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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, 1998
[ ]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:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
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,
1999, (based upon the average of the $2.06 per share "Bid" and $2.44 per share
"Asked" prices), was approximately $10,725,000 on such date.
The number of shares of the issuer's Common Stock, par value $.01 per
share, outstanding as of March 22, 1999 was 6,330,426 shares of which 4,766,739
shares were held by non-affiliates.
Documents Incorporated by Reference: Portions of the registrant's Proxy
Statement relating to the 1999 Annual Meeting of Shareholders to be held on May
28, 1999 have been incorporated by reference herein (Part III).
ABRAXAS PETROLEUM CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I
Page
Item 1. Business. ............................................................4
General .............................................................4
Business Strategy ....................................................5
Recent Developments...................................................5
Markets and Customers.................................................6
Risk Factors..........................................................6
Regulation of Crude Oil and Natural Gas Activities...................12
Natural Gas Price Controls...........................................12
State Regulation of Crude Oil and Natural Gas Production.............14
Royalty Matters......................................................15
Environmental Matters ..............................................16
Employees............................................................18
Item 2. Properties...........................................................19
Primary Operating Areas..............................................19
Exploratory and Developmental Acreage................................20
Productive Wells.....................................................20
Reserves Information.................................................21
Crude Oil and Natural Gas Production and Sales Price ................22
Drilling Activities..................................................23
Office Facilities....................................................24
Other Properties.....................................................24
Item 3. Legal Proceedings....................................................24
Item 4. Submission of Matters to a Vote of
Security Holders...................................................24
Item 4a. Executive Officers of the Company....................................24
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters....................................25
Market Information...................................................25
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
Results of Operations................................................27
Liquidity and Capital Resources......................................30
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...........36
Item 8. Financial Statements and Supplementary Data..........................34
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..............................37
2
PART III
Item 10. Directors and Executive Officers of the Registrant ................37
Item 11. Executive Compensation..............................................37
Item 12. Security Ownership of Certain Beneficial Owners and Management......37
Item 13. Certain Relationships and Related Transactions......................37
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K...........................................38
3
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934. All statements other than statements of
historical facts included in this report regarding the Company's financial
position, liquidity, cash flow from operations, internal cash flow projections,
business strategy, budgets, reserve estimates, development and exploitation
opportunities and projects, behind pipe zones, classification of reserves,
projected costs, potential reserves, availability or sufficiency of capital
resources and plans and objectives of management for future operations
including, but not limited to, statements including, any of the terms
"anticipates", "expects", "estimates", "believes" and similar terms are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are disclosed under "Risk Factors" and
elsewhere in this report including, without limitation, in conjunction with the
forward-looking statements included in this report. All subsequent written and
oral forward-looking statements attributable to the Company, or persons acting
on its behalf, are expressly qualified in their entirety by the Cautionary
Statements.
PART I
Item 1. Business
General
Abraxas Petroleum Corporation, a Nevada corporation ("Abraxas" or the
"Company"), is an independent energy company engaged primarily in the
acquisition, exploration, exploitation and production of crude oil and natural
gas. Since January 1, 1991, the Company's principal means of growth has been
through the acquisition and subsequent development and exploitation of producing
properties and related assets. The Company utilizes a disciplined acquisition
strategy, focusing its efforts on producing properties and related assets
characterized by a concentration of operations, significant and quantifiable
development potential, historically low operating expenses and the potential to
reduce general and administrative ("G&A") expense per Mcfe. The Company seeks to
complement its acquisition and development activities by selectively
participating in exploration projects with experienced industry partners. The
Company's principal areas of operation are Texas and western Canada. At December
31, 1998, the Company owned interests in 766,494 gross acres (494,647 net acres)
and operates properties accounting for 69% of its PV-10, affording the Company
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. The term Bbl
means one barrel of crude oil and MBbls is used to designate one thousand
barrels of crude oil.
At December 31, 1998, the Company's estimated total proved reserves were
244 Bcfe and aggregate PV-10 was $182 million. As of December 31, 1998, the
Company had net natural gas processing capacity of 108 MMcf per day through its
19 natural gas processing plants and compression facilities in Canada, giving
the Company substantial control over its Canadian production and marketing
activities.
4
Business Strategy
The Company's primary business objectives are to increase its reserves,
production and cash flow through the following:
o Improved Liquidity. In March 1999, the Company sold $63.5 million aggregate
principal amount of 12.875% Senior Secured Notes due 2003 (the "Secured
Notes"). The sale of the Secured Notes increased the Company's cash balance
to approximately $21 million, allowing the Company to meet its near-term
debt service requirements and facilitating limited capital expenditures.
The Company has historically funded its operations primarily through cash
flow from operations and borrowings under the Credit Facility (as defined
below). As a result of the sale of the Secured Notes, the Company's ability
to incur additional indebtedness will be substantially limited and thus, in
the current environment of depressed crude oil and natural gas prices, the
Company will rely on cash on hand, cash flow from operations, asset sales
and equity issuances to fund crude oil and natural gas exploitation
activities and acquisitions.
o Low Cost Operations. The Company seeks to maintain low operating and G&A
expenses per Mcfe by operating a majority of its producing properties and
related assets and by maintaining a high rate of production on a per well
basis. As a result of this strategy, the Company has achieved per unit
operating and G&A expenses that compare favorably with similar companies and
that have historically been lower than currently depressed crude oil and
natural gas prices realized by the Company.
o Exploitation of Existing Properties. The Company will allocate a portion of
its operating cash flow to the exploitation of its producing properties.
Management believes that the proximity of the Company's undeveloped reserves
to existing production makes development of these properties less risky and
more cost-effective than other drilling opportunities available to the
Company. Given the Company's high degree of operating control, the timing
and incurrence of operating and capital expenditures is largely within the
Company's discretion.
o Producing Property Acquisitions. As cash flow permits, the Company intends
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. The Company expects that the
combination of low crude oil and natural gas prices, limited access to
liquidity through the capital markets and reduced availability on commercial
bank lines will result in an increase in attractive acquisition
opportunities offered by crude oil and natural gas companies seeking
additional liquidity.
o Focused Exploration Activity. In periods of increased crude oil and natural
gas prices, the Company intends to allocate a portion of its capital budget
to the drilling of exploratory wells that have high reserve potential. The
Company believes that by devoting a relatively small amount of capital to
high impact, high risk projects while reserving the majority of its
available capital for development projects, it can reduce drilling risks
while still benefiting from the potential for significant reserve additions.
Recent Developments
In November 1998, Abraxas sold all of its interests in producing
properties located in the Wamsutter area of southwestern Wyoming (the "Wyoming
Properties") to a limited partnership (the "Partnership") for $58.6 million in
cash. A subsidiary of Abraxas owns a one percent equity interest in the
Partnership and acts as general partner of the Partnership. Abraxas also
receives a management fee and reimbursement of certain overhead costs from the
Partnership.
In January 1999, Canadian Abraxa Petroleum Limited, a wholly-owned
subsidiary of the Company ("Canadian Abraxas") acquired all of the outstanding
common shares of New Cache Petroleums Ltd. ("New Cache") for an aggregate of
$78.0 million in cash and the assumption of approximately $10.0 million in debt
(the "New Cache Debt"). New Cache is an independent energy company engaged in
the acquisition, exploration, development, production and gathering of natural
gas and crude oil. New Cache owns interests in 285 gross wells (88.5 net wells)
and 445,294 gross (256,524 net) acres located primarily in western Canada, as
well as three natural gas processing plants. At December 31, 1998, New Cache had
estimated total proved reserves of 77 Bcfe (75% natural gas) with a PV-10 of
$55.6 million all of which were proved developed.
In March 1999, the Company sold the Secured Notes. The net proceeds from
the sale of the Secured Notes, after deducting estimated offering expenses, was
5
approximately $61 million. The Company used the net proceeds to repay
outstanding indebtedness under its revolving credit facility (the "Credit
Facility") of approximately $34.5 million and the New Cache Debt with the
balance of approximately $16.5 million to be used for general corporate
purposes, including interest payments on Abraxas' and Canadian Abraxas' 11.5%
Senior Notes due 2004, Series D (the "Series D Notes").
Markets and Customers
The revenues generated by the Company's operations are highly dependent
upon the prices of, and demand for crude oil and natural gas. Historically, the
markets for crude oil and natural gas have been volatile and are likely to
continue to be volatile in the future. The prices received by the Company for
its crude oil and natural gas production and the level of such production are
subject to wide fluctuations and depend on numerous factors beyond the Company's
control including seasonality, the condition of the United States and the
Canadian economies (particularly the manufacturing sector), foreign imports,
political conditions in other oil-producing and natural gas-producing countries,
the actions of the Organization of Petroleum Exporting Countries and domestic
regulation, legislation and policies. Decreases in the prices of crude oil and
natural gas have had, and could have in the future, an adverse effect on the
carrying value of the Company's proved reserves and the Company's revenues,
profitability and cash flow.
