviations and terms have the
following meanings:
Crude Oil and Natural Gas Liquids (NGLs): bbl - barrel
----------------------------------------- bbls/d -
barrels per day
mbbls - 1,000
barrels
mmbbls -
1,000,000 barrels
Natural Gas: mcf - 1,000
cubic feet
------------ mmcf -
1,000,000 cubic feet
bcf -
1,000,000,000 cubic feet
mcf/d - 1,000
cubic feet per day
mmcf/d -
1,000,000 cubic feet per day
ARTC - Alberta Royalty Tax Credit
BOE - Barrels of oil equivalent; 10 mcf of natural gas
equals 1 bbl of oil
BOE/d - Barrels of oil equivalent per day
Netbacks - Oil and gas production revenues less royalties and
operating expenses.
mmbtu - Million British Thermal Units
CONVERSION
The following table sets forth certain standard conversions from
Standard Imperial units to the International System of units (or metric units).
To Convert From To Multiply By
--------------- -- -----------
Mcf Cubic metre ("m3") 28.174
Bbl Cubic metre ("m3") 0.1589
Feet Metre 3.3
Mile Kilometre 1.6
B-5
INCORPORATION
On December 31, 1993, Cascade Oil & Gas Ltd. amalgamated with Index
Petroleums Ltd. under the provisions of the BUSINESS CORPORATIONS ACT (Alberta)
to form Cascade Oil & Gas Ltd. On June 11, 1998, Cascade Oil & Gas Ltd. changed
its name to Grey Wolf Exploration Inc. (hereinafter "Grey Wolf" or the
"Corporation"). In June 1999, the Corporation filed Articles of Amendment and a
one for ten consolidation of common shares was completed. All references in this
Annual Information Form ("AIF") to common shares of Grey Wolf reflect this
consolidation, unless otherwise specified.
The head and principal office, as well as the registered office, of
Grey Wolf is located at 1600, 255 - 5th Avenue S.W., Calgary, Alberta, T2P 3G6.
GENERAL DEVELOPMENT OF THE BUSINESS
The Corporation is a natural gas company which focuses its efforts on
exploring for, developing, acquiring and producing petroleum and natural gas in
western Canada and the Northwest Territories. Natural gas in central and
northern Alberta accounts for over 90% of the Corporation's reserves and
production.
The Corporation operates and manages a working interest in all of its
major properties. Investments in producing, development and exploratory
petroleum and natural gas properties is done after consideration of such factors
as strategic compatibility with core areas and potential for future growth
through the application of geoscience and/or engineering expertise.
In late 1995, a majority of the Corporation's shareholders approved the
sale of 40,910,000 common shares, representing two-thirds (2/3) of the total
outstanding shares issued, at $0.10 per share for gross cash proceeds of
$4,091,000 to Grey Wolf Exploration Ltd. ("Grey Wolf Ltd."). Grey Wolf Ltd. was
a private corporation controlled 78% by Abraxas Petroleum Corporation
("Abraxas"). This transaction gave Abraxas effective ownership of approximately
52% of the common shares of the Corporation. The sale and purchase of shares
took effect on January 4, 1996.
In June, 1997, the Corporation sold substantially all of its
Saskatchewan petroleum and natural gas properties for cash proceeds of $1.4
million. The sold Saskatchewan properties accounted for the majority of the
Corporation's petroleum and natural gas operations at that time.
As part of the Corporation's search for opportunities to invest in oil
and gas operations in the western Canadian sedimentary basin, Grey Wolf
participated with Abraxas in evaluating the purchase of Canadian Gas Gathering
Systems Inc. ("CGGS"). In the fourth quarter of 1996, Canadian Abraxas Petroleum
Limited ("Canaxas"), a wholly-owned subsidiary of Abraxas, acquired the shares
of CGGS for $130.5 million, including $13.7 million of working capital. The
Corporation signed a contract to manage Canaxas and exercised an option to
acquire 10% of the Canaxas CGGS interests, effective July 1, 1997, for a total
consideration of $9.3 million consisting of $8.5 million in cash and the
issuance of 2,051,282 common shares.
On September 1, 1997, the Corporation acquired all of the common shares
of Pennant Petroleum Ltd. ("Pennant") in exchange for the issuance of 7,585,000
common shares.
In October 1997, the Corporation acquired an 8.27% interest in certain
oil and gas producing properties sold by Pacalta Resources Ltd. ("Pacalta").
Total consideration for the purchase was $2.13 million in exchange for $171.6
thousand in cash and the issuance to Pacalta of four million special warrants
which were subsequently exchanged for an equal number of common shares of the
Corporation.
On November 4, 1997, the Corporation acquired 100% of the common shares
of Grey Wolf Ltd. in exchange for the issuance by the Corporation of 42,741,053
common shares (preconsolidation) to the Grey Wolf Ltd. shareholders and the
cancellation of 40,910,000 common shares (preconsolidation) held by Grey Wolf
Ltd. Grey Wolf Ltd. was wound up into the Corporation immediately after the
acquisition. Grey Wolf Ltd. was previously the majority shareholder of the
Corporation and its assets consisted of 40,910,000 common shares
B-6
(preconsolidation) and some minor oil and gas property interests which generated
nominal revenues and earnings. This reorganization transaction resulted in the
share ownership in the Corporation previously held by Grey Wolf Ltd. being
passed to the Grey Wolf Ltd. shareholders.
In August 1998, the Corporation successfully completed a prospectus
offering of 50 million common shares (preconsolidation) for gross proceeds of
$16 million. Concurrent with the closing of this financing, the Corporation
acquired from Canaxas the 91.73% of certain oil and gas producing properties
sold by Pacalta to Canaxas in October, 1997, for a total cash consideration,
after adjustments, of $21.6 million.
In January 1999, the Corporation acquired, effective July 1, 1999, a
25% interest in certain undeveloped lands and proprietary seismic data owned by
New Cache Petroleums Ltd. ("New Cache") for a total cash consideration of $3.4
million. In addition, the Corporation entered into a farmout agreement with New
Cache whereby Grey Wolf will earn additional interests in the acquired lands by
paying a share of New Cache's seismic and drilling costs. Under this farmout
agreement, Grey Wolf agreed to spend a minimum of six million dollars on the
acquired lands over three years.
On May 20, 1999, the Corporation's shareholders approved the
consolidation of the share capital of the Corporation on the basis of one common
share for each ten common shares outstanding.
The Corporation has experienced management, technical and support staff
in the operations, exploitation, exploration, land, marketing, financial
management and administrative areas. At December 31, 2000, Grey Wolf had 32
(1999 - 27) full-time employees in its Calgary head office and 10 (1999 - 14)
full-time employees in field locations.
BUSINESS OF THE CORPORATION
PRINCIPAL PROPERTIES
The following is a description of the Corporation's principal
properties and natural gas facilities, all of which are located in the provinces
of Alberta and British Columbia, and the Northwest Territories.
CAROLINE, ALBERTA
Through a property swap transaction, Grey Wolf acquired a thirty party's
interest in the Sundre gas plant, 58 sections of land and associated wells in
November 2000. After the acquisition, Grey Wolf had an interest in 45,939 acres
(19,589 net) of land. Grey Wolf operates the majority of the area's production
and at year-end had an interest in a total of 38 wells (13.6 wells net); its
average interest increasing in 2000 from 17.6% to 43% by virtue of the
acquisition. Of the 38 wells, 32 (12.1 net) are producing and 6 (1.5 net) are
non-producing. Gross natural gas production from the wells averaged 8,400 mcf/d
in 2000 and Grey Wolf's share was 1,272 mcf/d. Grey Wolf's share of crude oil
and NGL sales was 62 bbls/d.
The Sundre gas plant has a licensed capacity to handle 20 mmcf/d of gas. The
acquisition increased Grey Wolf's working interest in the plant from 37.3% to
64% and net ownership capacity from 7.5 mmcf/d to 12.8 mmcf/d.
In 2000, Grey Wolf participated in drilling five wells (2.17 wells net), of
which four (1.67 wells net) were successful in various zones. In addition, there
were three successful re-completions (1.52 net). Projects planned for 2001
currently include drilling six wells, recompleting five wells, installing gas
gathering systems and gas plant compression and completing an area 3D seismic
program.
CHERHILL, ALBERTA
The Corporation holds a working interest position in 1,985 acres (785 net) of
land in the area. There are two producing (0.7 net) natural gas wells producing
on these lands at a gross rate of 1,480 mcf/d, with Grey Wolf's share being 889
mcf/d. The gas production from these wells is processed for sweetening,
dehydration and compression through both owned and non-owned facilities.
B-7
CROSSFIELD, ALBERTA
In the Crossfield area, Grey Wolf has an interest in 2,400 acres (1,480 net).
Grey Wolf operates the three working interest producing gas wells (1.9 net) in
the area. Working interests held by Grey Wolf range from 40.9% to 99.3%. In
addition, Grey Wolf holds a 1.25% over-riding royalty on a low productivity
Viking oil well. Gross natural gas production from the wells averaged 2,470
mcf/d in 2000 and Grey Wolf's share was 1,074 mcf/d. Grey Wolf's share of
associated NGLs production was 69 bbls/d.
The property includes a field compressor owned 49.6% by Grey Wolf, which ships
natural gas to a third party plant for processing.
MARTEN HILLS, ALBERTA
In this property, the Corporation owns working interests ranging from 12.5 % to
25.0% in 7,040 gross acres (1,600 net) and six gross wells (1.3 net). The wells
consist of four producing (0.75 net) and two non-producing (0.5 net) shallow gas
wells. Gross natural gas production from these wells in 2000 was 2,663 mcf/d,
with the Corporations working interest share being 564 mcf/d. Currently gas is
gathered and processed through a third party-owned facility.
NESTOW, ALBERTA
The Corporation holds a high working interest position in 3,840 acres (3,413
net) of land in the area. The wells include three producing (3.0 net) and two
non-producing (0.7 net) wells. Gross and net natural gas production from these
wells in 2000 was 2,845 mcf/d. The slightly sour gas produced was wellsite
sweetened and transported to third party gas facilities for further processing.
During 2000, Grey Wolf successfully re-completed two natural gas wells (2.0 net)
and drilled one (1.0 net) unsuccessful well.
NEWBROOK, ALBERTA
Grey Wolf held a working interest ranging from 66.5% to 100% in 4,480 gross
acres (4,266 net) of land in this area. There were two producing (1.6 net)
natural gas wells producing on these lands at a gross rate of 1,275 mcf/d, with
Grey Wolf's share being 1,187 mcf/d. This property was sold in November 2000 as
part of a property swap transaction.
POUCE COUPE/VALHALLA, ALBERTA
In Pouce Coupe, Grey Wolf holds various interests from 10% to 45% in 12,480
acres (2,896 net) of land in this area. The wells include five producing (1.0
net) and two non-producing (0.5 net) wells. In 2000, the total gross natural gas
production was 4,950 mcf/d (769 mcf/d net) with 60 bbls/d (9 bbls/d net) of
NGLs. All of the natural gas produced from this property is currently processed
through Corporation-owned gathering and processing facilities. Activity in 2000
for Grey Wolf included participation in drilling three wells (0.8 net) that
successfully encountered natural gas reserves in the Montney and Gething
formations. The Corporation also recompleted five wells (0.5 net) on this
property in 2000. Plans for 2001 include conducting a major 2D and 3D seismic
program over Grey Wolf interest lands, and drilling two wells (0.4 net) for
natural gas potential. Plans are underway to construct a gas gathering pipeline
from Pouce Coupe to a Grey Wolf owned facility at nearby Valhalla.
In Valhalla, the Corporation holds a working interest ranging from 3.85% to 25%
in 7,520 gross acres (1,253 net) of land in this property. The wells include
seven producing (0.3 net) and three non-producing (0.4 net) wells. Gross
production from these wells in 2000 was 777 mcf/d, with the Corporation's
working interest share being 77 mcf/d. All of the gas produced from this
property is currently processed through Corporation-owned gathering and
processing facilities. Activity in 2000 for Grey Wolf included participation in
the drilling of a natural gas well (0.25 net) late in the year.
B-8
RADWAY, ALBERTA
The Radway property was comprised of 17,280 gross acres (16,384 net) of land
with corporate interests varying from 20% to 100%. This property has 11
producing (10.2 net) and eight non-producing (5.8 net) wells. In 2000, the
property's gross natural gas production was 961 mcf/d and the Corporation's
working interest production was 899 mcf/d. In 2000, a 100% working interest well
was drilled for natural gas that resulted in an abandoned well. Grey Wolf
operated this property and owned a 90% interest in a dehydration and compression
facility. This property was sold as part of a property swap transaction,
effective November 2000.
REDWATER, ALBERTA
Grey Wolf was the operator of the Redwater property where the Corporation held
working interests ranging from 50% to 100% in 16,640 gross acres. Redwater had
10 producing (7.5 net) and 10 non-producing (5.5 net) wells. Gross natural gas
production from these wells in 2000 was 1,111 mcf/d, with the Corporation's
working interest share being 734 mcf/d. The Corporation owned a 50% working
interest in two gas processing facilities in the area. During 2000, Grey Wolf
participated, at a 50% working interest, in two successful wells. This property
was divested as part of a property swap transaction in November 2000.
THORHILD, ALBERTA
The Thorhild property held 43,680 gross acres of land with the Corporation's
interests varying from 2% to 81%. The property included 32 producing (9.3 net)
and 13 non-producing (3.8 net) wells. In 2000, Thorhild's gross natural gas
production was 3,925 mcf/d and corporate working interest production was 1,149
mcf/d. Grey Wolf owned a 35% interest in a dehydration and compression facility
in the area. In 2000, the Corporation participated in three successful
recompletions. This property was sold as part of a property swap transaction
effective November 2000.
LADYFERN, BRITISH COLUMBIA
This property is an exploration area where the Corporation holds an interest in
24,768 acres of gross land (4,126 net). Activity in 2000 for Grey Wolf included
participation in two unsuccessful wells (0.3 net). In early 2001, an extensive
3D seismic program has been shot, and will be evaluated to facilitate the
identification of potential drilling locations.
WIDEWATER, ALBERTA
This property is an exploration area where the Corporation holds an interest in
67,958 gross acres of land (29,118 net). Grey Wolf holds an interest in nine
(1.9 net) non-producing wells. In 2000, the Corporation participated in drilling
two gross (1.0 net) wells for natural gas of which one well (0.5 net) was
successful. Development plans for well tie-ins are being evaluated.
NORMAN WELLS, NORTHWEST TERRITORIES
This property is an exploration area where the Corporation holds an interest in
465,923 (110,638 net) acres of land that is adjacent to the prolific Norman
Wells oil field. There has been no activity on the property over the past year
but the Corporation continues to pursue industry partners to conduct a work
program on the lands for 2001-2002.
B-9
PRODUCTION BY PRINCIPAL PROPERTIES
2000
1999
------------------------------
--------------------------------
Natural Gas Crude oil
Natural Gas Crude oil and
(mcf/d) and NGLs
(mcf/d) NGLs (bbls/d)
(bbls/d)
--------------- --------------
---------------- ---------------
Caroline............................. 1,272 62
465 23
Cherhill............................. 889 0
1,543 1
Crossfield........................... 1,074 69
1,455 72
Marten Hills......................... 564 0
577 0
Nestow............................... 2,845 0
1,876 0
Newbrook *........................... 1,187 0
1,333 0
Pouce Coupe/Valhalla................. 846 9
231 0
Radway *............................. 899 0
1,217 0
Redwater *........................... 734 0
1,538 0
Thorhild *........................... 1,149 0
1,720 0
Other................................ 2,194 57
3,351 80
--------------- --------------
---------------- ---------------
Total................................ 13,653 197
15,306 176
--------------- --------------
---------------- ---------------
* Properties disposed of during year 2000.
WELLS DRILLED
Grey Wolf drilled or participated in the drilling of the following
number of wells for the periods indicated:
YEARS ENDED
DECEMBER 31 (1) (2)
--------------------------------------------------------------------------------
-
2000
1999
--------------------------------------
--------------------------------------
GROSS NET
GROSS NET
---------------- -----------------
---------------- ------------------
Natural Gas................. 12 4.1
12 3.5
Oil......................... 0 0
0 0.0
Dry & Abandoned............. 11 4.5
9 3.2
---------------- -----------------
---------------- ------------------
Total....................... 23 8.6
21 6.7
================ =================
================ ==================
Exploration................. 11 3.5
4 1.4
Development................. 12 5.1
17 5.3
---------------- -----------------
---------------- ------------------
Total....................... 23 8.6
21 6.7
================ =================
================ ==================
NOTES:
(1) "Gross" wells means the number of wells in which Grey Wolf has a working
interest.
(2) "Net" wells means the aggregate number of wells obtained by multiplying
each gross well by Grey Wolf's percentage working interest therein.
GAS PRODUCTION FACILITIES
The following table identifies the name and location of the nine
largest gas production facilities in which the Corporation has an ownership
interest. All of these facilities are located in the province of Alberta. The
table indicates gross and working interest natural gas processing capacity as at
December 31, 2000:
-------------------------------- ---------------- ---------
---------------------- ----------------------------
Area Operated/ Facility Ownership Working
Processing Capacity
Non-Operated Type Interest (%)
(mmcf/d)
Gross WI
-------------------------------- ---------------- ---------
---------------------- ----------------------------
Caroline Operated 2 64.0
20.0 12.8
Cherhill Operated 1 100.0
1.9 1.9
Chinchaga Operated 1 7.5
3.0 0.2
B-10
Eaglesham Non-operated 2 2.5
8.0 0.2
Knopcik (Functional Unit) Non-operated 2 1.0
71.7 0.7
Millarville Non-operated 1 2.5
25.0 0.6
Pouce Coupe Operated 1 10.0
8.0 0.8
Quirk Creek Non-operated 4 2.6
90.0 2.3
Valhalla Operated 3 10.0
34.1 3.4
-------------------------------- ---------------- ---------
---------------------- ------------- --------------
Total
261.7 17.6
-------------------------------- ---------------- ---------
---------------------- ------------- --------------
Facility Type - Legend
------------------------------------------------------------------------------
1 Compression and dehydration
2 Compression, dehydration and refridgeration
3 Compression, dehydration, refridgeration and acid gas processing
4 Compression, dehydration, refridgeration, lean oil absorption and sulphur
recovery
------------------------------------------------------------------------------
PRODUCING AND NON-PRODUCING WELLS
The following table summarizes, as at December 31, 2000, Grey Wolf's
interests in producing and non-producing wells of crude oil or natural gas and
NGLs. The stated interests are subject to landowner's and other royalties, where
applicable, in addition to usual crown royalties and mineral taxes. All wells
are located in the province of Alberta.
------------------------------------- ------------------------------------- ----
------------------------------------
Producing (1)(2)
Non-Producing (1)(2)
-------------------------------------
------------------------------------
Oil Natural Gas
Oil Natural Gas
---------------- ---------------
--------------- -----------------
Gross Net Gross Net
Gross Net Gross Net
-------- ------- -------- ------
------- ------- -------- --------
Including Unit Wells 41 2 120 24
12 1 78 12
Average Working Interest (%) 5 20
8 16
------------------------------------- -------- ------- ---- -------- ------ ----
------- ------- -- -------- --------
NOTES:
(1) "Gross" wells means the number of wells in which Grey Wolf has an interest.
(2) "Net" wells means the aggregate of the numbers obtained by multiplying each
gross well by Grey Wolf's percentage interest therein.
UNDEVELOPED LAND HOLDINGS
The following table sets forth Grey Wolf's non-producing land holdings
as at December 31, 2000:
Gross Acres (1) Net
Acres (2) Value (3)
---------------
------------- ---------
Alberta....................................... 428,251
120,234 6,309
British Columbia.............................. 55,179
11,112 1,320
Northwest Territories......................... 465,923
110,638 9,215
---------------
------------- ---------
Total......................................... 949,353
241,984 16,844
===============
============= =========
NOTES:
(1) "Gross Acres" represents the total number of acres in which Grey Wolf has
an interest.
(2) "Net Acres" refers to the total of each acreage holding in which Grey Wolf
has an interest multiplied by the percentage interest of Grey Wolf therein.
(3) Supplementary Land Services, independent mineral lease evaluation
consultants, have valued the Corporation's undeveloped mineral leases
effective January 1, 2001.
PETROLEUM AND NATURAL GAS RESERVES
Grey Wolf's interests in its oil and gas properties were evaluated in a
report prepared by McDaniel & Associates Consultants Ltd., an independent
petroleum consulting firm (the "McDaniel Report"). The McDaniel
B-11
Report is dated January 19, 2001 and evaluates Grey Wolf's interest in its oil
and gas properties effective January 1, 2001.
B-12
The following tables summarize the evaluation of the Corporation's
reserves:
PETROLEUM AND NATURAL GAS RESERVES BASED ON CONSTANT PRICE
ASSUMPTIONS (9)(11)(12)(13)
--------------------------------------------------------------------------------
---------------------------------
Crude Oil NGLs
Natural Gas
(mbbls) (3) (mbbls)
(4) (mmcf) (5)
--------------------------------------- -------------------------
---------------------- ----------------------
Gross (1) Net (2) Gross (1)
Net (2) Gross (1) Net (2)
--------------------------------------- ------------- ----------- ----------
----------- ----------- ----------
Proved Reserves (6)
Proved Producing 42 37 774
503 19,845 14,482
Proved Developed Non-Producing 3 3 287
184 8,989 6,727
Proved Undeveloped 0 0 7
5 251 180
--------------------------------------- ------------- ----------- ----------
----------- ----------- ----------
Total Proved Reserves 45 40 1,068
692 29,085 21,389
Probable Reserves (7) 17 13 235
149 8,749 6,447
--------------------------------------- ------------- ----------- ----------
----------- ----------- ----------
Proved Plus Probable Reserves 62 53 1,303
841 37,834 27,836
--------------------------------------- ------------- ----------- ----------
----------- ----------- ----------
PETROLEUM AND NATURAL GAS RESERVES BASED ON ESCALATED PRICE
ASSUMPTIONS (8)(10)(11)(12)(13)
--------------------------------------------------------------------------------
---------------------------------
Crude Oil NGLs
Natural Gas
(mbbls) (3) (mbbls)
(4) (mmcf) (5)
----------------------------------------- -----------------------
---------------------- ----------------------
Gross (1) Net (2) Gross (1)
Net (2) Gross (1) Net (2)
----------------------------------------- ----------- ----------- ----------
----------- ----------- ----------
Proved Reserves (6)
Proved Producing 41 37 777
507 19,917 14,513
Proved Developed Non-Producing 4 3 287
185 9,008 6,727
Proved Undeveloped 0 0 7
5 256 184
----------------------------------------- ----------- ----------- ----------
----------- ----------- ----------
Total Proved Reserves 45 40 1,071
697 29,181 21,424
Probable Reserves (7) 17 13 236
150 9,076 6,484
----------------------------------------- ----------- ----------- ----------
----------- ----------- ----------
Proved Plus Probable Reserves 62 53 1,307
847 38,257 27,908
----------------------------------------- ----------- ----------- ----------
----------- ----------- ----------
PRESENT WORTH OF FUTURE NET PRODUCTION REVENUE BASED ON CONSTANT PRICE
ASSUMPTIONS (9)(11)(12)(13)
--------------------------------------------------------------------------------
--------------------------------------
Discounted at the rate of
Undiscounted 10%
12% 15% 20%
----------------------------------------- ----------------- --------------
--------------- ------------- -------------
(thousands
of dollars)
Proved Reserves (6)
Proved Producing 215,932 139,426
130,668 119,656 105,384
Proved Developed Non-Producing 96,913 61,574
57,555 52,481 45,857
Proved Undeveloped 2,056 1,161
1,074 967 834
----------------------------------------- ----------------- --------------
--------------- ------------- -------------
Total Proved Reserves 314,901 202,161
189,297 173,104 152,075
Probable Reserves (7) 49,894 23,197
20,789 17,937 14,534
----------------------------------------- ----------------- --------------
--------------- ------------- -------------
Proved Plus Probable Reserves 364,795 225,358
210,086 191,041 166,609
----------------------------------------- ----------------- --------------
--------------- ------------- -------------
PRESENT WORTH OF FUTURE NET PRODUCTION REVENUE BASED ON ESCALATED PRICE
ASSUMPTIONS (8)(10)(11)(12)(13)
--------------------------------------------------------------------------------
--------------------------------------
Discounted at the rate of
Undiscounted 10%
12% 15% 20%
----------------------------------------- ----------------- --------------
--------------- ------------- -------------
(thousands
of dollars)
Proved Reserves (6)
Proved Producing 78,427 53,905
51,064 47,471 42,764
Proved Developed Non-Producing 34,889 22,709
21,355 19,650 17,425
Proved Undeveloped 793 418
384 342 291
----------------------------------------- ----------------- --------------
--------------- ------------- -------------
Total Proved Reserves 114,109 77,032
72,803 67,463 60,480
Probable Reserves (7) 16,094 7,420
6,664 5,775 4,721
----------------------------------------- ----------------- --------------
--------------- ------------- -------------
Proved Plus Probable Reserves 130,203 84,452
79,467 73,238 65,201
----------------------------------------- ----------------- --------------
--------------- ------------- -------------
NOTES:
(1) "GROSS RESERVES" means the total of the Corporation's working interests
and/or royalty interests share before deducting royalties owned by
others.
B-13
(2) "NET RESERVES" means the total of the Corporation's working interests
and/or royalty interests share after deducting the amounts attributable
to the royalties owned by others.
(3) "CRUDE OIL" means a mixture mainly of pentanes and heavier hydrocarbons
produced and sold in the field as crude oil. Minor volumes of field
condensate may be included in the crude oil sales in some instances.
(4) "NATURAL GAS LIQUIDS" (NGLS) means a mixture primarily of propane,
butane and natural gasoline (pentanes plus) removed from the raw
natural gas by processing through an extraction plant. In most
instances, a breakdown of these natural gas liquids into propane,
butane and natural gasoline has been made. It should be noted, however,
that some intermixing of these products occurs in actual field
operations and therefore this terminology does not necessarily refer to
pure components.
(5) "NATURAL GAS" refers to pipeline natural gas after deducting shrinkage
due to processing, fuel and other field losses.
(6) "PROVED OIL AND NATURAL GAS RESERVES" means the estimated quantities of
crude oil, natural gas and natural gas liquids which geological and
engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing
economic operating conditions (i.e. prices and costs as of the date the
estimate is made). Price includes consideration of changes in existing
prices provided by contractual arrangements, as well as escalations
based upon future conditions.
(i) Reservoirs are considered proved if economic producibility is
supported by either actual production or a conclusive
formation test. The area of a reservoir considered proved
includes (a) that portion delineated by drilling and defined
by gas-oil and/or gas-water contacts, if any; and (b) the
immediately adjoining portions not yet drilled, but which can
be reasonably judged as economically productive on the basis
of available geological and engineering data. In the absence
of information on fluid contacts, the lowest known structural
occurrence of hydrocarbons controls the lower proved limit of
the reservoir.
(ii) Reserves which can be produced economically through
application of improved recovery techniques (such as fluid
injection) are included in the "proved" classification when
successful testing by a pilot project, or the operation of an
installed program in the reservoir, provides support for the
engineering analysis on which the project or program was
based. The reserve category definitions are equivalent to
those of National Policy 2-B.
(7) "PROBABLE RESERVES" means those reserves which may be recoverable as a
result of the beneficial effects which may be derived from the future
institution of some form of pressure maintenance or other secondary
recovery method, or as a result of a more favourable performance of the
existing recovery mechanism than that which would be deemed proved at
the present time, or those reserves which may reasonably be assumed to
exist because of geophysical or geological indications and drilling
done in regions which contain proved reserves. PROBABLE RESERVES
PRESENT WORTH VALUES HAVE BEEN REDUCED BY 50% TO ALLOW FOR RISK. The
reserve category definitions are equivalent to those of National Policy
2-B.
(8) The McDaniel Report estimates the total capital costs, based on
escalating cost assumptions, net to the Corporation, necessary to
achieve the estimated future net production to be:
ESTIMATED CAPITAL COSTS PER CATEGORY OF RESERVES (THOUSANDS OF DOLLARS)
--------------------------------------------------------------------------------
-------------------------
Proved
Proved Developed Proved Total
Proved +
Producing Non-Producing Undeveloped Proved
Probable Probable
-------------- -------------- --------------- ----------------
-------------- ------------- -------------
2001 121 1,239 126 1,486
47 1,533
2002 246 246
94 339
2003 175 175
29 204
2004
2005
2006
2007
2008
2009
2010
2011
2 2
2012
2013
2014
2015
Remainder
28 28
-------------- -------------- --------------- ----------------
-------------- ------------- -------------
Total 121 1,660 126 1,907
200 2,106
-------------- -------------- --------------- ----------------
-------------- ------------- -------------
B-14
(9) The constant price case utilizes the product prices received or
estimated by the Corporation for December 29, 2000.
Product Price
---------------------------------------------------
-----------------
LIQUIDS ($/BBL)
Crude Oil (a) $39.35
Propane (b) $57.73
Butane (b) $48.20
Condensate (b) $50.09
---------------------------------------------------
-----------------
GAS ($/MMBTU)
Alberta Average (b) $10.06
Alberta Spot (c) $13.45
Transcanada Gas Services Ltd. (b) $8.89
Pan Alberta Gas Ltd. (b) $7.91
Progas Ltd. (b) $7.40
---------------------------------------------------
-----------------
SULPHUR ($/LT) (b) $7.00
---------------------------------------------------
-----------------
(a) December 29 average posting
(b) December 29 estimate
(c) December 29 actual
The constant price case assumes the continuance of current laws
(including ARTC), regulations and operating costs in effect on the date
of the McDaniel report. In addition, operating and capital costs have
not been increased on an inflationary basis.
(10) The escalating price assumptions assume the continuance of current laws
(including ARTC), regulations and any increases in wellhead selling
prices, and take into account inflation with respect to future
operating and capital costs. In the McDaniel Report, operating and
capital costs have been escalated by 2.0% per annum. Product prices in
the escalated price evaluation assumes the January 1, 2001 "McDaniel
Summary of Price Forecasts". Prices used in the evaluation are adjusted
by individual property contractual arrangements. Crude oil and natural
gas prices as forecast in the McDaniel Report are as follows:
FUTURE OIL AND GAS PRICE ASSUMPTIONS
--------------------------------------------------------------------------------
---------
US/Can Edmonton Alberta
Exchange WTI Oil Light Oil Average Gas
Alberta Progas Gas
Rate ($US/bbl) ($/bbl) ($mmbtu) Spot
Gas ($/mmbtu)
($US/$Can) (1) (2) (3)
($/mmbtu)
-------------- ------------ ---------- ----------- --------------
----------- -----------
2001 0.660 25.00 36.90 6.70
6.90 6.50
2002 0.680 23.00 32.80 5.10
5.20 5.00
2003 0.700 22.40 31.00 4.60
4.60 4.60
2004 0.720 22.30 29.90 4.05
4.05 4.05
2005 0.730 22.70 30.00 3.90
3.90 3.90
2006 0.730 23.20 30.70 3.95
3.95 3.95
2007 0.730 23.70 31.30 4.05
4.05 4.05
2008 0.730 24.20 32.00 4.15
4.15 4.15
2009 0.730 24.70 32.70 4.20
4.20 4.20
2010 0.730 25.20 33.30 4.30
4.30 4.30
2011 0.730 25.70 34.00 4.40
4.40 4.40
2012 0.730 26.20 34.60 4.50
4.50 4.50
2013 0.730 26.70 35.30 4.55
4.55 4.55
2014 0.730 27.20 36.00 4.65
4.65 4.65
2015 0.730 27.70 36.60 4.75
4.75 4.75
2016 0.730 28.30 37.40 4.85
4.85 4.85
2017 0.730 28.90 38.20 4.95
4.95 4.95
2018 0.730 29.50 39.00 5.05
5.05 5.05
2019 0.730 30.10 39.80 5.15
5.15 5.15
2020 0.730 30.70 40.60 5.25
5.25 5.25
-------------- ------------ ---------- ----------- --------------
----------- -----------
Remainder 0.730 30.70 40.60 5.25
5.25 5.25
-------------- ------------ ---------- ----------- --------------
----------- -----------
Notes:
(1) West Texas Intermediate at Cushing Oklahoma
(2) Edmonton price for 40 API, 0.5% sulphur crude
(3) Average Alberta field price applies to the Alberta reference
price used in the crown royalty calculations.
B-15
(11) The McDaniel Report has included estimates of future abandonment
capital costs net to the Corporation, unescalated, of:
ESTIMATED UNESCALATED ABANDONMENT COSTS PER
CATEGORY OF RESERVES (THOUSAND OF DOLLARS)
-------------------------------------------------------- ------------
Proved Reserves
Proved Producing 729
Proved Developed Non-Producing 106
Proved Undeveloped 2
-------------------------------------------------------- ------------
Total Proved Reserves 837
Probable Reserves 23
-------------------------------------------------------- ------------
Proved plus Probable Reserves 860
-------------------------------------------------------- ------------
(12) The extent and character of the Corporation's interest evaluated in the
McDaniel Report and all factual data supplied by Grey Wolf to McDaniel
& Associates were accepted by McDaniel as represented. The crude oil
and natural gas reserve calculations and any projections upon which the
McDaniel Report is based were determined in accordance with generally
accepted evaluation practices.
(13) The data utilized in the preparation of the McDaniel Report were
obtained from the Corporation's files, information on record with the
Alberta Energy and Utilities Board, Saskatchewan Energy and Mines,
British Columbia Ministry of Energy, Mines & Petroleum Resources and
certain non-confidential files of McDaniel. The data provided by the
Corporation with respect to ownership interests, sales contracts and
current operating costs, were relied upon by McDaniel & Associates as
being complete and accurate and were not subject to independent
verification by McDaniel & Associates.
RECONCILIATION OF RESERVES
The following table provides a summary of the changes in Grey Wolf's
working interest share of proven and probable crude oil, NGLs and natural gas
reserves, before royalties, which occurred in its most recently completed fiscal
year:
RECONCILIATION OF RESERVES (BEFORE ROYALTIES)
--------------------------------------------------------------------------------
-----------------------------
Crude Oil NGLs
Natural Gas
(mbbls) (mbbls)
(mmcf)
----------------------------------- ---------------------
---------------------- --------------------------
Proven Probable Proven Probable
Proven Probable
----------------------------------- ---------- ---------- ----------
----------- ------------ -------------
December 31, 1999 39 12 341 27
28,279 7,330
Additions 6 2 329 138
8,881 3,191
Acquisitions 8 0 389 70
8,834 3,367
Dispositions (1) 0 (1) 0
(9,915) (4,447)
Revisions 1 3 78 1
(1,901) (365)
Production (8) 0 (65) 0
(4,997) 0
----------------------------------- ---------- ---------- ----------
----------- ------------ -------------
December 31, 2000 45 17 1,071 236
29,181 9,076
----------------------------------- ---------- ---------- ----------
----------- ------------ -------------
B-16
CAPITAL EXPENDITURES
The following table summarizes Grey Wolf's capital expenditures in
thousands of dollars (net of government incentive grants) for the periods
indicated:
Years Ended December 31
-----------------------------------
2000
1999
------------- ----------
Land............................................................
1,950 4,625
Geological and geophysical......................................
2,098 889
Exploration and development drilling............................
12,476 4,054
Production equipment and facilities.............................
1,293 864
------------- ----------
Exploration and development costs...............................
17,817 10,432
Other corporate assets..........................................
124 305
Property acquisitions...........................................
10,792 3,662
Property dispositions...........................................
(12,674) (2,629)
------------- ----------
Total Capital Expenditures......................................