In order to manage its exposure to price risks in the marketing of its
crude oil and natural gas, the Company from time to time has entered into fixed
price delivery contracts, financial swaps and crude oil and natural gas futures
contracts as hedging devices. To ensure a fixed price for future production, the
Company may sell a futures contract and thereafter either (i) make physical
delivery of crude oil or natural gas to comply with such contract or (ii) buy a
matching futures contract to unwind its futures position and sell its production
to a customer. Such contracts may expose the Company to the risk of financial
loss in certain circumstances, including instances where production is less than
expected, the Company's customers fail to purchase or deliver the contracted
quantities of crude oil or natural gas, or a sudden, unexpected event materially
impacts crude oil or natural gas prices. Such contracts may also restrict the
ability of the Company to benefit from unexpected increases in crude oil and
natural gas prices. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources.
Substantially all of the Company's crude oil and natural gas is sold at
current market prices under short term contracts, as is customary in the
industry. During the year ended December 31, 1998, 4 purchasers accounted for
approximately 58% of the Company's crude oil and natural gas sales. The Company
believes that there are numerous other companies available to purchase the
Company's crude oil and natural gas and that the loss of any or all of these
purchasers would not materially affect the Company's ability to sell crude oil
and natural gas.
Risk Factors
Lack of Liquidity
The Company has historically funded its operations primarily through its
cash flow from operations and borrowings under the Credit Facility and other
credit sources. Due to severely depressed crude oil and natural gas market
prices, the Company's cash flow from operations has been substantially reduced.
The Company anticipates that it will have two principal sources of liquidity
during the next 12 months: (i) cash on hand, including the net proceeds from the
sale of the Secured Notes and after the repayment of the New Cache Debt and all
amounts outstanding under the Credit Facility and (ii) cash generated by
operations. See "-- High Degree of Leverage," "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.
The Company's ability to raise funds through additional indebtedness
will be substantially limited by the terms of the Indenture governing the
Secured Notes (the "Secured Notes Indenture") and the Indenture governing the
Series D Notes (the "Series D Indenture" and, together with the Secured Notes
Indenture, the "Indentures"). Additionally, substantially all of the Company's
crude oil and natural gas properties and natural gas processing facilities are
subject to a lien or floating charge for the benefit of the holders of the
Secured Notes, further limiting the Company's ability to incur additional
indebtedness. The Company may also choose to issue equity securities or sell
certain of its assets to fund its operations, although the Indentures will
substantially limit the Company's use of the proceeds of any such asset sales.
Due to the Company's diminished cash flow from operations and the resulting
depressed prices for its common stock, there can be no assurance that the
Company would be able to obtain equity financing on terms satisfactory to the
Company.
6
The Company has implemented a number of measures to conserve its cash
resources, including postponement of 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. See "-- Depletion of Reserves."
High Degree of Leverage
As of December 31, 1998, the Company's total debt and stockholders'
equity (deficit) were approximately $299.7 million and $(63.5) million,
respectively. In addition, the Company had $22.3 million of unused borrowing
capacity under the Credit Facility at December 31, 1998. In January 1999, the
Company and Canadian Abraxas completed the acquisition of New Cache requiring
approximately $61 million in cash and approximately $17.0 million of the
available borrowing capacity under the Credit Facility. In March 1999 the
Company sold $63.5 million of the Secured Notes and repaid all amounts due under
the Credit Facility and the New Cache Debt. After giving effect to the
acquisition of New Cache and the sale of the Secured Notes, the Company's total
debt and stockholders' equity (deficit) would have been approximately $347.5
million and $(90.0) million at December 31, 1998. The Company may incur
additional indebtedness in the future in connection with acquiring, developing
and exploiting producing properties, although the Company's ability to incur
additional indebtedness is limited by the terms of the Indentures. The Secured
Notes are secured by substantially all of the Company's existing and future oil
and gas producing properties.
The Company's level of indebtedness will have several important effects
on its future operations including (i) a substantial portion of the Company's
cash flow from operations will be dedicated to the payment of interest on the
Secured Notes and the Series D. Notes and will not be available for other
purposes; (ii) covenants contained in the Indentures will limit the Company's
ability to borrow additional funds or to dispose of assets and may affect the
Company's flexibility in planning for, and reacting to, changes in its business,
including possibly limiting acquisition activities; and (iii) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, interest payments, scheduled principal
payments, general corporate purposes or other purposes will be substantially
limited.
The Company's ability to meet its debt service obligations and to reduce
its total indebtedness will be dependent upon the Company's future performance,
which will be subject to general economic conditions and to financial, business
and other factors affecting the operations of the Company, many of which are
beyond its control. Based upon the current level of operations and the
historical production of the producing properties and related assets currently
owned by the Company, the Company believes that its cash flow from operations,
and cash currently on hand, including the proceeds from the sale of the Secured
Notes, will be adequate to meet its anticipated requirements for working
capital, capital expenditures, interest payments, scheduled principal payments
and general corporate or other purposes for the remainder of 1999. See the
Company's Consolidated Financial Statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." No assurance can be given,
however, that the Company's business will continue to generate cash flow from
operations at or above current levels or that the historical production of the
producing properties and related assets currently owned by the Company can be
sustained in the future. The Company's cash flow from operations will be
negatively affected by among other things, currently depressed commodity prices.
Further, the Company's operating cash flow could be negatively affected by the
Company's limited ability, due to its diminished liquidity and ability to borrow
funds, to acquire producing properties, to undertake exploration and development
projects and to otherwise replenish its depleting reserves. See "-- Depletion of
Reserves."
If the Company is unable to generate cash flow from operations in the
future to service the Notes, the Series D Notes and its other debt, it may be
required to refinance all or a portion of its debt or to obtain additional
financing. The Company's ability to refinance all or a portion of its debt or to
obtain additional financing will be substantially limited under the terms of the
Indentures. Also, substantially all of the Company's crude oil and natural gas
properties and natural gas processing facilities are subject to a lien or
floating charge for the benefit of the holders of the Notes. There can be no
assurance that any such refinancing would be possible or that any additional
financing could be obtained. In addition, the Secured Notes and the Series D
Notes are subject to certain limitations on redemption. See "-- Lack of
Liquidity" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations --Liquidity and Capital Resources."
7
Depletion of Reserves
The rate of production from crude oil and natural gas properties
declines as reserves are depleted. Except to the extent the Company acquires
additional properties containing proved reserves, conducts successful
exploration and development activities or, through engineering studies,
identifies additional behind-pipe zones or secondary recovery reserves, the
proved reserves of the Company will decline as reserves are produced. Future
crude oil and natural gas production is therefore highly dependent upon the
Company's level of success in acquiring or finding additional reserves. The
Company's ability to acquire or find additional reserves in the near future will
be severely diminished by its lack of available funds for acquisition,
exploration and development projects. The Company has implemented a number of
measures to conserve its cash resources, including postponement of 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 in the future. See "-- Lack of Liquidity."
The Company's ability to continue to acquire producing properties or
companies that own such properties assumes that major integrated oil companies
and independent oil companies will continue to divest many of their crude oil
and natural gas properties. There can be no assurance, however, that such
divestitures will continue or that the Company will be able to acquire such
properties at acceptable prices or develop additional reserves in the future. In
addition, under the terms of the Indentures, the Company's ability to obtain
additional financing in the future for acquisitions and capital expenditures is
limited.
Industry Conditions; Impact on Company's Profitability
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for crude oil and natural gas.
Crude oil and natural gas prices can be extremely volatile and in recent years
have been depressed by excess total domestic and imported supplies. Prices are
also affected by actions of state and local governmental agencies, the United
States and foreign governments and international cartels.Prices for crude oil
and natural gas have declined to historic lows on an inflation-adjusted basis.
There can be no assurance that commodity prices will rise or will not further
decrease. These external factors and the volatile nature of the energy markets
make it difficult to estimate future prices of crude oil and natural gas. The
substantial or extended decline in the prices of crude oil and natural gas has
had a material adverse effect on the Company's financial condition and results
of operations, including reduced cash flow and borrowing capacity. All of these
factors are beyond the control of the Company. Sales of crude oil and natural
gas are seasonal in nature, leading to substantial differences in cash flow at
various times throughout the year. Federal and state regulation of crude oil and
natural gas production and transportation, general economic conditions, changes
in supply and changes in demand all could adversely affect the Company's ability
to produce and market its crude oil and natural gas. If market factors were to
change dramatically, the financial impact on the Company could be substantial.
The availability of markets and the volatility of product prices are beyond the
control of the Company and thus represent a significant risk.
The Company periodically reviews the carrying value of its crude oil and
natural gas properties under the full cost accounting rules of the SEC. Under
these rules, capitalized costs of proved oil and natural gas properties may not
exceed the present value of proved reserves, discounted at 10%. Application of
the ceiling test requires pricing future revenue at the unescalated prices in
effect as of the end of each fiscal quarter and requires a write-down for
accounting purposes if the ceiling is exceeded, even if prices were depressed
for only a short period of time. The Company was required to write-down the
carrying value of its crude oil and natural gas properties at December 31, 1998
by $61.2 million and may be required to write-down the carrying value of its
crude oil and natural gas properties in the future when crude oil and natural
gas prices are depressed or unusually volatile. When a write-down is required,
it results in a charge to earnings, but does not impact cash flow from operating
activities. The Company sustained a charge to earnings of $61.2 million at
December 31, 1998, as a result of the write-down. Once incurred, a write-down of
crude oil and natural gas properties is not reversible at a later date. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
In order to manage its exposure to price risks in the marketing of its
crude oil and natural gas, the Company from time to time has entered into fixed
price delivery contracts, financial swaps and crude oil and natural gas futures
contracts as hedging devices. To ensure a fixed price for future production, the
Company may sell a futures contract and thereafter either (i) make physical
8
delivery of crude oil or natural gas to comply with such contract or (ii) buy a
matching futures contract to unwind its futures position and sell its production
to a customer. Such contracts may expose the Company to the risk of financial
loss in certain circumstances, including instances where production is less than
expected, the Company's customers fail to purchase or deliver the contracted
quantities of crude oil or natural gas, or a sudden, unexpected event materially
impacts crude oil or natural gas prices. Such contracts may also restrict the
ability of the Company to benefit from unexpected increases in crude oil and
natural gas prices. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Reliance on Estimates of Proved Reserves and Future Net Revenue Information
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond the control of the
Company. The reserve data included in this report represent only estimates. In
addition, the estimates of future net revenue from proved reserves and the
present value thereof are based upon certain assumptions about future production
levels, prices and costs that may not prove to be correct over time. In
particular, estimates of crude oil and natural gas reserves, future net revenue
from proved reserves and the PV-10 thereof for the crude oil and natural gas
properties 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, 1998.
The average sales prices as of such date used for purposes of such estimates of
the Company were $9.95 per Bbl of crude oil, $8.97 per Bbl of NGLs and $1.90 per
Mcf of natural gas. It is also assumed that the Company will make future capital
expenditures of approximately $31.7 million in the aggregate, which are
necessary to develop and realize the value of proved undeveloped reserves on
these properties. Any significant variance in actual results from these
assumptions could also materially affect the estimated quantity and value of
reserves set forth herein. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business -- Reserves Information."
Net Losses
The Company has experienced recurring losses. For the years ended
December 31, 1994, 1995, 1997 and 1998, the Company recorded net losses of $2.6
million, $1.6 million $6.7 million and $84.0 million, respectively. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and the Company's Consolidated Financial Statements and the notes
thereto included in this document. There can be no assurance that the Company
will become profitable in the future.
Foreign Operations
The Company's operations are subject to the risks of restrictions on
transfers of funds, export duties and quotas, domestic and international customs
and tariffs, and changing taxation policies, foreign exchange restrictions,
political conditions and governmental regulations. In addition, the Company
receives a substantial portion of its revenue in Canadian dollars. As a result,
fluctuations in the exchange rates of the Canadian dollar with respect to the
U.S. dollar could have an adverse effect on the Company's financial position,
results of operations and cash flows. The Company's stockholders' equity was
negatively impacted by approximately $6.0 million during 1998 due to
fluctuations in the foreign currency translation rate. The Company may from time
to time engage in hedging programs intended to reduce the Company's exposure to
currency fluctuations.
Integration of Operations
The Company's future operations and earnings will be dependent, in part,
upon the Company's ability to integrate the operations of New Cache. There can
be no assurance that the Company will be able to successfully integrate such
operations with those of the Company, and a failure to do so would have a
material adverse effect on the Company's financial position, results of
operations and cash flows. Additionally, although the Company does not currently
have any specific acquisition plans, the need to focus management's attention on
integration of the new operations, as well as other factors, may limit the
Company's ability to successfully pursue acquisitions or other opportunities
related to its business for the foreseeable future. Also, successful integration
of operations will be subject to numerous contingencies, some of which are
beyond management's control. These contingencies include general and regional
economic conditions, prices for crude oil and natural gas, competition and
changes in regulation.
Operating Hazards; Uninsured Risks
The nature of the crude oil and natural gas business involves certain
operating hazards such as crude oil and natural gas blowouts, explosions,
9
formations with abnormal pressures, cratering and crude oil spills and fires,
any of which could result in damage to or destruction of crude oil and natural
gas wells, destruction of producing facilities, damage to life or property,
suspension of operations, environmental damage and possible liability to the
Company. In accordance with customary industry practices, the Company maintains
insurance against some, but not all, of such risks and some, but not all, of
such losses. The occurrence of such an event not fully covered by insurance
could have a material adverse effect on the financial condition and results of
operations of the Company.
Restrictions Imposed by Terms of the Company's Indebtedness
The Indentures restrict, among other things, the Company's ability to
incur additional indebtedness, incur liens, pay dividends or make certain other
restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." A breach of any of these covenants could result in a default
under the Indentures. Upon the occurrence of an event of default, holders of the
Secured Notes and the Series D Notes could elect to accelerate the payment of
the notes. There can be no assurance that the assets of the Company would be
sufficient to repay the Secured Notes and/or the Series D Notes in full. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Possible Delisting of Common Stock on The Nasdaq National Market
Recently, the Company received notification from The Nasdaq National
Market ("NMS") that the Company did not meet the minimum net tangible assets and
"inside bid" price requirements for NMS listed companies. The Company has also
been notified that it does not meet the minimum market value of the "public
float" for NMS listed companies. The Company has requested a hearing regarding
the proposed delisting of the Company's Common Stock on the Nasdaq National
Market and intends to request an exception from the designated criteria to
permit continued inclusion of the Company's common stock on the NMS. No
assurance can be given that the Company's request for an exception will be
granted. The Company's common stock will continue to be traded on the NMS until
action by the Nasdaq Review Panel.
If the Company's Common Stock is no longer traded on the NMS Market, the
Company intends to apply for listing its Common Stock on The American Stock
Exchange or on a regional exchange, such as the Boston Stock Exchange. If the
Company's Common Stock is not approved for listing on The American Stock
Exchange or a regional exchange, trading in the Company's Common Stock would be
conducted in the over-the-counter market in the "pink sheets" or the electronic
bulletin board administered by the National Association of Securities Dealers,
Inc. In such an event, the liquidity and market price of the Company's Common
Stock may be adversely impacted. As a result, an investor may find it more
difficult to obtain accurate stock quotations.
Shares Eligible for Future Sale
At March 22, 1999, the Company had 6,330,426 shares of Common Stock
outstanding of which 1,563,687 shares were held by affiliates. In addition, at
March 22, 1999, the Company had 1,566,810 shares of Common Stock subject to
outstanding options granted under certain stock option plans (of which 501,422
shares were vested at March 22, 1999) and 225,500 shares issuable upon exercise
of warrants.
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 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 pursuant
to a registration statement could have a material adverse effect on the price of
the Common Stock and could impair the Company's ability to raise additional
capital through the sale of its equity securities.
Competition
The Company encounters strong competition from major oil companies and
independent operators in acquiring properties and leases for the exploration
for, and production of, crude oil and natural gas. Competition is particularly
intense with respect to the acquisition of desirable undeveloped crude oil and
natural gas leases. The principal competitive factors in the acquisition of such
undeveloped crude oil and natural gas leases include the staff and data
necessary to identify, investigate and purchase such leases, and the financial
10
resources necessary to acquire and develop such leases. Many of the Company's
competitors have financial resources, staff and facilities substantially greater
than those of the Company. In addition, the producing, processing and marketing
of crude oil and natural gas is affected by a number of factors which are beyond
the control of the Company, the effect of which cannot be accurately predicted.
The principal resources necessary for the exploration and production of
crude oil and natural gas are leasehold prospects under which crude oil and
natural gas reserves may be discovered, drilling rigs and related equipment to
explore for such reserves and knowledgeable personnel to conduct all phases of
crude oil and natural gas operations. The Company must compete for such
resources with both major crude oil companies and independent operators.
Although the Company believes its current operating and financial resources are
adequate to preclude any significant disruption of its operations in the
immediate future, the continued availability of such materials and resources to
the Company cannot be assured.