16,059 11,770
------------- ----------
MARKETING ARRANGEMENTS
Grey Wolf's gas marketing strategy is to build a balanced and
diversified portfolio in order to minimize price risk associated with any
particular market. Approximately 40 percent of Grey Wolf's gas is sold under
long-term contracts with Progas Limited, Pan-Alberta Gas Ltd. and TransCanada
Pipelines Limited. These companies manage multi-producer supply/sales pools
comprising a variety of sales contracts, including spot price sales, in the
domestic and United States of America export markets. The remaining 60 percent
of the Corporation's gas production is sold in the intra-Alberta spot market. In
aggregate, these arrangements result in approximately 70 percent of Grey Wolf's
gas production being tied to Alberta spot prices.
Grey Wolf markets its crude oil and natural gas liquids under
arrangements with prices tied to Edmonton postings which in turn are based on
the price of West Texas Intermediate crude oil. Grey Wolf's reported prices are
wellhead prices that reflect quality differences and transportation costs.
SEASONALITY
The exploration for and development of oil and natural gas reserves is
dependent on access to areas where operations are to be conducted. Seasonal
weather variations, including freeze-up and break-up, affect access in certain
circumstances.
Natural gas is used principally as a heating fuel and for power
generation. Accordingly, seasonal variations in weather patterns affect the
demand for natural gas. Depending on prevailing conditions, the prices received
for sales of natural gas are generally higher in winter than in summer months.
INDUSTRY CONDITIONS
CANADIAN GOVERNMENT REGULATION
The oil and natural gas industry is subject to extensive controls and
regulation imposed by various levels of government. The provincial governments
of Alberta and British Columbia have legislation and regulations which govern
land tenure, royalties, production rates, environmental protection, the
prevention of waste and other matters. Although it is not expected that these
controls and regulation will affect the operations of the Corporation in a
manner materially different than they would affect other oil and gas companies
of similar size, the controls and regulations should be considered carefully by
investors in the oil and gas industry. Outlined below are some of the principal
aspects of legislation and regulations governing the oil and gas industry. All
current legislation is a matter of public record and the Corporation is unable
to predict what additional legislation or amendments may be enacted.
B-17
PRICING AND MARKETING - OIL
In Canada, producers of oil negotiate sales contracts directly with oil
purchasers, with the result that the market determines the price of oil. The
price received by the Corporation depends, in part, on oil type and quality,
prices of competing fuels, distance to market, the value of refined products and
the supply/demand balance and other contractual terms. Oil exports from Canada
may be made pursuant to export contracts with terms not exceeding 1 year, in the
case of light crude, and not exceeding 2 years, in the case of heavy crude,
provided that an order approving any such export has been obtained from the
National Energy Board ("NEB"). Any oil export to be made pursuant to a contract
of longer duration (to a maximum of 25 years) requires an exporter to obtain an
export licence from the NEB and the issue of such a licence requires the
approval of the Governor in Council.
PRICING AND MARKETING - NATURAL GAS
In Canada, producers of natural gas also negotiate sales contracts
directly with the natural gas purchaser. The price of natural gas sold in
intra-provincial, inter-provincial and international trade is determined by
negotiation between buyers and sellers. The price received by the Corporation
depends, in part, on the natural gas heat content, prices of competing natural
gas and other fuels, distance to market, access to downstream transportation,
length of contract term, weather conditions, the supply/demand balance and other
contractual terms. Natural gas exported from Canada is subject to regulation by
the NEB and the government of Canada. Exporters are free to negotiate prices and
other terms with purchasers, provided that the export contracts must continue to
meet certain criteria prescribed by the NEB and the government of Canada.
Natural gas exports for a term of less than 2 years or for a term of 2 to 20
years (in quantities of not more than 30,000 m3/day) must be made pursuant to a
NEB order. Any natural gas export to be made pursuant to a contract of longer
duration (to a maximum of 25 years) or a larger quantity, requires an exporter
to obtain an export licence from the NEB, and the issue of such a licence
requires the approval of the Governor in Council.
The provincial governments of Alberta and British Columbia also
regulate the volume of natural gas which may be removed from those provinces for
consumption elsewhere, based on such factors as reserve availability,
transportation arrangements and market considerations.
PIPELINE CAPACITY
Significant pipeline expansions this past year has removed delivery
restrictions on the export pipelines for natural gas and crude oil. Alliance
Pipeline commenced natural gas delivery operations in late 2000, exporting 1.5
bcf/d to Chicago, Illinois, U.S.A. Inter-provincial Pipelines has completed the
expansion of its crude oil pipeline to Chicago. As well, the AEC operated
Express crude oil pipeline to the US Midwest also commenced operations over the
past year. Notwithstanding that pipeline expansions are ongoing, the potential
lack of firm domestic crude oil and natural gas pipeline capacity may restrict a
corporation's ability to market its production.
THE NORTH AMERICAN FREE TRADE AGREEMENT
On January 1, 1994 the North American Free Trade Agreement ("NAFTA")
among the governments of Canada, the United States of America ("U.S.") and
Mexico became effective. The NAFTA carries forward most of the material energy
terms contained in the Canada-U.S. Free Trade Agreement. In the context of
energy resources, Canada continues to remain 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 resource exported relative to domestic
use (based upon the proportion prevailing in the most recent 36 month period),
(ii) impose an export price higher than the domestic price, and (iii) disrupt
normal channels of supply. All three countries are prohibited from imposing
minimum export or import price requirements.
The NAFTA contemplates the reduction of Mexican restrictive trade
practices in the energy sector and prohibits discriminatory border restrictions
and export taxes. The NAFTA 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.
B-18
LAND TENURE
The mineral rights to crude oil and natural gas located in the western
provinces is owned predominantly by the respective provincial governments.
Provincial governments grant rights to explore for and produce oil and natural
gas pursuant to leases, licences and permits for varying terms from two years on
conditions set forth in provincial legislation, which may include requirements
to perform specific work or make mineral lease payments. Oil and natural gas
located in such provinces can also be privately owned and rights to explore for
and produce such oil and natural gas are generally granted by leases on such
terms and conditions as may be negotiated.
The Corporation's Exploration Licences in the Northwest Territories are
administered by the Federal Government through Indian and Northern Affairs
Canada and the National Energy Board. Exploration Licences only grant the right
to explore for crude oil and natural gas, and have a term of nine years,
consisting of consecutive periods of five and then four years. A Commercial
Discovery Licence must be obtained in order to produce oil and natural gas which
requires the confirmation of the declaration of a Commercial Discovery and
approval of a satisfactory development plan.
ROYALTIES AND INCENTIVES
For crude oil, natural gas and associated NGLs production from Crown
lands, the royalty regime is a significant factor in the profitability of such
production operations. Royalties payable on production from lands other than
Crown lands are determined by negotiations between the mineral owner and the
lessee, although production from such lands is also subject to certain
provincial taxes and royalties. Crown royalties are determined by governmental
regulation and are generally calculated as a percentage of the value of the
gross production. The rate of royalties payable generally depends in part on the
type of product being produced, well productivity, geographical location and
field discovery date.
From time to time the provincial governments of Alberta and British
Columbia have established incentive programs for exploration and development.
Such programs often provide for royalty reductions and royalty holidays, and are
generally introduced when commodity prices are low. The programs are designed to
encourage exploration and development activity by improving earnings and cash
flow within the industry. The trend in recent years has been for provincial
governments to allow such programs to expire without renewal, and consequently
few such programs are currently operative.
On October 13, 1992, the Government of Alberta implemented major
changes to its royalty structure and created incentives for exploring and
developing crude oil and natural gas reserves. The incentives created include:
(i) a 1 year royalty holiday on new oil discovered on or after October 1, 1992;
(ii) incentives by way of royalty holidays and reduced royalties on reactivated,
low productivity, vertical re-entry and horizontal wells; (iii) introduction of
separate par pricing for light/medium and heavy oil; and (iv) a modification of
the royalty formula structure through the implementation of a the Third Tier
Royalty with a base rate of 10% and a rate cap of 25% for 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%. The old oil royalty reserved to the Crown has
a base rate of 10% and a rate cap of 35%.
In Alberta, the royalty reserved to the Crown in respect of natural gas
production, subject to various incentives, is between 15% and 30%, in the case
of new gas, and between 15% and 35%, in the case of old gas, depending upon a
prescribed or corporate average reference price.
In Alberta, certain producers of oil or natural gas are also entitled
to a credit against the royalties payable to the Alberta Crown by virtue of the
Alberta royalty tax credit program ("ARTC"). The ARTC program is based on a
price-sensitive formula, and the ARTC rate varies between a 75% credit, at
prices for oil below $100 per cubic meter, and a 25% credit, at prices above
$210 per cubic meter. The ARTC rate is applied to a maximum of two million
dollars of Alberta Crown royalties payable for each producer or associated group
of producers. Crown royalties on production from producing properties acquired
from companies claiming maximum entitlement to ARTC will generally not be
eligible for ARTC. The ARTC rate is established quarterly based on the average
"par price", as determined by the Alberta Resource Development Department for
the previous quarterly period. The Government of Alberta is proposing changes to
the ARTC program which include (i) the elimination of ARTC for
B-19
trusts and individuals; (ii) the establishment of a $10,000 minimum royalty
payment for ARTC; and (iii) changes to how companies report and verify ARTC
eligible properties.
In British Columbia, the amount payable as a royalty in respect of
crude oil depends on the vintage of the crude oil (whether it was produced from
a pool discovered before or after October 31, 1975), the quantity of crude oil
produced in a month and the value of the crude oil. Crude 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 a prescribed minimum price. Natural gas produced in
association with oil has a minimum royalty of 8% while the royalty in respect of
other natural gas may not be less than 15%.
Crude oil and natural gas royalty holidays for specific wells and
royalty reduction reduce the amount of Crown royalties paid by the Corporation
to the provincial governments. The ARTC provides a rebate on Alberta Crown
royalties paid in respect of eligible producing properties. These incentives
result in increased net income and funds from operations of the Corporation.
CANADIAN ENVIRONMENTAL REGULATION
The oil and natural gas industry is currently subject to environmental
regulation pursuant to provincial and federal legislation. Environmental
legislation provides for restrictions and prohibitions on releases or emissions
of various substances produced or utilized in association with certain oil and
gas industry operations. In addition, legislation requires that well and
facility sites be abandoned and reclaimed to the satisfaction of provincial
authorities. Compliance with such legislation can require significant
expenditures. A breach of such legislation may result in the imposition of
material fines and penalties, the revocation of necessary licenses and
authorizations and civil liability for pollution damage.
In Alberta, environmental compliance is governed by the ALBERTA
ENVIRONMENTAL PROTECTION AND ENHANCEMENT ACT ("AEPEA"). In addition to replacing
a variety of older statutes which related to environmental matters, the AEPEA
imposes certain new environmental responsibilities on oil and natural gas
operators in Alberta and in certain instances also imposes greater penalties for
violations.
In British Columbia, energy projects may be subject to review pursuant
to the provisions of the ENVIRONMENTAL ASSESSMENT ACT ("EAA"). The EAA rolls the
previous processes for the review of major energy projects into a single
environmental assessment process which contemplates public participation in the
environmental review.
The Corporation is committed to meeting its responsibilities to protect
the environment wherever it operates and anticipates making increased
expenditures of both a capital and expense nature as a result of increasingly
stringent laws relating to the protection of the environment. The Corporation
will be taking such steps as required to ensure compliance with the AEPEA, EAA
and similar legislation in other jurisdictions in which it operates. The
Corporation believes that it is in material compliance with applicable
environmental laws and regulations. The Corporation also believes that it is
reasonably likely that the trend in environmental legislation and regulation
will continue toward stricter standards.
FUTURE SITE RESTORATION
The Corporation has made a provision of $210 thousand for future site
restoration in 2000 and has accrued $898 thousand in its financial statements
for future site restoration costs. Management does not currently anticipate that
material changes to the Corporation's planned capital expenditure program will
be required to meet existing environmental standards.
B-20
SELECTED FINANCIAL INFORMATION
The following is a summary of selected financial information for the
periods indicated in thousands of dollars, except for per share amounts:
YEARS ENDED
DECEMBER 31
----------------------------------------------------------------
2000 1999 1998
1997 1996
----------------------------------------------------------------
Total Revenue $26,009 $15,427 $8,797
$2,448 $739
Net earnings 3,940 1,347 9
556 248
Net earnings per share
- basic 0.31 0.11 -
0.08 0.04
- fully diluted 0.31 0.11 -
0.08 0.04
Total Assets 64,597 50,541 45,694
21,372 6,068
Total Long-term Debt 11,793 12,066 9,971
2,995 -
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
THREE MONTHS
ENDED
-----------------------------------------------------------------------
DEC. 31, 2000 SEPT. 30, 2000
JUNE 30, 2000 MARCH 31, 2000
-----------------------------------------------------------------------
Revenue $8,504 $6,576
$6,186 $4,743
Net Earnings 2,155 1,252
496 37
Net Earnings per share
- basic 0.17 0.10
0.04 -
- fully diluted 0.17 0.10
0.04 -
THREE MONTHS
ENDED
-----------------------------------------------------------------------
DEC. 31, 1999 SEPT. 30, 1999
JUNE 30, 1999 MARCH 31, 1999
-----------------------------------------------------------------------
Revenue $4,231 $4,110
$3,683 $3,403
Net earnings (loss) 623 523
196 5
Net earnings per share
- basic 0.05 0.04
0.02 -
- fully diluted 0.05 0.04
0.02 -
DIVIDEND POLICY
Grey Wolf has not paid any dividends on its common shares to date
and does not expect to pay dividends on such shares in the foreseeable future
as it expects to use all available funds to finance future development and
growth.
B-21
MANAGEMENT'S DISCUSSION AND ANALYSIS
With the benefit of higher commodity prices received throughout
the year, Grey Wolf attained record cash flow and earnings levels. Capital
expenditures, incurred principally for natural gas exploitation, were funded
by internally generated funds and working capital. The Corporation retains
its conservative financing strategy, with the ratio of debt to cash flow
being reduced to 1.2 years.
PRODUCTION
Average production in 2000 decreased eight percent to 1,562 BOE/d
from 1,707 BOE/d in 1999. Natural gas production declined 10 percent to 13.7
mmcf/d from 15.3 mmcf/d in the previous year. The loss of 2 mmcf/d at Nestow
in the fourth quarter of 2000, together with normal reservoir production
declines, account for the decrease. Development wells drilled and recompleted
in the second half of 2000 were not tied-in and brought on production until
early in 2001. Crude oil and NGLs production increased 12 percent to 197
BOE/d in 2000 from 176 BOE/d in 1999 due to the acquisition of increased
interests in the Caroline area as a result of the swap transaction completed
in November 2000.
Grey Wolf's production remains concentrated on natural gas and
NGLs which accounted for 99 percent of total production in 2000. With the
exploitation focus maintained on multi-horizon natural gas in western Alberta
and northeastern British Columbia, the Corporation will continue to benefit
from record high natural gas prices.
PRODUCTION 2000
1999
-------------------------------------- ---------------
-------------
Natural gas (mmcf/d) 13,653
15,306
Crude oil and NGLs (bbls/d) 197
176
Oil equivalent (BOE/d) 1,562
1,707
2000
1999
---------------------------------
----------------------------
PER BOE ANALYSIS ($000s) ($/BOE)
($000s) ($/BOE)
-------------------------------------- --------------- -----------------
------------- --------------
Natural gas ($/mcf) 22,683 4.54
13,481 2.41
Oil and NGL ($/bbl) 2,635 36.55
1,296 20.09
Processing and other 691 1.21
650 1.05
-------------------------------------- --------------- -----------------
------------- --------------
Petroleum and natural gas revenue 26,009 45.49
15,427 24.76
Royalties (5,897) (10.32)
(3,755) (6.03)
Alberta Royalty Tax Credit 517 0.90
1,392 2.23
Operating Costs (3,462) (6.05)
(3,236) (5.19)
-------------------------------------- --------------- -----------------
------------- --------------
Operating netback 17,167 30.02
9,828 15.77
General and administrative costs (1,384) (2.42)
(903) (1.45)
Capital tax (61) (0.10)
(110) (0.18)
Interest expense (1,126) (1.97)
(576) (0.92)
-------------------------------------- --------------- -----------------
------------- --------------
Cash flow from operations 14,596 25.53
8,239 13.22
Depletion and depreciation (7,924) (13.86)
(6,663) (10.69)
Future income taxes (2,732) (4.78)
(229) (0.37)
-------------------------------------- --------------- -----------------
------------- --------------
Net income 3,940 6.89
1,347 2.16
-------------------------------------- --------------- -----------------
------------- --------------
REVENUES
Oil and gas revenues in 2000 were up 69 percent to $26.0 million from
$15.4 million reported in the previous year. The increase was mainly due to the
dramatic increase in commodity prices, offset somewhat by the eight percent
decrease in production. The Corporation's average natural gas price in 2000
increased 88 percent to $4.54 per mcf from $2.41 per mcf in 1999. Due to the
reduction of pipeline transportation constraints, Canadian natural gas producers
benefited from increased prices reflecting North American market demand.
Consistent with world price increases, the average price received for crude oil
and NGLs was $36.55 per bbl compared to $20.09 per bbl in 1999, an 82 percent
increase.
B-22
Revenues for the year also include processing fees of $691 thousand,
a slight increase over $650 thousand in 1999.
REVENUE
2000
1999
---------------------------------------- ---------------- -------------
------------------ --------------
($ thousands) %
%
---------------------------------------- ---------------- -------------
------------------ --------------
Natural gas 22,683 88
13,481 87
Oil and NGLs 2,635 10
1,296 8
Processing and other 691 2
650 4
---------------------------------------- ---------------- -------------
------------------ --------------
Petroleum and natural gas revenue 26,009 100
15,427 100
---------------------------------------- ---------------- -------------
------------------ --------------
ROYALTIES
Royalties increased 57 percent to $5.9 million from $3.8 million
in the previous year. Higher natural gas commodity prices resulted in an
increase in the gas royalty rate which is highly price sensitive. The Alberta
Royalty Tax Credit ("ARTC") was reduced in 2000 to $0.5 million from $1.4
million in 1999. The ARTC is also price sensitive, with higher commodity
prices resulting in a lower ARTC rate, which decreased to 25 percent in 2000
from 69 percent in 1999.
ROYALTIES
2000
1999
------------------------------
-----------------------------
($000s) % Rate
($000s) % Rate
---------------------------------------- ---------------- -------------
-------------- --------------
Natural gas 5,166 23
3,423 25
Oil 47 13
41 13
NGLs 684 30
291 29
---------------------------------------- ----------------
--------------
Gross royalties 5,897 23
3,755 25
Alberta Royalty Tax Credit (517) (2)
(1,392) (9)
---------------------------------------- ---------------- -------------
-------------- --------------
Net royalties 5,380 21
2,363 16
---------------------------------------- ---------------- -------------
-------------- --------------
OPERATING EXPENSES
Operating costs increased slightly to $3.5 million from $3.2 million in 1999 due
to increased workover and turnaround costs. On a BOE basis, operating costs for
2000 were $6.05 compared to $5.19 in the prior year. The per BOE increase
results primarily to declines in production.
OPERATING COSTS
2000
1999
------------------------------
-------------------------------
($000s) $/BOE
($000s) $/BOE
---------------------------------------- ---------------- -------------
--------------- ---------------
Operating 3,462 6.05
3,236 5.19
Costs related to third party processing
income (210) (0.36)
(252) (0.40)
---------------------------------------- ---------------- -------------
--------------- ---------------
Production expenses 3,252 5.69
2,984 4.79
---------------------------------------- ---------------- -------------
--------------- ---------------
B-23
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses were up 53 percent to $1.4
million due principally to reorganization charges incurred in the second quarter
of 2000. With the added effect of reduced production in 2000, G&A expenses were
$2.42 per BOE compared to $1.45 per BOE in 1999.
GENERAL AND ADMINISTRATIVE EXPENSES
($ THOUSANDS) 2000 1999
--------------------------------------------------- --------------
---------------
Gross general and administrative expenses 2,905 2,030
Recoveries (1,141) (886)
--------------------------------------------------- --------------
---------------
1,764 1,144
Capitalized general and administrative expenses (380) (241)
--------------------------------------------------- --------------
---------------
Net general and administrative expenses 1,384 903
--------------------------------------------------- --------------
---------------
Net general and administrative expenses per BOE 2.42 1.45
--------------------------------------------------- --------------
---------------
INTEREST EXPENSES
Interest expense increased to $1.1 million from $0.6 million in the
previous year. This increase was due to a higher debt level resulting from
increased capital expenditures in 2000 and an increase in the average interest
rate, which rose to an average 7.15 percent during 2000.
DEPLETION AND DEPRECIATION
Total depletion, depreciation and site restoration expense increased
to $7.9 million, up 19 percent from the prior year total of $6.7 million. On
a BOE basis, depletion and depreciation expense increased to $13.49 from
$10.08 in 1999 due to reserve revisions in December 1999 affecting the year
2000 rate. The site restoration provision declined to $210 thousand from $400
thousand due to the divesture of properties with potentially higher site
restoration liabilities.
INCOME TAXES
The provision for future income taxes was $2.7 million, up
significantly from the $229 thousand reported in 1999 as net earnings before
taxes increased by 299% due to higher commodity prices and to higher
non-deductible crown royalties for tax purposes. Capital tax declined
slightly to $61 thousand in 2000 from $110 thousand mainly due to a prior
year adjustment.
Grey Wolf has approximately $45.3 million of tax pools remaining
at December 31, 2000 and accordingly, is not currently cash taxable.
Effective the beginning of 2000, the Corporation adopted the new Canadian
Institute of Chartered Accountant recommendations for the liability method of
tax allocation accounting, which resulted in a $562 thousand reduction in
retained earnings.
ESTIMATED TAX POOLS AT DECEMBER 31, 2000
($ THOUSANDS)
----------------------------------------------------------------
--------------------------
Canadian oil and gas property expense 21,158
Canadian development expense 9,838
Canadian exploration expense 5,735
Undepreciated capital cost 7,097
Non-capital losses 1,249
Unamortized share issue costs 210
----------------------------------------------------------------
--------------------------
Total 45,287
----------------------------------------------------------------
--------------------------
B-24
CASH FLOW AND EARNINGS
Cash flow increased 77 percent to $14.6 million ($1.15 per share) in
2000 from $8.2 million ($0.65 per share) in 1999. Net earnings increased 193
percent to $3.9 million ($0.31 per share) in 2000 from $1.3 million ($0.11
per share) in 1999. The increase in both cash flow and net earnings resulted
primarily from the higher natural gas and crude oil commodity prices. For
purposes of per share calculations, the weighted average shares outstanding
for the year amounted to 12.7 million, the same as in 1999.
CASH FLOW AND NET EARNINGS
($ THOUSANDS, EXCEPT PER SHARE)) 2000 1999
----------------------------------------------- ----------------
-----------------
Cash flow 14,596 8,239
Cash flow per share 1.15 0.65
Net earnings 3,940 1,347
Net earnings per share 0.31 0.11
----------------------------------------------- ----------------
-----------------
CAPITAL EXPENDITURES
During 2000, the Corporation invested a total of $16.1 million in
capital expenditures, including property acquisitions net of divestitures,
compared to $11.8 million in 1999. The majority of the increase was spent on
seismic and drilling in the Corporation's core areas of Caroline and Pouce
Coupe. In November 2000, Grey Wolf disposed of properties in Redwater,
Thorhild, Radway, Newbrook and Abee in exchange for an increase in the
Corporation's interest at Caroline. This property swap transaction also
resulted in net proceeds of $1.6 million being paid to Grey Wolf.
CAPITAL EXPENDITURES
($ THOUSANDS) 2000 1999
----------------------------------------------- ------------------
-------------------
Land 1,950 4,625
Geological and geophysical 2,098 889
Exploration and development drilling 12,476 4,054
Production equipment and facilities 1,293 864
----------------------------------------------- ------------------
-------------------
Exploration and development costs 17,817 10,432
Other corporate assets 124 305
Property acquisitions 10,792 3,662
Property dispositions (12,674) (2,629)
----------------------------------------------- ------------------
-------------------
Total capital expenditures 16,059 11,770
----------------------------------------------- ------------------
-------------------
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures of $16.1 million were financed mainly through
internally generated funds and working capital. No new shares were issued except
for an 1,800 share option exercised by an employee of the Corporation.
Grey Wolf has a bank credit facility of $20.0 million, which bears
interest at the bank's prime rate plus one-eighth of one percent. The credit
facilities are subject to annual review. At December 31, 2000, the combined
bank debt and working capital deficiency amounted to $17.7 million, up 10
percent from the $16.1 million reported one year ago. The year-end debt to
current year cash flow multiple was 1.2, which met the Corporation's
objective to maintain a cash flow multiple of less than 2.0 times.
B-25
BUSINESS RISKS AND PROSPECTS
Grey Wolf's operations are subject to the inherent risks associated
with the exploration, development and production of oil and natural gas.
These include the uncertainty of finding reserves in economic quantities and
the possibility of drilling and production problems.
Grey Wolf seeks to balance risk and reward in its exploration and
development projects. The cost of replacing and developing proven and
probable reserves is a measure of a company's efficiency in finding new
reserves. In making this calculation, Grey Wolf compares all costs associated
with exploration, development and production facilities with proven reserves
added. Depending on the spending pattern during a specific year, finding and
development costs can vary significantly between years.
The Corporation is also subject to market fluctuations in the prices
of crude oil and natural gas. Like most industry participants, Grey Wolf has
limited ability to affect the price it receives for crude oil and gas
production. Historically, the Corporation has chosen not to hedge or forward
sell any of its production.
The oil and gas industry is subject to a variety of environmental
regulations. Grey Wolf is proactive in ensuring that its activities are
carried out in accordance with sound oilfield practices and provincial
federal policies and regulations. Grey Wolf has established appropriate
emergency procedures intended to mitigate the environmental impact of any
accidental occurrences in its field operations. While the Corporation and the
industry have a good safety record, the risk of personal injury and property
damage cannot be eliminated. Grey Wolf maintains liability and property
insurance coverage in amounts sufficient to minimize any financial loss
associated with these risks.
Grey Wolf is optimistic about its prospects for continued profitable
growth. The Corporation believes it has a highly experienced and dedicated
team of professionals with the knowledge and technical tools available to add
and exploit oil and natural gas reserves in a manner profitable for its
shareholders.
MARKET FOR SECURITIES
The outstanding common shares of Grey Wolf are listed and posted for
trading on The Toronto Stock Exchange under the symbol "GWX".
B-26
DIRECTORS AND OFFICERS
The Corporation has an audit committee and a compensation committee.
Members of each committee are indicated in the table below.
NAME AND MUNICIPALITY OF RESIDENCE OFFICE
CURRENT OCCUPATION
----------------------------------- -------------------------------
--------------------------------------
Donald B. Copeland (1) (2) Director since May 1996
Independent oil and gas businessman
Calgary, Alberta
John F. Curran (1) (2) Director since May 1996
Senior Partner, Bennett Jones LLP,
Calgary, Alberta
Barristers and Solicitors
Orval K. Horn Director since September 1997
Independent oil and gas businessman
Calgary, Alberta
James C. Phelps (1) (2) Director since January 1996
Independent oil and gas consultant
San Antonio, Texas
Richard M. Riggs Director since May 1996
Independent oil and gas consultant
San Antonio, Texas
Robert L.G. Watson Director since May 1996 and
Chairman, President, Chief Executive
San Antonio, Texas Chairman of the Board and Chief
Officer, Abraxas Petroleum Corporation
Executive Officer
James K. Wilson Senior Vice President & Chief
Senior Vice President & Chief
Financial Officer and Corporate
Financial Officer and Corporate
Secretary
Secretary, Grey Wolf Exploration Inc.
Vincent J. Tkachyk Vice President, Operations
Vice President, Operations, Grey Wolf
Exploration Inc.
Francis Cheung Controller
Controller, Grey Wolf Exploration Inc.
NOTES:
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Each of the foregoing individuals has been engaged in his principal
occupation or in other capacities with the same firm or organization for the
past five years except for: Orval K. Horn, who, prior to January 2001, was
President of Jubilee Resources Inc. and prior to September 1997, was President
of Pennant Petroleum Ltd.; Vincent J. Tkachyk, who, prior to June 1997, was Vice
President of Pennant Petroleum Ltd. and prior to June 1994 was President of
Dekalb Energy Company; James K. Wilson, who, prior to March 2000 was Vice
President, Finance & CFO and Corporate Secretary of Maxx Petroleum Ltd., and
prior thereto, Executive Vice President, Finance & CFO of Chauvco Resources
International Ltd. and prior thereto, Senior Vice President, Finance and
Administration & CFO of Chauvco Resources Ltd.; and Francis Cheung, who, prior
to June, 1998, was with Maxx Petroleum Ltd. as Controller, and prior thereto,
was with Riata Resources as Controller.
As of March 13, 2001, all the directors and senior officers of Grey
Wolf as a group beneficially owned, directly or indirectly or exercised control
or direction over, 923,488 common shares representing 7% of all issued and
outstanding common shares of the Corporation. The information contained herein
as to securities beneficially owned, directly, or over which control or
direction is exercised, is based upon information furnished to Grey Wolf by the
respective directors and senior officers.
B-27
Each director will hold office until the next annual general meeting of
Grey Wolf or until his successor is duly elected, unless his office is earlier
vacated in accordance with the by-laws of the Corporation.
FINANCIAL STATEMENTS
AUDITORS' REPORT
To the Shareholders of
Grey Wolf Exploration Inc.
We have audited the balance sheet of Grey Wolf Exploration Inc. as at December
31, 2000 and the statements of earnings and retained earnings 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 Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2000 and the
results of its operations and its cash flows for the year then ended in
accordance with Canadian generally accepted accounting principles.
The financial statements as at and for the year ended December 31, 1999 were
audited by another firm of auditors who expressed an unqualified opinion
thereon.
"Deloitte & Touche LLP"
February 23, 2001 Deloitte & Touche LLP
Calgary, Canada Chartered Accountants
B-28
BALANCE SHEETS
As at December 31
(THOUSANDS OF DOLLARS) 2000
1999
--------------------------------------------------------------------------------
------------------
ASSETS
CURRENT
Accounts receivable [NOTE 8]
$9,815 $4,103
Property and equipment [NOTE 3]
54,782 46,438
--------------------------------------------------------------------------------
------------------
$64,597 $50,541
================================================================================
==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities [NOTE 8]
$15,764 $8,117
Long-term debt [NOTE 4]
11,793 12,066
Future site restoration
898 891
Future taxes [NOTE 6]
3,297 3
--------------------------------------------------------------------------------
------------------
31,752 21,077
--------------------------------------------------------------------------------
------------------
SHAREHOLDERS' EQUITY
Share capital [NOTE 5]
27,555 27,552
Retained earnings
5,290 1,912
--------------------------------------------------------------------------------
------------------
32,845 29,464
--------------------------------------------------------------------------------
------------------
$64,597 $50,541
================================================================================
==================
SEE ACCOMPANYING NOTES
On behalf of the Board:
"Robert L.G. Watson" "James C. Phelps"
Robert L.G. Watson, Director James C. Phelps, Director
B-29
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
Years ended December 31
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) 2000
1999
--------------------------------------------------------------------------------
--------------
REVENUE
Petroleum and natural gas revenue $26,009
$15,427
Royalties, net of Alberta Royalty Tax Credit (5,380)
(2,363)
--------------------------------------------------------------------------------
--------------
20,629
13,064
--------------------------------------------------------------------------------
--------------
EXPENSES
Operating 3,462
3,236
General and administrative 1,384
903
Interest on long-term debt 1,126
576
Depletion, depreciation and site restoration 7,924
6,663
--------------------------------------------------------------------------------
--------------
13,896
11,378
--------------------------------------------------------------------------------
--------------
Earnings before taxes 6,733
1,686
Provision for taxes [NOTE 6]
Capital tax 61
110
Future income taxes 2,732
229
--------------------------------------------------------------------------------
--------------
NET EARNINGS 3,940
1,347
Retained earnings, beginning of year 1,912
565
Adoption of income tax accounting standard change [NOTE 6] (562)
-
--------------------------------------------------------------------------------
--------------
RETAINED EARNINGS - end of year $5,290
$1,912
================================================================================
==============
BASIC AND FULLY DILUTED EARNINGS PER SHARE [NOTE 7] $0.31
$0.11
================================================================================
==============
SEE ACCOMPANYING NOTES
B-30
STATEMENTS OF CASH FLOWS
Years ended December 31
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) 2000
1999
--------------------------------------------------------------------------------
-----------------------
OPERATING ACTIVITIES
Net earnings $
3,940 $ 1,347
Depletion, depreciation and site restoration
7,924 6,663
Future taxes
2,732 229
--------------------------------------------------------------------------------
-----------------------
Cash flow from operations
14,596 8,239
Changes in non-cash working capital
1,936 (289)
--------------------------------------------------------------------------------
-----------------------
16,532 7,950
--------------------------------------------------------------------------------
-----------------------
FINANCING ACTIVITIES
Increase (decrease) in long-term debt
(273) 2,094
Issue (repurchase) of common shares
3 (78)
--------------------------------------------------------------------------------
-----------------------
(270) 2,016
--------------------------------------------------------------------------------
-----------------------
TOTAL CASH RESOURCES PROVIDED
16,262 9,966
--------------------------------------------------------------------------------
-----------------------
INVESTING ACTIVITIES
Property and equipment received under property swap agreement
10,779 -
Disposal of property and equipment under property swap agreement
(12,332) -
--------------------------------------------------------------------------------
-----------------------
Net cash proceeds
(1,553) -
Other acquisitions
13 3,662
Expenditures for property and equipment
17,941 10,737
Sale of property and equipment
(342) (2,629)
Site restoration
203 -
--------------------------------------------------------------------------------
-----------------------
16,262 11,770
--------------------------------------------------------------------------------
-----------------------
DECREASE IN CASH AND CASH EQUIVALENTS
- (1,804)
Cash and cash equivalents, beginning of year
- 1,804
--------------------------------------------------------------------------------
-----------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $
- $ -
================================================================================
=======================
CASH FLOW FROM OPERATIONS PER SHARE [NOTE 7]
Basic
$1.15 $0.65
Fully diluted
$1.11 $0.62
================================================================================
=======================
Cash interest paid
1,123 614
Cash taxes paid
72 104
================================================================================
=======================
SEE ACCOMPANYING NOTES
B-31
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Grey Wolf Exploration Inc. (the "Company") was incorporated under the laws of
the Province of Alberta on December 23, 1986. The Company's primary business is
the exploration, development and production of crude oil and natural gas in
western Canada.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with Canadian
generally accepted accounting principles and are expressed in Canadian dollars.
PETROLEUM AND NATURAL GAS PROPERTIES
The Company follows the full cost method of accounting in accordance with the
guideline issued by the Canadian Institute of Chartered Accountants whereby all
costs associated with the exploration for and development of petroleum and
natural gas reserves, whether productive or unproductive, are capitalized in a
Canadian cost centre and charged to income as set out below. Such costs include
acquisition, drilling, geological and geophysical costs related to exploration
and development activities. Costs of acquiring and evaluating unproved
properties are excluded from the depletion base until it is determined whether
or not proved reserves are attributable to the properties or impairment occurs.
Gains or losses are not recognized upon disposition of petroleum and natural gas
properties unless crediting the proceeds against accumulated costs would result
in a change in the rate of depletion of 20% or more.
Depletion of petroleum and natural gas properties and depreciation of production
equipment, except for gas plants and related facilities, is provided on
accumulated costs using the unit of production method based on estimated proved
petroleum and natural gas reserves, before royalties, as determined by
independent engineers. For purposes of the depletion calculation, proven
petroleum and natural gas reserves are converted to a common unit of measure on
the basis of one barrel of oil or liquids being equal to six thousand cubic feet
of natural gas. Depreciation of gas plants and related facilities is calculated
on a straight line basis over an average eighteen year term.