The Company faces significant competition for obtaining additional
natural gas supplies for gathering and processing operations, for marketing
NGLs, residue gas, helium, condensate and sulfur, and for transporting natural
gas and liquids. The Company's principal competitors include major integrated
oil companies and their marketing affiliates and national and local gas
gatherers, brokers, marketers and distributors of varying sizes, financial
resources and experience. Certain competitors, such as major crude oil and
natural gas companies, have capital resources and control supplies of natural
gas substantially greater than the Company. Smaller local distributors may enjoy
a marketing advantage in their immediate service areas.
The Company competes against other companies in its natural gas
processing business both for supplies of natural gas and for customers to which
it 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.
Certain Business Risks
The Company intends to continue acquiring producing crude oil and
natural gas properties or companies that own such properties. Although the
Company performs a review of the acquired properties that it believes is
consistent with industry practices, such reviews are inherently incomplete. It
generally is not feasible to review in depth every individual property involved
in each acquisition. Ordinarily, the Company will focus its review efforts on
the higher-valued properties and will sample the remainder. However, even an
in-depth review of all properties and records may not necessarily reveal
existing or potential problems nor will it permit the Company to become
sufficiently familiar with the properties to assess fully their deficiencies and
capabilities. Inspections may not always be performed on every well, and
environmental problems, such as ground water contamination, are not necessarily
observable even when an inspection is undertaken. Furthermore, the Company must
rely on information, including financial, operating and geological information,
provided by the seller of the properties without being able to verify fully all
such information and without the benefit of knowing the history of operations of
all such properties.
In addition, a high degree of risk of loss of invested capital exists in
almost all exploration and development activities which the Company undertakes.
No assurance can be given that crude oil or natural gas will be discovered to
replace reserves currently being developed, produced and sold, or that if crude
oil or natural gas reserves are found, they will be of a sufficient quantity to
enable the Company to recover the substantial sums of money incurred in their
acquisition, discovery and development. Drilling activities are subject to
numerous risks, including the risk that no commercially productive crude oil or
natural gas reservoirs will be encountered. The cost of drilling, completing and
operating wells is often uncertain. The Company's operations may be curtailed,
delayed or canceled as a result of numerous factors including title problems,
weather condition, compliance with governmental requirements and shortages or
delays in the delivery of equipment. The availability of a ready market for the
Company's natural gas production depends on a number of factors, including,
without limitation, the demand for and supply of natural gas, the proximity of
natural gas reserves to pipelines, the capacity of such pipelines and
governmental regulations.
Government Regulation
The Company's business is subject to certain federal, state and local
laws and regulations relating to the exploration for and development, production
and marketing of crude oil and natural gas, as well as environmental and safety
matters. Such laws and regulations have generally become more stringent in
recent years, often imposing greater liability on a larger number of potentially
responsible parties. Because the requirements imposed by such laws and
regulations are frequently changed, the Company is unable to predict the
11
ultimate cost of compliance with such requirements. There is no assurance that
laws and regulations enacted in the future will not adversely affect the
Company's financial condition and results of operations.
Dependence on Key Personnel
The Company depends to a large extent on Robert L. G. Watson, its
Chairman of the Board, President and Chief Executive Officer, for its management
and business and financial contacts. The unavailability of Mr. Watson would have
a material adverse effect on the Company's business. The Company's success is
also dependent upon its ability to employ and retain skilled technical
personnel. While the Company has not to date experienced difficulties in
employing or retaining such personnel, its failure to do so in the future could
adversely affect its business. The Company has entered into employment
agreements with Mr. Watson and each of the Company's vice presidents. The
employment agreements terminate on December 31, 1999 except that the term may be
extended for an additional year if by December 1 of the prior year neither the
Company nor the officer has given notice that it does not wish to extend the
term. Except in the event of a change in control, Mr. Watson's and each of the
vice president's employment is terminable at will by the Company for any reason,
without notice or cause.
Limitations on the Availability of the Company's Net Operating Loss
Carryforwards
At December 31, 1998, the Company had, subject to the limitations
discussed below, $46.6 million of net operating loss carryforwards for U.S. tax
purposes, of which it is estimated a maximum of $43.8 million may be utilized
before it expires. These loss carryforwards will expire from 2002 through 2018
if not utilized. At December 31, 1998, the Company had approximately $11.9
million of net operating loss carryforwards for Canadian tax purposes of which
$200,000 will expire in 2002, $5.0 million will expire in 2003, $3.2 million
will expire in 2004 and $3.5 will expire in 2005. As a result of the acquisition
of certain partnership interests and crude oil and natural gas properties in
1990 and 1991, an ownership change under Section 382 of the Internal Revenue
Code of 1986, as amended (Section 382), occurred in December 1991. Accordingly,
it is expected that the use of the U.S. net operating loss carryforwards
generated prior to December 31, 1991 of $4.9 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 $837,000
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 $8.9 million will be limited to approximately $1.0 million per year, subject
to the lower limitations described above. Of the $8.9 million net operating loss
carryforwards existing at October 1993, it is anticipated that the maximum net
operating loss that may be utilized before it expires is $6.1 million. Future
changes in ownership may further limit the use of the Company's carryforwards.
In addition to the Section 382 limitations, uncertainties exist as to
the future utilization of the operating loss carryforwards under the criteria
set forth under FASB Statement No. 109. Therefore, the Company has established a
valuation allowance of $5.9 million and $32.8 million for deferred tax assets at
December 31, 1997 and 1998, respectively.
Regulation of Crude Oil and Natural Gas Activities
Regulatory Matters
The Company's operations are affected from time to time in varying
degrees by political developments and federal, state, provincial and local laws
and regulations. In particular, oil and gas production operations and economics
are, or in the past have been, affected by price controls, taxes, conservation,
safety, environmental, and other laws relating to the petroleum industry, by
changes in such laws and by constantly changing administrative regulations.
Price Regulations
In the recent past, maximum selling prices for certain categories of
crude oil, natural gas, condensate and NGLs were subject to federal regulation.
In 1981, all federal price controls over sales of crude oil, condensate and NGLs
were lifted. In 1993, the Congress deregulated natural gas prices for all "first
12
sales" of natural gas. As a result, all sales of the Company's United States
produced crude oil, natural gas, condensate and NGLs may be sold at market
prices, unless otherwise committed by contract.
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 regulates 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.
United States Natural Gas Regulation.
Historically, interstate pipeline companies generally acted as wholesale
merchants by purchasing natural gas from producers and reselling the gas to
local distribution companies and large end users. Commencing in late 1985, the
Federal Energy Regulatory Commission (the "FERC") issued a series of orders that
have had a major impact on interstate natural gas pipeline operations, services
and rates, and thus have significantly altered the marketing and price of
natural gas. The FERC's key rule making action, order No. 636 ("Order 636"),
issued in April 1992, required each interstate pipeline to, among other things,
"unbundle" its traditional bundled sales services and create and make available
on an open and nondiscriminatory basis numerous constituent services (such as
gathering services, storage services, firm and interruptible transportation
services, and standby sales and gas balancing services), and to adopt a new
ratemaking methodology to determine appropriate rates for those services. To the
extent the pipeline company or its sales affiliate makes natural gas sales as a
merchant, it does so pursuant to private contracts in direct competition with
all of the sellers, such as the Company; however, pipeline companies and their
affiliates were not required to remain "merchants" of natural gas, and most of
the interstate pipeline companies have become "transporters only." In subsequent
orders, the FERC largely affirmed the major features of Order 636. By the end of
1994, the FERC had concluded the Order 636 restructuring proceedings, and, in
general, accepted rate filings implementing Order 636 on every major interstate
pipeline. The federal appellate courts have largely affirmed the features of
Order 636 and numerous related orders pertaining to the individual pipelines.
The Company does not believe that Order 636 and the related restructuring
proceedings affect it any differently than other natural gas producers and
marketers with which it competes.
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 (i) a series of orders in individual pipeline proceedings articulating a
policy of generally approving the voluntary divestiture of interstate pipeline
owned gathering facilities by interstate pipelines to their affiliates (the
so-called "spin down" of previously regulated gathering facilities to the
pipeline's nonregulated affiliates), (ii) the completion of rule-making
involving the regulation of pipelines with marketing affiliates under Order No.
497, (iii) various FERC's orders adopting rules proposed by the Gas Industry
Standards Board which were designed to further standardize pipeline tariffs and
business practices, (iv) a notice of proposed rulemaking that, among other
things, proposes (aa) to eliminate the cost-based price cap currently imposed on
natural gas transactions of less than one year in duration, (bb) to establish
mandatory "transparent" capacity auctions of short-term capacity on a daily
basis, and (cc) to permit interstate pipelines to negotiate terms and conditions
of service with individual customers, (v) a notice of inquiry which continues
13
the FERC's review of its regulatory policies with respect to the pricing of
long-term pipeline transportation services by presenting a range of questions to
the industry dealing with current cost based pricing of new and existing
capacity and alternative rate mechanism options, including the desirability of
pricing interstate pipeline capacity utilizing market-based rates, incentive
rates, or indexed rates, and (vi) 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
resolution of complaints and organizing the complaint procedures so that all
complaints are handled in a timely and fair manner. Several of these initiatives
are intended to enhance competition in natural gas markets, although some, such
as "spin downs," may have the adverse effect of increasing the cost of doing
business on some in the industry as a result of the monopolization of those
facilities by their new, unregulated owners. As to all of these FERC
initiatives, the ongoing, or, in some instances, preliminary evolving nature of
these regulatory initiatives makes it impossible at this time to predict their
ultimate impact on the Company's business.
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." The Company ships certain of its 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 the Company's gas on
third party gathering facilities, the Company's 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. The Company does not believe that there rules
affect it any differently that other crude oil producers and marketers with
which it competes.
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. The Company cannot predict when or
if any such proposals might become effective or their effect if any, on the
Company's operations. The oil and gas industry historically has been 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 the Company owns producing crude oil
and natural gas properties have statutory provisions regulating the exploration
for and production of crude oil and natural gas, including provisions requiring
permits for the drilling of wells and maintaining bonding requirements in order
to drill or operate wells and provisions relating to the location of wells, the
method of drilling and casing wells, the surface use and restoration of
properties upon which wells are drilled and the plugging and abandoning of
wells. The Company's operations are also subject to various conservation laws
and regulations. These include the regulation of the size of drilling and
spacing units or proration units and the density of wells which may be drilled
and the unitization or pooling of crude oil and natural gas properties. In this
regard, some states allow the forced pooling or integration of tracts to
facilitate exploration while other states rely on voluntary pooling of lands and
leases. In addition, state conservation laws establish maximum rates of
production from crude oil and natural gas wells, generally prohibit the venting
or flaring of natural gas and impose certain requirements regarding the
ratability of production. Some states, such as Texas and Oklahoma, have, in
recent years, reviewed and substantially revised methods previously used to make
monthly determinations of allowable rates of production from fields and
individual wells. The effect of these regulations is to limit the amounts of
crude oil and natural gas the Company can produce from its wells, and to limit
the number of wells or the location at which the Company can drill.
State 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. 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, on August 19, 1997, the Texas
Railroad Commission enacted a Natural Gas Transportation Standards and Code of
Conduct to provide regulatory support for the State's more active review of
rates, services and practices associated with the gathering and transportation
of gas by an entity that provides such services to others for a fee, in order to
prohibit such entities from unduly discriminating in favor of their affiliates.
14
In the event the Company conducts operations on federal or Indian oil
and gas leases, such operations must comply with numerous regulatory
restrictions, including various non-discrimination statutes, and certain of such
operations must be conducted pursuant to certain on-site security regulations
and other permits issued by various federal agencies. In addition, the Minerals
Management Service ("MMS") has recently issued a final rule to clarify the types
of costs that are deductible transportation costs for purposes of royalty
valuation of production sold off the lease. In particular, MMS will not allow
deduction of costs associated with marketer fees, cash out and other pipeline
imbalance penalties, or long-term storage fees. Further, the MMS has been
engaged in a three-year 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. The Company cannot predict what, if any, effect any
new rule will have on its 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 meters 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,
and the ARTC rate currently varies between 75% for prices for crude oil at or
below CDN $100 per cubic meter and 35% for prices above CDN $210 per cubic
meter. The ARTC rate is currently applied to a maximum of CDN $2.0 million of
Alberta Crown royalties payable for each producer or associated group of
producers. Crown royalties on production from producing properties acquired from
corporations claiming maximum entitlement to ARTC will generally not be eligible
for ARTC. The rate is established quarterly based on average "par price", as
determined by the Alberta Department of Energy for the previous quarterly
period. On December 22, 1997, the Government of Alberta gave notice that it
intended to review the ARTC program with expected changes to take effect prior
to 2001.
The Government of Saskatchewan's fiscal regime for the oil and gas
industry provides an incentive to encourage the drilling on new vertical oil
wells through a revised royalty/tax structure for mew vertical oil wells and 15
15
incremental production from new of expanded water flood projects.. This "third
tier" Crown royalty rate is price sensitive and varies between heavy and
non-heavy oil (from a minimum off 10% for heavy oil at a base price to a maximum
of 35% for non-heavy oil at a price above the base price). Previous time-based
royalty/tax holidays applicable to vertically drilled oil wells have been
replaced with volume-based royalty/tax reduction incentives in which a maximum
royalty of 5% will apply to various volumes depending on the depth and nature of
the well (up to 25,000 cubic meters of oil in the case of deep exploratory
wells). The maximum royalty applicable to the first 12,000 cubic meters of oil
has been increased from 5% to 10% for production from certain horizontal wells.
In addition, royalty/tax holidays for deep horizontal wells have been replaced
with a 25,000 cubic meters volume incentive (5% maximum royalty). Oil produced
from qualified reactivated oil wells are subject to a maximum new royalty rate
of 5% for the first 5 years following the re-activation in the case of wells
reactivated after 1993 and shut-in or suspended prior to January 1, 1993. With
respect to qualifying exploratory natural gas wells, the first 25 million cubic
meters of natural gas produced will be subject to an incentive maximum royalty
rate of 5%. On February 9, 1998, the Government of Saskatchewan announced
further royalty incentive programs to encourage oil and gas exploration.
Producers of oil and natural gas in British Columbia are also required
to pay annual rental payments in respect to Crown lease 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), 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 that
15%.
Crude oil and natural gas royalty holidays and reductions for specific
wells reduce the amount of Crown royalties paid to the provincial governments.
The ARTC program provides a rebate on Crown royalties paid in respect of
eligible producing properties.
Environmental Matters
The Company's 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
aquifers that may contaminate groundwater; and impose substantial liabilities
for pollution resulting from the Company's operations. Environmental permits
required for the Company's 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.
Management of the Company believes that it is in substantial compliance with
current environmental laws and regulations, and that the Company 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 the Company as well
as the oil and gas industry in general, and thus the Company is unable to
predict the ultimate cost and effect of future changes in environmental laws and
regulations.
In the United States, the Comprehensive Environment Response,
Compensation, and Liability Act ("CERCLA"), also known as the "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
dispose or arranged for the disposal of the hazardous substances released at the
site. Under CERCLA such persons or companies may be 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 not uncommon 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 statues govern the disposal of
"solid waste" and "hazardous waste" and authorize imposition of substantial
civil and criminal penalties for noncompliance. Although CERCLA currently
excludes petroleum from the definition of "hazardous substance," state laws
affecting the Company's operations impose cleanup liability relating to
petroleum and petroleum related products. In addition, although RCRA currently
classifies certain oilfield wastes as "non-hazardous," such exploration and
16
production wastes could be reclassified as hazardous wastes thereby making such
wastes subject to more stringent handling and disposal requirements.
The Company currently owns or leases, and has 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 the Company has utilized
operating and disposal practices that were standard in the industry at the time,
hydrocarbons or other wastes may have been disposed of or released on or under
the properties owned or leased by the Company 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 the Company's control.
These properties and the wastes disposed thereon may be subject to CERCLA, RCRA,
and analogous state laws. The Company's operations are also impacted by
regulations governing the disposal of naturally occurring radioactive materials
("NORM"). The Company must comply with the Clean Air Act and comparable state
statutes which prohibit the emissions of air contaminants, although a majority
of the Company's 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 the Company,
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 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.
The Company's Canadian operations are also subject to environmental
regulation pursuant to local, provincial and federal legislation which generally
require operations to be conducted in a safe and environmentally responsible
manner. Canadian environmental legislation provides for restrictions and
prohibitions relating to the discharge of air, soil and water pollutants and
other substances produced in association with certain crude oil and natural gas
industry operations, and environmental protection requirements, including
certain conditions of approval and laws relating to storage, handling,
transportation and disposal of materials or substances which may have an adverse
effect on the environment. Environmental legislation can affect the location of
wells and facilities and the extent to which exploration and development is
permitted. In addition, legislation requires that well and facilities sites be
abandoned and reclaimed to the satisfaction of the provincial authorities. A
breach of such legislation may result in the imposition of fines of issuance of
clean-up orders.
Certain federal environmental laws that may affect the Company 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 insure 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, thorough 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 consolidation 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.
17
British Columbia's Environmental Assessment Act become effective June
30, 1995. This legislation 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.
Saskatchewan's Environmental Management and Protection Act is the
primary environmental legislation for that province. This Act provides
significant enforcement and penalty provisions, and includes a compensation
scheme respecting losses or damage from spills. The Clean Air Act provides a
permitting scheme for certain industrial activities, broad enforcement
provisions and significant penalties for non-compliance. The Environmental
Assessment Act provides that certain development activities which can affect the
environment must undergo environmental assessment and approval from the
provincial government.