The depletion and depreciation cost base includes capitalized costs, less costs
of unproved properties, plus provision for future development costs of proved
undeveloped reserves.
The net carrying value of the Company's petroleum and natural gas properties is
limited to an ultimate recoverable amount. This amount is the aggregate of
estimated future net revenues from proved reserves and the costs of unproved
properties, net of impairment allowances, less future estimated production
costs, general and administration costs, financing costs, site restoration and
abandonment costs, and income taxes. Future net revenues are estimated using
prices and costs without escalation or discounting, and the income tax and
Alberta Royalty Tax Credit legislation in effect at the year end.
FUTURE ABANDONMENT AND SITE RESTORATION COSTS
The estimated cost of future abandonment and site restoration is based on the
current cost and the anticipated method and extent of site restoration in
accordance with existing legislation and industry practice. The annual charge is
provided for on a unit of production basis for all properties except for gas
plants for which the annual charge is calculated on a straight-line basis over
the estimated remaining life of the plants. Actual site restoration expenditures
are charged to the accumulated liability account as incurred.
OTHER ASSETS
Furniture, leasehold improvements, computer hardware, software and office
equipment are carried at cost and are depreciated over the estimated useful life
of the assets at rates varying between 20 percent and 30 percent, on a declining
balance basis.
USE OF ESTIMATES
The amounts recorded for depletion and depreciation of property and equipment
and the provision for abandonment and site restoration are based on estimates.
The ceiling test calculation is based on estimates of proved reserves,
production rates, oil and
B-32
natural gas prices, future costs and other relevant assumptions. By their
nature, these estimates are subject to uncertainty and the effect on the
financial statements of changes in such estimates could be significant.
JOINT OPERATIONS
Substantially all of the Company's exploration and development activities are
conducted jointly with others, and accordingly the financial statements reflect
only the Company's proportionate interest in such activities.
FUTURE INCOME TAXES
The Company has adopted, on a retroactive basis without restatement of the 1999
financial statements, the new accounting recommendation of the Canadian
Institute of Chartered Accountants "Income Taxes". Under this standard, future
income tax assets and liabilities are measured based upon temporary differences
between the carrying values of assets and liabilities and their tax basis.
Income tax expense (recovery) is computed based on the change during the year in
the future tax assets and liabilities. Effects of changes in tax laws and tax
rates are recognized when substantially enacted.
FINANCIAL INSTRUMENTS
Financial instruments of the Company consist of accounts receivable, accounts
payable and accrued liabilities, long-term debt and forward commodity sales
contracts. As at December 31, 2000 and 1999, there were no significant
differences between the carrying amounts of these financial instruments reported
on the balance sheet and their estimated fair values.
The Company also from time to time employs financial instruments to manage its
exposure to commodity prices. These instruments are not used for speculative
trading purposes.
Gains and losses on commodity price hedges are included in revenues upon the
sale of the related production provided there is reasonable assurance that the
hedge is and will continue to be effective.
STOCK OPTIONS
The Company has a stock option plan as described in Note 5. No compensation
expense is recognized when the stock options are issued. Consideration received
on exercise of stock options is credited to share capital.
3. PROPERTY AND EQUIPMENT
2000
--------------------------------------------------------------------------------
---------------------
ACCUMULATED
DEPLETION AND
NET BOOK
COST DEPRECIATION
VALUE
$ $
$
--------------------------------------------------------------------------------
---------------------
Petroleum and natural gas properties 69,543,143 19,383,519
50,159,624
Gas plants and related production facilities 5,786,479 1,326,197
4,460,282
Other assets 531,147 368,082
163,065
--------------------------------------------------------------------------------
---------------------
Net property and equipment 75,860,769 21,077,798
54,782,971
================================================================================
=====================
1999
--------------------------------------------------------------------------------
---------------------
ACCUMULATED
DEPLETION AND
NET BOOK
COST DEPRECIATION
VALUE
$ $
$
--------------------------------------------------------------------------------
---------------------
Petroleum and natural gas properties 54,879,522 12,370,865
42,508,657
Gas plants and related production facilities 4,494,066 792,833
3,701,233
Other assets 499,942 272,333
227,609
--------------------------------------------------------------------------------
---------------------
Net property and equipment 59,873,530 13,436,031
46,437,499
================================================================================
=====================
B-33
Undeveloped property costs of $6,441,705 at December 31, 2000 (1999 -
$7,365,579) have been excluded from the depletion base.
4. LONG-TERM DEBT
At December 31, 2000, the Company had a revolving term credit facility with a
Canadian chartered bank with a maximum limit of $20,000,000. At December 31,
2000, $11,792,690 was drawn down against this facility (1999 - $12,065,824).
Under the facility, loan advances bear interest at bank prime plus 1/8%, or if
bankers acceptances are utilized, the current bankers acceptances rate plus 1
1/8%. Loan advances are supported by a first floating charge demand debenture in
the amount of $25,000,000 covering all the assets of the Company. Subject to
annual renewal, the facility is renewable to May 31, 2002, at which time the
outstanding bank debt would convert to a term loan.
5. SHARE CAPITAL
AUTHORIZED
Unlimited number of common shares without nominal or par value.
ISSUED
#
$
--------------------------------------------------------------------------------
-------------------------
BALANCE, DECEMBER 31, 1998 12,704,341
27,630,426
Issuer Bid
(44,600) (78,056)
--------------------------------------------------------------------------------
-------------------------
BALANCE, DECEMBER 31, 1999 12,659,741
27,552,370
Exercise of stock options 1,800
2,880
--------------------------------------------------------------------------------
-------------------------
BALANCE, DECEMBER 31, 2000 12,661,541
27,555,250
--------------------------------------------------------------------------------
-------------------------
STOCK OPTIONS
A maximum of 1,270,000 options to purchase common shares have been authorized
for issuance under the Company's stock option plan. The options are exercisable
on a cumulative basis at 25% per year commencing one year after grant date and
expire five years from the date of grant. Options to acquire 1,010,029 common
shares are outstanding at December 31, 2000.
NUMBER
WEIGHTED AVERAGE
OF OPTIONS
OPTION PRICE
--------------------------------------------------------------------------------
-----------------
BALANCE, DECEMBER 31, 1998 897,816
3.20
Issued 328,470
1.91
Cancelled (192,571)
2.83
--------------------------------------------------------------------------------
-----------------
BALANCE, DECEMBER 31, 1999 1,033,715
2.84
Issued 398,376
1.60
Exercised (1,800)
1.60
Cancelled (420,262)
2.53
--------------------------------------------------------------------------------
-----------------
BALANCE, DECEMBER 31, 2000 1,010,029
2.30
--------------------------------------------------------------------------------
-----------------
---------------------------------------------------------------
----------------------------------
Options Outstanding Options
Exercisable
---------------------------------------------------------------
----------------------------------
Weighted
Range of Exercise Number Average Weighted Number
Weighted
Prices Outstanding at Remaining Average Exercisable at
Average
Dec. 31/00 Contractual Exercised Dec. 31/00
Exercise Price
Life Price
(years)
------------------- ---------------- ------------- ------------ ----------------
-----------------
$1.15 to $2.06 718,626 3.10 $1.73 199,094
$1.95
$3.20 to $3.90 242,373 1.50 $3.51 185,312
$3.71
$4.00 to $4.80 49,030 1.00 $4.65 39,030
$4.80
---------------- ----------------
$1.15 to $4.80 1,010,029 2.58 $2.30 423,436
$2.60
================ ================
B-34
6. PROVISION FOR TAXES
Income taxes recorded on the statement of earnings and retained earnings differ
from the tax calculated by applying the combined statutory Canadian corporate
and provincial income tax rate as follows:
(dollars) 2000
1999
--------------------------------------------------------------------------------
---------------------
Calculated income tax expense at 44.62% 3,004,549
752,237
INCREASE (DECREASE) IN INCOME TAX RESULTING FROM
Non-deductible crown royalties and other charges 2,254,168
2,146,809
Resource allowance (2,066,595)
(1,174,140)
Alberta Royalty Tax Credit (230,775)
(1,392,117)
Non-deductible depletion and depreciation -
43,472
Benefit of losses not previously recognized -
(147,000)
Large corporation tax 61,330
109,686
Other (229,104)
-
--------------------------------------------------------------------------------
---------------------
Income tax provision 2,793,573
338,947
================================================================================
=====================
The major components of future income tax liability at December 31, 2000 are
related to the following accounts:
Property and equipment
$4,767,094
Future site restoration
(400,854)
Share issue costs
(94,059)
Non-capital losses carried forward
(557,361)
ACRI carry-forward
(143,540)
Resource Allowance
(274,036)
------------------------------------------------------------
-------------------------
Balance, December 31, 2000
$3,297,244
============================================================
=========================
Upon adoption of the new accounting recommendation of the Canadian Institute of
Chartered Accountants, the company recorded a future income tax liability of
$562 thousand and decreased the Company's retained earnings by $562 thousand.
Had the new method not been adopted, net earnings would have been increased by
$88 thousand.
As at December 31, 2000, the Company has exploration and development costs,
undepreciated capital costs and unamortized share issue costs available for
deduction against future taxable income in the following approximate amounts:
(dollars)
--------------------------------------------------------------------------------
-------------------
Canadian oil and gas property expense
21,158,000
Canadian development expense
9,838,000
Canadian exploration expense
5,735,000
Undepreciated capital cost
7,097,000
Non-capital losses
1,249,000
Unamortized share issue costs
210,000
--------------------------------------------------------------------------------
-------------------
45,287,000
================================================================================
===================
The Company's non-capital losses are available to be carried forward to offset
taxable income in future years and expire between 2002 and 2004.
7. PER SHARE AMOUNTS
The calculation of basic net earnings per common share and cash flow from
operations per common share is based on the weighted average number of common
shares outstanding during the year ended December 31, 2000 of 12,660,528 (1999 -
12,695,313). The effect of any potential common share issuances is anti-dilutive
with respect to the earning per share calculation. Fully diluted cash flows from
operations was calculated based on 13,238,586 weighted average number of common
shares.
B-35
Cash flow from operations per share is based on cash flow from operations before
changes in non-cash working capital items.
8. RELATED PARTY TRANSACTIONS
Grey Wolf manages the assets and operations of Canadian Abraxas Petroleum
Limited ("Canaxas") pursuant to a Management Agreement dated November 12, 1996.
Canaxas is a wholly-owned subsidiary of Abraxas Petroleum Corporation
("Abraxas"). Abraxas owns 46.2% of the common shares of Grey Wolf. Canaxas owns
2.7% of the common shares of Grey Wolf.
The aggregate common costs of operations and administration of the Canaxas and
Grey Wolf assets are shared on a pro rata basis, based on net revenue.
Amounts due to and from these related parties at December 31, 2000 and 1999 are
non-interest bearing, are not collateralized and are due on demand as follows:
(DOLLARS) 2000
1999
--------------------------------------------------------------------------------
-------------------
Due (to) from Canaxas 3,822,861
(554,254)
Also included in accounts receivable are promissory notes totaling $200,000
which are due from senior officers of the Company. The notes bear interest equal
to the Banker's Acceptance rate plus 1 1/8% per annum. Interest is charged at
the end of each month against salaries otherwise payable. The notes are fully
due and payable by the holders upon termination of employment or resignation.
9. SUBSEQUENT EVENT
On January 19, 2001, the Corporation and Abraxas jointly announced they were in
discussions concerning a share-for-share acquisition by Abraxas of the remaining
51% ownership of the Corporation that Abraxas does not currently own.
B-36
ADDITIONAL INFORMATION
Additional information, including directors' and officers'
remuneration and indebtedness, principal holders of Grey Wolf's securities
and options to purchase securities and interests of insiders in material
transactions, where applicable, is contained in Grey Wolf's Management Proxy
Circular dated April 6, 2000, which relates to the annual meeting of
Shareholders held on May 17, 2000. Additional financial information is
contained in the Corporation's comparative financial statements for the years
ended December 31, 2000 and 1999.
For copies of the aforementioned documents, please contact:
Debbie Wozny, Assistant Secretary
Grey Wolf Exploration Inc.
1600, 255 - 5th Avenue S.W.
Calgary, Alberta
T2P 3G6
Telephone: (403) 262-1949
Facsimile: (403) 262-1969
B-37
ANNEX B-2
GREY WOLF AUDITED ANNUAL FINANCIAL STATEMENTS
FOR THE YEARS ENDED AND AT DECEMBER 31, 1998 AND 1999
B-38
AUDITORS' REPORT
To the Shareholders of Grey Wolf Exploration Inc.
We have audited the balance sheets of Grey Wolf Exploration Inc. as at
December 31, 1999 and 1998 and the statements of earnings and retained
earnings and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1999 and
1998 and the results of its operations and its cash flows for the years then
ended in accordance with accounting principles generally accepted in Canada.
Calgary, Canada
March 10, 2000
/s/ Ernst & Young LLP
Chartered Accountants
B-39
BALANCE SHEETS AS AT DECEMBER 31
($) 1999 1998
---------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents ---- 1,803,699
Accounts receivable [NOTE 8] 4,103,267 2,713,745
---------------------------------------------------------------------------
4,103,267 4,517,444
Deferred taxes recoverable --- 226,410
Property and equipment [NOTE 3] 46,437,499 40,950,330
---------------------------------------------------------------------------
50,540,766 45,694,184
---------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable [NOTE 8] 8,116,897 7,016,185
Long-term debt [NOTE 4] 12,065,824 9,971,215
Future site restoration 891,125 511,587
Deferred taxes 2,851 -----
---------------------------------------------------------------------------
21,076,697 17,498,987
---------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital [NOTE 5] 27,552,370 27,630,426
Retained earnings 1,911,699 564,771
---------------------------------------------------------------------------
29,464,069 28,195,197
---------------------------------------------------------------------------
50,540,766 45,694,184
---------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
/s/ Ernst & Young
On behalf of the Board:
/s/ Director
/s/ Director
B-40
STATEMENTS OF EARNINGS AND
RETAINED EARNINGS YEARS ENDED DECEMBER 31
($) 1999
1998
--------------------------------------------------------------------------------
----
REVENUE
Petroleum and natural gas sales 15,426,519
8,797,181
Royalties, net of Alberta Royalty Tax Credit (2,363,267)
(934,667)
--------------------------------------------------------------------------------
----
13,063,252
7,862,514
--------------------------------------------------------------------------------
----
EXPENSES
Production 3,236,022
2,373,036
General and administrative 903,045
641,925
Interest on long-term debt 575,812
407,669
Depletion, depreciation and site restoration 6,662,498
4,363,109
--------------------------------------------------------------------------------
----
11,377,377
7,785,739
--------------------------------------------------------------------------------
----
Earnings before taxes 1,685,875
76,775
Provision for income taxes [NOTE 6] 338,947
68,129
--------------------------------------------------------------------------------
----
NET EARNINGS 1,346,928
8,646
Retained earnings, beginning of year 564,771
556,125
--------------------------------------------------------------------------------
----
RETAINED EARNINGS, END OF YEAR 1,911,699
564,771
--------------------------------------------------------------------------------
----
EARNINGS PER SHARE [NOTE 7]
BASIC AND FULLY DILUTED $0.11
$0.00
SEE ACCOMPANYING NOTES
B-41
STATEMENTS OF CASH FLOWS Years ended December 31
--------------------------------------------------------------------------------
---
($) 1999
1998
--------------------------------------------------------------------------------
---
OPERATING ACTIVITIES
Net earnings 1,346,928
8,646
Depletion, depreciation and site restoration 6,662,498
4,363,109
Deferred tax 229,261
-----
--------------------------------------------------------------------------------
---
Cash flow from operations 8,238,687
4,371,755
Net change in non-cash working capital items (288,810)
1,903,102
--------------------------------------------------------------------------------
---
7,949,877
6,274,857
--------------------------------------------------------------------------------
---
FINANCING ACTIVITIES
Increase in long-term debt 2,094,609
6,976,175
Issue of common shares net of costs -----
15,500,679
Repurchase of common shares (78,056)
-----
--------------------------------------------------------------------------------
---
2,016,553
22,476,854
--------------------------------------------------------------------------------
---
TOTAL CASH RESOURCES PROVIDED 9,966,430
28,751,711
--------------------------------------------------------------------------------
---
INVESTING ACTIVITIES
Acquisitions of property and equipment 3,661,485
21,926,628
Expenditures on property and equipment 10,737,146
7,049,278
Sale of property and equipment (2,628,502)
(1,196,250)
--------------------------------------------------------------------------------
---
11,770,129
27,779,656
--------------------------------------------------------------------------------
---
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (1,803,699)
972,055
Cash and cash equivalents beginning of year 1,803,699
831,644
--------------------------------------------------------------------------------
---
CASH AND CASH EQUIVALENTS,
END OF YEAR -----
1,803,699
--------------------------------------------------------------------------------
---
CASH FLOW FROM OPERATIONS PER SHARE
[NOTE 7]
Basic $0.65
$0.45
Fully diluted $0.62
$0.45
--------------------------------------------------------------------------------
---
SEE ACCOMPANYING NOTES
B-42
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Grey Wolf Exploration Inc. ("Grey Wolf" or "the Company") was incorporated
under the laws of the Province of Alberta on December 23, 1986. The Company's
business is the exploration, development and production of oil and natural
gas in Western Canada.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with generally
accepted accounting principles which, in management's opinion, have been
properly prepared within reasonable limits of materiality and within the
framework of the accounting policies summarized below.
PROPERTY AND EQUIPMENT
PETROLEUM AND NATURAL GAS PROPERTIES, GAS PLANTS AND RELATED EQUIPMENT
The Company follows the full cost method of accounting in accordance with the
guideline issued by the Canadian Institute of Chartered Accountants whereby all
costs associated with the exploration for and development of petroleum and
natural gas reserves, whether productive or unproductive, are capitalized in a
Canadian cost centre and charged to income as set out below. Such costs include
property acquisition, land, undeveloped lease rentals, geological and
geophysical, drilling and facility costs related to exploration and development
activities. Costs of acquiring and evaluating unproven properties are excluded
from the depletion base until it is determined whether or not proven reserves
are attributable to the properties or impairment occurs.
Gains or losses are not recognized upon disposition of petroleum and natural
gas properties unless crediting the proceeds against accumulated costs would
result in a change in the rate of depletion of 20 percent or more.
Depletion of petroleum and natural gas properties and depreciation of
production equipment, except for gas plants and related facilities, is
provided on accumulated net book value using the unit of production method
based on estimated proven petroleum and natural gas reserves, before
royalties, as determined by independent engineers. For purposes of the
depletion calculation, proven petroleum and natural gas reserves are
converted to a common unit of measure on the energy equivalent basis of one
barrel of oil or liquids being equal to six thousand cubic feet of natural
gas. Depreciation of gas plants and related facilities is calculated on a
straight line basis over an average eighteen year term.
The depletion and depreciation cost base includes capitalized costs, less
costs of unproven properties, plus a provision for future development costs
of proven undeveloped reserves.
The net carrying value of the Company's petroleum and natural gas properties
is limited to an ultimate recoverable amount. This amount is the aggregate of
estimated future net revenues from proven reserves and the costs of unproven
properties, net of impairment allowances, less future estimated production
costs, general and administration costs, financing costs, site restoration
and abandonment costs, and income taxes. Future net revenues are estimated
using prices and costs without escalation or discounting, and the income tax
and Alberta Royalty Tax Credit legislation in effect at the year end.
FUTURE ABANDONMENT AND SITE RESTORATION COSTS
The estimated cost of future abandonment and site restoration is based on the
current cost and the anticipated method and extent of site restoration in
accordance with existing legislation and industry practice. The annual charge
is provided for on a unit of production basis for all properties except for
gas plants for which the annual charge is calculated on a straight line basis
over the estimated remaining life of the plants. Actual site restoration
expenditures are charged to the accumulated liability account as incurred.
OTHER ASSETS
Furniture, leasehold improvements, computer hardware, software and office
equipment are carried at cost and are depreciated over the estimated useful
life of the assets at rates varying between 20 percent and 30 percent, on a
declining balance basis.
MEASUREMENT UNCERTAINTY
The amounts recorded for depletion and depreciation of property and equipment
and the provision for abandonment and site restoration are based on
estimates. The ceiling test calculation is based on estimates of proven
reserves, production rates, oil and natural gas prices, future costs and
other relevant assumptions. By
B-43
their nature, these estimates are subject to measurement uncertainty and the
effect on the financial statements of changes in such estimates could be
significant.
JOINT OPERATIONS
Substantially all of the Company's exploration and development activities are
conducted jointly with others, and accordingly the financial statements
reflect only the Company's proportionate interest in such activities.
CASH AND CASH EQUIVALENTS
Cash equivalents consist primarily of highly liquid money market securities
that are readily convertible into cash. Cash equivalents are carried at cost
plus accrued interest which approximates market value.
INCOME TAXES
The Company follows the deferral method of accounting for income taxes under
which the income tax provision is based on the earnings reported in the
accounts. Under this method, the Company provides for deferred income taxes
to the extent that income taxes otherwise payable are reduced by exploration
and development costs and capital cost allowance in excess of the depletion
and depreciation provisions recorded in the accounts.
FINANCIAL INSTRUMENTS
Financial instruments of the Company consist of cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities, long-term debt
and forward commodity sales contracts. As at December 31, 1999 and 1998,
there were no significant differences between the carrying amounts of these
financial instruments reported on the balance sheet and their estimated fair
values.
The Corporation also from time to time employs financial instruments to
manage its exposure to commodity prices. These instruments are not used for
speculative trading purposes.
Gains and losses on commodity price hedges are included in revenues
upon the sale of the related production provided there is reasonable
assurance that the hedge is and will continue to be effective.
3. PROPERTY AND EQUIPMENT
Accumulated
1999 depletion and Net
($) Cost depreciation Book value
-----------------------------------------------------------------
Petroleum and
natural gas
properties 54,879,522 12,370,865 42,508,657
Gas plants and
related facilities 4,494,066 792,833 3,701,233
Other assets 499,942 272,333 227,609
-----------------------------------------------------------------
59,873,530 13,436,031 46,437,499
-----------------------------------------------------------------
1998
-----------------------------------------------------------------
Petroleum and
natural gas
properties 43,454,166 6,273,979 37,180,187
Gas plants and
related facilities 4,215,446 684,920 3,530,526
Other assets 433,789 194,172 239,617
-----------------------------------------------------------------
48,103,401 7,153,071 40,950,330
-----------------------------------------------------------------
Undeveloped property costs of $7,365,579 at December 31, 1999 (1998
-$4,455,137) have been excluded from the depletion and ceiling test
calculations.
4. LONG-TERM DEBT
At December 31, 1999, the Company had an operating credit facility with a
Canadian chartered bank with a maximum limit of $23,000,000. Under the
facility, loan advances bear interest at bank prime plus one-eighth percent
or, if bankers' acceptances are utilized, current bankers' acceptance rate
plus one and one-eighth percent. Loan advances are supported by a first
floating charge demand debenture in the amount of $25,000,000 covering all
the assets of the Company.
While the facility is demand in nature, the bank has stated that it is not
its intention to call for repayment before December 31, 2000 provided there
is no adverse change in the financial position of the Corporation.
Accordingly, the loan has been classified as long term.
At December 31, 1999, the effective interest rate on the facility was 6.7
percent (1998-6.2 percent). Interest paid for the years ended December 31,
1999 and 1998 approximates interest expense in each year.
B-44
5. SHARE CAPITAL
AUTHORIZED
Unlimited number of common shares without nominal or par value.
ISSUED
ISSUED
Number of shares $ amount
----------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 7,698,091 11,903,337
Issued on exercise of
stock options 6,250 15,250
Issued for cash,
net of costs (ii) 5,000,000 15,711,839
----------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 12,704,341 27,630,426
Shares cancelled pursuant to
issuer bid (44,600) (78,056)
----------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 12,659,741 27,552,370
----------------------------------------------------------------
(i) On May 20, 1999, the Company's shareholders approved the consolidation
of the share capital of the Corporation on the basis of one common share for
each ten common shares outstanding. All common share and per share amounts
have been reflected on a post consolidation basis.
(ii) In July, 1998, the Company issued 5,000,000 common shares at $3.20 per
share for gross proceeds of $16,000,000. Abraxas Petroleum Corporation
("Abraxas") acquired 2,500,000 of these shares. Costs of the issue totaled
$514,571 and have been recorded net of the associated $226,410 deferred tax
benefit.
STOCK OPTIONS
Under the Company's stock option plan, a maximum of 1,265,000 common shares
are reserved for issuance. The options expire five years from the grant date
and are exercisable equally over four years commencing one year after the
grant date. No compensation expense is recognized when stock options are
issued or exercised.
The following is a continuity of stock options outstanding for which common
shares have been reserved for issuance:
Weighted
average
option
Number of shares price ($)
-----------------------------------------------------------------
BALANCE DECEMBER 31, 1997 667,287 3.10
Granted 271,154 3.53
Exercised (6,250) 2.44
Cancelled (34,375) 5.00
-----------------------------------------------------------------
BALANCE DECEMBER 31, 1998 897,816 3.20
Granted 328,470 1.91
Cancelled (192,571) 2.83
BALANCE DECEMBER 31, 1999 1,033,715 2.84
-----------------------------------------------------------------
Weighted
Options Options Average Expiry
outstanding exercisable option price date
-----------------------------------------------------------------
23,062 23,062 $2.12 2000
424,030 318,023 $2.55 2001
111,375 55,688 $4.48 2002
249,278 62,320 $3.53 2003
225,970 -- $1.87 2004
-----------------------------------------------------------------
1,033,715
-----------------------------------------------------------------
B-45
6. PROVISION FOR INCOME TAXES
Income taxes recorded on the statement of earnings and retained earnings
differ from the tax calculated by applying the combined statutory Canadian
corporate and provincial income tax rate as follows:
($) 1999 1998
-----------------------------------------------------------------
Calculated income tax expense
at 44.6% 752,237 34,242
INCREASE (DECREASE) IN
INCOME TAX RESULTING
FROM :
Non-deductible crown royalties
and other
charges, net of
Alberta Royalty Tax Credit 754,692 320,406
Resource allowance (1,174,140) (552,130)
Non-deductible depletion
and depreciation 43,472 34,492
Deferred tax benefits
not recognized -- 162,990
Recognition of deferred
tax benefits not (147,000) --
-----------------------------------------------------------------
229,261 --
Large corporation tax 109,686 68,129
-----------------------------------------------------------------
Income tax provision 338,947 68,129
-----------------------------------------------------------------
Taxes paid for the years ended December 31, 1999 and 1998 approximate large
corporations tax expense in each year.
As at December 31, 1999, the Company has exploration and development costs,
undepreciated capital costs and
unamortized share issue costs available for deduction against future taxable
income in the following approximate amounts:
$ amount
---------------------------------------------------------------
Canadian oil and gas property expense 23,280,000
Canadian development expense 3,650,000
Canadian exploration expense 6,830,000
Undepreciated capital cost 8,220,000
Non-capital losses 1,249,000
Unamortized share issue costs 605,000
---------------------------------------------------------------
43,834,000
---------------------------------------------------------------
7. PER SHARE AMOUNTS
The calculation of earnings per share and cash flow from operations per share
is based on the weighted average number of common shares outstanding during
the year ended December 31, 1999 of 12,695,313 (1998-9,809,661). The fully
diluted weighted average number of common shares outstanding during the year
ended December 31, 1999 is 13,681,195 (1998 -The effect of any potential
common share issuances was antidilutive).
Cash flow from operations per share is based on cash flow from operations
before changes in non-cash working capital items.
8. RELATED PARTY TRANSACTIONS
The Company manages the assets and operations of Canadian Abraxas Petroleum
Limited ("Canaxas") pursuant to a Management Agreement dated November
12,1996. Canaxas is a wholly-owned subsidiary of Abraxas. As at December 31,
1999 Abraxas owns 46.0 percent of the common shares of the Company and
Canaxas owns 2.7 percent of the common shares of the Company.
The aggregate common costs of operations and administration of the Canaxas'
and the Company's assets are shared on a pro rata basis, based on revenue.
Amounts due to and from these related parties at December 31, 1999 and 1998
are non-interest bearing, are not collateralized and are due on demand as
follows:
($) 1999 1998
----------------------------------------------------------------
Due to Canaxas 289,815 1,361,193
----------------------------------------------------------------
In July 1999, the Corporation purchased undeveloped property from a
wholly-owned subsidiary of Canaxas for a total cost of $3,421,000. As a
result of this acquisition, the Corporation is committed to spend $6,000,000
prior to June 30, 2002 pursuant to the terms of a farm-in agreement between
the Corporation and the wholly-owned subsidiary of Canaxas.
9. COMPARATIVE FIGURES
In 1999, the Corporation adopted, on a retroactive basis, the requirements of
the Canadian Institute of Chartered Accountants as they relate to the
presentation of the cash flow statement.
B-46
1999 1998
1997 1996 1995
--------------------------------------------------------------------------------
-------------------------------------
FINANCIAL ($)
Revenue 15,426,519 8,797,181
2,448,269 739,426 722,119
Net earnings 1,346,928 8,646
556,125 247,595 (684,023)
Per share 0.11 --
0.08 0.04 (0.33)
Cash flow from operations 8,238,687 4,371,755
1,079,991 470,664 244,778
Per share 0.65 0.45
0.16 0.08 0.12
Property and equipment
capital expenditures 10,737,146 7,049,278
1,897,671 504,635 645,358
Acquisitions 3,661,485 21,926,628
15,840,716 -- --
Dispositions 2,628,502 1,196,250
1,404,005 17,585 79,160
Total assets 50,540,766 45,694,184
21,371,743 6,068,103 1,638,486
Working capital (deficiency) (4,013,630) (2,498,741)
(1,567,694) 4,473,863 432,301
Long term debt 12,065,824 9,971,215
2,995,040 -- --
Shareholders' equity 29,464,069 28,195,197
12,459,462 5,685,543 1,361,948
Shares outstanding
Weighted for year 12,695,313 9,809,661
6,574,708 6,102,875 2,045,500
Year-end balance 12,659,741 12,704,341
7,698,091 6,136,500 2,045,500
--------------------------------------------------------------------------------
-------------------------------------
OPERATIONS
Production
Natural Gas (MMcf/d) 15.3 10
1.7 -- --
Oil and NGLs (Bbl/d) 176 185
87 80 95
Boe/d 1,707 1,187
260 80 95
Reserves - Natural Gas (Bcf)
Proven 28.3 36.2
11.2 -- --
Probable 7.3 6.6
2.4 -- --
Reserves - Oil and NGLs (Mbbl)
Proven 380 671
339 135 165
Probable 39 54
31 7 13
Undeveloped land
Gross acres 1,024,190 439,782
402,246 n/a n/a
Net acres 264,516 127,900
58,505 n/a n/a
Wells drilled
Gross 21 26
14 n/a n/a
Net 6.7 6.7
2.0 n/a n/a
All per share calculations have taken account of the consolidation of one common
share for ten shares outstanding, which was effective in May 1999
B-47
ANNEX B-3
GREY WOLF MANAGEMENT'S DISCUSSION AND ANALYSIS FROM 1999 ANNUAL REPORT
B-48
MANAGEMENT'S DISCUSSION AND ANALYSIS
Grey Wolf achieved record average production in 1999, leading to record cash
flow and net earnings. The strong operational results were supported by
conservative financial management. Capital expenditures for exploration and
development were funded by cash flow and property disposition proceeds.
PRODUCTION
Grey Wolf increased 1999 production volumes by 44 percent to 1,707 barrels of
oil equivalent per day (Boe/d) compared with 1,187 Boe/d in 1998. The increase
was mainly due to the full year impact of the acquisition of producing
properties on July 1, 1998. The year-end exit production rate for the Company
was 1,688 Boe/d, down 10 percent from 1,885 Boe/d at year-end 1998. The decrease
was a result of the sale of 160 Boe/d of minor properties in early 1999 and the
sale of an interest at the Bellis area of Alberta at mid-year. The production
increase from drilling and recompletions more than offset normal production
declines.
Average natural gas production in 1999 climbed 53 percent to 15.3 million cubic
feet per day (MMcf/d) from 10.0 MMcf/d in 1998. Natural gas liquids (NGLs)
production increased 10 percent to 136 Boe/d while crude oil production
decreased 34 percent to 40 Boe/d in 1999 from 61 Boe/d in 1998. The Company's
production remains heavily concentrated on natural gas and NGLs which account
for 98 percent of total production, up from 95 percent in 1998.
REVENUE
---------------------------------------------------
REVENUE ANALYSIS
---------------------------------------------------
($ thousands) 1999 1998 1997
---------------------------------------------------
Natural Gas 13,479 7,291 1,399
Crude oil and NGLs 1,296 1,026 733
Processing 652 480 316
---------------------------------------------------
15,427 8,797 2,448
---------------------------------------------------
Total oil and gas revenues in 1999 were $15.4 million, up 75 percent from the
$8.8 million reported in 1998. The increase was due to the combination of higher
production volumes and higher commodity prices, with a 59 percent, or $3.9
million, increase in production volume sales and a 41 percent, or $2.7 million,
increase in commodity prices.
The average natural gas price for 1999 was up 21 percent to $2.41 per thousand
cubic feet (Mcf) compared with $1.99 per Mcf in 1998. The average price received
in 1999 for oil and NGLs was $20.09 per barrel, up 32 percent from $15.18 per
barrel in 1998.
The 1999 gross revenues included $652 thousand (1998-$481 thousand) related to
processing, gathering and road use fees charged to third parties.
NATURAL GAS: VOLUME AND PRICE
-----------------------------------------------------------
1999 1998
(average volume) MMcf/d $/Mcf MMcf/d $/Mcf
-----------------------------------------------------------
First Quarter 16.5 2.05 4.7 1.76
Second Quarter 16.3 2.12 5.0 1.86
Third Quarter 14.9 2.67 14.8 1.89
Fourth Quarter 13.8 2.81 15.1 2.19
-----------------------------------------------------------
Annual average 15.3 2.41 10.0 1.99
-----------------------------------------------------------
-----------------------------------------------------------
CRUDE OIL AND NGLS: VOLUME AND PRICE
-----------------------------------------------------------
1999 1998
-----------------------------------------------------------
(average volume) Bbl/d $/Bbl Bbl/d $/Bbl
-----------------------------------------------------------
First Quarter 189 12.55 126 15.46
Second Quarter 193 15.76 124 15.76
Third Quarter 156 22.65 288 14.98
Fourth Quarter 165 29.01 205 15.10
-----------------------------------------------------------
Annual average 176 20.09 185 15.18
-----------------------------------------------------------
ROYALTIES
The Company's gross royalty rate, before the Alberta Royalty Tax Credit (ARTC),
as a percentage of total gross revenues was 25.4 percent in 1999, an increase
from 17.1 percent in 1998. The majority of the increase was due to higher gas
Crown royalty rates, which are
B-49
formulated to increase progressively with higher natural gas prices. The 21
percent increase in natural gas prices during 1999 was the major reason for
the increase in total royalties. To a lesser extent, certain wells came
on-stream in 1999 with overriding royalty burdens that contributed to the
higher royalty in 1999.
The ARTC entitlements increased 186 percent to $1.4 million in 1999 from $486
thousand in 1998. The increase was a result of more qualified wells acquired in
the previous year, new wells that came on production during 1999, and an
increase in gas production.
------------------------------------------------------
ROYALTIES
------------------------------------------------------
($ thousands) 1999 1998 1997
------------------------------------------------------
Crown royalties 3,016 1,149 355
Other royalties 739 272 65
Alberta Royalty Tax Credit (1392) (486) (63)
------------------------------------------------------
Net royalties 2,363 935 357
------------------------------------------------------
Average corporate royalty rate 16% 11% 17%
------------------------------------------------------
EXPENSES
Operating costs of $3.2 million were up 36 percent over 1998. On a Boe basis,
operating costs for the year amounted to $5.19, down from $5.48 in 1998. The
divestiture of minor properties resulted in an improvement in operating cost
structure.