The Company is 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
laws, which would have a material adverse effect on the Company's financial
position or results of operations. Moreover, the Company maintains insurance
against costs of clean-up operations, but it is not fully insured against all
such risks. A serious incident of pollution may, as it has in the past, also
result in the suspension or cessation of operations in the affected area.
The Company has a Corporate Environmental Policy and a detailed
Environmental Management System in place to ensure continued compliance with
environmental, health and safety laws and regulations. The Company believes that
is has obtained and is in compliance with all material environmental permits,
authorizations and approvals.
Title to Properties
As is customary in the crude oil and natural gas industry, the Company
makes only a cursory review of title to undeveloped crude oil and natural gas
leases at the time they are acquired by the Company. However, before drilling
commences, the Company requires a thorough title search to be conducted, and any
material defects in title are remedied prior to the time actual drilling of a
well begins. To the extent title opinions or other investigations reflect title
defects, the Company, rather than the seller of the undeveloped property, is
typically obligated to cure any title defect at its expense. If the Company were
unable to remedy or cure any title defect of a nature such that it would not be
prudent to commence drilling operations on the property, the Company could
suffer a loss of its entire investment in the property. The Company believes
that it has good title to its crude oil and natural gas properties, some of
which are subject to immaterial encumbrances, easements and restrictions. The
crude oil and natural gas properties owned by the Company are also typically
subject to royalty and other similar non-cost bearing interests customary in the
industry. The Company does not believe that any of these encumbrances or burdens
will materially affect the Company's ownership or use of its properties.
Employees
As of March 22, 1999, Abraxas and its subsidiaries had 86 full-time
employees, including six executive officers, six non-executive officers, six
petroleum engineers, one landmen, one geophysicist, four geologists, seven
managers, 28 secretarial, accounting and clerical personnel and 27 field
personnel. Additionally, Abraxas also retains contract pumpers on a
month-to-month basis. Abraxas retains independent geologic, geophysical and
engineering consultants from time to time on a limited basis and expects to
continue to do so in the future.
18
Item 2. Properties.
Primary Operating Areas
Texas
The Company's U.S. operations are concentrated in South and West Texas
with over 99% of the PV-10 of the Company's U.S. crude oil and natural gas
properties located in those two regions. The Company operates 84% of its 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. The Company owns an average 71% working interest in 115 wells with
average daily production of 863 net Bbls of crude oil and NGLs and 10,285 net
Mcf of natural gas per day for the year ended December 31, 1998. The Company's
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. The Company owns an average 72% working interest in 264 wells with
average daily production of 1,264 net Bbls of crude oil and NGLs and 6,926 net
Mcf of natural gas per day for the year ended December 31, 1998. During 1998, a
total of 11 new wells (9.6 net) were drilled by the Company in Texas with a 100%
success rate.
Western Canada
In January 1996, the Company invested $3.0 million in Grey Wolf
Exploration Ltd. ("Grey Wolf"), a privately held Canadian corporation, which, in
turn, invested these proceeds in newly-issued shares of Cascade Oil & Gas, Ltd.
("Cascade"), an Alberta-based corporation whose common shares were traded on The
Alberta Stock Exchange. In November 1997, Grey Wolf merged with Cascade, which
later changed its name to Grey Wolf Exploration Inc. Abraxas and Canadian
Abraxas own approximately 48% of the outstanding capital stock of Grey Wolf. The
shares of Grey Wolf are traded on the Alberta Stock Exchange and the Toronto
Stock Exchange under the symbol "GWX." 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.
The Company owns 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 19 natural gas
processing plants. As of December 31, 1998, Canadian Abraxas and Grey Wolf had
estimated net proved reserves of 98,905 Mmcfe (88% natural gas) with a PV-10 of
$87.3 million, 95% if which was attributable to proved developed reserves. For
the year ended December 31, 1998, the Canadian properties produced an average of
approximately 999 net Bbls of crude oil and NGL's per day and 48,435 net Mcf of
natural gas per day from 100.8 net wells. The natural gas processing plants had
aggregate capacity of approximately 263 MMcf of natural gas per day (108.5 net
MMcf).
In January 1999, Canadian Abraxas acquired all of the outstanding common
shares of New Cache for an aggregate of $78.0 million in cash and the assumption
of the New Cache Debt which was repaid in March 1999 from the proceeds of the
sale of the Secured Notes. As of December 31, 1998, New Cache had estimated
total proved reserves of 77 Bcfe (75% natural gas) with a PV-10 of $55.6
million, all of which was attributable to proved developed reserves. For the
year ended December 31, 1998, New Cache produced an average of approximately
1,389 net Bbls of crude oil and NGL's per day and 25.3 net MMcf of natural gas
per day. New Cache owns interests in 285 gross wells (88.5 net wells) and
445,294 gross (256,524 net) acres as well as three natural gas processing
plants.
19
Exploratory and Developmental Acreage
Abraxas' principal crude oil and natural gas properties consist of
non-producing and producing crude oil and natural gas leases, including reserves
of crude oil and natural gas in place. The following table indicates Abraxas'
interest in developed and undeveloped acreage as of December 31, 1998:
Developed and Undeveloped Acreage
As of December 31, 1998
Developed Acreage (1) Undeveloped Acreage (2)
---------------------------- -----------------------------
Gross Acres (3) Net Acres (4)Gross Acres (3) Net Acres
(4)
------------- ------------ ------------- --------------
Canada 213,763 120,470 439,782 290,427
Texas 43,659 27,090 17,704 14,646
N. Dakota 1,544 985 -- --
Oklahoma 3,041 1,405 -- --
Colorado 160 36 -- --
Mississippi 40 2 -- --
New Mexico 160 30 -- --
Kansas 1,280 277 -- --
Wyoming 9,139 6,965 36,182 32,314
Alabama 40 -- -- --
------------- ------------ ------------- --------------
Total 272,826 157,260 493,668 337,387
- ---------------
(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 Abraxas owns 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 the total gross and net productive wells
of Abraxas, expressed separately for crude oil and natural gas, as of December
31, 1998:
Productive Wells (1)
As of December 31, 1998
State/Country Crude Oil Natural Gas
-------------------------- ----------------------------
Gross(2) Net(3) Gross(2) Net(3)
----------------- ------------ ------------ ------------ -------------
Canada 50.0 10.6 201.0 90.2
Texas 276.0 201.1 103.0 78.5
N. Dakota 2.0 1.4 - -
Oklahoma 5.0 1.8 5.0 2.0
Colorado 1.0 0.2 - -
Mississippi 1.0 0.1 - -
New Mexico 1.0 0.2 - -
Wyoming - - 13.0 2.0
Alabama 1.0 - - -
Kansas 3.0 0.7 1.0 0.2
============ ============ ============ =============
Total 340.0 216.1 323.0 172.9
============ ============ ============ =============
- ------------
(1) Productive wells are producing wells and wells capable of production.
(2) A gross well is a well in which Abraxas owns an interest. The number of
gross wells is the total number of wells in which Abraxas owns 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
Abraxas' fractional working interest owned in gross wells.
(4) Included in the above wells are 23 gross and 21 net crude oil and 11 gross
and 3 net natural gas wells with multiple completions.
20
Substantially all of Abraxas' existing crude oil and natural gas
properties are pledged to secure Abraxas' indebtedness under the Secured Notes.
See "Management's Discussion of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
Reserves Information
The crude oil and natural gas reserves of Abraxas have been estimated as
of January 1, 1999, January 1, 1998 and January 1, 1997 and of Canadian Abraxas
as of January 1, 1997, by DeGolyer & MacNaughton, of Dallas, Texas. The reserves
of Canadian Abraxas and Grey Wolf as of January 1, 1999 and January 1, 1998 have
been estimated by McDaniel & Associates Consultants Ltd. of Calgary, Alberta.
Crude oil and natural gas reserves, and the estimates of the present value of
future net revenues therefrom, were determined based on then current prices and
costs. Reserve calculations involve the estimate of future net recoverable
reserves of crude oil and natural gas and the timing and amount of future net
revenues to be received therefrom. Such estimates are not precise and are based
on assumptions regarding a variety of factors, many of which are variable and
uncertain.
The following table sets forth certain information regarding estimates
of the Company's crude oil, natural gas liquids and natural gas reserves as of
January 1, 1999, January 1, 1998 and January 1, 1997:
Estimated Proved Reserves
----------------------------------------
Proved Proved Total
Developed Undeveloped Proved
----------- ------------ --------------
As of January 1, 1997(1)
Crude oil (MBbls) 7,871 1,930 9,801
NGLs (MBbls) 7,090 1,144 8,234
Natural gas (MMcf) 157,660 19,600 177,260
As of January 1, 1998(1)(2)(3)
Crude oil (MBbls) 7,075 1,873 8,948
NGLs (MBbls) 7,178 1,651 8,829
Natural gas (MMcf) 186,490 34,824 221,314
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
- ------------------
(1) Includes 120,000, 128,900 and 31,900 barrels of crude oil reserves owned
by Grey Wolf of which 57,600, 69,500 and 16,400 barrels are applicable
to the minority interests share of these reserves as of January 1, 1997,
1998 and 1999, respectively.