------------------------------------------------------
OPERATING EXPENSES
($ thousands) 1999 1998 1997
------------------------------------------------------
Operating expenses 3,236 2,373 688
Net operating
expenses per Boe 5.19 5.48 7.24
------------------------------------------------------
On a Boe basis, general and administrative (G&A) expenses were down slightly to
$1.45 in 1999 from $1.48 in the prior year. In total, G&A expenses were up 41
percent to $903 thousand. The increase was mainly due to the increase in
production and capital expenditure activities in 1999. The Company maintains its
G&A sharing arrangement with its affiliate, Canadian Abraxas Petroleum Limited,
on the basis of respective net revenues. In 1999, the portion of total G&A paid
by Grey Wolf was 21 percent, which was comparable to the 22 percent paid in
1998.
------------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES
($ thousands) 1999 1998 1997
--------------------------------------------------------
Gross general and
administrative expenses 3,726 2,245 888
Operating recoveries (2,823) (1,603) (573)
--------------------------------------------------------
Net general and
administrative expenses 903 642 315
--------------------------------------------------------
Net general and
administrative expenses per Boe 1.45 1.48 3.31
--------------------------------------------------------
Interest expense increased 41 percent to $576 thousand from $408 thousand
reported in 1998. The increase was primarily due to the increase in outstanding
bank debt. The Company's bank loan increased 21 percent to $12.1 million at
year-end 1999. The Company continues to utilize the banker acceptance (BA) form
of bank financing. Using BAs has saved the Company an average of 45 basis points
when compared with conventional bank loan financing.
------------------------------------------------------
INTEREST EXPENSE
($ thousands) 1999 1998 1997
------------------------------------------------------
Interest Expense 576 408 79
Bank debt, December 31 12,066 9,971 2,995
Debt-to-cash flow ratio 1.46 2.28 2.77
------------------------------------------------------
Total production volumes increased by 44 percent in 1999 on a Boe basis,
resulting in a 53 percent increase in depletion, depreciation and site
restoration expense to $6.7 million from $4.4 million in 1998. The
disproportionate increase in percentage was due to higher finding costs and
revisions to proven reserves in 1999. Excluding gas plant and office equipment
depreciation expense of $186 thousand and site restoration expense of $400
thousand, depletion expense was $9.78 per Boe compared to $9.22 per Boe in 1998.
The significant increase in net earnings has resulted in a provision for
deferred income tax of $229 thousand in 1999. Capital tax for 1999 amounted to
$110 thousand, up marginally from the $68 thousand recorded in 1998. The capital
tax increase was mainly due to the increased level of invested capital. Grey
Wolf has total tax
B-50
pools of $43.8 million, which are available to reduce future years' income
for income tax purposes.
NETBACKS
The netbacks for all products climbed 31 percent to $13.22 per Boe in 1999 from
$10.09 per Boe in 1998. The increase was primarily due to an improvement in all
commodity prices, offset by the resulting increase in royalties. The corporate
expenses remained constant with the 1998 level and had no impact on 1999
netbacks.
------------------------------------------------------
NETBACKS
(BOE) 1999 1998 1997
------------------------------------------------------
Revenue 24.75 20.31 25.76
Royalties (net of ARTC) (3.79) (2.16) (3.76)
Interest and other --- --- 1.02
Operating Costs (5.19) (5.48) (7.24)
------------------------------------------------------
Operating netback 15.77 12.67 15.78
General and administrative (1.45) (1.48) (3.31)
Interest on long-term debt (0.92) (0.94) (0.83)
Large corporation tax (0.18) (0.16) (0.27)
------------------------------------------------------
Corporate netback 13.22 10.09 11.37
------------------------------------------------------
CASH FLOW AND EARNINGS
Cash flow increased to $8.2 million ($0.65 per share), an 88 percent increase
from $4.4 million ($0.45 per share) in 1998. Net earnings increased
substantially in 1999 to $1.35 million or $0.11 per share (1998 - $9 thousand or
nil per share). The increase in both cash flow and net earnings resulted
primarily from the improvement in commodity prices and higher production
volumes.
----------------------------------------------------
CASH FLOW AND EARNINGS
($ thousands, except per 1999 1998 1997
share)
----------------------------------------------------
Cash Flow 8,239 4,372 1,080
Cash flow per share 0.65 0.45 0.16
Net earnings 1,347 9 556
Net earnings per share 0.11 0 0.08
----------------------------------------------------
CAPITAL EXPENDITURES
During 1999, the majority of the $11.8 million total capital expenditures was
expended on land, acquisitions and rentals. The Company spent $3.4 million to
acquire significant undeveloped acreage from New Cache Petroleums Ltd. and $868
thousand for land at Widewater, Alberta. In 1998, the Company established new
core areas for future expansion. As a result, the Company spent a total of $2.9
million in 1999 on exploratory drilling and seismic in the Northwest
Territories, Chinchaga, Springburn and Widewater areas. Development expenditures
of $2.0 million in 1999 was spent mostly on the Company's activities at
Redwater, Thorhild, Radway and Nestow. As a part of the Company's
rationalization program, Grey Wolf disposed of several non-core properties for a
total consideration of $2.6 million. The Company acquired producing properties
and additional interests in the gas plant at the Sundre/Caroline area for a
total of $3.7 million, resulting in net production acquisitions of $1.0 million.
------------------------------------------------------
CAPITAL EXPENDITURES
($ thousands) 1999 1998 1997
------------------------------------------------------
Land 4,625 304 29
Geological and
geophysical 889 1,093 801
Exploration and
development costs 4,054 4,172 677
Production equipment
and facilities 864 1,358 302
------------------------------------------------------
Exploration and
development costs 10,432 6,927 1,809
Other corporate assets 305 123 88
Property acquisitions 3,662 21,926 15,841
Property dispositions (2,629) (1,196) (1,404)
-----------------------------------------------------
Total capital
expenditures 11,770 27,780 16,334
-----------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Cash flow of $8.2 million, together with disposition proceeds of $2.6 million,
financed the Company's 1999 ongoing exploration and development activities.
Acquisitions of $3.7 million were financed with incremental bank debt and
working capital.
On May 20, 1999 the Company announced a normal issuer bid to purchase shares for
B-51
cancellation of up to five percent of its outstanding shares. During 1999, the
Company acquired and cancelled 44,600 shares pursuant to its issuer bid at an
average price of $1.75 per share.
At December 31, 1999, Grey Wolf had a $23 million bank credit facility, of which
$12.1 million had been utilized. Under the terms of the credit facility, this
line of credit bears interest at the bank's prime rate plus one-eighth of one
percent. The Company is not required to make any principal repayments during the
next year. The year-end bank debt-to-cash flow was 1.46. The Company's goal is
to maintain a cash flow multiple of less then 2.0 times.
B-52
ANNEX B-4
GREY WOLF FIRST QUARTER REPORT DATED MAY 17, 2001
B-53
Q1 REPORT
GREY WOLF EXPLORATION INC.
----------------------------------------------------
-------------------------------------------------
HIGHLIGHTS Three
Months Ended March 31
---------------------------------------------------- ---------------
-------------- ------------------
2001
2000 % Change
---------------------------------------------------- ---------------
-------------- ------------------
PRODUCTION
Natural gas (Mmcf/d) 11.1
15.2 (27)
Oil & natural gas liquids (Bbl/d) 520
173 201
---------------------------------------------------- ---------------
-------------- ------------------
Total (6:1 Boe/d) 2,367
2,702 (12)
---------------------------------------------------- ---------------
-------------- ------------------
PRICES
Natural gas ($/Mcf) 9.53
2.92 226
Oil & natural gas liquids ($/Bbl) 43.91
32.82 34
---------------------------------------------------- ---------------
-------------- ------------------
FINANCIAL ($000S EXCEPT PER SHARE AMOUNTS)
Oil & natural gas revenue 11,667
4,692 149
Net earnings 2,868
37 7,651
Net earnings per share 0.23
- -
Cash flow from operations 7,365
2,245 228
Cash flow from operations per share 0.58
0.18 222
Capital expenditures 6,486
2,993 117
Dispositions 18
17 6
---------------------------------------------------- ---------------
-------------- ------------------
REPORT TO SHAREHOLDERS
Sustained industry-wide higher commodity prices have resulted in record cash
flow and earnings for Grey Wolf for the first quarter of 2001. The Company's
cash flow rose to $7.4 million ($0.58 per share), a 228% increase over the
same quarter in 2000, while net earnings amounted to $2.9 million ($0.23 per
share) compared to $37 thousand last year.
OPERATIONS
During the first quarter of 2001, 3D seismic programs have been completed in
the Company's focus areas of Caroline, Pouce Coupe and Ladyfern. Initial
interpretation of all three seismic programs has yielded drilling locations
in each of these areas. At Caroline, an up-hole completion of a well drilled
in the fall of 2000 together with recompletions of new productive zones in
two other wells was successful. To handle approximately 4.8 million cubic
feet per day ("Mmcf/d") of new production, gas gathering lines and plant
expansion were also completed in the area. Grey Wolf completed a natural gas
well in Pouce Coupe with initial daily production of 4.6 Mmcf/d of natural
gas and 160 barrels per day ("Bbl/d") of NGLs. In the Valhalla area, the
Company participated in the unsuccessful drilling of a Montney zone natural
gas well (38% Company working interest). Subsequent to the end of the
quarter, a 15 mile pipeline was completed to take production from Pouce Coupe
to the Company's gas plant at Valhalla.
FINANCIAL
For the first quarter of 2001, revenues were up 149% to $11.7 million due to
increased commodity prices offsetting a 12% decline in production. At $9.53
per thousand cubic feet of natural gas and $43.91 per barrel of crude oil and
natural gas liquids ("NGLs"), the Company received a 226% increase in natural
gas prices and a 34% increase in crude oil and NGLs prices over the same
period in 2000. Daily production for the first three months of 2001 amounted
to 11.1 Mmcf/d of natural gas and 520 Bbl/d of crude oil and NGLs. The
production decline was due to normal field production declines and the loss
of
B-54
natural gas production due to reservoir water invasion in Nestow, Alberta
offset by new natural gas and NGLs production from Pouce Coupe, Alberta.
Current production levels are now at 12.4 Mmcf/d for natural gas and 500
Bbl/d for crude oil and NGLs.
With higher commodity prices, the net royalty rate has increased from 23% to
25% of oil and natural gas revenues. Operating costs of $754 thousand for the
first quarter of 2001 are lower by 9% compared to the same period in 2000,
but up 4% to $3.54 per barrel of oil equivalent produced, on a 6:1 basis.
General administration costs are $436 thousand up from $281 thousand last
year as a result of staff incentive bonus payments and costs related to the
evaluation of the proposed share exchange proposal by Grey Wolf's major
shareholder, Abraxas Petroleum Corporation. Interest costs of $160 thousand
are down from $209 thousand in 2000 due to reduced average debt outstanding
during the period. Depletion and depreciation expense are relatively
unchanged as lower production levels were offset by higher depletion and
depreciation rates due to increased seismic costs in the first quarter of
2001.
During the first three months of 2001, Grey Wolf invested $6.5 million in oil
and natural gas land purchases, seismic programs, drilling operations and
facilities construction. These capital expenditures were entirely funded by
cash flow.
OUTLOOK
Drilling activity in Caroline and Pouce Coupe areas is expected to recommence
at the end of the second quarter, with one rig drilling continuously in each
area throughout the balance of the year. Based on continued current commodity
price levels, 2001 cash flow is expected to exceed $24 million ($1.88 per
share). At this level of cash flow, all capital expenditures will be funded
through internally generated cash flow.
On behalf of the Board of Directors,
"Robert L.G. Watson" (signed)
Robert L.G. Watson
Chairman & CEO
May 10, 2001
B-55
----------------------------------------------------
----------------------------------------
STATEMENT OF EARNINGS AND RETAINED EARNINGS Three Months
Ended March 31
----------------------------------------------------
----------------------------------------
($000S) 2001
2000
---------------------------------------------------- ------------------
---------------------
REVENUE
Petroleum and natural gas sales $11,667
$ 4,692
Royalties, net of ARTC (2,927)
(1,100)
---------------------------------------------------- ------------------
---------------------
8,740
3,592
==================================================== ==================
=====================
EXPENSES
Production 754
830
General and administrative 436
281
Interest on long-term debt 160
209
Depletion and depreciation 2,091
2,124
---------------------------------------------------- ------------------
---------------------
3,441
3,444
==================================================== ==================
=====================
Earnings before taxes 5,299
148
Provision for taxes
Capital taxes 25
27
Future income taxes 2,406
84
---------------------------------------------------- ------------------
---------------------
Net earnings 2,868
37
Retained earnings, beginning of period 5,290
1,912
Adoption of new accounting income tax standard -
(562)
==================================================== ==================
=====================
Retained earnings, end of period $ 8,158
$ 1,387
==================================================== ==================
=====================
Weighted average number of shares outstanding 12,666
12,660
==================================================== ==================
=====================
Net earnings per share 0.23
-
Diluted net earnings per share 0.22
-
==================================================== ==================
=====================
STATEMENT OF CASH FLOW THREE MONTHS
ENDED MARCH 31
---------------------------------------------------
-----------------------------------------
($000S) 2001
2000
--------------------------------------------------- -------------------
---------------------
OPERATING ACTIVITIES
Net earnings $ 2,868
$ 37
Depletion and depreciation 2,091
2,124
Future income taxes 2,406
84
--------------------------------------------------- -------------------
---------------------
Cash flow from operations 7,365
2,245
Changes in non-cash working capital items (2,186)
(799)
--------------------------------------------------- -------------------
---------------------
5,179
1,446
--------------------------------------------------- -------------------
---------------------
FINANCING ACTIVITIES
Long term debt 1,247
1,530
Issue of shares, net of costs 12
-
--------------------------------------------------- -------------------
---------------------
1,259
1,530
--------------------------------------------------- -------------------
---------------------
Total cash resources provided 6,438
2,976
--------------------------------------------------- -------------------
---------------------
INVESTING ACTIVITIES
Site restoration incurred (30)
-
Property, plant and equipment 6,486
2,993
Sale of property, plant and equipment (18)
(17)
--------------------------------------------------- -------------------
---------------------
6,438
2,976
--------------------------------------------------- -------------------
---------------------
Decrease in cash -
-
Cash, beginning of period -
-
--------------------------------------------------- -------------------
---------------------
Cash, end of period $ -
$ -
=================================================== ===================
=====================
Cash flow from operations per share 0.58
0.18
Diluted cash flow from operations per share 0.57
0.17
=================================================== ===================
=====================
B-56
--------------------------------------------------------------------------------
---------------------------------
BALANCE SHEET
--------------------------------------------------------------------------------
---------------------------------
MARCH 31,
December 31, March 31
($000S) 2001
2000 2000
--------------------------------------------------- -------------------
--------------------- -------------------
ASSETS
Current assets
Accounts receivable $11,432
$ 9,815 $5,290
--------------------------------------------------- -------------------
--------------------- -------------------
5,290
Property, plant and equipment 59,209
54,782 47,383
--------------------------------------------------- -------------------
--------------------- -------------------
$70,641
$64,597 $52,673
=================================================== ===================
===================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $15,196
$15,764 $ 8,504
Long-term debt 13,040
11,793 13,596
Future site restoration 977
898 985
Future income taxes 5,703
3,297 649
--------------------------------------------------- -------------------
--------------------- -------------------
34,916
31,752 23,734
--------------------------------------------------- -------------------
--------------------- -------------------
Shareholders' equity
Share capital 27,567
27,555 27,552
Retained earnings 8,158
5,290 1,387
--------------------------------------------------- -------------------
--------------------- -------------------
35,725
32,845 28,939
--------------------------------------------------- -------------------
--------------------- -------------------
$70,641
$64,597 $52,673
=================================================== ===================
===================== ===================
Shares outstanding 12,667
12,662 12,660
=================================================== ===================
===================== ===================
NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2001
ACCOUNTING POLICIES
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments for a normal and recurring
nature necessary to present fairly Grey Wolf's financial position at March
31, 2001 and the results of its operations and its cash flows for the three
month periods ended March 31, 2001 and 2000. The results of operations and
cash flows are not necessarily indicative of the results of operations or
cash flows to be expected for the year ending December 31, 2001.
The accounting policies followed by Grey Wolf are set forth in Note 1 to the
audited consolidated financial statements included in the Corporation's 2000
Annual Information Form except for the following:
ACCOUNTING CHANGE
Effective the first quarter of 2001, the Company retroactively adopted
recommendations of the CICA Handbook section 3500 regarding earnings per
share. Under the revised standard, the treasury stock method is used instead
of the current imputed earnings approach for determining the dilutive effect
of options issued.
B-57
RESTATEMENT
Certain comparative amounts in 2000 have been restated to conform to the
presentation adopted in 2001.
OFFICERS AND MANAGEMENT HEAD OFFICE
Robert L.G. Watson Grey Wolf Exploration Inc.
Chairman of the Board & CEO Suite 1600, Bow Valley Square III
255 - 5 Avenue S.W.
James K. Wilson Calgary, Alberta T2P 3G6
Senior Vice President & CFO
Tel: (403) 262-1949
Vincent J. Tkachyk Fax: (403) 262-1969
Vice president, Operations
Email: info@greywolf.ca
Francis Cheung Website: www.greywolf.ca
Controller
Tom Zuorro
Senior Manager, Land & Contracts
Doug Carter
Manager, Production & Facilities
Mike Fabi
Manager, Engineering & Joint Venture
Glen Glass
Manager, Drilling & Completions
Bob Johnson
Manager, Exploration
Debbie Wozny
Assistant Secretary
Grey Wolf is a Canadian junior oil and natural gas exploration and production
company, which trades on The Toronto Stock Exchange under the ticker symbol
GWX. For further information please contact Jim Wilson, Senior Vice President
& CFO at (403)262-1949 of fax (403)262-1969.
B-58
ANNEX B-5
MANAGEMENT PROXY/INFORMATION CIRCULAR DATED MAY 17, 2001
B-59
GREY WOLF EXPLORATION INC.
MANAGEMENT PROXY CIRCULAR
FOR THE
ANNUAL MEETING
OF HOLDERS OF COMMON SHARES
TO BE HELD ON JUNE 28, 2001
SOLICITATION OF PROXIES
THIS MANAGEMENT PROXY CIRCULAR (THE "CIRCULAR") IS FURNISHED IN
CONNECTION WITH THE SOLICITATION BY MANAGEMENT OF GREY WOLF EXPLORATION INC.
(THE "CORPORATION" OR "GREY WOLF") OF PROXIES TO BE USED AT THE ANNUAL MEETING
(THE "MEETING") OF THE HOLDERS OF COMMON SHARES OF THE CORPORATION (THE
"SHAREHOLDERS") TO BE HELD AT THE TIME AND PLACE AND FOR THE PURPOSES SET FORTH
IN THE ACCOMPANYING NOTICE OF ANNUAL MEETING AND IN THIS CIRCULAR. Solicitation
of proxies will be primarily by mail but may also be undertaken by way of
telephone, facsimile or oral communication by the directors and officers of the
Corporation, at no additional compensation. The cost of the solicitation of
proxies will be borne by the Corporation.
APPOINTMENT AND REVOCATION OF PROXIES
The management designees named in the accompanying Instrument of Proxy
are directors and/or officers of the Corporation. A SHAREHOLDER HAS THE RIGHT TO
APPOINT A PERSON OR CORPORATION (WHO NEED NOT BE A SHAREHOLDER), OTHER THAN THE
MANAGEMENT DESIGNEES NAMED IN THE ACCOMPANYING INSTRUMENT OF PROXY, TO REPRESENT
SUCH SHAREHOLDER AT THE MEETING. To exercise this right, the names of the
persons designated by management should be crossed out and the name of the
Shareholder's appointee should be legibly printed in the blank space provided.
Alternatively, a Shareholder may complete another appropriate form of proxy. The
Instrument of Proxy or such other appropriate form of proxy as may be used by a
Shareholder will not be valid unless it is received by Valiant Corporate Trust
Company, 510, 550 - 6th Avenue S.W., Calgary, Alberta, T2P 0S2, not less than
forty-eight (48) hours before the time of the Meeting or any adjournment
thereof.
A Shareholder who has submitted an Instrument of Proxy or another
appropriate form of proxy, as the case may be, may revoke it by an instrument in
writing signed by the Shareholder or by an authorized attorney thereof, or, if
the Shareholder is a corporation, by a duly authorized officer thereof, and
mailed to or deposited with either: (i) Valiant Corporate Trust Company, 510,
550 - 6th Avenue S.W., Calgary, Alberta, T2P 0S2, at any time up to and
including the last business day preceding the day of the Meeting or any
adjournment thereof; or (ii) with the Chairman of the Meeting prior to the
commencement of the Meeting or any adjournment thereof. In addition, an
Instrument of Proxy or another appropriate form of proxy, as the case may be,
may be revoked: (i) by the Shareholder personally attending the Meeting and
voting the securities represented thereby or, if the Shareholder is a
corporation, by a representative of the corporation attending the Meeting and
voting such securities; or (ii) in any other manner permitted by law.
EXERCISE OF DISCRETION BY PROXIES
The persons named in the accompanying Instrument of Proxy will vote or
withhold from voting the shares in respect of which they are appointed, on any
ballot that may be called for, in accordance with the direction of the
Shareholder appointing them and if the Shareholder specifies a choice with
respect to
B-60
any matter to be acted upon, the shares will be voted accordingly. IN THE
ABSENCE OF SUCH DIRECTION, THE RELEVANT SHARES WILL BE VOTED FOR ALL MATTERS
REFERRED TO IN THE INSTRUMENT OF PROXY. The accompanying Instrument of Proxy
confers discretionary authority upon the persons named therein with respect
to amendments to, or variations of, the matters identified in the Notice of
Annual Meeting and with respect to such other matters that may properly come
before the Meeting. As at the date hereof, management of the Corporation
knows of no such amendments, variations or other matters to come before the
Meeting.
SIGNATURE
The Instrument of Proxy must be signed by the Shareholder or his duly
appointed attorney authorized in writing or, if the Shareholder is a
corporation, by a duly authorized officer thereof. If the Instrument of Proxy is
signed by a person acting as attorney or in some other representative capacity
(including a representative of a corporate Shareholder), that person should
indicate his capacity (following his signature) and should be accompanied by the
appropriate documentation evidencing qualification and authority to act (unless
such documentation has been previously filed with the Corporation).
VOTING SECURITIES AND PRINCIPAL HOLDERS OF VOTING SECURITIES
VOTING OF COMMON SHARES - GENERAL
As at the date hereof, 12,794,286 common shares without nominal or par
value of the Corporation are issued and outstanding, each such share carrying
the right to one vote. The record date for the determination of shareholders
entitled to vote at the Meeting is deemed to be the close of business on May 15,
2001 (the "Record Date"). Shareholders whose names have been entered on the
register of shareholders as at the close of business on the Record Date will be
entitled to receive notice of and to vote at the Meeting; provided that, to the
extent that a Shareholder transfers the ownership of any of his shares after the
Record Date but before the Meeting and the transferee of those shares
establishes that he owns such shares and demands not later than ten days before
the Meeting that his name be included in the list of Shareholders eligible to
vote at the Meeting, such transferee will be entitled to vote such shares at the
Meeting.
A quorum of Shareholders at the Meeting will be present if at least two
persons are present holding or representing not less than 5% of the common
shares entitled to be voted at the Meeting.
VOTING OF COMMON SHARES - ADVICE TO BENEFICIAL HOLDERS
THE FOLLOWING INFORMATION IS OF SIGNIFICANT IMPORTANCE TO THOSE
SHAREHOLDERS WHO DO NOT HOLD COMMON SHARES OF THE CORPORATION IN THEIR OWN NAME.
Shareholders who do not hold common shares of the Corporation in their own name
(referred to in this Circular as "Beneficial Shareholders") should note that
only proxies deposited by Shareholders whose names appear on the records of the
Corporation as the registered holders of common shares will be recognized and
acted upon at the Meeting. If shares are listed in an account statement provided
to a Shareholder by a broker, then in many cases those shares will not be
registered in the Shareholder's name on the records of the Corporation. Such
shares will more likely be registered under the name of the Shareholder's broker
or an agent or nominee of that broker. In Canada, the vast majority of such
shares are registered under the name of CDS & Co. (the registration name for The
Canadian Depository for Securities, which acts as nominee for many Canadian
brokerage firms). Shares held by brokers or their agents or nominees can only be
voted (for, withheld from voting or against resolutions) upon the instructions
of the Beneficial Shareholder. Without specific instructions, brokers and their
agents and nominees are prohibited from voting shares of
B-61
Beneficial Shareholders. THEREFORE, BENEFICIAL SHAREHOLDERS SHOULD ENSURE
THAT INSTRUCTIONS RESPECTING THE VOTING OF THEIR SHARES ARE COMMUNICATED TO
THE APPROPRIATE PERSON.
Applicable regulatory policy requires brokers and their agents and
nominees to seek voting instructions from Beneficial Shareholders in advance of
shareholders' meetings. Each broker has its own mailing procedures and provides
its own return instructions to clients, which should be carefully followed by
Beneficial Shareholders in order to ensure that their shares are voted at the
Meeting. Often, the Instrument of Proxy supplied to a Beneficial Shareholder by
his broker (or the agent or nominee of the broker) is identical to the form of
proxy provided to registered Shareholders. However, its purpose is limited to
instructing the registered Shareholder (the broker or agent or nominee of the
broker) on how to vote shares on behalf of the Beneficial Shareholder. The
majority of brokers now delegate responsibility for obtaining instructions from
clients to Independent Investor Communications Corporation ("IICC"). IICC
typically applies a special sticker to the proxy forms, mails those forms to the
Beneficial Shareholders and asks Beneficial Shareholders to return the proxy
forms to IICC. IICC then tabulates the results of all instructions received and
provides appropriate instructions respecting the voting of shares to be
represented at the Meeting. A BENEFICIAL SHAREHOLDER RECEIVING A PROXY WITH AN
IICC STICKER ON IT CANNOT USE THAT PROXY TO VOTE SHARES DIRECTLY AT THE MEETING.
THE PROXY MUST BE RETURNED TO IICC WELL IN ADVANCE OF THE MEETING IN ORDER TO
HAVE THE SHARES VOTED.
Although a Beneficial Shareholder may not be recognized directly at the
Meeting for the purposes of voting common shares registered in the name of his
broker (or agent or nominee of the broker), a Beneficial Shareholder may attend
the Meeting as proxyholder for the registered Shareholder and vote the common
shares in that capacity. Beneficial Shareholders who wish to attend the Meeting
and indirectly vote their common shares as proxyholder for the registered
Shareholder, should enter their own names in the blank space in the form of
proxy provided to them by their broker and return the same to their broker (or
the broker's agent or nominee) in accordance with the instructions provided by
such broker (or agent), well in advance of the Meeting.
PRINCIPAL HOLDERS OF COMMON SHARES
To the knowledge of the directors and senior officers of the
Corporation, no person beneficially owns, directly or indirectly, or exercises
control or direction over, common shares carrying more than 10% of the voting
rights of the Corporation, except as follows:
NUMBER OF
PERCENTAGE OF OUTSTANDING COMMON
NAME COMMON SHARES
SHARES
-------------------------------------- ----------------------------------
------------------------------------
Abraxas Petroleum Corporation 6,190,481(1)
48.4%(1)
("Abraxas")
Notes:
(1) Includes the 345,279 common shares (or 2.7%) held by its wholly-owned
subsidiary, Canadian Abraxas Petroleum Limited ("Canaxas").
B-62
ELECTION OF DIRECTORS
There are presently six directors of the Corporation, all of whose term
of office expires at the Meeting. The board of directors of the Corporation (the
"Board" or the "Board of Directors") has fixed the number of directors at six.
Accordingly, it is proposed that the following six directors be elected to hold
office until the next annual general meeting or until their successors are
elected or appointed:
Donald B. Copeland James C. Phelps
John F. Curran, Q.C. Richard M. Riggs
Orval K. Horn Robert L.G. Watson
UNLESS OTHERWISE DIRECTED, IT IS THE INTENTION OF THE PERSONS NAMED IN
THE INSTRUMENT OF PROXY TO VOTE FOR THE ELECTION OF THE ABOVE NOMINEES AS
DIRECTORS.
Information is given below with respect to each nominee for election as
a director, including the length of time he has been a director of the
Corporation. The statements below as to voting securities beneficially owned,
directly or indirectly, or over which control or direction is exercised by the
proposed director and his associates or affiliates, are based upon information
furnished to the Corporation by the respective nominees.
================================== =================================
============================ ===================
NUMBER OF COMMON
NAME AND MUNICIPALITY OF OFFICE HELD AND TIME AS A
PRESENT PRINCIPAL SHARES
RESIDENCE DIRECTOR
OCCUPATION BENEFICIALLY OWNED
---------------------------------- ---------------------------------
---------------------------- -------------------
Donald B. Copeland (1)(2) Director since May 1996 Independent
oil and gas 54,175
Calgary, Alberta businessman
---------------------------------- ---------------------------------
---------------------------- -------------------
John F. Curran (1)(2) Director since May 1996 and Senior
Partner, 10,450
Calgary, Alberta Secretary from May 1997 to Bennett
Jones LLP,
March 23, 2000 Barristers
and Solicitors
---------------------------------- ---------------------------------
---------------------------- -------------------
Orval K. Horn Director since September 1997 Independent
oil and gas 16,850
Calgary, Alberta businessman
---------------------------------- ---------------------------------
---------------------------- -------------------
James C. Phelps (1)(2)(3) Director since January 1996 Independent
oil and gas 237,937
San Antonio, Texas consultant
---------------------------------- ---------------------------------
---------------------------- -------------------
Richard M. Riggs Director since May 1996 Independent
oil and gas 182,937
San Antonio, Texas consultant
---------------------------------- ---------------------------------
---------------------------- -------------------
Robert L.G. Watson (2)(3) Director, Chairman of the Board Chairman,
President and 137,936
San Antonio, Texas and Chief Executive Officer Chief
Executive Officer,
since May 1996 Abraxas
Petroleum
Corporation
================================== =================================
============================ ===================
Notes:
(1) Member of the Audit Committee, a committee required by applicable
legislation.
(2) Member of the Compensation Committee.
(3) Officer or Director of Abraxas Petroleum Corporation.
B-63
STATEMENT OF EXECUTIVE COMPENSATION
COMPENSATION OF NAMED EXECUTIVE OFFICERS
The following table sets forth information concerning the total
compensation paid during each of the last three fiscal years to the Chief
Executive Officer of the Corporation and the Corporation's other executive
officers who received total remuneration, determined on the basis of total
annual salary and bonus, in excess of $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
================================================================================
========================================
ANNUAL COMPENSATION
LONG-TERM COMPENSATION
----------------------------------------------------------
--------------------------------
------------ ------------ ------------
------------------- ----------------- --------------
SECURITIES
OTHER
ANNUAL UNDER OPTIONS LTIP
YEAR ENDED SALARY BONUS
COMPENSATION GRANTED PAYOUTS
NAME AND PRINCIPAL POSITION DECEMBER 31 ($) ($) ($)
(#)(1) ($)(2)
---------------------------- ------------ ------------ ------------
------------------- ----------------- --------------
Robert L.G. Watson 2000 - -
- - -
Chairman of the 1999 - -
- 4,688 -
Board and Chief 1998 - -
- 6,730 -
Executive Officer
---------------------------- ------------ ------------ ------------
------------------- ----------------- --------------
James K. Wilson(3) 2000 140,561 -
10,964 100,000 -
Senior Vice President & 1999 - -
- - -
Chief Financial Officer 1998 - -
- - -
and Corporate Secretary
---------------------------- ------------ ------------ ------------
------------------- ----------------- --------------
Vincent J. Tkachyk 2000 162,500 20,000
13,104 32,188 -
Vice President, Operations 1999 150,000 6,571
12,600 - -
1998 135,000 12,840
13,022 15,000 -
---------------------------- ------------ ------------ ------------
------------------- ----------------- --------------
Donald A. Engle(4) 2000 58,333 -
267,279(5) - -
President 1999 200,000 -
16,287 - -
1998 175,000 75,000
15,900 50,000 -
---------------------------- ------------ ------------ ------------
------------------- ----------------- --------------
Roger L. Bruton(4) 2000 58,333 -
276,672(5) - -
Executive Vice President 1999 200,000 -
15,394 - -
1998 175,000 75,000
16,120 50,000 -
============================ ============ ============ ============
=================== ================= ==============
Notes:
(1) The securities under options granted reflect the consolidation of
common shares of the Corporation on a one-for-ten basis which was
effective May 20, 1999.
(2) The Corporation does not have a long-term incentive plan pursuant to
which cash or non-cash compensation was paid or distributed to any of
the Named Executive Officers during the fiscal year ended December 31,
2000.
(3) Mr. Wilson commenced employment with the Corporation in March, 2000.
(4) Messrs. Engle and Bruton resigned in their capacity as directors and
officers in April, 2000.
(5) These amounts include all accrued but unpaid salary, savings plan
payments, holiday pay and expenses through March 31, 2000, a
retirement allowance, consulting fees, legal costs and a bonus.
OPTION GRANTS DURING THE FISCAL YEAR ENDED DECEMBER 31, 2000
The following table sets forth the options granted during the fiscal
year ended December 31, 2000 to the Named Executive Officers. The Corporation
has not granted any stock appreciation rights.
B-64
OPTION GRANTS DURING THE FISCAL YEAR ENDED DECEMBER
31, 2000
========================= ============= ================= ===============
===================== =====================
SECURITIES
MARKET VALUE OF
UNDER % OF TOTAL
SECURITIES
OPTIONS OPTIONS GRANTED EXERCISE
UNDERLYING OPTIONS
GRANTED TO EMPLOYEES IN PRICE ON
THE DATE OF EXPIRATION
NAME (#)(1) 2000 ($/SECURITY) GRANT
($/SECURITY) DATE
------------------------- ------------- ----------------- ---------------
--------------------- ---------------------
Robert L.G. Watson - - -
- -
------------------------- ------------- ----------------- ---------------
--------------------- ---------------------
James K. Wilson 100,000 25 1.40
1.40 March 13, 2005
------------------------- ------------- ----------------- ---------------
--------------------- ---------------------
Vincent J. Tkachyk 7,188 2 1.50
1.50 April 8 2005
25,000 6 1.90
1.90 August 21, 2005
------------------------- ------------- ----------------- ---------------
--------------------- ---------------------
Donald A. Engle - - -
- -
------------------------- ------------- ----------------- ---------------
--------------------- ---------------------
Roger L. Bruton - - -
- -
========================= ============= ================= ===============
===================== =====================
Note:
(1) The options have a five year term and are exercisable as to one-quarter
on each of the first, second, third and fourth anniversary dates of the
date of grant.
AGGREGATED OPTION EXERCISES DURING THE FISCAL YEAR ENDED DECEMBER 31, 2000
AND FISCAL YEAR END OPTION VALUES
The following table sets forth the number and accrued value of
unexercised stock options granted to the Named Executive Officers as at December
31, 2000. No stock options issued to the Named Executive Officers were exercised
during the fiscal year ended December 31, 2000.