(2) Includes 131,300 and 443,500 barrels of natural gas liquids reserves
owned by Grey Wolf of which 70,889 and 227,600 barrels are applicable to
the minority interests share of these reserves as of January 1, 1998 and
1999, respectively.
(3) Includes 7,446 and 28,610 Mmcf of natural gas reserves owned by Grey
Wolf of which 4,020 and 14,700 Mmcf are applicable to the minority
interests share of these reserves as of January 1, 1998 and 1999,
respectively.
There are numerous uncertainties inherent in estimating crude oil and
natural gas reserves and their estimated values, including many factors beyond
the control of the producer. The reserve data set forth herein represent only
estimates. Reserve engineering is a subjective process of estimating underground
accumulations of crude oil and natural gas that cannot be measured in an exact
21
manner. The accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment. As
a result, estimates of different engineers often vary. In addition, estimates of
reserves are subject to revision by the results of drilling, testing and
production subsequent to the date of such estimates. Accordingly, reserve
estimates are often different from the quantities of crude oil and natural gas
that are ultimately recovered. The meaningfulness of such estimates is highly
dependent upon the accuracy of the assumptions upon which they are based.
In general, the volume of production from crude oil and natural gas
properties declines as reserves are depleted. Except to the extent the Company
acquires properties containing proved reserves or conducts successful
exploration and development activities, or both, the proved reserves of the
Company will decline as reserves are produced. The Company's future crude oil
and natural gas production is therefore highly dependent upon its level of
success in acquiring or finding additional reserves.
The Company files reports of its estimated crude oil and natural gas
reserves with the Department of Energy and the Bureau of the Census. The
reserves reported to these agencies are required to be reported on a gross
operated basis and therefore are not comparable to the reserve data reported
herein.
Crude Oil, Natural Gas Liquids, and Natural Gas Production and Sales Prices
The following table presents the net crude oil, net natural gas liquids
and net natural gas production for Abraxas, 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, 1998:
1998 1997 1996
--------------- -------------- ---------------
Crude oil production (Bbls) 728,560 936,716 425,188
Natural gas production(Mcf) 24,929,866 21,050,045 6,350,069
Natural gas liquids
production (Bbls) 867,443 992,266 299,509
Mmcfe 34,506 32,624 10,698
Average sales price per
Bbl of crude oil ($) $13.65 $18.63 $20.85
Average sales price per
MCF of natural gas ($) $ 1.54 $ 1.79 $ 1.97
Average sales price per
Bbl of natural gas
liquids ($) $ 6.81 $10.75 $14.55
Average sales price per Mcfe($) $ 1.57 $ 2.02 $ 2.40
Average cost of production($)
per BOE produced (1) $ 2.93 $ 2.74 $ 3.28
(1) Oil and gas were combined by converting gas to a barrel oil equivalent
("BOE") on the basis of 6 Mcf gas =1 Bbl of oil. Production costs
include direct operating costs, ad valorem taxes and gross production
taxes.
22
Drilling Activities
The following table sets forth Abraxas' gross and net working interests
in exploratory, development, and service wells drilled during the three years
ended December 31, 1998:
1998 1997 1996
--------------------- ------------------ ----------------
Gross(1) Net(2) Gross Net Gross Net
--------- --------- -------- ------- -------- ------
Exploratory(3)
Productive(4)
Crude oil 1.0 1.0 - - 2.0 1.2
Natural gas 7.0 5.6 10.0 7.9 2.0 1.2
Dry holes(5) 9.0 7.3 2.0 1.8 4.0 1.4
--------- --------- --------- ------- -------- ------
Total 17.0 13.9 12.0 9.7 8.0 3.8
========= ========= ========= ======= ======== ======
Development(6)
Productive
Crude oil 3.0 2.4 25.0 22.3 20.0 15.8
Natural gas 30.0 23.9 20.0 14.9 10.0 3.7
Service(7) 1.0 1.0 - - 1.0 1.0
Dry holes 3.0 2.2 3.0 2.0 - -
--------- --------- --------- ------- -------- ------
Total 37.0 29.5 48.0 39.2 31.0 20.5
========= ========= ========= ======= ======== ======
(1) A gross well is a well in which Abraxas owns 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 22, 1999, the Company had one well in process of drilling.
23
Office Facilities
The Company's executive and administrative offices are located at 500 N.
Loop 1604 East, Suite 100, San Antonio, Texas 78232. The Company owns a 16%
limited partnership interest in the Partnership which owns the office building.
The Company also has an office in Midland, Texas. These offices, consisting of
approximately 12,650 square feet in San Antonio and 1,090 square feet in
Midland, are leased until March 2006 from unaffiliated parties at an aggregate
rate of approximately $18,000 per month. Grey Wolf leases 8,683 square feet of
office space in Calgary, Alberta pursuant to a lease with an unaffiliated third
party which expires on December 31, 2001 at a rate of approximately CDN $15,000
per month. New Cache leases 7,427 square feet of office space in Calgary,
Alberta pursuant to a lease which expires on July 1, 2001 at a rate of
approximately CDN $12,400 per month.
Other Properties
The Company owns 10 acres of land, an office building, shop, warehouse
and house in Sinton, Texas, 160 acres of land in Coke County, Texas and a 50%
interest in approximately 2.0 acres of land in Bexar County, Texas. All three
properties are used for the storage of tubulars and production equipment. The
Company also owns 21 vehicles which are used in the field by employees.
Item 3. Legal Proceedings
General. From time to time, the Company is involved in litigation
relating to claims arising out of its operations in the normal course of
business. As of March 22, 1999, 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.
Hornburg Litigation. In May 1995, certain plaintiffs filed a lawsuit
against the Company alleging negligence and gross negligence, tortious
interference with contract, conversion and waste. In March 1998, a jury found
against the Company and on May 22, 1998 final judgment in the amount of $1.3
million was entered. The Company has filed an appeal. Management believes that
the plaintiffs' claims are without merit and that damages should not be
recoverable under this action; however, the ultimate effect on the Company's
financial position and results of operations cannot be determined at this time.
The Company had not established a reserve for this matter at December 31, 1998.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year ended December 31, 1998.
Item 4a. Executive Officers of the Company
Certain information is set forth below concerning the executive officers
of the Company, each of whom has been selected to serve until the 1999 annual
meeting of directors and until his successor is duly elected and qualified.
Robert L. G. Watson, age 48, 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. In January 1999, Mr. Watson was
elected Chairman of the Board and director of New Cache. Prior to joining
Abraxas, Mr. Watson was employed in various petroleum engineering positions with
Tesoro Petroleum Corporation, a crude oil and natural gas exploration and
production company, from 1972 through 1977, and DeGolyer & McNaughton, an
independent petroleum engineering firm, from 1970 to 1972. Mr. Watson received a
Bachelor of Science degree in Mechanical Engineering from Southern Methodist
University in 1972 and a Master of Business Administration degree from the
University of Texas at San Antonio in 1974.
Chris E. Williford, age 48, 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
January 1999, Mr. Williford was elected Assistant Secretary of New Cache. 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.
24
Robert W. Carington, Jr., age 37, was elected Executive Vice President
and a director of the Company in July 1998. Prior to joining the Company, Mr.
Carington was a Managing Director with Jefferies & Company, Inc. Prior to
joining Jefferies & Company, Inc. in January 1993, Mr. Carington was a Vice
President at Howard, Weil, Labouisse, Friedrichs, Inc. Prior to joining Howard,
Weil, Labouisse, Freidrichs, 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.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information
Abraxas Common Stock is traded on the NASDAQ Stock Market and commenced
trading on May 7, 1991. The following table sets forth certain information as to
the high and low bid quotations quoted on NASDAQ for 1996, 1997 and 1998.
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
1996
First Quarter.............................$7.75 $4.13
Second Quarter.............................7.25 5.00
Third Quarter..............................7.13 4.75
Fourth Quarter............................10.50 5.75
1997
First Quarter............................$14.00 $8.88
Second Quarter............................14.13 10.00
Third Quarter.............................15.75 12.50
Fourth Quarter............................19.50 13.88
1998
First Quarter............................$15.00 $7.00
Second Quarter............................11.25 8.25
Third Quarter............................. 9.50 5.31
Fourth Quarter............................ 7.56 4.00
Recently, the Company received notification from The NMS that the
Company did not meet the minimum net tangible assets and "inside bid" price
requirements for NMS listed companies. The Company has also been notified that
it does not meet the minimum market value of the "public float" for NMS listed
companies. The Company has requested a hearing regarding the proposed delisting
of the Company's Common Stock on the NMS and intends to request an exception
from the designated criteria to permit continued inclusion of the Company's
common stock on the NMS. No assurance can be given that the Company's request
for an exception will be granted. The Company's common stock will continue to be
traded on the Nasdaq NMS until action by the Nasdaq Review Panel..