AGGREGATED OPTION EXERCISES DURING THE FISCAL YEAR ENDED DECEMBER 31, 2000
AND FISCAL YEAR END OPTION VALUES
================================================================================
====================================
VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT
DECEMBER 31, 2000 AT DECEMBER 31, 2000
SECURITIES ACQUIRED AGGREGATE VALUE
EXERCISABLE/ EXERCISABLE/
ON EXERCISE REALIZED
UNEXERCISABLE UNEXERCISABLE
NAME (#) ($)
(#) ($)(1)
------------------------ ---------------------- ----------------------
---------------------- ----------------------
Robert L. G. Watson - -
84,537/6,882 0/0
------------------------ ---------------------- ----------------------
---------------------- ----------------------
James K. Wilson - -
0/100,000 0/85,000
------------------------ ---------------------- ----------------------
---------------------- ----------------------
Vincent J. Tkachyk - -
48,011/67,063 0/24,647
------------------------ ---------------------- ----------------------
---------------------- ----------------------
Donald A. Engle - -
- -
------------------------ ---------------------- ----------------------
---------------------- ----------------------
Roger L. Bruton - -
- -
======================== ====================== ======================
====================== ======================
Note:
(1) The value of unexercised in-the-money stock options has been determined
by subtracting the exercise price at which common shares may be
acquired pursuant to the option from the closing share price of $2.25
on December 29, 2000, and multiplying such difference by the number of
common shares that may be acquired upon the exercise of the option.
(2) Messrs. Engle and Bruton resigned in their capacity as directors and
officers in April, 2000. Their unexercised options expired in June,
2000.
TERMINATION OF EMPLOYMENT, CHANGE IN RESPONSIBILITIES AND EMPLOYMENT CONTRACTS
Two executive officers of the Corporation have each entered into a
change of control agreement with the Corporation. These agreements provide for a
cash payment to each executive officer equal to two times his annual salary in
the event of a change of control of the Corporation, Canaxas or Abraxas,
B-65
coupled with a change in the employee's terms of employment, including
without limitation, a change in responsibilities, duties, reporting
relationship, compensation or benefits, or the executive officer is
terminated by the Corporation other than for just cause, disability or
death.. Payments pursuant to these agreements are to be shared according to
the terms of a management agreement dated November 12, 1996, between the
Corporation and Canaxas.
COMPOSITION OF THE COMPENSATION COMMITTEE
Persons who served on the Corporation's compensation committee (the
"Compensation Committee") during fiscal year ended December 31, 2000, were John
F. Curran, Q.C., Donald B. Copeland and James C. Phelps. Donald A. Engle was
also a member of the Compensation Committee from January 1, 2000 to April 14,
2000, to the date he resigned from the Corporation. Robert L.G. Watson was
appointed to the Compensation Committee effective May 17, 2000.
REPORT ON EXECUTIVE COMPENSATION
In arriving at its compensation decisions, the Compensation Committee
considers the long-term interests of the Corporation as well as its current
stage of development. Based on these considerations, compensation is focused on
performance based factors. The Compensation Committee makes specific
recommendations to the Board of Directors with respect to compensation paid to
executive officers including the Named Executive Officers.
COMPONENTS OF COMPENSATION
The annual compensation of each executive officer is determined having
regard to such executive officer's current responsibilities, individual
performance during the year, corporate performance during the year, years of
service and the assessment by the Compensation Committee of such other matters
as may be presented by management. The Corporation's compensation policy has
three basic components: (i) base salary and benefits; (ii) incentive-based cash
bonuses; and (iii) stock options. The Corporation's executive officers are
eligible to participate in the Corporation's compensation programs. The
components of the Corporation's compensation policy have been designed to
attract and retain highly qualified people at the executive level and to align
the interest of executive officers with those of the Corporation's shareholders.
The Corporation participates in annual compensation surveys for
Canadian oil and gas producers conducted by independent third parties to assist
in determining the competitiveness of compensation of the executive officers'
base salary and benefits.
The Corporation's compensation philosophy is to encourage, at all
levels of the organization, the maximization of shareholder value by making cash
bonuses a component of compensation and taking into consideration performance by
both the Corporation and the employee.
The maximization of shareholder value is encouraged by making long-term
equity incentives a component of compensation. The Corporation has in place a
stock option plan under which awards have been made to executive officers in
amounts relative to position, performance and what is considered competitive in
the industry.
B-66
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The Chief Executive Officer, Robert L.G. Watson, has served as Chairman
of the Board and Chief Executive Officer since 1996. Mr. Watson owns an equity
interest in the Corporation. This interest provides a strong incentive to
maintain corporate performance. During the fiscal year ended 2000, Mr. Watson
received no compensation in his capacity as Chairman of the Board and Chief
Executive Officer, other than fees earned in his capacity as a director of the
Corporation.
Submitted by the Compensation Committee:
Messrs. James C. Phelps (Chairman), Donald B. Copeland, John F. Curran and
Robert L.G. Watson
PERFORMANCE GRAPH
The following graph and table compare the cumulative total shareholder
return over the last five years of the common shares of the Corporation
(assuming a $100 investment was made on December 31, 1995) with the cumulative
total return of the TSE Composite Index and the TSE Oil and Gas Producers
Sub-Group Index, assuming reinvestment of dividends.
[OBJECT OMITTED]
=============================== ============== =============== =============
============= ============= ==========
Fiscal Year 1995 1996 1997
1998 1999 2000
------------------------------- -------------- --------------- -------------
------------- ------------- ----------
Grey Wolf(1) $100 $265 $247
$179 $77 $132
------------------------------- -------------- --------------- -------------
------------- ------------- ----------
TSE 300 $100 $128 $148
$145 $191 $205
------------------------------- -------------- --------------- -------------
------------- ------------- ----------
TSE Oil and Gas Producers $100 $138 $123
$86 $105 $154
Sub-Group Index
=============================== ============== =============== =============
============= ============= ==========
Note:
(1) Grey Wolf's cumulative total shareholder return for the fiscal year
ended December 31, 2000 reflects the one-for-ten common share
consolidation effected May 20, 1999.
B-67
COMPENSATION OF DIRECTORS
During the fiscal year ended December 31, 2000, the Chairman and
directors were compensated for their attendance at board and committee meetings
as approved by the Board of Directors on March 23, 2000. Each director received
$1,500 for each board meeting, attended in person or by phone, and $750 for each
committee meeting, attended in person or by phone. The Chairman and directors
were also reimbursed for their out-of-pocket expenses which were reasonably
incurred in conjunction with their duties to the Corporation.
Mr. Curran is a partner of the law firm Bennett Jones LLP, which firm
receives fees for legal services rendered to the Corporation.
INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS
As at May 4, 2001, the aggregate indebtedness of all current and former
officers, directors and employees of the Corporation to the Corporation in
connection with the purchase of securities of the Corporation was $200,000. This
amount represented indebtedness to the Corporation by such persons as set forth
below:
NUMBERS OF
LARGEST AMOUNT
FINANCIALLY
OUTSTANDING
AMOUNT ASSISTED COMMON
DURING FINANCIAL
OUTSTANDING SHARES PURCHASED
YEAR ENDED AS AT
DURING FINANCIAL
NAME AND INVOLVEMENT OF DECEMBER 31, 2000 MAY 4,
2001 YEAR ENDED SECURITY FOR
PRINCIPAL POSITION ISSUER ($) ($)
DECEMBER 31, 2000 INDEBTEDNESS
-------------------------- -------------- -----------------
----------- ------------------- --------------
James K. Wilson Lender 100,000
100,000 63,000 common shares
Senior Vice President &
Chief Financial Officer
and Corporate Secretary
Vincent J. Tkachyk Lender 100,000
100,000 62,439 common shares
Vice President, Operations
The loans referred to above were granted by the Corporation pursuant to
the provisions of pledge agreements and promissory notes entered into by the
Corporation with each of Messrs. Wilson and Tkachyk. Under the pledge
agreements, the acquired common shares were pledged as collateral security for
the repayment of the loans. The loans bear interest at a rate per annum equal to
the Corporation's borrowing rate from time to time with its principal banker.
Interest on the loans is repayable monthly whereas unpaid principal amounts are
due and payable on the earlier of termination of employment of the debtors with
the Corporation, default by the debtors of payment or other obligations under
the pledge agreements or the promissory notes or the insolvency, bankruptcy or
receivership of the debtors. Principal amounts may be prepaid in full or in part
at any time without penalty.
There is no other indebtedness owed to the Corporation by any of its
former or current directors, officers or employees.
B-68
CORPORATE GOVERNANCE PRACTICES
Under the rules of The Toronto Stock Exchange (the "TSE"), the
Corporation is required to disclose information relating to its corporate
governance system with specific reference to each of the TSE's 14 guidelines
for effective corporate governance. Where the Corporation's corporate
governance system is different from any of the guidelines or where the
guidelines do not apply to the Corporation's corporate governance system, the
Corporation is required to explain the differences or the inapplicability of
the guidelines to the Corporation. The alignment of the Corporation's
corporate governance practices with the 14 guidelines recommended by the TSE
is discussed in Appendix A attached to this Circular. The disclosure has been
approved by the Board of Directors.
The Board and senior management of Grey Wolf consider good corporate
governance to be central to the effective and efficient operation of Grey
Wolf. However, given the particular circumstances of Grey Wolf, including its
size, stage of development and nature of operations, not all of the
guidelines of the TSE have been followed.
APPOINTMENT OF AUDITORS
Management proposes that Deloitte & Touche LLP, Chartered
Accountants, of Calgary, Alberta, be appointed as auditors of the Corporation
until the next annual meeting of Shareholders.
Ernst & Young LLP, Chartered Accountants, resigned as the auditors
of the Corporation and Deloitte & Touche LLP, Chartered Accountants, were
appointed as the auditors of the Corporation effective August 22, 2000.
ON ANY BALLOT THAT MAY BE CALLED FOR AT THE MEETING, THE PERSONS
NAMED IN THE ENCLOSED INSTRUMENT OF PROXY, IF NAMED AS PROXY, INTEND TO VOTE
SUCH PROXY FOR THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS AUDITORS OF THE
CORPORATION, UNLESS A SHAREHOLDER HAS SPECIFIED IN HIS PROXY THAT HIS SHARES
ARE TO BE WITHHELD FROM VOTING IN THE APPOINTMENT OF AN AUDITOR.
OTHER MATTERS
Management knows of no amendment, variation or other matters to come
before the Meeting other than the matters referred to in the Notice of Annual
Meeting. HOWEVER, IF ANY OTHER MATTERS PROPERLY COME BEFORE THE MEETING, IT
IS THE INTENTION OF THE PERSONS NAMED IN THE ENCLOSED INSTRUMENT OF PROXY TO
VOTE THE SHARES REPRESENTED THEREBY IN ACCORDANCE WITH THEIR BEST JUDGMENT ON
SUCH MATTER.
MANAGEMENT CONTRACTS
No management functions of the Corporation are performed to any
substantial degree by a person or persons other than the directors or senior
officers of the Corporation.
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
No director or senior officer of the Corporation, nor any associate
or affiliate thereof, has any material interest, direct or indirect, by way
of beneficial ownership of securities or otherwise, in matters to be acted
upon at the Meeting.
B-69
EFFECTIVE DATE
Unless otherwise indicated, all information set forth in this Circular
is stated as at May 4, 2001.
DIRECTORS' APPROVAL
The contents of this Circular and the forwarding of same to
Shareholders have been approved by the Board of Directors.
CERTIFICATE
The foregoing contains no untrue statement of a material fact and
does not omit to state a material fact that is required to be stated or that
is necessary to make a statement not misleading in light of the circumstances
in which it was made.
Dated May 4, 2001.
Robert L.G. Watson James K. Wilson
Chairman of the Board and Senior Vice-President & Chief
Chief Executive Officer Financial Officer
and Corporate Secretary
B-70
APPENDIX A
GREY WOLF ALIGNMENT WITH TSE CORPORATE GOVERNANCE GUIDELINES
DOES GREY
CORPORATE GOVERNANCE GUIDELINES WOLF ALIGN?
COMMENTS
----------------------------------- ------------------
----------------------------------------------
1. The board of directors should
explicitly assume responsibility
for stewardship of the
Corporation, and specifically for:
a. adoption of a strategic Yes During
2000, the Board approved a strategic
planning process business
plan presented by management. Four
times
annually (and more frequently if required),
management reports to the Board on implementation
of the
strategi plan and results of its operational
activities.
b. identification of principal Yes
Management reports on these matters to the
risks and ensuring Board
four times annually (and more
implementation of appropriate
frequently if required).
risk management systems
c. succession planning, No The
Board considers its needs for senior
including appointing,
management from time to time and takes all
training and monitoring
necessary steps to hire qualified management.
senior management
d. communications policy No The
Board delegates its communications
policy
to the senior management of the
Corporation.
e. integrity of internal control Yes
Integrity of the internal control systems is
and management information the
responsibility of management which is
systems reviewed
by the Audit Committee of the
Corporation. The Audit Committee reports on
these
matters to the Board.
B-71
2. Majority of directors should be No Of the
current six directors, two are
"unrelated" (independent of related.
In addition, two of the current
management and free from six
directors are directors and officers of
conflicting interest). Abraxas,
which owns, directly or indirectly,
approximately 49% of Grey Wolf. The Board
feels
that the Corporation has an
appropriate number of unrelated directors
and
directors who do not have a relationship
with
Abraxas.
3. Disclose which directors are Yes Robert
L. G. Watson (Chief Executive
related and how that conclusion Officer)
and John F. Curran Q.C., are
was reached. related
directors. Mr. Curran is a related
director
by virtue of his position with
Bennett
Jones LLP which provides legal
services
to the Corporation. The remainder
of the
directors are unrelated as they do
not work
for the Corporation, do not have
material
contracts with the Corporation and
do not
receive remuneration from the
Corporation in excess of director's fees,
inclusive of stock options.
4. a. Appoint a committee No The
Corporation has no formal nominating
responsible for appointment/
committee.
assessment of directors.
b. The committee should be No The
Corporation has no formal nominating
composed exclusively of
committee.
outside (i.e. non-management)
directors, the majority of
whom are unrelated.
5. Implement a process for assessing No The
consideration and implementation of
the effectiveness of the Board,
corporate governance matters is presently
its committees and the
considered to be the on-going responsibility
contribution of individual of all
members of the Board.
directors.
B-72
6. Provide orientation and education No The
Corporation does not have a formal
programs for new directors.
orientation and education program for new
members
of the Board.
7. Review the size of the Board and Yes The
Board as constituted is appropriate for
its effectiveness in making the
complexity of Board demands, considering
decisions. the size
of the Corporation.
8. Review the adequacy and form of Yes The
Board reviews the adequacy and form of
compensation of directors and
compensation of directors and is of the view
whether it reflects the risks and that the
compensation of directors is
responsibilities of an effective
commensurate with such risks and
director.
responsibilities.
9. a. Committees should generally Yes All
members of the Audit Committee and all
be composed of but one
member of the Compensation Committee
non-management directors. are
non-management directors.
b. Majority of committee members No A
majority of the Audit Committee and two of
should be unrelated. the four
members of the Compensation
Committee are unrelated.
10. Appoint a committee responsible No The
Corporation does not have a corporate
for the response and approach to
governance committee. Corporate governance
corporate governance issues. matters
are considered to be the
responsibility of all Board members.
11. Define limits to management's
responsibilities by developing
mandates for:
B-73
a. (i) the Board No The
Board does not have a specific mandate
as any
matters not specifically delegated to
management or directors is considered the
responsibility of all Board members.
(ii) the CEO No The CEO
has the responsibility to lead and
direct
the development of the Corporation's
business. The CEO's mandate is to maximize
shareholder value.
b. The board should approve the Yes The
Board approves corporate objectives and
CEO's corporate objectives.
recommended courses of action which the CEO
is
responsible for presenting to the Board
four
times annually.
12. a. Establish structures and Yes
Notwithstanding that Robert L. G. Watson is
procedures to ensure that the the
Chairman, the other members of the Board
Board can function are free
to function independently of
independently of management.
management.
b. Appoint a chairman who is No
Notwithstanding that Robert L. G. Watson is
independent of management or the
Chairman, the other members of the Board
assign responsibility to a are free
to function independently of
"Lead Director".
management.
13. a. Establish an Audit Committee Yes The
Audit Committee is mandated to:
with a specifically defined
mandate. -
monitor the effectiveness of internal
control systems and review of financial
statements;
-
address the Corporation's business risk
and
risk management programs; and
- meet
with external auditors, independent
of
management.
B-74
b. All members of the Audit Yes All
members of the Audit Committee are
Committee should be
non-management directors.
non-management directors.
c. The Audit Committee should Yes The
Audit Committee has direct access to
have direct communication external
auditors and has direct
channels with the internal
communication channels with internal
and external auditors.
management personnel.
d. The Audit Committee should Yes The
Audit Committee monitors audit functions
have oversight responsibility and
reporting on internal control matters.
for management reporting on
internal control.
14. Implement a system to enable No
Individual directors can engage outside
individual directors to engage advisors
at the cost of the Corporation but
outside advisors at the no
formal system for this is currently in
Corporation's expense. place.
B-75
ANNEX B-6
GREY WOLF INFORMATION REGARDING OPTION OWNERSHIP
B-76
INFORMATION REGARDING OPTION OWNERSHIP
GREY WOLF
OPTION
EXPIRATION
PRICE
NAME OF OPTIONEE OPTIONS GRANTED DATE
C$
Directors
Copeland, D.B. 8,173 Mar 23, 2003
3.90
25,000 Sep 27, 2001
3.40
6,445 Jan 7, 2004
3.20
Curran, J.F. 9,615 Mar 23, 2003
3.90
25,000 Sep 27, 2001
3.40
6,445 Jan 7, 2004
3.20
Horn, O.K. 962 Mar 23, 2003
3.90
12,500 Apr 18, 2002
4.80
4,688 Jan 7, 2004
3.20
7,188 Apr 8, 2005
1.50
Phelps, J.C. 9,615 Mar 23, 2003
3.90
4,102 Jan 7, 2004
3.20
Riggs, R.M. 4,808 Mar 23, 2003
3.90
4,102 Jan 7, 2004
3.20
Watson, R.L.G. 6,731 Mar 23, 2003
3.90
80,000 Sep 27, 2001
3.40
4,688 Jan 7, 2004
3.20
Officers
Cheung, F. 19,200 Jun 11, 2003
2.00
6,250 Nov12, 2003
2.00
8,000 Jan 1, 2005
1.31
Tkachyk, V.J. 12,500 Apr 18, 2002
4.80
27,000 Jun 16, 2002
3.80
10,000 Nov 13, 2002
4.80
15,000 Nov12, 2003
3.50
15,000 Jan 1, 2005
1.31
7,188 Apr 8, 2005
1.50
25,000 Aug 21, 2005
1.90
Wilson, James 100,000 Mar 13, 2005
1.40
Employees/ Others
Bates, J. 2,000 Aug 24, 2003
2.00
500 Nov 12, 2003
2.00
1,500 Jan 1, 2005
1.31
Bird, Marci 1,250 Feb 5, 2004
2.00
750 Jan 1, 2005
1.31
Bosnak, D. 5,000 Nov 13, 2002
2.00
Carter, D. 5,000 Nov12, 2003
2.00
7,500 Sep 1, 2002
2.00
5,000 Jan 1, 2005
1.31
Clark, Jace 10,000 Jul 7, 2005
1.65
Connolly, Karen 3,000 Aug 21, 2005
1.90
B-77
Cook, W. 10,000 Mar 23, 2003
2.00
5,000 Nov 12, 2003
2.00
4,000 Jan 1, 2005
1.31
Dowhaniuk, Monica 4,000 Aug 21, 2005
1.90
Eamer, Bruce 30,000 Nov 8, 2005
2.05
Fabi, Michael 11,250 Feb 1, 2005
1.25
Gaeta, Joan 4,000 Nov 8, 2005
2.05
Gillis, S.J. 2,500 Nov 13, 2002
4.80
Glass, G.D. 5,000 Jun 11, 2003
2.00
1,250 Nov 12, 2003
2.00
3,750 Jan 1, 2005
1.31
Goddard, Miriam 3,000 Jul 7, 2005
1.65
Gow, Kari 15,000 Feb 5, 2004
2.00
4,000 Jan 1, 2005
1.31
Gundersen, Daniel 7,500 Aug 21, 2005
1.90
Hill, Charlene 1,250 Feb 5, 2004
2.00
1,125 Jan 1, 2005
1.31
Hudspeth, S.M. 314 Dec 23, 2002
2.00
1,186 Nov 12, 2003
2.00
1,500 Jan 1, 2005
1.31
James, Kevin 5,000 Sep 26, 2005
2.05
Johnson, Robert 50,000 Jul 26, 2004
1.15
Kimmett, Barbara 4,000 Jan 1, 2005
1.31
Leyden, P. 1,250 Aug 24, 2003
2.00
313 Nov 12, 2003
2.00
750 Jan 1, 2005
1.31
Park, Constance 10,000 Dec 21, 2005
2.06
Pham, Anh 10,000 Jul 7, 2005
1.65
Phillips, D.L. 157 Nov 13, 2002
2.00
313 Nov 12, 2003
2.00
Podivinsky, Tom 30,000 Feb 5, 2004
2.00
8,000 Jan 1, 2005
1.31
Rodd, Philip 10,000 Feb 5, 2004
2.00
2,500 Jan 1, 2005
1.31
Rodgers, John S. 2,500 Apr 18, 2002
4.80
Shigematsu, J. 2,500 Nov 13, 2002
2.00
2,500 Nov 12, 2003
2.00
5,000 Jan 1, 2005
1.31
Simpson, A. 1,250 Aug 24, 2003
2.00
313 Nov 12, 2003
2.00
750 Jan 1, 2005
1.31
Smith, Pender 10,000 Mar 12, 2006
3.00
Wan-Chan, Shirley 7,000 Feb 5, 2004
2.00
1,500 Jan 1, 2005
1.31
Wiebe, Cheryl 7,500 Jul 7, 2005
1.65
Wozny, Debbie 7,500 Feb 5, 2004
2.00
1,000 Jan 1, 2005
1.31
Yeomans, Brenda 4,000 Sep 26, 2005
2.05
Zuorro, Thomas 30,000 May 17, 2005
2.00
30,000 Jul 7, 2005
1.65
Group 867,920
B-78
ANNEX C
VALUATION OF RAYMOND JAMES & ASSOCIATES, INC.
C-1
GREY WOLF EXPLORATION INC.
[ABRAXAS LOGO]
ABRAXAS PETROLEUM CORPORATION
ONTARIO SECURITIES COMMISSION RULE 61-501 VALUATION
MAY 29, 2001
PREPARED
BY
RAYMOND JAMES & ASSOCIATES, INC.
[RAYMOND JAMES & ASSOCIATES, INC. LOGO]
C-2
TABLE OF CONTENTS
TAB PAGE
1. Ontario Securities Commission Rule 61-501 Valuation
I. Introduction and Overview............................... 3
II. Description of Companies................................ 10
III. Basis of Valuation...................................... 16
IV. Valuation of Common Shares.............................. 22
V. Conclusions............................................. 28
2. Summary of After-tax Net Asset Value Calculation
3. Summary of Engineering and Exchange Analysis
4. Summary Grey Wolf Peer Group Analysis
5. Summary of Abraxas Peer Group Analysis
6. Summary of Comparable Transaction Analysis
7. Grey Wolf / Abraxas Relative Trading Analysis
ALL DOLLAR FIGURES ARE DENOMINATED IN U.S. DOLLARS, UNLESS INDICATED OTHERWISE.
C-3
I. INTRODUCTION AND OVERVIEW
May 29, 2001
The Special Committee of the
Board of Directors
Grey Wolf Exploration Inc.
1600, 255 - 5th Avenue SW
Calgary, Alberta
T2P 3G6
TO THE MEMBERS OF THE SPECIAL COMMITTEE:
Raymond James & Associates, Inc. ("Raymond James") understands that Abraxas
Petroleum Corporation ("Abraxas" or the "Corporation") proposes to acquire all
of the issued and outstanding common shares (the "Grey Wolf Common Shares") of
Grey Wolf Exploration Inc. ("Grey Wolf" or the "Company") not owned by Abraxas.
The offer is proposed to be implemented by way of a takeover bid (the "Takeover
Offer"). More specifically, Abraxas proposes to exchange 0.60 common shares of
Abraxas (the "Abraxas Common Shares") for each issued and outstanding Grey Wolf
Common Share. The terms of the Takeover Offer are more fully described in a
takeover bid circular (the "Takeover Circular") to be mailed to all Grey Wolf
shareholders.
GREY WOLF SHARE CAPITAL
As at December 31, 2000, there were approximately 12.7 million Grey Wolf Common
Shares issued and outstanding, no preferred shares outstanding, no securities
convertible into Grey Wolf Common Shares or preferred shares outstanding, and
approximately 1.0 million options outstanding to acquire Grey Wolf Common Shares
granted to officers, directors and employees of the Company.
OWNERSHIP OF GREY WOLF
Raymond James understands the following regarding Grey Wolf and Abraxas:
a) Abraxas beneficially owns, directly or indirectly, or exercises control or
direction over approximately 6.1 million Grey Wolf Common Shares,
representing approximately 48.0% of the issued and outstanding shares of Grey
Wolf;
b) the Officers and Directors of Abraxas beneficially own, directly or
indirectly, or exercise control or direction over approximately 1.7 million
Grey Wolf Common Shares, representing approximately 13.4% of the issued and
outstanding shares of Grey Wolf;
c) the Officers and Directors of Abraxas beneficially own, directly or
indirectly, or exercise control or direction over 2.7 million Abraxas Common
Shares, representing approximately 11.9% of the issued and outstanding shares
of Abraxas;
C-4
d) Abraxas owns 100% of the issued and outstanding common shares of Canadian
Abraxas Petroleum Limited ("Canadian Abraxas");
e) Robert L.G. Watson is Chairman of the Board, Chief Executive Officer and a
Director of Grey Wolf. Mr. Watson is also Chairman of the Board, President,
Chief Executive Officer and Director of Abraxas; and Chairman of the Board,
Chief Executive Officer and a Director of Canadian Abraxas, a wholly-owned
subsidiary of Abraxas; and
f) Shareholders other than Abraxas and its Officers and Directors (the "Public
Shareholders") own approximately 4.9 million Grey Wolf Common Shares,
representing approximately 38.6% of the outstanding Grey Wolf Common Shares.
Accordingly, Raymond James understands that the Takeover Offer will be subject
to the Ontario Securities Commission Rule 61-501 ("OSC 61-501").
BACKGROUND TO THE TAKEOVER OFFER
On January 8, 2001, Abraxas, through a special committee, comprised of two of
its independent directors (the "Abraxas Special Committee"), forwarded a written
offer to acquire all of the Grey Wolf Common Shares that Abraxas does not own at
an exchange ratio of 0.66 freely trading Abraxas Common Shares for each Grey
Wolf Common Share (the "Initial Offer"). Upon receiving the Initial Offer, the
Board of Directors of Grey Wolf established a special committee comprised of two
of its independent directors (the "Grey Wolf Special Committee") to review the
Initial Offer and make its recommendation thereon to the Board of Directors of
Grey Wolf. The Initial Offer stated that its terms were in the best interest of
the Public Shareholders and encouraged the Grey Wolf Special Committee to retain
independent counsel and an investment banker for financial advisory services as
well as a fairness opinion. The Initial Offer stated that the exchange ratio of
0.66 was subject to due diligence and refinement upon receipt of updated
independent reserve reports for Abraxas and Grey Wolf. The Initial Offer was
also subject to the approval of the Boards of Directors and the shareholders of
both companies, approval by the United States Securities and Exchange Commission
("SEC") of Abraxas' registration statement covering the common shares of Abraxas
contemplated to be issued in the transaction and the receipt by Abraxas of a
fairness opinion.
On February 15, 2001, Grey Wolf and Abraxas entered into an agreement (the
"Confidentiality Agreement") whereby each party agreed to make available, on a
confidential basis, to the other party, certain information concerning their
respective businesses, financial conditions, operations, assets and liabilities
for the purpose of evaluating a possible transaction between Grey Wolf and
Abraxas. Upon signing the Confidentiality Agreement, both parties initiated
discussions pertaining to establishing a mutually acceptable set of parameters
and guidelines to facilitate a common approach to evaluating the relative values
of the companies (the "Combination Analysis"). These parameters and guidelines
included, among other factors, commodity price forecasts, U.S. / Canadian
exchange rates, discount rates, monetary assets and liabilities, dilution
factors and independent valuation of reserves and undeveloped land (the "Mutual
Valuation Parameters"). Upon agreeing on the Mutual Valuation Parameters, both
parties instructed their respective independent oil and gas reservoir
engineering consultants to undertake an independent reserve evaluation using
specific commodity pricing and foreign exchange assumptions (the "Engineering
and Exchange Analysis").
C-5
On March 19, 2001, Abraxas prepared and provided Grey Wolf the Combination
Analysis (dated March 16, 2001) that, on a quantitative analysis of the relative
values of Abraxas and Grey Wolf, using the Mutual Valuation Parameters, yielded
an exchange ratio of 0.47. The Abraxas Special Committee and Grey Wolf Special
Committee reviewed the Combination Analysis and requested additional
information, including reconciliation schedules of year end 1999 and 2000
reserve values and the reserve volumes comprising the exchange ratio in the
Initial Offer compared with the resultant exchange ratio of the Combination
Analysis.
On March 22, 2001, following a review of the additional information from
Abraxas, the Abraxas Special Committee and Grey Wolf Special Committee met again
to discuss the quantitative analysis. The Grey Wolf Special Committee expressed
the view that the Combination Analysis was useful and important, but that it did
not address certain qualitative factors that the Grey Wolf Special Committee
believed should be considered in establishing a fair exchange ratio.
On April 4, 2001, the Abraxas Special Committee made a formal written offer to
acquire all of the Grey Wolf Common Shares that it does not own at an exchange
rate of 0.565 freely trading Abraxas Common Stock for each Grey Wolf Common
Share (the "Revised Offer"). The Revised Offer was subject to the execution of a
mutually acceptable definitive agreement, the receipt of fairness opinions and
open for acceptance until April 11, 2001. The Grey Wolf Special Committee took
immediate steps to review the Revised Offer and to seek clarification of its
contents from the Abraxas Special Committee. At the conclusion of these
discussions, the Grey Wolf Special Committee informed the Abraxas Special
Committee that it would refer the Revised Offer to Grey Wolf's Board of
Directors for consideration without a favourable recommendation of the Grey Wolf
Special Committee. The Abraxas Special Committee agreed with this referral.
On April 6, 2001, the Board of Directors of Grey Wolf met to review the Revised
Offer at which time the Grey Wolf Special Committee recommended against
accepting the Revised Offer and further recommended making a counter offer. The
Board of Directors of Grey Wolf decided not to accept the Revised Offer and not
to make a counter offer; accordingly, the Revised Offer expired.
On April 12, 2001, Abraxas made a press release announcing that it intends to
commence an exchange tender offer to acquire any or all of the Grey Wolf Common
Shares not owned by Abraxas in exchange for 0.60 shares of Abraxas Common Shares
(the "Takeover Offer"). The press release indicated that further information
about the Takeover Offer would be set forth in the Takeover Circular to be
issued to the Grey Wolf Shareholders and Abraxas registration statement and
other offering materials to be filed with United States Securities and Exchange
Commission at a later date. The press release further indicated that Abraxas
decided to make its offer directly to the Grey Wolf Shareholders as a result of
the expiration of the Revised Offer.
Effective April 25, 2001, in response to Abraxas' announcement of its intention
to make the Takeover Offer, Grey Wolf reappointed the Grey Wolf Special
Committee with a mandate to act in compliance with OSC Rule 61-501 by selecting
an independent valuator to evaluate the Takeover Offer and supervise the
preparation of an independent evaluation. The mandate also includes reviewing
the terms of the Takeover Offer and negotiating the terms thereof with Abraxas
and ultimately making a recommendation to the Board of Directors of Grey Wolf as
to whether the Company's shareholders should deposit their Grey Wolf Common
Shares under the Takeover Offer. On May 23, 2001, Grey Wolf issued a press
release announcing the reappointment of the Grey Wolf Special Committee and the
engagement of Raymond James' services.
ENGAGEMENT
After receiving the Initial Offer, the Grey Wolf Special Committee determined
that independent financial advisors should be engaged and authorized the
solicitation of a proposal from Raymond
C-6
James to act in such capacity. On January 23, 2001, the Grey Wolf Special
Committee requested that Raymond James provide a written proposal for the
provision of services in connection with the proposed transaction. On January
29, 2001, Raymond James forwarded a written proposal to the Grey Wolf Special
Committee for its review and consideration. On January 31, 2001, Raymond James
met with the Grey Wolf Special Committee to discuss Raymond James' written
proposal. The Grey Wolf Special Committee inquired as to Raymond James'
independence, capabilities and expertise to provide financial advisory services
including the preparation and delivery of an independent valuation of both
companies as the Grey Wolf Special Committee might require (the "Valuation"),
and, if requested, the provision of Raymond James' opinion as to the fairness
(the "Fairness Opinion"), from a financial point of view, of a transaction to
the Public Shareholders.
On March 2, 2001, Raymond James and the Grey Wolf Special Committee entered into
a written agreement (the "Engagement Letter") to document the terms of the
engagement and Grey Wolf announced that the Grey Wolf Special Committee had
retained Raymond James to provide general financial advice, valuation expertise
and, if requested, a fairness opinion to Grey Wolf's Board of Directors and
shareholders. On May 23, 2001, in the Company's press release, Grey Wolf
officially announced that the Grey Wolf Special Committee had retained Raymond
James to prepare the Valuation relating to the Takeover Offer.
The Valuation has been prepared in compliance with provisions of the Ontario
Securities Commission Rule 61-501. Raymond James understands that the Valuation
will be included, subject to terms of the Engagement Letter, in the Takeover
Circular and Raymond James has consented thereto.
Grey Wolf has agreed to compensate Raymond James for its services, to reimburse
for its reasonable out-of-pocket expenses and to indemnify it in certain
circumstances. The fee payable to Raymond James is not contingent in whole or
part upon the success of the Takeover Offer nor is it dependent on the
conclusion reached by Raymond James in the Valuation or the Fairness Opinion.
Raymond James will be paid a fee in the amount of Cdn. $275,000 for the
Valuation and related financial advisory services, and a fee of Cdn. $75,000 for
the Fairness Opinion, if such is requested by the Grey Wolf Special Committee.
QUALIFICATIONS OF RAYMOND JAMES & ASSOCIATES, INC.
Raymond James is an independent, full service investment dealer with investment
banking and retail brokerage operations located across the United States and
Canada. Its investment banking division specializes in corporate finance
services for, and the sales and trading of equity securities of, industrial and
resource companies throughout the United States and Canada. Raymond James also
provides investment research and trading services to financial institutions
relating to investments. Raymond James and its principals have prepared numerous
valuations and fairness opinions and have participated in a significant number
of transactions involving private and publicly traded companies.
The valuation expressed herein is the opinion of Raymond James and the form and
content hereof has been approved for release by a committee of its officers and
directors, each of whom is experienced in merger, acquisition, divestiture and
valuation matters.
C-7
INDEPENDENCE OF RAYMOND JAMES & ASSOCIATES, INC.
Raymond James is not an insider, associate or affiliate (as such terms are
defined in the SECURITIES ACT (Ontario)), of Grey Wolf, Abraxas or Canadian
Abraxas or of any of their respective associates or affiliates and neither
Raymond James nor any of its affiliates is an advisor to Abraxas in respect of
the Takeover Offer. Except as pursuant to the Engagement Agreement, neither
Raymond James nor any of its affiliates has advised Grey Wolf, Abraxas or
Canadian Abraxas or any of their respective associates or affiliates in respect
to the negotiation of the terms of the Takeover Offer. During the 24 months
preceding the date Raymond James was first contacted regarding this engagement,
Raymond James has not provided any financial advisory services, or participated
in any financing as lead or co-lead underwriter involving Grey Wolf, Abraxas or
Canadian Abraxas, or any of their respective associates or affiliates.
Raymond James' compensation is not dependent on the success of the Takeover
Offer nor does Raymond James have any understandings or agreements with Grey
Wolf, Abraxas or Canadian Abraxas or any of their respective affiliates, with
respect to future business dealings. Raymond James may, however, from time to
time in the future, perform financial advisory or investment banking services
for Grey Wolf, Abraxas or Canadian Abraxas.
SCOPE OF REVIEW
This Valuation has been prepared in accordance with OSC Rule 61-501 and the
Disclosure Standards for Formal Valuations of the Investment Dealers Association
of Canada ("the Association") but the Association has not been involved in the
preparation or review of this valuation.
In preparing the Valuation, Raymond James has, among other things, reviewed and,
where it considered appropriate, relied upon certain financial and other
information relating to Grey Wolf, Abraxas and Canadian Abraxas, certain reports
and information prepared by independent advisors and other publicly available
information. The following, among other things, sets forth the principal
documents and key available information Raymond James reviewed, considered and,
where it considered appropriate, relied upon.
With respect to Grey Wolf:
a) the audited consolidated balance sheets, consolidated statements of income
and retained earnings, and consolidated statements of cash flows for the
years ended December 31, 2000, 1999 and 1998;
b) the interim unaudited consolidated balance sheets, consolidated statements of
income and retained earnings and consolidated statements of cash flows for
the periods ended March 31, 2000, June 30, 2000, September 30, 2000 and March
31, 2001;
c) the Information Circulars relating to the Annual and Special Meetings of
Shareholders of Grey Wolf held April 6, 2000 and Annual Meeting of
Shareholders of Grey Wolf to be held June 28, 2001;
d) the Annual Information Form for the year ended December 31, 2000;
e) the financial and operating budgets for the 12 month periods ending December
31, 2001 and December 31, 2000 as prepared by Grey Wolf's senior management;
f) the engineering summary reserves reports dated January 1, 2001, prepared by
McDaniel & Associates Consultants Ltd. ("McDaniel") outlining its evaluation
of the crude oil , natural gas and natural gas products of Grey Wolf at
January 1, 2001 (based on escalating and constant price assumptions);
C-8
g) information regarding Grey Wolf's undeveloped land holdings and an
independent land appraisal prepared by Supplementary Land Services effective
January 1, 2001 and dated February 25, 2001;
h) interviews and discussions with members of Grey Wolf's senior management with
regard to its production, reserves, financial and strategic plans, and future
prospects;
i) public information related to the business, operations, financial performance
and stock trading of Grey Wolf and other selected public oil and gas
companies;
j) press releases of Grey Wolf (and its predecessor company Cascade Oil & Gas
Ltd.) from April 11, 1997 to May 23, 2001;
k) publicly available information and certain confidential information possessed
by Raymond James with respect to recent transactions involving the sale of
oil and gas companies and properties of a comparable nature considered to be
relevant by Raymond James in the circumstances; and
l) such other information, investigations and analyses as Raymond James
considered necessary or appropriate in the circumstances to compile the
Valuation.
With respect to Abraxas:
a) the SEC Form 10-K reports and audited consolidated balance sheets,
consolidated statements of income and deficit and consolidated statements of
cash flows for the years ended December 31, 2000, 1999 and 1998;
b) the SEC 10-Q reports and interim unaudited consolidated balance sheets,
consolidated statements of income and retained earnings and consolidated
statements of cash flows for the periods ended March 30, 2000, June 30, 2000,
September 30, 2000 and March 31, 2001;
c) the financial and operating budgets for the 12 month periods ending December
31, 2000 and December 31, 2001 as prepared by Abraxas' senior management;
d) the engineering summary reserves report dated January 1, 2001 prepared by
DeGolyer and MacNaughton ("D&M"), independent oil and gas reservoir
engineering consultants outlining its determination of Abraxas' reserve value
and related cash flow as at January 1, 2001 pertaining to certain oil and gas
properties owned by the Corporation in the United States;
e) the engineering summary reserves report dated January 2001, prepared by
McDaniel outlining its evaluation of the crude oil, natural gas and natural
gas products of Canadian Abraxas at January 1, 2001 (based on escalating and
constant price assumptions);
f) information regarding Canadian Abraxas' undeveloped land holdings and an
independent land appraisal prepared by Supplementary Land Services effective
January 1, 2001 and dated February 25, 2001;
g) interviews and discussions with members of Abraxas' senior management with
regard to its production, reserves, financial and strategic plans, and future
prospects;
h) public information related to the business, operations, financial performance
and stock trading of Abraxas' and other selected public oil and gas
companies;
i) press releases of Abraxas' from January 1, 1998 to May 23, 2001;
j) publicly available information and certain confidential information possessed
by Raymond James with respect to recent transactions involving the sale of
oil and gas companies and properties of a comparable nature considered to be
relevant by Raymond James in the circumstances; and
k) such other information, investigations and analyses as Raymond James
considered necessary or appropriate in the circumstances to compile the
Valuation.
C-9
Raymond James conducted such analyses, investigations, research and testing of
assumptions as we considered appropriate in the circumstances. Raymond James was
granted access to the managements of Grey Wolf and Abraxas and was not, to its
knowledge, denied any type of requested information which might be material to
the conclusions reached in the Valuation.
ASSUMPTIONS AND LIMITATIONS
Raymond James has relied upon and has assumed the completeness, accuracy and
fair presentation of all of the financial and other information, data, advice,
opinions or representations obtained by it from public sources, or provided to
it by Grey Wolf, Abraxas or Canadian Abraxas or their subsidiaries or
affiliates. Raymond James has assumed that the projections provided to it by
Grey Wolf and Abraxas and their managements, were prepared using the assumptions
identified therein and that such assumptions were reasonable at the time of
preparation and continue to be reasonable in the circumstances. Subject to the
exercise of Raymond James' professional judgement and except as expressly
described herein, Raymond James has not attempted to verify independently the
accuracy or completeness of any of such information, data, advice, opinions,
representations, business plans, forecasts or projections.
Grey Wolf has represented to Raymond James, in a certificate dated as at the
date hereof that, among other things, to the best of the knowledge of Grey Wolf:
(a) the information, data, reports, opinions and representations relating to
Grey Wolf provided to Raymond James are complete, true and correct in all
material respects and do not contain any untrue material fact or omit to state
any material fact to make the statements made not misleading in light of the
circumstances in which they were made; (b) since the date the relevant
information was provided, there has been no material change in Grey Wolf or any
of its subsidiaries and no material change has occurred in the information or
any part thereof which would reasonably be expected to have a material effect on
the Valuation; and (c) with respect to any portions of the information that
constitute forecasts, projections or estimates, such forecasts, projections or
estimates were prepared using the assumptions identified therein, which in the
reasonable belief of Grey Wolf, are reasonable in the circumstances, and are not
misleading in any material respect in light of the assumptions used therefore.
Abraxas has represented to Raymond James, in a certificate dated as at the date
hereof that, among other things, to the best of the knowledge of Abraxas: (a)
the information, data, reports, opinions and representations relating to Abraxas
and Canadian Abraxas provided to Raymond James are complete, true and correct in
all material respects and do not contain any untrue material fact or omit to
state any material fact to make the statements made not misleading in light of
the circumstances in which they were made; (b) since the date the relevant
information was provided, there has been no material change in Abraxas or any of
its subsidiaries and no material change has occurred in the information or any
part thereof which would reasonably be expected to have a material effect on the
Valuation; and (c) with respect to any portions of the information that
constitute forecasts, projections or estimates, such forecasts, projections or
estimates were prepared using the assumptions identified therein, which in the
reasonable belief of Abraxas, are reasonable in the circumstances, and are not
misleading in any material respect in light of the assumptions used therefore.
The Valuation is rendered on the basis of securities market, economic and
general business and financial conditions prevailing as at the date hereof and
the condition and prospects, financial and otherwise of Grey Wolf, Abraxas and
Canadian Abraxas as reflected in the information and documents reviewed by
Raymond James. Raymond James' analysis must be considered as a whole. Selecting
portions of our analysis and of the factors considered, without considering all
C-10
factors and analysis in connection with the preparation of the Valuation, could
create a misleading view of the processes underlying the Valuation. The
preparation of a valuation is a complex process and is not necessarily
susceptible to partial analysis or summary description. Any attempt to do so
could lead to undue emphasis on any particular factor or analysis. In our
analysis, we have made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, any of
which are beyond the control of any party involved in the Takeover Offer.
C-11
II. DESCRIPTION OF COMPANIES
DESCRIPTION OF GREY WOLF
Grey Wolf is primarily a natural gas company which focuses its efforts on
exploring for, developing, acquiring and producing petroleum and natural gas in
western Canada and the Northwest Territories. Natural gas in southwestern and
northwestern Alberta accounts for over 85% of the Company's reserves and
production in 2000. On December 31, 1993, Cascade Oil & Gas Ltd. ("Cascade")
amalgamated with Index Petroleums Ltd. under the provisions of the BUSINESS
CORPORATIONS ACT (Alberta). In late 1995, a majority of the corporation's
shareholders approved the issuance of Cascade's common shares which resulted in
52% of the company being held by Abraxas Petroleum Corporation of San Antonio,
Texas. On June 11, 1998, Cascade Oil & Gas Ltd. changed its name to Grey Wolf
Exploration Inc. On January 7, 1999, Grey Wolf received conditional approval of
the Toronto Stock Exchange ("TSE") to list its common shares on the TSE under
the trading symbol "GWX". Prior thereto, the Company's common shares were listed
for trading on The Alberta Stock Exchange under the trading symbol "GWX". In
June 1999, the Company filed Articles of Amendment and a one for ten
consolidation of common shares was completed.
As at January 1, 2001, using year-end constant prices, McDaniel estimated that
Grey Wolf had total gross proved and probable reserves before royalties of 37.8
bcf (27.8 Bcf net after royalties) of natural gas and 62 mbbls (53 mbbls net
after royalties) of crude oil and 1,303 mbbls (841 net after royalties) of
natural gas liquids. Working interest production (before royalties) for the
first three months of 2001 averaged 11.1 mmcf per day of natural gas and 520
bbls per day of crude oil and natural gas liquids. Comparable volumes for the
same period in 2000 were 15.2 mmcf per day of natural gas and 173 bbls per day
of crude oil and natural gas liquids.
Grey Wolf's producing properties are located in Alberta with most of its
production and activity focused on three core areas: Caroline / Sundre in
southwestern Alberta, and Pouce Coupe / Valhalla / Knopcik and Ladyfern /
Chinchaga located in the Peace River Arch region of northwest Alberta -
northeast British Columbia. In addition, Grey Wolf holds undeveloped acreage in
Norman Wells, Northwest Territories.
Caroline / Sundre is one of Grey Wolf's key core areas with current production
of 7.2 Mmcfe per day accounting for approximately 49% of the Company's total
current daily production and over 58% of total Company year-end reserves based
on constant prices. The area is characterized by long-life, liquids-rich natural
gas producing properties with multi-pay zones. Grey Wolf operates the majority
of the area's production and currently has an interest in a total of 39 wells
(14.0 wells net) with an average working interest of 43%. The Company also owns
a 64% interest in the Sundre gas plant which has a licensed capacity to handle
up to 20 Mmcf per day of gas. In 2000, Grey Wolf participated in drilling five
wells (2.17 wells net), of which four (1.67 wells net) were successful in
various zones. In addition, there were three successful re-completions (1.52
net). Projects planned for 2001 currently include drilling six wells,
recompleting five wells and installing additional gas gathering systems and gas
plant compression. Since year-end, a 3-D seismic survey has been completed, and
interpretation is underway. Overall, the Company has identified nine additional
development drilling locations on its 45,939 gross (19,634 net) acres of mineral
rights in the area.
The Peace River Arch is Grey Wolf's second largest core area. Production from
this area is currently 3.2 Mmcfe per day or approximately 22% of Grey Wolf's
total current daily production. Total year-end reserves attributable to the area
based on constant prices are estimated by McDaniel at 11% of total company
reserves. Core areas in the Peace River Arch include Pouce
C-12
Coupe, Valhalla, Knopcik, Ladyfern and Chinchaga and are primarily characterized
by medium depth, multi-zoned natural gas targets with significant natural gas
liquids potential.
At Pouce Coupe, Grey Wolf holds various interests ranging from 10% to 45% in
17,280 gross acres (4,925 net) of land in this area. The Company owns an
interest in seven producing wells (1.6 net) and one non-producing (0.4 net)
wells. All of the natural gas produced from this property is currently processed
through gathering and processing facilities owned by Grey Wolf. Activity in 2000
in this area for Grey Wolf included participation in drilling three wells (0.8
net) and recompletion of five wells (0.5 net). In 2001, the Company has
completed a major 3-D seismic program on Grey Wolf interest lands and drilled
one well and recompleted two wells for natural gas potential. In addition, a
gas-gathering pipeline from Pouce Coupe to a Grey Wolf-owned facility in nearby
Valhalla has been completed in early 2001.
In Valhalla, Grey Wolf owns working interests ranging from 3.85% to 25% in
11,680 gross acres (2,295 net) of land in this property. The Company holds an
interest in seven producing (0.3 net) and four non-producing (0.7 net) wells.
All of the gas produced from this property is currently processed through Grey
Wolf-owned gathering and processing facilities. Activity in 2000 for Grey Wolf
included participation in the drilling of a natural gas well (0.25 net) late in
the year. Overall, the Company plans to drill ten more wells in 2001 at Pouce
Coupe/Valhalla/Knopcik another 20 drilling locations readily identified.
Grey Wolf's Ladyfern/Chinchaga area is an exploration play for the Company where
it holds an interest in 24,867 acres of gross (4,260 net) land. Activity in 2000
for Grey Wolf in this area included participation in two unsuccessful wells (0.3
net) in Chinchaga. In early 2001, an extensive 3-D seismic program has been shot
at Ladyfern, and is being evaluated for the purposes of identifying potential
drilling locations. The Company plans to drill two wells in this area in either
the summer of 2001 or during the 2001 / 2002 winter drilling season. With
anticipated success in the first two wells, another two follow-up locations have
been identified for drilling. It is also anticipated that Grey Wolf will
participate for its share (currently estimated to be 8 Mmcf per day) of firm
service pipeline capacity being proposed by operators in the area.
Norman Wells, Northwest Territories is an exploration area where the Company
holds an interest in 465,923 (110,368 net) acres of land that is adjacent to the
prolific Norman Wells Oil Field. There has been no activity on the property over
the past year, however, the Company continues to pursue industry partners to
conduct a work program on the lands scheduled for 2001 - 2002.
Grey Wolf employs a comprehensive marketing strategy for its natural gas,
natural gas liquids and crude oil. Approximately 40% of Grey Wolf's gas is sold
under long-term contracts with Progas Limited, Pan-Alberta Gas Ltd. and
TransCanada Pipelines Limited. The remaining 60% of the Company's gas production
is sold in the intra-Alberta spot market. Grey Wolf markets its crude oil and
natural gas liquids under arrangements with prices tied to Edmonton postings
which in turn are based on the price of West Texas Intermediate crude oil.
For 2000 compared to 1999, Grey Wolf attained record cash flow and earnings
levels, despite an eight percent decrease in production volumes and primarily
due to the dramatic increase in commodity prices. Compared to 1999, the
Company's average natural gas price in 2000 increased 88% to $4.54 per mcf and
the average realized price for natural gas liquids and crude oil increased 82%
to $36.55 per bbl. Grey Wolf's capital expenditures in 2000 totalled Cdn.$16.1
million in 2000, net of Cdn.$12.7 million of property descriptions. These
expenditures, principally increased for natural gas exploitation, were funded by
internally generated funds and working capital.
Cash flow (funds provided from operations) for the first three months of
2001 has been reported by Grey Wolf to be Cdn.$7.4 million or Cdn.$0.58 per
Common Share versus Cdn.$2.2
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million or Cdn.$0.18 per Common Share for the same period one year earlier. Grey
Wolf's net capital expenditures aggregated Cdn.$6.5 million in the first three
months of 2001. Grey Wolf had Cdn.$13.0 million of long-term outstanding debt
and a working capital deficit of Cdn.$3.8 million as at March 31, 2001.
C-14
SELECTED HISTORICAL AND FINANCIAL INFORMATION
THREE MONTHS
ENDED MARCH 31
YEARS ENDED DECEMBER 31
---------------------------
------------------------------------------
2001 2000
2000 1999 1998
---------- ----------
---------- ---------- ----------
(THOUSANDS EXCEPT PER SHARE AND
OPERATING DATA, ALL DOLLAR FIGURES IN CDN.$)
DAILY PRODUCTION (1)
Natural Gas (Mmcf/d) 11.1 15.2
13.7 15.3 10.0
Crude Oil & NGL's (bbls/d) 520 173
197 176 185
Total (10:1) (BOE/d) 1,630 1,680
1,562 1,707 1,185
Total (6:1) (BOE/d) 2,367 2,702
2,480 2,726 1,852
FINANCIAL
Gross Production Revenue $ 11,667 $ 4,682 $
26,009 $ 15,427 $ 8,797
Cash Flow from Operations 7,365 2,245
14,596 8,239 4,372
Per Share 0.58 0.18
1.15 0.65 0.45
Earnings 2,868 37
3,940 1,347 9
Per Share 0.23 --
0.31 0.11 --
Capital Expenditures (net) 6,468 2,976
16,059 11,770 27,780
CAPITAL STRUCTURE
Working Capital (deficiency) ($ 3,764) ($ 3,214) ($
5,949) ($ 4,014) ($ 2,499)
Total Assets 70,641 52,673
64,597 50,541 45,694
Long Term Debt 13,040 13,596
11,793 12,066 9,971
Shareholders' Equity 35,725 28,939
32,845 29,464 28,195
CRUDE OIL, NATURAL GAS LIQUIDS AND NATURAL GAS RESOURCES
AS AT JANUARY 1, 2001
(BASED ON YEAR-END CONSTANT PRICES)
NET RESERVES (AFTER ROYALTIES)
GROSS RESERVES (BEFORE ROYALTIES)
---------------------------------------
-----------------------------------------
CRUDE NATURAL GAS NATURAL
CRUDE NATURAL GAS NATURAL
OIL LIQUIDS GAS
OIL LIQUIDS GAS
---------- ------------ -----------
---------- ------------- ----------
(Mbls) (Mbls) (Mmcf)
(Mbls) (Mbls) (Mmcf)
Proven Producing 42 774 19,845
37 503 14,482
Proven Non-Producing 3 287 8,989
3 184 6,727
Proven Undeveloped -- 7 251
-- 5 180
------ ------ ------
------ ------ ------
Total Proven 45 1,068 29,085
40 692 21,389
Total Probable 17 235 8,749
13 149 6,447
------ ------ ------
------ ------ ------
Total Proven & Probable 62 1,303 37,834
53 841 27,836
------ ------ ------
------ ------ ------
--------------
(1) Based on net working interest.
c-15
DESCRIPTION OF ABRAXAS
Abraxas is a San Antonio, Texas based independent energy company engaged
primarily in the acquisition, exploration, exploitation and production of crude
oil and natural gas in Texas, Wyoming and western Canada. Abraxas was
incorporated in 1990 under the Articles of Incorporation of the state of Nevada.
Abraxas Common Shares began trading on the American Stock Exchange on August 18,
2000, under the symbol "ABP". Prior thereto, Abraxas Common Shares were listed
on the OTC Bulletin Board under the symbol "AXAS". As of May 15, 2001, Abraxas
had 22.6 million common shares outstanding and approximately 1,600 shareholders
of record. On May 21, 2001, Abraxas converted 3.3 million Contingent Value
Rights ("CVRs") into Abraxas Common Shares on a one-for-one basis.
The crude oil and natural gas reserves of Abraxas have been estimated as of
January 1, 2001 by D&M. The reserves of Canadian Abraxas and Grey Wolf as of
January 1, 2001 have been estimated by McDaniel. As of January 1, 2001, Abraxas
had total (combined) proved net reserves of 191.3 bcf of natural gas and 8,843
Mbbls of crude oil and natural gas liquids.
Abraxas' primary operations in the U.S. are concentrated in South and West Texas
and Wyoming where Abraxas operates the majority of its wells. Abraxas also owns
producing properties in western Canada, consisting primarily of natural gas
reserves with working interests ranging from 10% - 100% as well as ownership in
approximately 200 miles of natural gas gathering systems and 13 natural gas
processing plants.
During the past couple of years, Abraxas has focused on an exploitation strategy
for its U.S. operations, emphasizing the use of horizontal technologies.
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.
The area is characterized by long-life, deep natural gas producing properties.
Abraxas owns an average 70% working interest in 69 wells, with average daily
production of 514 net Bbls of crude oil and natural gas liquids and 16.6 mmcf/d
of natural gas for the year ended December 31, 2000. Currently the Edwards area
is producing 7.5 (net) Mmcf per day of natural gas accounting for approximately
11% of the Corporation's total current daily production and over 6.6% of the
Corporation's total reserves. Since late 1997, the Corporation has drilled 13
horizontal wells (resulting in 12 producing wells and one non-commercial well)
with a view to offsetting daily production declines. Abraxas has identified
three additional horizontal drilling locations in this area which it considers
to have limited upside potential overall.
Abraxas' West Texas operations are concentrated along the deep Devonian /
Ellenburger formations and shallow Cherry Canyon sandstones in Ward County, the
Spraberry trend in Midland County and the Sharon Ridge Clearfork Field in Scurry
County. The Corporation's core areas in West Texas include the Montoya Formation
in the Caprito Block 16 Field and Oates SW Field which represent the
Corporation's largest portion of its reserves with 51.9 Bcfe of proven
undeveloped reserves representing approximately 21% of total Corporation proved
reserves.
At the Caprito Block 16 Field, Abraxas holds a 25% carried interest in a joint
venture with EOG Resources, Inc. (the "EOG Joint Venture") in approximately
13,000 acres. The EOG Joint Venture successfully drilled a horizontal well in
October 2000 that is currently producing 5 mmcf per day of natural gas and has
recently drilled a second horizontal well that has reached a total measured
depth of 18,000 ft. Production from the second well is expected in the summer of
2001. In addition, the EOG Joint Venture has recently completed a 60 square mile
3-D seismic survey that has identified 18 additional horizontal drilling
locations. The Corporation expects the EOG Joint Venture to begin drilling a
third well in June 2001. Subsequent to forming the EOG
C-16
Joint Venture, Abraxas acquired 100% of an additional 13,000 acres and 53 miles
of 2-D seismic on trend with the EOG Joint Venture in the Oates SW Field.
Abraxas is permitting a 40 square mile 3-D seismic survey and plans to drill its
first horizontal well in the area in 2001. The Corporation has also identified
nine additional horizontal drilling locations in the area.
Abraxas' third core area in the U.S. is at Brooks Draw, Wyoming where the
Corporation holds a 100% interest in 62,000 acres located in the Powder River
Basin. The Corporation completed a 3-D seismic survey and interpretation on its
acreage at Brooks Draw during the first quarter of 2001. Abraxas has completed
three wells in the area, which are producing oil, and has two additional wells
in the process of being completed. The area is characterized by wells with
hyperbolic decline and multi-zone potential. Abraxas expects to spend almost $4
million in this area during 2001. Based on a 320-acre spacing, the Corporation
believes as many as 190 well locations are possible at Brooks Draw.
Abraxas owns all of its interests and assets in Canada through its wholly-owned
subsidiary, Canadian Abraxas and 48.4%-owned subsidiary, Grey Wolf. Grey Wolf
manages the operations of Canadian Abraxas pursuant to a management agreement
between Abraxas and Grey Wolf. Under the management agreement, Canadian Abraxas
reimburses Grey Wolf for reasonable costs or expenses attributable to Canadian
Abraxas and for administration expenses based upon the percentage that Canadian
Abraxas' gross revenue bears to the total gross revenue of Canadian Abraxas and
Grey Wolf. Reference is made to "Description of Grey Wolf" for an overview of
Abraxas' and Canadian Abraxas' activities in western Canada and the Northwest
Territories.
Abraxas sells the majority of its gas production in the spot market, with
approximately 35% of its Canadian gas dedicated to aggregators. Abraxas markets
its crude oil and natural gas liquids under arrangements with prices tied to the
price of West Texas Intermediate crude oil. In addition, the Corporation has
actively managed crude oil and natural gas through periodic use of commodity
price hedging arrangements. Currently, approximately 20 Mmcf per day of natural
gas is hedged at an average price of U.S.$2.75 per mmbtu through October 2002.
Net production for the first three months of 2001 averaged 51.4 Mmcf per day of
natural gas and 2,338 bbls per day of crude oil and natural gas liquids.
Comparable volumes for the same period in 2000 were 59.8 Mmcf per day of natural
gas and 2,758 bbls per day of crude oil and natural gas liquids. Discretionary
cash flow (funds provided from operations) for the first three months of 2001
has been reported by Abraxas to be U.S.$14.1 million or U.S.$0.62 per Common
Share versus U.S.$2.2 million or U.S.$0.10 per Common Share for the same period
one year earlier, excluding non-recurring items..
Abraxas' net capital expenditures aggregated U.S.$17.8 million in the first
three months of 2001. Abraxas had U.S.$266.8 million of long-term debt and a
working capital deficit of U.S.$16.7 million, excluding current hedge liability
and related deferred tax asset, as at March 31, 2001.
C-17
SELECTED HISTORICAL AND FINANCIAL INFORMATION
THREE MONTHS
ENDED MARCH 31
YEARS ENDED DECEMBER 31
----------------------------
-------------------------------------------
2001 2000
2000 1999 1998
---------- ----------
--------- ---------- -----------
(THOUSANDS EXCEPT PER
SHARE AND OPERATING DATA, U.S. DOLLAR FIGURES)
DAILY NET PRODUCTION
Natural Gas (Mmcf/d) 51.4 59.8
54.7 70.4 68.3
Crude Oil & NGL's (bbls/d) 2,338 2,758
2,607 3,163 4,373
Total (10:1) (BOE/d) 7,478 8,738
8,077 10,203 11,203
Total (6:1) (BOE/d) 10,905 12,725
11,724 14,896 15,756
FINANCIAL
Gross Production Revenue $ 29,086 $ 16,717
$ 76,600 $ 66,770 $ 60,084
Cash Flow from Operations (1) 14,103 2,187
21,372 3,882 4,845
Per Share (1) 0.62 0.10
0.95 0.57 0.77
Earnings (1) 255 (6,827)
8,449 (36,680) (83,960)
Per Share (fully-diluted) (1) 0.01 (0.30)
0.21 (5.41) (13.26)
Capital Expenditures 17,861 11,840
74,412 128,708 57,861
CAPITAL STRUCTURE
Working Capital (deficiency) (2) ($ 16,663) ($ 20,292)
($ 13,829) ($ 7,305) $ 50,689
Total Assets 333,974 355,186
335,560 322,284 291,498
Long Term Debt 266,786 275,384
266,441 273,421 299,698
Shareholders' Equity (deficit) (32,984) 15,806
(6,503) (9,505) (63,522)
CRUDE OIL, NATURAL GAS LIQUIDS AND NATURAL GAS RESERVES
AS OF JANUARY 1, 2001
ESTIMATED PROVED RESERVES (3) (4) (5)
----------------------------------------
PROVED PROVED TOTAL
DEVELOPED UNDEVELOPED PROVED
---------- ------------- ---------
Crude Oil (Mmbls) 3.9 1.4 5.3
Natural Gas Liquids (Mmbls) 3.1 0.4 3.5
Natural Gas (Mmcf) 119.7 71.6 191.3
(1) 1st Quarter of 2000 pro forma, excludes a one-time gain of $34.0 million
related to the Company's sale of equity investment in the Wamsutter
Partnership.
(2) March 31, 2001 excludes currently liability related to hedge accounting of
$17.7 million less related deferred tax asset of $3.4 million.
(3) Includes 40,000 barrels of crude oil reserves owned by Grey Wolf of which
20,525 barrels are applicable to the minority interests share of these
reserves as of January 1, 2001.
(4) Includes 692,000 barrels of natural gas liquids reserves owned by Grey Wolf
of which 355,083 barrels are applicable to the minority interests share of
these reserves as of January 1, 2001.
(5) Includes 21,389 Mmcf of natural gas reserves owned by Grey Wolf of which
10,975 Mmcf are applicable to the minority interest share of these reserves
as of January 1, 2001.
C-18
III. BASIS OF THE VALUATION
DEFINITION OF FAIR MARKET VALUE
For the purpose of the Valuation, fair market value is defined as the highest
price that a willing and informed buyer would pay in an open and unrestricted
market to a willing and informed seller, with each acting at arm's length and
with neither party being under any compulsion to enter into the transaction,
expressed in terms of money or money's worth and without any adjustment for a
non-controlling interest.
APPROACH TO VALUATION
In preparing the Valuation it was necessary to estimate the fair market value of
the common shares of each of Grey Wolf and Abraxas (the "Companies"). Raymond
James employed accepted valuation methodologies used to estimate the value of
the assets or common shares of natural resource firms such as Grey Wolf and
Abraxas.
Raymond James utilized the net asset value approach ("RJ NAV") as the primary
valuation technique whereby the value of each of the Companies' assets and
liabilities are estimated with the aggregate estimated value used to determine a
range of estimated value per share for each of the Companies. In our opinion,
based on our knowledge of the oil and gas industry and on valuation practices
commonly used within the industry, the net asset value approach is the most
appropriate method for estimating the relative value of Grey Wolf and Abraxas
because each asset and liability can be valued using a method which is
appropriate to the particular asset or liability. The net asset value approach
is a fundamental approach used in estimating the value of resource companies
such as Grey Wolf and Abraxas.
The basis for the net asset value approach is to evaluate, on a segmented basis,
all of the operating assets, financial assets and all liabilities of each of the
Companies. This approach values only the existing proved and probable reserves,
as evaluated by independent engineers, and does not provide for additional
reserves, which may develop from the reinvestment of future available cash flow.
This approach to reserve evaluation, in which established reserves are produced
to exhaustion, is known as a blowdown evaluation. It is a common method of
reserve evaluation in the oil and gas industry. The rationale for the net asset
value approach, including the allocation of capital expenditures and general and
administrative expenses on a blowdown basis, is the responsibility for, and
hence the value of, the future ability of an oil and gas company to locate,
develop and produce new reserves belongs to the notional buyer, not existing
security holders.
In addition to the RJ NAV approach, and among other supporting valuation
methodologies, the Engineering & Exchange Analysis was conducted by the
Companies' respective independent engineering consultants based on a mutually
agreed to price deck in order to arrive at a share value and resultant implied
exchange ratio. Both approaches employed the discounted cash flow ("DCF") method
as outlined below, in order to estimate the value of the crude oil and natural
gas reserves of Grey Wolf and Abraxas. The RJ NAV approach utilized the reserve
volumes stated in the respective engineering reports provided by the Companies.
These volumes were then subjected to the then current commodity futures prices.
The resultant cash flows were discounted at an after tax rate of 9%. The
Engineering & Exchange Analysis approach employed a pre-tax calculation for both
Grey Wolf and Abraxas was based on the summary reserve information provided by
the Companies. A mutually agreed to price deck was applied to the reserve
volumes. A 10% discount rate was applied to the cash flows under this approach.
Under the Engineering &
C-19
Exchange Analysis, three scenarios were used: (i) Least-Risked Case; (ii) Base
Case; and (iii) Risked Case.
The Least-Risked Case received 100% value to proven reserves and 50% to probable
reserves. Undeveloped land and related third party processing (collectively
"Primary Additions"), were given 100% of the stated value provided by the
Companies. Tax pools, seismic, estimated 2001 incremental production and reserve
additions to date (collectively "Secondary Additions"), were given 25% of stated
value. The Base Case received 100% value to proven developed reserves, 90% to
proven undeveloped reserves and 33% to probable reserves. Primary Additions
received 90% of total value and Secondary Additions received 10% of total value.
The Risked Case gave 100% value to proven developed reserves, 90% to proven
developed non-producing reserves, 75% to proven undeveloped reserves and 25% to
probable reserves. Primary Additions received 75% of stated value and no value
was attributed to Secondary Additions.
In addition to using the Engineering & Exchange Analysis to confirm the
conclusion of the RJ NAV approach, two other approaches were used to value the
Companies' shares and thus the implied exchange ratio: (i) an analysis of Grey
Wolf and Abraxas relative to their respective peer groups in terms of certain
market parameters ("Peer Group Analysis"); and (ii) an analysis of the
consideration to be received by the Grey Wolf Shareholders relative to recent
public acquisitions in terms of price paid for production and reserves
("Comparable Acquisition Analysis").
WORKING CAPITAL CONSIDERATIONS
GREY WOLF - At December 31, 2000 and March 31, 2001, Grey Wolf's consolidated
financial statements recorded current assets of $6.38 million and $7.43
million respectively and current liabilities of $10.25 million and $9.88
million respectively for a working capital deficiency of $3.87 million and
$2.45 million respectively.
TABLE 1
GREY WOLF'S ADJUSTED WORKING CAPITAL
======================================================================
($ millions) December 31, 2000 March 31, 2000
As per Financial Statements
(December 31, 2000) $(3.87) $(2.45)
Add: Exercise of Options $ 1.49 $ 1.49
------ ------
Adjusted Working Capital $(2.38) $(0.96)
======
The Grey Wolf adjusted working capital deficiency for December 31, 2000 and
March 31, 2001 is $2.38 million and $0.96 million respectively.
ABRAXAS - At December 31, 2000 and March 31, 2001, Abraxas' consolidated
financial statements (net of Abraxas' 49% interest in Grey Wolf) recorded
current assets of $21.06 million and $17.55 million respectively and current
liabilities of $32.92 million and $47.34 million for a working capital
deficiency of $11.86 million and $29.79 million. The March 31, 2001 current
liabilities had included $17.7 million of its $20.6 million of deferred net
losses on derivative instruments as recorded in Abraxas' March 31, 2001
financial statements.
C-20
TABLE 2
ABRAXAS' ADJUSTED WORKING CAPITAL
======================================================================
($ millions) December 31, 2000 March 31, 2001
As per Financial Statements $(11.86) $(29.79)
Add: Exercise of Options and
Warrants $ 16.99 $ 16.99
------- -------
Adjusted Working Capital $ 5.13 $(12.80)
=======
The Abraxas' adjusted working capital deficiency (surplus) for December 31,
2000 and March 31, 2001 is ($5.13) million and $12.90 million respectively.
RESERVES
Estimates of value for the crude oil and natural gas reserves for each of the
Companies employed by Raymond James in the Valuation were based on independent
engineering reports. In the case of Grey Wolf the engineering report was
prepared by McDaniel with an effective date of January 1, 2001 and in the case
of Abraxas, the engineering report was prepared by D&M with an effective date of
January 1, 2001. These reports set out an independent assessment of the
Companies' oil and gas reserves. We relied upon the aforementioned independent
engineering reports with respect to reserve volumes, forecasts of future
production rates, capital and operating expenditures, royalties and ARTC in
order to arrive at full life reserve pre-tax cash flows for each of the
Companies. In the case of the Engineering & Exchange Analysis, a mutually agreed
to flat price deck of $25.00 WTI and $5.25 NYMEX was applied to reserve volumes.
In the case of the RJ NAV calculation, the futures prices (as at May 15, 2001)
for crude oil, natural gas and natural gas liquids were used.
The DCF valuation method has an advantage in that it takes into account
increases and decreases in future production volumes, wellhead price
differentials, royalties and operating and capital expenditures. However, DCF
estimates of value are subject to the uncertainty inherent in estimates of
future commodity prices such as crude oil, NGL's, and natural gas. Furthermore,
DCF estimates of value may overstate or understate the value of non-producing
oil and gas reserves if the estimates of the on-stream dates later prove to be
optimistic or pessimistic, respectively.
CRUDE OIL AND NATURAL GAS PRICE FORECASTS
The RJ NAV used commodity prices based upon the quoted futures market on May 15,
2001. In order to achieve a direct relative comparison between the two
Companies, the Companies agreed to a flat price deck of $25.00 per barrel WTI
for crude oil and $5.25 per mcf NYMEX for the Engineering & Exchange Analysis.
BARREL OF OIL EQUIVALENT CONVERSION
For the purposes of the Valuation, a conversion ratio equating 6 mcf of natural
gas to one barrel of crude oil was employed. This conversion ratio reflects
equating natural gas to crude oil based on the relative to heating equivalent
and level of commodity prices. In order to make a fair comparison between Grey
Wolf and Abraxas in terms of reserves and production volumes, both figures are
stated net of production taxes and royalties net of ARTC.
C-21
DISCOUNT RATES
For the RJ NAV calculation, a discount rate of 9% was applied to the cash flow
streams of the Companies. This discount rate is the standard rate employed for
the purposes of valuing total proven reserves as well as risked proven and
probable reserves by Raymond James on an after tax basis. The Engineering &
Exchange Analysis calculation employed a pre-tax 10% discount rate to cash
flows.
INCOME TAXES
The RJ NAV analysis was done on an after tax basis. In the case of Grey Wolf,
the Canadian tax laws were applied incorporating accumulated tax pools. In the
case of Abraxas, the U.S. tax laws were applied to the U.S. operations and
Canadian tax laws were applied to Canadian Abraxas. The Engineering & Exchange
Analysis applied a multiplier to the Companies' respective Canadian tax pools
(0.25, 0.10 and 0.0 for the Least-Risked Case, Base Case and Risked Case
respectively).
UNDEVELOPED LAND
Grey Wolf owns an interest in approximately 205,491 net acres of undeveloped oil
and gas properties. Supplementary Land Services prepared reports evaluating the
net undeveloped oil and gas properties of each of Grey Wolf and Canadian Abraxas
Petroleum Limited. The undeveloped land value for Abraxas (U.S. land only) was
stated by Abraxas to be $3.5 million and Raymond James has not verified this
figure. For the purposes of its Valuation, Raymond James considered the
Supplementary Land Services land values as well as the stated values from
Abraxas. The undeveloped land holdings for each of the Companies are summarized
below:
TABLE 3:
GREY WOLF UNDEVELOPED LAND VALUE
==========================================================================
Value Value
Net Acres ($/acre) ($ millions)
---------------------------------------
Alberta 101,194 $ 40.53 $ 4.1
British Columbia 11,112 $ 77.21 $ 0.9
Northwest Territories 93,185 $ 64.28 $ 6.0
------- ------
Total 205,491 $ 10.9
======= ======
C-22
TABLE 4:
ABRAXAS UNDEVELOPED LAND VALUE
===========================================================================
Value Value
Net Acres ($/acre) ($ millions)
-----------------------------------------
Canadian Abraxas Limited
Alberta 201,755 $ 38.44 $ 7.8
British Columbia 26,919 $ 43.34 $ 1.2
Northwest Territories 163,292 $ 63.59 $ 10.4
------- -------
Total 391,966 $ 19.6
------- -------
Abraxas (U.S. holdings) 71,277 $ 49.40 $ 3.5
49% of Grey Wolf 100,691 $ 53.30 $ 5.4
------- -------
Total Abraxas 563,934 $ 28.5
======= =======
OTHER ASSETS
For the purposes of the RJ NAV, tax deferrals, tax pools, ARTC as well as
undeveloped land were added to the reserve values. For the purposes of the
Engineering & Exchange Analysis, Primary Additions and Secondary Additions were
added to the reserve values as per the discounting factors defined for each of
the cases as outlined above in the Approach to Valuation section.
C-23
LIABILITIES AND EQUITY
LONG TERM DEBT
GREY WOLF - Grey Wolf reported that long-term debt was $7.67 million and $8.48
million at December 31, 2000 and March 31, 2001, respectively.
The long term debt is comprised of:
DEC. 31,
2000 MARCH 31, 2001
------------- --------------
Bank Facility (Prime + 1/8% or BA's + 1 1/8%) $
7,665,450 $ 8,476,000
ABRAXAS - Abraxas reported that long-term debt was $266.44 million and $266.79
million at December 31, 2000 and March 31, 2001, respectively.
The long term debt is comprised of:
DEC. 31,
2000 MARCH 31, 2001
------------- --------------
11.5% Senior Notes due 2004 ("Old Notes) $
801,000 $ 801,000
12.875% Senior Secured Notes due 2003 ("First Lien Notes")
63,500,000 63,500,000
11.5% Second Lien Notes due 2004 ("Second Lien Notes")
190,178,000 190,178,000
Bank Facility (Prime + 0.125%) (1)
7,665,450 8,476,000
Production Payment
5,231,000 4,904,000
Less: Current Maturities
1,128,000 884,000
------------ ------------
Total Long-term Debt as stated in YE 2000 financials
$266,247,450 $266,975,000
Less: 51% of Grey Wolf Debt $
3,909,340 $ 4,322,760
------------ ------------
Total Long-term Debt accounting for minority interest
$262,338,110 $262,652,240
(1) Grey Wolf's Bank Facility converted into U.S. dollars at an exchange rate of
0.65.
On January 1, 2001, in accordance with the transition provisions of SFAS 133,
the Company recorded $31.0 million, net of tax, in Other Comprehensive
Income/Loss representing the cumulative effect of an accounting change to
recognize the fair value of cash flow derivatives. As of March 31, 2001,
$20.6 million of deferred net losses on derivative instruments were recorded
in other comprehensive income, of which $17.7 million was recorded as a
current liability on Abraxas' March 31, 2001 financial statements.
In December 1999, Abraxas and Canadian Abraxas consummated an exchange offer
whereby $269.7 million of the Old Notes were exchanged for $188.8 million of new
Second Lien Notes, 16.1 million common shares of Abraxas and CVRs which entitled
the holders to receive up to a total of 105,408,978 Abraxas common shares under
certain circumstances as defined. On May 21, 2001, approximately 3.38 million
common shares were issued to the CVR holders. There are no additional CVRs
outstanding.
C-24
COMMON SHARES
GREY WOLF - For the purpose of computing the fully diluted net asset value per
Grey Wolf Share, the number of Grey Wolf Shares outstanding was increased by
1.01 million shares for proceeds of $1.49 million. The adjusted number of Grey
Wolf common shares outstanding and reserved for issuance for the purpose of this
Valuation are as follows:
TABLE 5:
GREY WOLF COMMON SHARES OUTSTANDING AND OPTIONED
================================================================================
===================
Exercise Price
# of Shares ($/share)
Expiry Date
---------------------------------------------------------
Common Shares Outstanding
as at December 31, 2000 12,661,541
Add: Employee and Directors Options 1,010,029 $0.74 to 3.07
various
----------
Common Shares Outstanding and Optioned 13,671,570
==========
ABRAXAS - For the purposes of computing the fully diluted net asset value per
Abraxas Share, the number of Abraxas Shares outstanding was increased by 8.376
million shares for proceeds of $16.99 million which includes outstanding
options, warrants and issue of 3.386 million Abraxas shares in respect of the
outstanding CVRs at May 21, 2001. The adjusted number of Abraxas Shares
outstanding and reserved for issuance for the purpose of this Valuation are as
follows:
TABLE 6:
ABRAXAS COMMON SHARES OUTSTANDING AND OPTIONED
================================================================================
=========================
Exercise Price
# of Shares ($/share)
Expiry Date
----------------------------------------------------------
Common Shares Outstanding
as at December 31, 2000 22,593,969
Add: Outstanding Stock Options 4,042,000 $1.30 to $5.03
various
----------
Adjusted Common Shares Outstanding 26,635,969
Add: Stock Warrants 950,000 $3.50
July 1, 2004
----------
Fully Diluted Common Shares 27,585,969
==========
Add: CVRs 3,386,000 N/A
May 21, 2001
----------
Fully Diluted Common Shares including CVRs 30,971,969
==========
C-25
OTHER FACTORS AFFECTING VALUATION
In the case of Abraxas, a hedge settlement cost of $30.7 million was applied
directly against the value of proved developed producing reserves within the
Engineering & Exchange Analysis (defined on page 23).
REFERENCE IS MADE TO TABS 2 - 7 FOR MORE DETAILED INFORMATION AND DATA
PERTAINING TO THE VALUATION METHODOLOGIES UTILIZED AND SUMMARIZED HEREIN.
C-26
IV. VALUATION OF THE COMMON SHARES
NET ASSET VALUE ANALYSIS (RJ NAV ANALYSIS)
The RJ NAV assumed a March 31, 2001 date for the balance sheets and hedge losses
net of tax. Abraxas' year end 2000 net operating loss carry forwards of
$101,800,000 was included in the analysis (discounted at 50% to reflect the
present value). Other than 3rd party processing fees (such values were supplied
by the companies), no values were assigned to gas plants or gathering lines.
Plant assets are required in the operation of an oil and gas company and
therefore lower a company's third party operating costs it would otherwise
incur. The reserve values were calculated from future prices as posted on May 4,
2001 (RJ's future price deck for the month of May, 2001).
GREY WOLF SHARES
Based on and subject to the foregoing RJ NAV calculation, Raymond James has
estimated the fair market value of the Grey Wolf Shares to be approximately
$3.33. A summary of the value determined under the going concern approach for
the Grey Wolf Shares is shown in Table 6.
TABLE 6:
GREY WOLF NET ASSET VALUE
================================================================================
==
($ millions) ($ per
share)
----------------------------------
Proven Reserves $ 29.19 $ 2.13
Probable Reserves $ 4.42 $ 0.33
Undeveloped Land $ 10.92 $ 0.80
Other Assets (3rd Party Processing) $ 0.58 $ 0.05
Adjusted Working Capital + Option Proceeds $ (0.98) $ (0.07)
Long-term Debt $ (8.48) $ (0.62)
Present Value of Tax Pools and ARTC $ 13.13 $ 0.96
Present Value of A.T. G&A Costs $ (2.67) $ (0.20)
----------- ---------
Net Asset Value $ 45.57 $ 3.37
=========== =========
Fully Diluted Shares Outstanding 13,672,000
C-27
ABRAXAS SHARES
Based on and subject to the foregoing NAV calculation, Raymond James has
estimated the fair market value of the Abraxas Shares to be approximately $4.28.
A summary of the range of values determined under the going concern approach for
the Abraxas Shares is shown in Table 7.
TABLE 7:
ABRAXAS NET ASSET VALUE (000)
================================================================================
($ millions) ($ per share)
--------------------------------
Proven Reserves $ 244.92 $ 7.90
Probable Reserves $ 128.44 $ 4.15
Undeveloped Land $ 28.80 $ 0.93
Other Assets (3rd Party Processing) $ 3.90 $ 0.12
Adjusted Working Capital + Option Proceeds ($ 12.94) ($ 0.42)
Long-term Debt + hedge loss not included
in Adjusted Working Capital $ (265.53) ($ 8.57)
Present Value of Tax Pools and ARTC $ 52.39 $ 1.69
Present Value of A.T. G&A Costs $ (25.94) $ (0.84)
------------- -----------
Net Asset Value $ 132.54 $ 4.97
============= ===========
Fully Diluted Shares Outstanding 30,971,969
In calculating Abraxas' RJ NAV, it was assumed that Abraxas' corporate tax rate
was 35% plus a 5% production tax/ad valorem tax as stated by Abraxas, for an all
in tax rate of 40%. As the above indicates, risked probable reserves account for
approximately 84% of the total net asset value of Abraxas as opposed to Grey
Wolf's risked probable reserves accounting for approximately 10% of the total
net asset value. G&A after tax represents 6.9% and 7.9% of the after tax proven
and probable reserve values for Abraxas and Grey Wolf respectively.
The implied exchange ratio derived from the RJ NAV analysis is 0.679 Abraxas
shares per Grey Wolf share.
ENGINEERING & EXCHANGE ANALYSIS APPROACH
The Engineering & Exchange Analysis approach employed a pre-tax calculation for
both Grey Wolf and Abraxas was based on the summary reserve information provided
by the Companies. A mutually agreed to price deck was applied to the reserve
volumes. A 10% discount rate was applied to the cash flows under this approach.
Abraxas' hedge loss w Under this approach, three scenarios were used: (i)
Least-Risked Case; (ii) Base Case; and (iii) Risked Case. In each case, no
values were attributed to tax pools (the reserves were calculated on a before
tax basis), seismic, 2001 incremental additions and inventory of potential
drilling locations (collectively, "Secondary Additions").
The Least-Risked Case received 100% value to proven reserves and 50% to probable
reserves. Primary Additions, which included undeveloped land and related third
party processing, were given 100% of the stated value provided by the Companies.
The Base Case applied 100% value to proven developed reserves, 90% to proven
undeveloped reserves and 33% to probable reserves. Primary Additions received
90% of total value. The Risked Case gave 100% value to proven producing
reserves, 90% to proven developed non-producing reserves, 75% to proven
C-28
undeveloped reserves and 25% to probable reserves. Primary Additions received
75% of stated value.
TABLE 8:
ENGINEERING & EXCHANGE ANALYSIS
================================================================================
LEAST-RISKED BASE CASE RISKED
CASE CASE
------------- ---------- ------------
NAV PER SHARE - PROVEN RESERVES
Grey Wolf $4.75 $4.75 $4.58
Abraxas $6.53 $6.10 $5.12
Implied Exchange Ratio 0.727 0.779 0.894
NAV PER SHARE - PROVEN + PRIMARY
Grey Wolf $5.59 $5.51 $5.21
Abraxas $7.22 $7.05 $5.91
Implied Exchange Ratio 0.775 0.782 0.882
NAV PER SHARE - PROVEN + PROBABLE +
PRIMARY
Grey Wolf $6.21 $5.91 $5.52
Abraxas $11.36 $9.54 $7.80
Implied Exchange Ratio 0.547 0.620 0.708
The range of exchange ratios vary depending upon risk and asset additions. Not
including probable reserves, the exchange ratio ranges between 0.727 Abraxas
share per Grey Wolf share to 0.894 Abraxas share to Grey Wolf share. Taking
probable reserves into account (assuming the above risk parameters) the exchange
ratio range is between 0.547 Abraxas share per Grey Wolf share to 0.708 Abraxas
share to Grey Wolf share.
PEER GROUP ANALYSIS APPROACH
In the case of Grey Wolf, the comparison to its peer group involved using an
adjusted enterprise value ("AEV") (the market value of a company's shares
outstanding plus a company's net debt less a company's undeveloped land value)
and adjusted price ("AdjPrice") (the company's share price less the per share
value of the company's undeveloped land).
The peer groups for Grey Wolf and Abraxas were chosen on the basis of comparable
enterprise value, daily production, and the natural gas component of production.
In the case of Grey Wolf, all five comparable companies are currently under RJ
research coverage. In the case of Abraxas, two of the nine comparable companies
are currently under RJ research coverage. In addition, leverage was also
considered within Abraxas' comparable companies.
C-29
TABLE 9:
GREY WOLF VERSUS PEERS (STATED IN CDN$ AND 6:1 GAS:OIL EQUIVALENT RATIO)
================================================================================
GREY PEER GROUP IMPLIED IMPLIED
WOLF AVERAGE SHARE PRICE SHARE PRICE
(Cdn$ per share) (US$ per
share)
-------- ------------ ---------------
---------------
Share Price ($/share) $3.80 $6.00
AMC ($ millions) $35.10 $87.20
AEV ($ millions) $51.86 $106.84
Cash Flow ($ millions) $25.20 $38.50
AdjPrice/Cash Flow 1.4X 2.1X $5.07 $3.30
EBITDA ($ millions) $27.10 $43.75
AEV/EBITDA 1.9X 2.3X $4.50 $2.93
Production (boe/d) 2,567 4,650
AEV/boe/d ($/boe/d) $21,087 $20,022 $3.96 $2.57
Proven Reserves
(mmboe) 5.98 8.51
AEV/boe ($/boe) $8.68 $11.72 $5.13 $3.33
Proven + Probable
Reserves (mmboe) 7.75 11.42
AEV/boe ($/boe) $6.70 $8.70 $4.93 $3.20
AVERAGE $4.72 $3.07
The implied share value range is between $2.57 and $3.33 (Cdn$3.96 and Cdn$5.13)
with an average share value of $3.07 (Cdn$4.72).
In the case of Abraxas, the peer group comparison focused on cash flow,
earnings, EBITDA, daily production and proven reserves. Enterprise value and
share price was adjusted to account for undeveloped land ("AEV" and "AdjPrice"
respectively). Each company's North American undeveloped acreage was valued a
US$50.00 per acre. In addition, exercisable options and their respective average
exercise price as of December 31, 2000 were taken into account in determining
option proceeds and fully diluted shares.
C-30
TABLE 10:
ABRAXAS VERSUS PEERS
================================================================================
ABRAXAS PEER GROUP IMPLIED SHARE
----------- AVERAGE PRICE
----------- -------------
Share Price ($/share) $4.15 $15.03
Enterprise Value ($ millions) $391.0 $480.5
Cash Flow ($ millions) $56.41 $93.80
ADJPRICE/CASH FLOW 1.6X 3.4X $7.92
EBITDA ($ millions) $87.86 $117.88
AEV/EBITDA 4.1X 4.4X $5.08
Earnings $3.1 $32.56
ADJP/EARNING 28.6X 8.5X $1.94
Production (boe/d) 10,906 18,478
AEV/BOEPD ($/BOE) $33,267 $31,562 $3.49
Proven Reserves (mmboe) 38.6 69.5
AEV/BOE ($/BOE) $9.40 $6.93 $0.75
AVERAGE $3.84
Financial multiples give an indication of how a company is valued relative to
its peers, however, they don't take into account a company's asset value (in
this, the value of the company's reserves) nor risk associated with debt
leverage. Abraxas' leverage versus its peers is significantly higher than that
of its peers: 2000 year end debt to estimated 2001 cash flow is 5.0x for Abraxas
versus 2.3x for the peer group; debt to enterprise value is 69% for Abraxas
versus 35% for the peer group; and debt to book value is 102% for Abraxas versus
59% for the peer group.
Abraxas trades at a high value on a proven reserve basis relative to its peers.
U.S. based oil and gas companies do not publish their probable reserves and for
this reason, RJ was not able to include probable reserves in the peer analysis.
It is uncertain how Abraxas' probable reserves would compare to its peer group.
It should be noted that probable reserves are typically risked between 50% and
100%.
The implied share value range is between $0.75 and $7.92. The average of the
share value range was $3.84. The implied exchange ratio assuming a Grey Wolf
share price based upon its peer group average of $3.07 and an Abraxas share
price based upon its peer group average of $3.84 would be 0.799x
COMPARABLE ACQUISITIONS ANALYSIS
The consideration to be received by the Grey Wolf Shareholders was evaluated by
comparing the Takeover Offer to comparable acquisitions announced during the
fourth quarter of 2000 and the first quarter of 2001 in terms of the reserve
value per unit of daily production as well as per unit reserves on a proven and
a proven plus half probable basis. The purpose of the Comparable Acquisition
Analysis is to assist in the determination of potential offer prices for Grey
Wolf by bona fide interested third parties.
C-31
The comparable acquisitions were defined as corporate acquisitions where the
transaction value was greater than Cdn$20 million and the gas component of
reserves was greater than 50% (based on a 10:1 conversion). Reserve value is
defined as market capitalization on a fully diluted basis plus net debt
including proceeds from "in the money" options less net undeveloped land.
Variations in unit value between transactions can be attributed to a large
number of factors including: location, size and quality of reserves and their
stage of development and potential upside; associated operating costs and
royalty burdens; access to markets; amount and nature of existing and available
sales contracts; accompanying redundant assets such as plant and facilities and
undeveloped land; type and amount of available tax pools; and the number and
type of available purchasers (particularly special purchasers and their
motivation).
TABLE 11:
GREY WOLF ACQUISITION VERSUS COMPARABLE ACQUISITIONS
(STATED IN CDN$ AND 10:1 GAS/OIL CONVERSION)
================================================================================
===========================
GREY WOLF AVERAGE
IMPLIED IMPLIED
--------- -------
-------- --------
SHARE PRICE SHARE PRICE
----------- -----------
(Cdn$) (US$)
Reserve Value ($ millions) $54.0 $532.7
Reserve Value/Proven Reserves ($/boe) $13.42 $15.77
$4.71 $3.06
Reserve Value/Proven+1/2 Probable Reserves ($/boe) $11.77 $13.14
$4.47 $2.91
Reserve Value/Daily Production ($/boe/d) $35,140 $45,945
$5.16 $3.35
AVERAGE
$4.78 $3.11
---------------------------------------------------- --------------- -----------
------------ -------------
An implied offer price for a Grey Wolf share is between $2.90 to $3.35 (Cdn$4.47
and Cdn$5.16) for an average offer price of $3.11.
CONSIDERATION OF OTHER BENEFITS
Raymond James believes that the combination of the Companies may result in a
number of benefits to the holders of the common shares of the pro forma company.
It is not possible to accurately quantify these potential benefits. However,
benefits of the Takeover Bid will be shared by the shareholders of each of the
Companies on a basis pro rata to their interests in the pro forma company.
PRIOR VALUATIONS
The management of Grey Wolf and Abraxas have represented to Raymond James that
there have been no prior valuations in respect to Grey Wolf and Abraxas prepared
in the last 24 months.
COMPARISON OF THE SHARE EXCHANGE RATIO TO THE RATIO OF TRADING PRICES
We performed an analysis of the historical ratio of the weighted average trading
price of a Abraxas Share to a Grey Wolf Share at certain periods prior and
subsequent to the announcement of Abraxas' offer to purchase the remaining
portion of Grey Wolf it does not already own. The purpose of this comparison is
for illustrative information only and has not been employed to derive share
values or an appropriate exchange ratio. This analysis indicates that the market
has responded by trading towards the announced exchange ratio.
C-32
TABLE 12:
GREY WOLF / ABRAXAS RELATIVE TRADING (1)
================================================================================
===================================
IMPLIED PRICE MARKET
GREY PER
GREY WOLF PREMIUM IMPLIED
WOLF GREY WOLF ABRAXAS
SHARE TO MARKET EXCHANGE RATIO
------- ---------- --------
---------- ----------- ---------------
(Cdn$) (US$) (US$)
($Cdn)
30 days prior to announcement $2.18 $1.42 $4.05
$3.74 71% 0.35
60 days prior to announcement $2.06 $1.34 $3.71
$3.43 67% 0.36
90 days prior to announcement $2.11 $1.37 $3.69
$3.40 61% 0.37
120 days prior to announcement $2.01 $1.31 $3.22
$2.97 48% 0.41
30 days after the announcement $2.90 $1.88 $4.71
$4.35 63% 0.40
60 days after the announcement $3.07 $1.99 $4.78
$4.42 56% 0.42
10 days prior to announcement of
exchange
ratio $3.29 $2.14 $4.87
$4.49 48% 0.44
day prior to announcement of exchange
ratio $3.43 $2.23 $4.91
$4.53 43% 0.45
day of announcement of exchange ratio $3.77 $2.45 $4.83
$4.46 28% 0.51
announcement date to current $3.73 $2.43 $4.30
$3.97 15% 0.56
last 10 days $3.73 $2.42 $4.20
$3.88 4% 0.58
last 20 days $3.73 $2.42 $4.27
$3.94 6% 0.57
current (5/15/01) $3.78 $2.46 $4.20
$3.88 3% 0.58
(1) All share prices are stated as the weighted average for the indicated
period.
COMPARISON OF PRO FORMA FINANCIAL RESULTS
We analysed the forecasted cash flow and net income per share that would accrue
to a Grey Wolf Share on a stand alone basis and pro forma the Takeover Offer. In
the year 2001, such analysis forecasts that the cash flow and net income
attributable to each Grey Wolf Share would increase.
COMPARISON OF QUALITATIVE FACTORS
In addition to the foregoing, we are of the opinion that the combination of the
businesses of Grey Wolf and Abraxas through the Takeover Offer will result in
the shareholders of Grey Wolf participating in an entity that will have a larger
asset and cash flow base and with greater financial resources, which may be
strategically, financially and operationally in a better position to compete in
the business of exploring for, developing and producing crude oil and natural
gas. These attributes of Abraxas, pro forma the Takeover Offer, may provide the
Shareholders with additional qualitative benefits.
C-33
V. CONCLUSIONS
VALUATION CONCLUSIONS
Based on, and subject to the foregoing, Raymond James's opinion as to the fair
market value of each of the Grey Wolf Shares and Abraxas Shares, for the purpose
of this Valuation, are as follows:
TABLE 13:
CONCLUSIONS: RANGE OF VALUES
================================================================================
RJ NAV
Grey Wolf Share $3.37
Abraxas Share $4.97
IMPLIED EXCHANGE RATIO 0.679
ENGINEERING & EXCHANGE ANALYSIS (BASE CASE)
PROVEN + PROBABLE + PRIMARY
Grey Wolf Share $5.91
Abraxas Share $9.54
IMPLIED EXCHANGE RATIO 0.620
PEER GROUP ANALYSIS AVERAGE LOW HIGH
--------- -------- ---------
Grey Wolf Share $3.07 $2.57 $3.33
Abraxas Share $3.84 $0.75 $7.92
IMPLIED EXCHANGE RATIO 0.799
COMPARABLE ACQUISITION ANALYSIS AVERAGE LOW HIGH
--------- -------- ---------
Grey Wolf Share $3.11 $2.91 $3.35
The Valuation used three methodologies in calculating the estimated fair
market share value of Grey Wolf, (RJ NAV, Peer Group Analysis and Comparable
Acquisition Analysis). The ranges of the methodologies' averages are $3.07
per Grey Wolf Share to $3.37 per Grey Wolf Share (C$4.72 to C$5.19) with an
average of $3.18 per Grey Wolf Share (C$4.90).
C-34
The Valuation used two metholologies in calculating the estimated fair market
share value of Abraxas (RJ NAV and Peer Group Analysis). The ranges of the
methodologies' averages are $3.84 per Abraxas share to $4.97 per Abaxas share
with and average of $4.41 per Abraxas share.
The exchange ratio assuming the above averages of the estimated fair market
share values for Grey Wolf and Abraxas ($3.18 and $4.41 respectively) is
0.721.
The Valuation used three methodologies in calculating an exchange ratio
(RJ NAV, Engineering & Exchange Ananlysis and Peer Group Analysis). The three
exchange ratios in Table 13 range from 0.620 to 0.799 with an average of
0.699. The median (which corresponds to the RJ NAV exchange value) is 0.679.
Share values for higher leveraged companies (such as Abraxas) are more
sensitive to changes in commodity prices than companies with lower leverage.
The future share value of companies with a high degree of probable reserves
(such as Abraxas) is directly impacted by the success the company has in
drilling its probable reserves. Predicting the probability of success of
drilling probable reserves is difficult.
In conclusion, the Valuation undertook four methodologies reflecting economic
and general business and financial conditions prevailing as at the date hereof
and the condition and prospects, financial and otherwise of Grey Wolf, Abraxas,
Canadian Abraxas and the companies within the Canadian and U.S. peer groups as
reflected in the information and documents reviewed by Raymond James. In our
analysis, we made numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, any of which are
beyond the control of any party involved in the Takeover Offer. The analysis
took a number of approaches and parameters, including those specific to the oil
and gas industry, which resulted in numerous share value data points. The reader
cannot select portions of our analysis, but must consider all factors of the
analysis.
Yours truly,
RAYMOND JAMES & ASSOCIATES, INC
C-35
Abraxas Petroleum Corporation
500 North Loop 1604 East
Suite 100
San Antonio, Texas 78232
Abraxas Acquisition Corporation
1900, 333-7th Ave. S.W.
Calgary, Alberta T2P 2Z1
Gentlemen:
We refer to the formal valuation dated May 29, 2001, which we prepared for the
Special Committee of the Board of Directors of Grey Wolf Exploration Inc. for
the take-over bid proposed by Abraxas Petroleum Corporation and Abraxas
Acquisition Corporation. We consent to the filing of the formal valuation
with the Ontario, British Columbia and Alberta Securities Commissions and the
inclusion of the formal valuation in this take-over bid circular and the
summary thereof contained in such circular.
Dated: July 30, 2001
/s/ RAYMOND JAMES & ASSOCIATES, INC.
RAYMOND JAMES & ASSOCIATES, INC.
C-36
ANNEX D
OPINION OF JEFFRIES & COMPANY, INC.
D-1
June 7, 2001
The Special Committee of the Board of Directors
ABRAXAS PETROLEUM CORPORATION
500 N. Loop 1604 East, Suite 100
San Antonio, TX 78232
Attention: Mr. Robert L.G. Watson
President & Chief Executive Officer
Gentlemen:
You have advised us that Abraxas Petroleum Corporation ("Abraxas" or the
"Company") proposes to enter into an agreement whereby Abraxas will acquire the
common shares of Grey Wolf Exploration Inc. (the "Grey Wolf Shares") that it
does not already own (the "Transaction") for an exchange of Abraxas common stock
("Abraxas Shares") for Grey Wolf Shares at a ratio of 0.6 Abraxas Shares for
each Grey Wolf Share. You have requested our Opinion (the "Opinion") as to
whether the exchange ratio is fair, from a financial point of view, to the
stockholders of the Company's Common Stock (other than the Abraxas stockholders
who also own Grey Wolf Shares).
In conducting our review and analysis and in arriving at the Opinion, we have,
with the Company's permission, assumed and relied upon, without independent
verification, the accuracy and completeness of all of the historical and
projected financial and other information provided to us by the Company, and our
assumption regarding U.S. and Canadian currency exchange rates. With respect to
the above noted historical and projected financial information, the management
of the Company has advised us that such information has been reasonably prepared
and reflects such management's best currently available estimates and judgments,
including the impact of the Transaction on the Company's projections, and you
have instructed us to rely on such information in rendering the Opinion. We have
also relied upon the assurances of management that they were not aware of any
facts that make this information inaccurate or misleading. We have not conducted
a physical inspection or appraisal of any of the assets, liabilities, properties
or facilities of the Company or Grey Wolf Exploration, nor have we made or
considered any independent evaluations or appraisals of any of such assets,
properties or facilities.
In conducting our analysis and rendering the Opinion as expressed herein, we
have considered such financial and other factors as we have deemed appropriate
under the circumstances, including: (i) the exchange ratio; (ii) drafts of the
offer to exchange and offering circular; (iii) historical and current financial
condition and results of operations, including certain public filings of the
Company; (iv) certain non-public financial and
D-2
non-financial information prepared by the Company and provided to us for our
analysis; (v) the business prospects of the Company and Grey Wolf Exploration
considering their current capital structure and after giving effect to the
Transaction; (vi) the historical and current market price of the Company and
Grey Wolf common stock; (vii) publicly available industry data we considered
relevant to our inquiry; (viii) the value of certain intangible benefits that
may accrue to the Company as a result of the Transaction and (ix) such other
factors as we deemed relevant to the Opinion. In addition, we have taken into
account general economic, monetary, political and market conditions as well as
our experience with similar transactions and the valuation of similar
securities. The Opinion is based on the aforementioned conditions as they exist
currently and can be evaluated on the date hereof. Existing conditions are
subject to rapid and unpredictable change and any such change could impact the
Opinion.
Jefferies & Company, Inc. ("Jefferies") will receive a fee of $200,000 payable
upon delivery of this Opinion. In the ordinary course of Jefferies' business, it
actively trades the securities of the Company for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or short
position in such securities. Jefferies has rendered investment banking services
to the Company in the past and has received fees for the rendering of such
services.
Based upon and subject to the foregoing, we are of the Opinion, as investment
bankers, that, as of the date hereof, the exchange ratio is fair, from a
financial point of view, to the holders of the Company's Common Stock (other
than the Abraxas stockholders who also own Grey Wolf Shares).
This letter is solely for the information of the Special Committee of the Board
of Directors of the Company as one element in the Board's consideration of the
Transaction and may not be relied upon by any other person. This letter does not
address the underlying decision by the Company to engage in the Transaction and
does not constitute a recommendation to any holder of the Company's Common Stock
as to how to vote on the approval of the Transaction or any matter related
thereto. The Opinion, and any supporting analysis or other material prepared by
Jefferies, may not be quoted or referred to, in whole or in part, in any public
filing or in any written document, or used for any other purpose, without our
prior written consent. We understand and agree that this letter will be
reprinted in its entirety and that we will have the opportunity to review and
comment on all descriptions thereof prior to dissemination to the stockholders
of the Company. We expressly disclaim any undertaking or obligation to advise
any person of any change in any fact or matter affecting, or that may affect,
this Opinion of which we become aware after the date hereof.
Very truly yours,
Jefferies & Company, Inc.
D-3
ANNEX E
SECTIONS 187-199 OF THE ALBERTA BUSINESS CORPORATIONS ACT
E-1
Take-Over Bids - Compulsory Purchase
Definitions 187
In this part,
(a) "dissenting offeree" means an offeree who does not accept a
take-over bid and a person who acquires from an offeree a share for
which a take-over bid is made;
(b) "offer" includes an invitation to make an offer;
(c) "offeree" means a person to whom a take-over bid is made;
(d) "offeree corporation" means a corporation whose shares are the
object of a take-over bid;
(e) "offeror" means a person, other than an agent, who makes a take-over
bid, and includes 2 or more persons who, directly or indirectly,
(i) make take-over bids jointly or in concert, or
(ii) intend to exercise jointly or in concert voting rights
attached to shares for which a take-over bid is made;
(f) "share" means a share with or without voting rights and includes
(i) a security currently convertible into such a share, and
(ii) currently exercisable options and rights to acquire such a
share or such a convertible security;
(g) "take-over bid" means an offer made by an offeror to shareholders to
acquire all of the shares of any class of shares of an offeree
corporation not already owned by the offeror, and includes every
take-over bid by a corporation to repurchase all of the shares of
any class of its shares which leaves outstanding voting shares of
the corporation.
188
1. A take-over bid is deemed to be dated as of the date on which it is
sent.
2. If within the time limited in a take-over bid for its acceptance or within
120 days after the date of a take-over bid, whichever period is the
shorter, the bid is accepted by the holders of not less than 90% of the
shares of any class of shares to which the take-over bid relates, other
than shares of that class held at the date of the take-over bid by or on
behalf of the offeror or an affiliate or associate of the offeror, the
offeror is entitled, on the bid being so accepted and on complying with
this Part, to acquire the shares of that class held by the dissenting
offerees.
E-2
3. The rights of an offeror and offeree under this Part are subject to any
unanimous shareholder agreement.
189
1. An offeror may acquire shares held by a dissenting offeree by sending by
registered mail within 60 days after the date of termination of the take-over
bid and in any event within 180 days after the date of the take-over bid, an
offeror's notice to each dissenting offeree stating that
(a) the offerees holding more than 90% of the shares to which the
bid relates have accepted the take-over bid,
(b) the offeror is bound to take up and pay for or has taken up and
paid for the shares of the offerees who accepted the take-over bid,
(c) a dissenting offeree is required to elect
(i) to transfer his shares to the offeror on the terms on
which the offeror acquired the shares of the offerees
who accepted the take- over bid, or
(ii) to demand payment of the fair value of his shares
(A) by notifying the offeror, and
(B) by applying to the Court to fix the fair value
of the shares of the dissenting offeree,
within 60 days after the date of the sending of the offeror's notice,
(d) a dissenting offeree who does not notify the offeror and apply to
the Court in accordance with clause (c)(ii) is deemed to have
elected to transfer his shares to the offeror on the same terms that
the offeror acquired the shares from the offerees who accepted the
take-over bid, and
(e) a dissenting offeree shall send the share certificates of the class
of shares to which the take-over bid relates to the offeree
corporation within 20 days after he receives the offerror's notice.
2. Concurrently with sending the offeror's notice under subsection (1),
the offeror shall send or deliver to the offeree corporation a
notice of adverse claim in accordance with section 73 with respect
to each share held by a dissenting offeree.
E-3
190
1. A dissenting offeree to whom an offeror's notice is sent under section
189(1), within 20 days after he receives that notice, send his share
certificates of the class of shares to which the take-over bid relates to
the offeree corporation.
2. Within 20 days after the offeror sends an offeror's notice under section
189(1), the offeror shall pay or transfer to the offeree corporation the
amount of money or other consideration that the offeror would have had to
pay or transfer to a dissenting offeree if the dissenting offeree had
elected to accept the take-over bid under section 189(1)(c)(i).
191
1. The offeree corporation is deemed to hold in trust for the dissenting
offerees the money or other consideration it receives under section
190(2), and the offeree corporation shall deposit the money in a separate
account in a bank or other body corporate any of whose deposits are
insured by the Canada Deposit Insurance Corporation or guaranteed by the
Quebec Deposit Insurance Board, and shall place the other consideration in
the custody of a bank or such other body corporate.
2. Within 30 days after the offeror sends an offeror's notice under section
189(1), the offeree corporation shall, if the offeror has paid or
transferred to the offeree corporation the money or other consideration
referred to in section 190(2),
(a) issue to the offeror a share certificate in respect of the shares
that were held by dissenting offerees,
(b) give to each dissenting offeree who elects to accept the take-over
bid terms under section 189(1)(c)(i) and who sends or delivers his
share certificates as required under section 190(1), the money or
other consideration to which he is entitled, disregarding fractional
shares, which may be paid for in money, and
(c) send to each dissenting shareholder who has not sent his share
certificates as required under section 190(1) a notice stating that
(i) his shares have been cancelled,
(ii) the offeree corporation or some designated person holds in
trust for him the money or other consideration to which he is
entitled as payment for or in exchange for his shares, and
(iii) the offeree corporation will, subject to section 192 to 198,
send that money or other consideration to him forthwith after
receiving his shares.
192 If a dissenting offeree has elected to demand payment of the fair value of
his shares under section 189(1)(c), the offeror may, within 20 days after it has
paid the money or transferred the other consideration under section 190(2),
apply to the Court to fix the fair value of the shares of that dissenting
offeree.
E-4
193 A dissenting offeree is not required to give security for costs in an
application made under this Part.
194 If more than one application is made under sections 189 and 192, the offeror
or a dissenting offeree may apply to have the applications heard together.
195 On application under this Part, the Court shall fix a fair value for the
shares of each dissenting offeree who is a party to the application.
196 The Court may in its discretion appoint one or more appraisers to assist the
Court to fix a fair value for the shares of a dissenting offeree.
197 The final order of the Court shall be made against the offeror in favour of
each dissenting offeree who has elected to demand payment of the fair value of
his shares for the fair value of his shares as fixed by the Court.
198 In connection with proceedings under this Part, the Court may make any order
it thinks fit and, without limiting the generality of the foregoing, it may do
any or all of the following;
(a) fix the amount of money or other consideration that is
required to be held in trust under section 191(1);
(b) order that the money or other consideration be held in trust
by a person other than the offeree corporation;
(c) allow a reasonable rate of interest on the amount payable to
each dissenting offeree from the date he sends or delivers his
share certificates under section 190(1) until the date of
payment;
(d) order that any money payable to a shareholder who cannot be
found be paid to the Provincial Treasurer and section 220(3)
applies in respect of money so paid.
199
1. If the take-over bid is an offer by a corporation to repurchase its own
shares section 189(2) does not apply, and section 190(2) does not apply, but the
corporation shall comply with section 191(1) within 20 days after it sends an
offeror's notice under section 189(1).
2. If
(a) the take-over bid is an offer by a corporation to repurchase its own
shares, and
(b) the corporation is prohibited by section 32
(i) from depositing or placing the consideration for the shares
pursuant to section 191(1), or
(ii) paying the amount for the shares fixed by the Court pursuant
to section 195
E-5
the corporation
(c) shall re-issue to the dissenting offeree the shares for which the
corporation is not allowed to pay, and
(d) is entitled to use for its own benefit any money or consideration
deposited or placed under section 1919(1), and
the dissenting offeree is reinstated to his full rights, as a shareholder.
E-6
ANNEX F
INFORMATION CONCERNING ABRAXAS ACQUISITION CORPORATION
F-1
AUDITORS' REPORT
To the Shareholder of
ABRAXAS ACQUISITION CORPORATION:
We have audited the balance sheet of ABRAXAS ACQUISITION CORPORATION as at June
7, 2001. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, the balance sheet presents fairly, in all material respects, the
financial position of the Company as at June 7, 2001 in accordance with Canadian
generally accepted accounting principles.
Calgary, Canada (signed) "DELOITTE & TOUCHE LLP"
June 7, 2001 Chartered Accountants
F-2
ABRAXAS ACQUISITION CORPORATION
BALANCE SHEET
AS AT JUNE 7, 2001
(STATED IN CANADIAN DOLLARS)
-------------------------------------------------------------------------------
$
-------------
ASSET
Cash 100
=============
SHAREHOLDER'S EQUITY
Share capital (Note 2) 100
=============
APPROVED ON BEHALF OF THE BOARD
(SIGNED) "ROBERT L. G. WATSON", DIRECTOR
(SIGNED) "MARK R. SMITH", DIRECTOR
ABRAXAS ACQUISITION CORPORATION
NOTES TO THE BALANCE SHEET
AS AT JUNE 7, 2001
(STATED IN CANADIAN DOLLARS)
------------------------------------------------------------------------------
1. INCORPORATION
The Company was incorporated in Canada under the Business Corporations Act
(Alberta) on May 31, 2001. The Company is a wholly-owned subsidiary of
Abraxas Petroleum Corporation.
2. SHARE CAPITAL
Authorized
Unlimited number of common shares without nominal or par value
-------------------------
NUMBER OF AMOUNT
SHARES $
-------------------------
Issued
Common shares 100 100
=========================
F-3
ANNEX G
ABRAXAS AUDIT COMMITTEE CHARTER
G-1
ABRAXAS PETROLEUM CORPORATION
Audit Committee Charter
The audit committee of the board of directors shall be comprised of directors
who are independent of management and the Company. Members of the audit
committee shall be considered independent if they have no relationship to the
Company that may interfere with the exercise of their independence from
management and the Company. All audit committee members will be financially
literate and at least one member will have accounting or related
financial/management expertise.
STATEMENT OF POLICY
The audit committee shall provide assistance to the directors in fulfilling
their responsibility to the shareholders, potential shareholders, and investment
community relating to corporate accounting, reporting practices of the Company,
and the quality and integrity of financial reports of the Company. In so doing,
it is the responsibility of the audit committee to maintain free and open
communication between the directors, the independent auditors, and the financial
management of the Company.
RESPONSIBILITIES
In carrying out its responsibilities, the audit committee believes it policies
and procedures should remain flexible, in order to best react to changing
conditions and to ensure to the directors and shareholders that the corporate
accounting and reporting practices of the Company are in accordance with all
requirements and are of the highest quality.
In carrying out these responsibilities, the audit committee will:
o Obtain the full board of directors' approval of this Charter and
review and reassess this Charter as conditions dictate (at least
annually).
o Review and recommend to the directors the independent auditors to be
selected, subject to shareholders approval, to audit the financial
statements of the Company and its divisions.
o Have a clear understanding with the independent auditors that they
are ultimately accountable to the audit committee and the board of
directors who, as the shareholders' representatives, have the
ultimate authority in evaluating and, if appropriate, terminating
their services.
o Meet with the independent auditors and financial management of the
Company to review the scope of the proposed audit and timely
quarterly reviews for the current year and the procedures to be
utilized, the adequacy of the independent auditor's compensation,
and at the conclusion thereof, review such audit or review,
including any comments or recommendations of the independent
auditors.
G-2
o Review with the independent auditors and the Company's financial and
accounting personnel, the adequacy and effectiveness of the
accounting and financial controls of the Company, and elicit any
recommendations for the improvement of such internal controls or
particular areas where new or more detailed controls or procedures
are desirable. Particular emphasis should be given to the adequacy
of internal controls to expose any payments, transactions, or
procedures that might be deemed illegal or otherwise improper.
Further, the committee periodically should review Company policy
statements to determine their adherence to the code of conduct.
o Review reports received from regulators and other legal and
regulatory matters that may have a material effect on the financial
statements or related Company compliance policies.
o Inquire of management and the independent auditors about significant
risks or exposures and assess the steps management has taken to
minimize such risks to the Company.
o Review the quarterly financial statements with financial management
and the independent auditors prior to the filing of the form 10-Q
(or prior to the press release of results, if possible) to determine
that the independent auditors do not take exception to the
disclosure and content of the financial statements, and discuss any
other matters required to be communicated to the committee by the
auditors. The chair of the committee may represent the entire
committee for the purpose of review.
o Review the financial statements contained in the annual report to
shareholders with management and the independent auditors to
determine that the independent auditors are satisfied with the
disclosure and content of the financial statements to be presented
to the shareholders. Review with financial management and the
independent auditors the results of their timely analysis of
significant financial reporting issues and practices, including
changes in, or adoptions of, accounting principles and disclosure
practices, and discuss any other matters required to be communicated
to the committee by the auditors. Also review with financial
management and the independent auditors their judgments about the
quality, not just acceptability, of accounting principles and the
clarity of the financial disclosure practices used or proposed to be
used, and particularly, the degree of aggressiveness or conservatism
of the organization's accounting principles and underlying
estimates, and other significant decisions made in preparing the
financial statements.
G-3
o Provide sufficient opportunity for the independent auditors to meet
with the members of the audit committee without members of
management present. Among the items to be discussed in these
meetings are the independent auditors' evaluation of the Company's
financial and accounting personnel and the cooperation that the
independent auditors received during the course of audit.
o Review accounting and financial human resources and succession
planning relative thereto.
o Report the results of the annual audit to the board of directors. If
requested by the board, invite the independent auditors to attend
the full board of directors meeting to assist in reporting the
results of the annual audit or to answer other directors' questions
(alternatively, the other directors, particularly the other
independent directors, may be invited to attend the audit committee
meeting during which the results of the annual audit are reviewed).
o On an annual basis, obtain from the independent auditors a written
communication delineating all their relationships and professional
services as required by Independent Standards Board Standard No. 1,
Independence Discussions with Audit Committees. In addition, review
with the independent auditors the nature and scope of any disclosed
relationships of professional services and take, or recommend that
the board of directors take, appropriate action to ensure the
continuing independence of the auditors.
o Submit the minutes of all meetings of the audit committee to, or
discuss the matters discussed at each committee meeting with, the
board of directors.
o Investigate any matter brought to its attention within the scope of
its duties, with the power to retain outside counsel for this
purpose if, in its judgment, that is appropriate.
G-4
ANNEX H
ABRAXAS PETROLEUM CORPORATION 1994 LONG TERM INCENTIVE PLAN
H-1
ABRAXAS PETROLEUM CORPORATION
1994 LONG TERM INCENTIVE PLAN
(as amended through June 5, 2001)
Abraxas Petroleum Corporation (the "Company") hereby establishes the Plan
for key employees of, and consultants to, the Company and its Affiliates as
follows:
I. PURPOSE
The purpose of the Plan is to aid the Company and its Affiliates in
employing and retaining qualified and competent personnel and to encourage
significant contributions by such personnel to the success of the Company and
its Affiliates. It is believed that this purpose will be furthered through the
granting to key employees and consultants of Awards, as authorized under the
Plan, so that such employees and consultants will be encouraged and enabled to
acquire a substantial personal interest in the continued success of the Company
and its Affiliates.
This Plan shall be effective January 1, 1994, subject to approval by the
Company's stockholders at the 1994 Annual Meeting of Stockholders to be held May
19, 1994, and shall terminate on December 31, 2003, except with respect to any
Award then outstanding.
2. DEFINITIONS
"ADMINISTRATIVE GUIDELINES" means the interpretative guidelines approved
by the Committee providing the foundation for administration of the Plan.
"AFFILIATE" means any subsidiary corporation (as defined in Section 424 of
the Code) of the Company.
"AWARD" means an Award described in Section 4 of this Plan.
"AWARD AGREEMENT" means an agreement entered into between the Company and
a Participant, setting forth the terms and conditions applicable to the Award
granted to the Participant.
"BOARD" means the Board of Directors of the Company.
"CODE" means the Internal Revenue Code of 1986 and the regulations
thereunder, as amended from time to time.
"COMMITTEE" means the Compensation Committee of the Board, the requisite
number of members of which shall qualify as "disinterested persons" within the
meaning of Rule 16b-3 under the Exchange Act or any successor provision.
H-2
"COMMON STOCK" means the common stock of the Company, par value $.01 per
share, and shall include both treasury shares and authorized but unissued shares
and shall also include any security of the Company issued in substitution, in
exchange for, or in lieu of the Common Stock.
"EXCHANGE ACT" means the Securities Exchange Act of 1934 and the
regulations thereunder, as amended from time to time.
"FAIR MARKET VALUE" means the average of the high and low sale prices of a
share of Common Stock, or other security for which Fair Market Value is being
determined, as quoted on the NASDAQ Stock Market (or such other reporting system
as shall be selected by the Committee) on the relevant date, or if no sale of
Common Stock or such other security is reported for such date, the first
preceding day for which there is a reported sale. The Committee shall determine
the Fair Market Value of any security that is not publicly traded, using such
criteria as it shall determine, in its sole discretion, to be appropriate for
the purposes of such valuation.
"PARTICIPANT" means an individual who has been granted an Award pursuant
to this Plan.
"PLAN" means this Abraxas Petroleum Corporation 1994 Long Term Incentive
Plan, as set forth herein and as it may be amended from time to time.
"PLAN YEAR" means the calendar year.
3. ELIGIBILITY
Key employees (including officers and employee directors) of, and
consultants to, the Company and its Affiliates shall be eligible to participate
in this Plan. An Award may not be granted to a member of the Board who is not
also an employee of the Company or an Affiliate.
4. AWARDS
An Award is the right to receive compensation, payable in cash, Common
Stock or other securities of the Company or an Affiliate, or any combination
thereof, determined in accordance with the Administrative Guidelines. All Awards
made pursuant to this Plan are in consideration of services performed or to be
performed for the Company or its Affiliates. The Committee may establish minimum
performance targets with respect to each Award. Performance targets may be based
on financial criteria, such as the Fair Market Value of Common Stock or other
objective measures of financial performance of the Company, or may be based on
the performance of a division, subsidiary or Affiliate of the Company, or the
performance of an individual Participant. Notwithstanding anything in this Plan
to the contrary, any Awards of stock options or similar rights, stock
appreciation rights, performance units, or performance shares shall contain the
restrictions on assignability in Section 6(a) of this Plan to the extent
required under Rule 16b-3 of the Exchange Act. The following types of Awards may
be granted under this Plan, singly or in combination or in tandem with other
Awards, as the Committee may determine:
H-3
(a) NON-QUALIFIED STOCK OPTIONS. A non-qualified stock option is a
right to purchase, during such period of time as the Committee may
determine, a specified number of shares of Common Stock or other security,
which does not qualify as an incentive stock option under Section 422 of
the Code, at a fixed option price equal to no less than 100 percent of the
Fair Market Value of the Common Stock or other security on the date the
Award is granted. A non-qualified stock option shall be designated as such
in the Award Agreement and on the Company's books and records.
The option price may be payable in the following form(s) as determined in
accordance with the Administrative Guidelines:
(i) in U.S. dollars by personal check, bank draft or money
order payable to the order of the Company, wire transfer,
or direct account debit;
(ii) through the delivery or assignment of the ownership of shares of
Common Stock or other securities of the Company with a Fair Market
Value equal to all or a portion of the option price for the total
number of options being exercised; or
(iii) by a combination of the methods described in clauses (i)
and (ii) above.
(b) INCENTIVE STOCK OPTIONS. An incentive stock option is a right to
purchase, during such period of time as the Committee may determine, a
specified number of shares of Common Stock, that shall comply with the
requirements of Section 422 of the Code or any successor section, at a
fixed option price equal to no less than 100 percent of the Fair Market
Value of the Common Stock on the date the Award is granted; provided,
however, if the optionee owns stock possessing more than ten (10%) of the
total combined voting power of all classes of stock of the Company or any
of its Affiliates, the option price shall not be less than one-hundred ten
percent (110%) of the Fair Market Value of the Common Stock on the date
H-4
the Award is granted. The aggregate Fair Market Value (determined at the
time of grant of the Award) of the shares with respect to which incentive
stock options are exercisable for the first time by an optionee during a
calendar year shall not exceed $100,000 (or such other limit as may be
required by the Code) based on the Fair Market Value of the stock on the
date that the incentive stock option is granted. An incentive stock option
shall not be exercisable after the expiration of ten (10) years from the
date such Award is granted; provided, however, if the optionee owns stock
possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any of its Affiliates, any
incentive stock option granted to such optionee shall not be exercisable
after the expiration of five (5) years from the date such Award is
granted. The Committee may provide that the option price under an
incentive stock option may be paid by one or more of the methods described
in Sections 4(a)(i), (ii) and (iii) above.
(c) STOCK APPRECIATION RIGHTS. A stock appreciation right is a right to
receive, without payment, an amount not in excess of (i) the Fair Market
Value on the exercise date of the number of shares of Common Stock for
which the stock appreciation right is exercised less (ii) the exercise
price of such stock appreciation right, which price shall equal the Fair
Market Value of such shares on the date the stock appreciation right was
granted (or, in the case of an option with a tandem stock appreciation
right, the option price that the optionee would otherwise have been
required to pay for such shares). The right to receive such amount shall
be conditioned upon the surrender of the stock appreciation right (or of
both the option and the stock appreciation right in the case of a tandem
stock appreciation right, or a portion of either). Stock appreciation
rights shall be payable in Common Stock, cash or a combination thereof.
(d) RESTRICTED STOCK. Restricted Stock is Common Stock or other security
of the Company or an Affiliate that is subject to restrictions on transfer
and such other restrictions on the incidents of ownerships as the
Committee may determine. Restricted Stock Awards may be made without cash
payment by, or other out of pocket consideration from, the Participant,
either on the date of grant or the date the restriction(s) lapse or are
removed. Restricted Stock Awards shall be designated as such in the Award
Agreement and on the Company's books and records.
(e) PERFORMANCE UNITS. A performance unit is a promise by the Company to
make a payment to the Participant, which may be contingent upon the
achievement of one or more performance targets specified by the Committee.
A performance unit is a right to receive an amount that may be determined
by reference to Common Stock, other securities of the Company or an
Affiliate, or by reference to dollar amounts. Performance units shall be
subject to such conditions with respect to vesting, timing, and amount of
payments as the Committee shall determine. Performance units shall be
payable in cash. Performance unit Awards may be made without cash payment
by, or other out of pocket consideration from, the Participant, either on
the date of grant or the date of payment.
H-5
(f) PERFORMANCE SHARES. A performance share is a promise by the Company to
make a payment to the Participant, which may be contingent upon the
achievement of one or more performance targets specified by the Committee.
A performance share is a right to receive an amount that may be determined
by reference to Common Stock, other securities of the Company or an
Affiliate, or by reference to dollar amounts. Performance shares shall be
subject to such conditions with respect to vesting, timing, and amount of
payments as the Committee shall determine. Performance shares shall be
payable in Common Stock or other securities of the Company or any
Affiliate. Performance share Awards may be made without cash payment by,
or other out of pocket consideration from, the Participant, either on the
date of grant or the date of payment. Performance Share Awards shall be
designated as such in the Award Agreement and on the Company's books and
records.
(g) DIVIDEND EQUIVALENTS. A dividend equivalent is the right to
receive an amount equal to the dividends paid on a specified number of
shares of Common Stock. A dividend equivalent shall be payable in cash.
(h) OTHER AWARDS. The Committee may, from time to time, grant such other
Awards as the Committee may determine, provided that no such Award shall
be inconsistent with the terms of this Plan.
(i) LIMITATIONS ON AWARDS TO INDIVIDUAL PARTICIPANTS. Subject to
adjustment pursuant to Section 10 hereof, the number of shares of Common
Stock awarded as incentive stock options, non-qualified stock options,
stock appreciation rights, Restricted Stock Awards and/or performance
shares which may be granted hereunder to any Participant during any Plan
Year under all forms of Awards shall not exceed 100,000 shares.
5. NUMBER OF SHARES
Not more than 5,000,000 shares of Common Stock may be issued with respect
to all Awards granted under this Plan, subject to the adjustment provisions set
forth in Section 10 hereof. Upon the expiration or termination of an Award, for
any reason, the shares shall again be available for grant under the Plan. No
Awards under this Plan shall be granted after December 31, 2003, pursuant to
Section 1 hereof. Awards that are granted or paid in some manner other than by
the issuance of Common Stock shall not be counted in determining the number of
shares issued under this Plan.
H-6
6. AWARD AGREEMENTS
Each Award under this Plan shall be evidenced by an Award Agreement
setting forth the terms and conditions, as determined by Administrative
Guidelines, applicable to the Award. Award Agreements may include:
(a) NON-ASSIGNABILITY. A provision that no Award shall be assignable
or transferable except by will or by the laws of descent and distribution
and that during the lifetime of a Participant, the Award shall be
exercised only by such Participant or by his guardian or legal
representative. Incentive Stock Option Awards shall include a
non-assignability provision as provided in this Section 6(a).
(b) TERMINATION OF EMPLOYMENT. Provisions governing the disposition
of an Award in the event of the retirement, disability, death, or other
termination of a Participant's employment or relationship to the Company
or an Affiliate.
(c) RIGHTS AS A STOCKHOLDER. A provision concerning what rights, if
any, a Participant shall have as a stockholder with respect to any shares
of Common Stock covered by an Award until the date the Participant or his
nominee becomes the holder of record. Except as provided in Section 10
hereof, no adjustment shall be made for dividends or other rights for
which the record date is prior to such date, unless the Award Agreement
specifically requires such adjustment.
(d) WITHHOLDING. A provision requiring the withholding of all taxes
as required by law. In the case of payments of Awards in shares of Common
Stock or other securities, withholding shall be as required by law and in
the Administrative Guidelines.
(e) MISCELLANEOUS. Such other terms and conditions including,
without limitation, the criteria for determining vesting of Awards, the amount
or value of Awards, termination of Awards for cause, the exercise of Awards
pursuant to a brokerage or similar arrangement or adjustments for nonrecurring
or extraordinary items, as are necessary and appropriate to effect the purposes
of the Plan.
7. CHANGE IN CONTROL
Award Agreements may include, as set forth in the Administrative
Guidelines, that any or all of the following actions may occur as a result of,
or in anticipation of, any Change in Control to assure fair and equitable
treatment of Participants:
(a) acceleration of time periods for purposes of vesting in, or
realizing gain from, any outstanding Award made pursuant to this Plan;
H-7
(b) purchase of any outstanding Award made pursuant to this Plan
from the holder of its equivalent cash value, as determined by the
Committee, as of the effective date of the Change in Control; and
(c) adjustments or modifications to outstanding Awards as the
Committee deems appropriate to maintain and protect the rights and
interests of Participants.
For purposes of this Section, a "Change in Control" shall mean the
occurrence of any of the following events:
(i) a third person, including a "group" as determined in accordance
with Section 13(d)(3) of the Exchange Act, becomes the beneficial owner
(as determined pursuant to Section 13(d)(3) of the Exchange Act) of Common
Stock having thirty percent (30%) or more of the total number of votes
that may be cast for the election of members of the Board;
(ii) all or substantially all of the assets and business of the
Company are sold, transferred or assigned to, or otherwise acquired by,
any other entity or entities; or
(iii) as a result of, or in connection with, any cash tender or
exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions (each
a "Transaction"), the persons who are members of the Board before the
Transaction shall cease to constitute a majority of the Board of the
Company or any successor to the Company after the Transaction.
Notwithstanding the foregoing, in no event shall the distribution by the
Company to its stockholders of stock in a subsidiary be deemed a Change in
Control.
8. AMENDMENT AND TERMINATION
Although the Committee may at any time amend, suspend, or discontinue the
Plan or alter or amend any or all Award Agreements under the Plan to the extent
permitted by law, no amendment, suspension, or termination of the Plan shall,
without the consent of the Participant, adversely alter or change any of the
rights or obligations under any Awards or other rights previously granted the
Participant under the Plan. However, no such action by the Committee may,
without approval of the Board and the Company's stockholders if such approval is
required by law, Rule 16b-3 of the Exchange Act or any successor provisions, or
the rules of any stock exchange on which the Common Stock or any other security
of the Company or its Affiliates are listed, alter the provisions of the Plan so
as to:
H-8
(a) increase the maximum number of shares of Common Stock (or other
securities) that may be subject to Awards granted under the Plan;
(b) change the class of individuals eligible to receive Awards
under the Plan;
(c) permit any member of the Committee to be eligible to receive
or hold an Award under the Plan;
(d) materially increase the benefits accruing to Participants
under the Plan; or
(e) effect any other amendment to the Plan, or to an existing Award
under the Plan, that would require the approval of the Company's
stockholders in accordance with Rule 16b-3 under the Exchange Act or any
successor provision or under the rules of any stock exchange on which the
Common Stock or any other securities of the Company or its Affiliates are
listed or quoted.
9. ADMINISTRATION
(a) The Plan and all Awards granted pursuant thereto shall be administered
by the Committee. The Committee shall periodically make determinations with
respect to eligible individuals who shall participate in the Plan and receive
Awards pursuant thereto. All questions of interpretation and administration with
respect to the Plan and Award Agreements shall be determined by the Committee in
its absolute discretion and its determination shall be final and conclusive upon
all parties in interest.
(b) The Committee may authorize persons other than its members to carry
out its policies and directives, including the authority to grant Awards,
subject to the limitations and guidelines set by the Committee, except that: (i)
the authority to grant or administer Awards with respect to persons who are
subject to Section 16 of the Exchange Act, shall not be delegated by the
Committee; and (ii) any such delegation shall satisfy any other applicable
requirements of Rule 16b-3 of the Exchange Act, or any successor provision. Any
person to whom such authority is granted shall continue to be eligible to
receive Awards under the Plan, provided that such Awards are granted directly by
the Committee without delegation.
H-9
10. ADJUSTMENT PROVISIONS
If the outstanding shares of Common Stock shall be changed into or
exchanged for a different number or kind of shares of stock or other securities
or property of the Company or of another corporation (whether by reason of
merger, consolidation, recapitalization, reclassification, split up, combination
of shares or otherwise), or if the number of such shares of Common Stock shall
be increased by a stock dividend or stock split, there shall be substituted for
or added to each share of Common Stock theretofore reserved for the purposes of
the Plan, whether or not such shares are at the time subject to outstanding
Awards, the number and kind of shares of stock or other securities or property
into which each outstanding share of Common Stock shall be so changed or for
which it shall be so exchanged, or to which each such share shall be entitled,
as the case may be. Outstanding Awards shall also be considered to be
appropriately amended as to price and other terms as may be necessary or
appropriate to reflect the foregoing events. If there shall be any other change
in the number or kind of the outstanding shares of Common Stock, or of any stock
or other securities or property into which such Common Stock shall have been
changed, or for which it shall have been exchanged, and if the Board shall in
its sole discretion determine that such change equitably requires an adjustment
in the number or kind or price of the shares then reserved for the purposes of
the Plan, or in any Award theretofore granted or which may be granted under the
Plan, then such adjustment shall be made by the Board and shall be effective and
binding for all purposes of the Plan. In making any such substitution or
adjustment pursuant to this Section 10, fractional shares may be ignored.
The Board shall have the power, in the event of any merger or
consolidation of the Company with or into any other corporation, or the merger
or consolidation of any other corporation with or into the Company, to amend all
outstanding Awards to permit the exercise thereof in whole or in part at
anytime, or from time to time, prior to the effective date of any such merger or
consolidation (but not more than ten (10) years after the date of grant of any
incentive stock option) and to terminate each such Award as of such effective
date.
11. UNFUNDED PLAN
The adoption of the Plan and any setting aside of amounts by the Company
with which to discharge its obligations hereunder shall not be deemed to create
a trust. The benefits provided under this Plan shall be a general, unsecured
obligation of the Company payable solely from the general assets of the Company,
and neither a Participant nor the Participant's beneficiaries or estate shall
have any interest in any assets of the Company by virtue of this Plan. Nothing
in this Section 11 shall be construed to prevent the Company from implementing
or setting aside funds in a grantor trust subject to the claims of the Company's
creditors. Legal and equitable title to any funds set aside, other than any
grantor trust subject to the claims of the Company's creditors, shall remain in
the Company and any funds so set aside shall remain subject to the general
creditors of the Company, present and future. Any liability of the Company to
any Participant with respect to an Award shall be based solely upon contractual
obligations created by this Plan, the Administrative Guidelines, and the Award
Agreements.
H-10
12. RIGHT OF DISCHARGE RESERVED
Nothing in this Plan or in any Award shall confer upon any employee or
other individual the right to continue in the employment or service of the
Company or any Affiliate or affect any right that the Company or any Affiliate
may have to terminate the employment or service of any such employee or other
individual at any time for any reason.
13. GOVERNING LAW
This Plan shall be governed by, construed and enforced in accordance with
the laws of the State of Texas applicable to transactions that take place
entirely within the State of Texas, and, where applicable, the laws of the
United States.
---------------
H-11
ANNEX I
SECTION 184 OF THE ALBERTA BUSINESS CORPORATIONS ACT
I-1
SECTION 184 OF THE BUSINESS CORPORATIONS ACT (ALBERTA)
184(1) Subject to sections 185 and 234, a holder of shares of any class of a
corporation may dissent if the corporation resolves to:
1. amend its articles under section 167 or 168 to add, change or
remove any provisions restricting or constraining the issue or
transfer of shares of that class,
2. amend its articles under section 167 to add, change or remove any
restrictions on the business or businesses that the corporation
may carry on,
3. amalgamate with another corporation, otherwise than under
section 178 or 180.1,
4. be continued under the laws of another jurisdiction under
section 182, or
5. sell, lease or exchange all or substantially all its property
under section 183.
(2) A holder of shares of any class or series of shares entitled to vote
under section 170, other than section 170(l)(a), may dissent if the
corporation resolves to amend its articles in a manner described in that
section.
(3) In addition to any other right he may have, but subject to
subsection (20), a Shareholder entitled to dissent under this section and who
complies with this section is entitled to be paid by the corporation the fair
value of the shares held by him in respect of which he dissents, determined
as of the close of business on the last business day before the day on which
the resolution from which he dissents was adopted.
(4) A Dissenting Shareholder may only claim under this section with
respect to all the shares of a class held by him or on behalf of any one
beneficial owner and registered in the name of the Dissenting Shareholder.
(5) A Dissenting Shareholder shall send to the corporation a written
objection to a resolution referred to in subsection (1) or (2)
1. at or before any meeting of Shareholders at which the resolution
is to be voted on, or
2. if the corporation did not send notice to the Shareholder of
the purpose of the meeting or of his right to dissent, within a
reasonable time after he learns that the resolution was adopted
and of his right to dissent.
(6) An application may be made to the Court by originating notice after
the adoption of a resolution referred to in subsection (1) or (2),
(a) by the corporation, or
(b) by a Shareholder if he has sent an objection to the corporation
under subsection (5),
to fix the fair value in accordance with subsection (3) of the shares of a
Shareholder who dissents under this section.
(7) If an application is made under subsection (6), the corporation
shall, unless the Court otherwise orders, send to each Dissenting Shareholder
a written offer to pay him an amount considered by the directors to be the
fair value of the shares.
I-2
(8) Unless the Court otherwise orders, an offer referred to in
subsection (7) shall be sent to each Dissenting Shareholder
(a) at least 10 days before the date on which the application is
returnable, if the corporation is the applicant, or
(b) within 10 days after the corporation is served with a copy of
the originating notice, if a Shareholder is the applicant.
(9) Every offer made under subsection (7) shall
(a) be made on the same terms, and
(b) contain or be accompanied by a statement showing how the fair
value was determined.
(10) A Dissenting Shareholder may make an agreement with the corporation
for the purchase of his shares by the corporation, in the amount of the
corporation's offer under subsection (7) or otherwise, at any time before the
Court pronounces an order fixing the fair value of the shares.
(11) A Dissenting Shareholder
(a) is not required to give security for costs in respect of an
application under subsection (6), and
(b) except in special circumstances shall not be required to pay the
costs of the application or appraisal.
(12) In connection with an application under subsection (6), the Court
may give directions for
(a) joining as parties all Dissenting Shareholders whose shares have
not been purchased by the corporation and for the representation
of Dissenting Shareholders who, in the opinion of the Court, are
in need of representation,
(b) the trial of issues and interlocutory matters, including pleadings
and examinations for discovery,
(c) the payment to the Shareholder of all or part of the sum offered
by the corporation for the shares,
(d) the deposit of the share certificates with the Court or with the
corporation or its transfer agent,
(e) the appointment and payment of independent appraisers, and the
procedures to be followed by them,
(f) the service of documents, and
(g) the burden of proof on the parties.
(13) On an application under subsection (6), the Court shall make an order
(a) fixing the fair value of the shares in accordance with subsection
(3) of all Dissenting Shareholders who are parties to the
application,
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(b) giving judgment in that amount against the corporation and in
favour of each of those Dissenting Shareholders, and
(c) fixing the time within which the corporation must pay that amount
to a Shareholder.
(14) On
(a) the action approved by the resolution from which the Shareholder
dissents becoming effective,
(b) the making of an agreement under subsection (10) between the
corporation and the Dissenting Shareholder as to the payment to
be made by the corporation for his shares, whether by the
acceptance of the corporation's offer under subsection (7) or
otherwise, or
(c) the pronouncement of an order under subsection (13), whichever
first occurs, the Shareholder ceases to have any rights as a
Shareholder other than the right to be paid the fair value of
his shares in the amount agreed to between the corporation and
the Shareholder or in the amount of the judgment, as the case
may be.
(15) Subsection (14)(a) does not apply to a Shareholder referred to in
subsection (5)(b).
(16) Until one of the events mentioned in subsection (14) occurs,
(a) the Shareholder may withdraw his dissent, or
(b) the corporation may rescind the resolution, and in either event
proceedings under this section shall be discontinued.
(17) The Court may in its discretion allow a reasonable rate of interest
on the amount payable to each Dissenting Shareholder, from the date on which
the Shareholder ceases to have any rights as a Shareholder by reason of
subsection (14) until the date of payment.
(18) If subsection (20) applies, the corporation shall, within 10 days after
(a) the pronouncement of an order under subsection (13), or
(b) the making of an agreement between the Shareholder and the
corporation as to the payment to be made for his shares, notify
each Dissenting Shareholder that it is unable lawfully to pay
Dissenting Shareholders for their shares.
(19) Notwithstanding that a judgment has been given in favour of a
Dissenting Shareholder under subsection (13)(b), if subsection (20) applies,
the Dissenting Shareholder, by written notice delivered to the corporation
within 30 days after receiving the notice under subsection (18), may withdraw
his notice of objection, in which case the corporation is deemed to consent
to the withdrawal and the Shareholder is reinstated to his full rights as a
Shareholder, failing which he retains a status as a claimant against the
corporation, to be paid as soon as the corporation is lawfully able to do so
or, in a liquidation, to be ranked subordinate to the rights of creditors of
the corporation but in priority to its Shareholders.
(20) A corporation shall not make a payment to a Dissenting Shareholder
under this section if there are reasonable grounds for believing that
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(a) the corporation is or would after the payment be unable to pay
its liabilities as they become due, or
(b) the realizable value of the corporation's assets would thereby be
less than the aggregate of its liabilities.
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