If the Company's Common Stock is no longer traded on The Nasdaq National
Market, the Company intends to apply for listing its Common Stock on The
American Stock Exchange or on a regional exchange, such as the Boston Stock
Exchange. If the Company's Common Stock is not approved for listing on The
American Stock Exchange or a regional exchange, trading in the Company's Common
Stock would be conducted in the over-the-counter market in the "pink sheets" or
the electronic bulletin board administered by the National Association of
Securities Dealers, Inc. In such an event, the liquidity and market price of the
Company's Common Stock may be adversely impacted. As a result, an investor may
find it more difficult to obtain accurate stock quotations.
25
Holders
As of March 22, 1999 Abraxas had 6,330,426 shares of common stock
outstanding and had approximately 1,650 stockholders of record.
Dividends
Abraxas has not paid any cash dividends on its Common Stock and it is
not presently determinable when, if ever, Abraxas will pay cash dividends in the
future. The Indentures prohibit the payment of cash dividends and stock
dividends on the Company's Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".
26
Item 6. Selected Financial Data
The following selected financial data are derived from the consolidated
financial statements of Abraxas. The data should be read in conjunction with the
Consolidated Financial Statements of the Company and Notes thereto, and other
financial information included herein. See "Financial Statements."
Year Ended December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands except per share data)
Total revenue $ 60,804 $ 70,931 $ 26,653 $13,817 $11,349
Income (loss) from continuing operations $(83,960) $ (6,485) $ 1,940 $(1,208) $ 113
Income (loss) per common share from
continuing operations $ (13.26) $ (1.11) $ .23 $ (.34) $ .02
Weighted average shares outstanding 6,331 6,025 6,794 4,635 4,310
Total assets $291,498 $338,528 $304,842 $85,067 $75,361
Long-term debt $299,698 $248,617 $215,032 $41,601 $41,296
Total shareholders' equity (deficit) $(63,522) $ 26,813 $ 35,656 $37,062 $28,502
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
The following is a discussion of the Company's consolidated financial
condition, results of operations, liquidity and capital resources. This
discussion should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto. See "Financial Statements".
Results of Operations
The factors which most significantly affect the Company's results of
operations are (1) the sales prices of crude oil, natural gas liquids and
natural gas, (2) the level of total sales volumes of crude oil, natural gas
liquids and natural gas, (3) the level of and interest rates on borrowings and
(4) the level and success of exploration and development activity.
Selected Operating Data. The following table sets forth certain
operating data of the Company for the periods presented:
Years Ended December 31,
-----------------------------------------
(dollars in thousands, except
per unit data)
1998 1997 1996
------------- ------------ ------------
Operating revenue:
Crude oil sales $ 9,948 $ 17,453 $ 8,864
NGLs sales 5,905 10,668 4,359
Natural gas sales 38,410 37,705 12,526
Gas Processing revenue 3,159 3,568 600
Other 2,663 1,537 304
============= ============ ============
Total operating revenue $60,084 $ 70,931 $ 26,653
============= ============ ============
Operating income (loss) $ (56,500) $ 15,150 $ 8,826
Crude oil production (MBbls) 728.6 936.7 425.2
NGLs production (MBbls) 867.4 992.3 299.5
Natural gas production (MMcf) 24,929.9 21,050.0 6,350.0
Average crude oil sales price (per Bbl) $ 13.65 $ 18.63 $ 20.85
Average NGLs sales price (per Bbl) $ 6.81 $ 10.75 $ 14.55
Average natural gas sales price (per Mcf) $ 1.54 $ 1.79 $ 1.97
27
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997
Operating Revenue. During the year ended December 31, 1998, operating
revenue from crude oil, natural gas and natural gas liquids sales, and natural
gas processing revenues decreased by $12.0 million from $69.4 million in 1997 to
$57.4 million in 1998, of which $11.8 million was attributable to the Wyoming
Properties. This decrease was primarily attributable to a decline in commodity
prices. Production volumes increased from 32,624 MMcfe in 1997 to 34,506 MMcfe
for the year ended December 1998, of which 8,609 MMcfe were attributable to the
Wyoming Properties. Crude oil and natural gas liquids sales volumes decreased by
17.2% from 1,930 MBbls in 1997 to 1,596 MBbls during 1998, and natural gas sales
volumes increased by 18.4% from 21.1 Bcf in 1997 to 24.9 Bcf in 1998. The
increase in natural gas sales volumes was attributable to increased production
attributable to the Company's ongoing development program on existing and
acquired properties. Crude oil sales volumes decreased 22.2% to 729 MBbls during
1998 from 937 MBbls in 1997 due primarily to the Company's decreased emphasis on
crude oil development projects during 1998 because of the continuing decline in
crude oil prices. Natural gas liquids sales volumes decreased 12.6% to 867 MBbls
in 1998 from 992 MBbls in 1997. Approximately 66 MBbls of the decline in natural
gas liquids was attributable to the loss of production from the Company's
Wyoming Properties. In the ten and one-half months that the Company owned the
Wyoming Properties during 1998, they contributed 89 MBbls of crude oil, 454
MBbls of natural gas liquids and 5.4 Bcf of natural gas production. Average
sales prices in 1998 were $13.65 per Bbl of crude oil, $6.81 per Bbl of natural
gas liquids and $1.54 per Mcf of natural gas compared to $18.63 per Bbl of crude
oil, $10.75 per Bbl of natural gas liquids and $1.79 per Mcf of natural gas in
1997. The Company also had gas processing revenue of $3.1 million in 1998 as
compared to $3.6 million in 1997.
Lease Operating Expense. Lease operating expense ("LOE") and natural gas
processing costs increased by $2.0 million from $16.1 million for the year ended
December 31, 1997 to $18.1 million for the same period of 1998, of which $2.0
million was attributable to the Wyoming Properties. The increase was due
primarily to the greater number of wells owned by the Company for the year ended
December 31, 1998 compared to the year ended December 31, 1997. The Company's
LOE on a per Mcfe basis for 1998 was $0.49 per Mcfe as compared to $0.46 per
Mcfe in 1997. Natural gas processing cost remained constant at $1.2 million in
1998 as compared to $1.2 million in 1997.
G&A Expense. G&A expense increased from $4.2 million for the year ended
December 31, 1997 to $5.3 million for the year ended December 31, 1998, as a
result of the Company's hiring additional staff. The sale of the Wyoming
Properties will not have a material effect on G&A expense. The Company's G&A
expense on a per Mcfe basis was $0.16 per Mcfe in 1998 compared to $0.13 per
Mcfe for 1997.
DD&A Expense. Due to the increase in sales volumes of crude oil and
natural gas, depreciation, depletion and amortization ("DD&A") expense increased
by $600,000 from $30.6 million for the year ended December 31, 1997 to $31.2
million for the year ended December 31, 1998, of which $3.4 million was
attributable to the Wyoming Properties. The Company's DD&A expense on a per Mcfe
basis for 1998 was $0.90 per Mcfe as compared to $0.94 per Mcfe in 1997.
Interest Expense and Preferred Dividends. Interest expense and preferred
dividends increased by $6.2 million from $24.6 million to $30.8 million for the
year end December 31, 1998 compared to 1997. This increase was attributable to
increased borrowings by the Company during 1998. In January 1998, Abraxas and
Canadian Abraxas issued $60.0 million in principal amount of 11.5% Senior Notes
due 2004, Series C ("Series C Notes"), and in June 1998, Abraxas and Canadian
Abraxas exchanged all of their outstanding Series C Notes and their 11.5% Senior
Notes due 2004, Series B in the original principal amount of $215.0 million
("Series B Notes") for $275.0 million of the Series D Notes. During 1998, the
Company also made additional borrowings under the Credit Facility. Long-term
debt increased from $248.6 million at December 31, 1997 to $299.7 million at
December 31, 1998. During 1998, the Company paid no preferred dividends as
compared to $183,000 in 1997. Preferred dividends were eliminated on July 1,
1997 as the result of the conversion of all outstanding preferred stock into
Abraxas common stock.
28
Ceiling Limitation Writedown. The Company records the carrying value of
its crude oil and natural gas properties using the full cost method of
accounting for oil and gas properties. Under this method, the Company
capitalizes the cost to acquire, explore for and develop oil and gas properties.
Under the full cost accounting rules, the net capitalized cost of crude oil and
natural gas properties less related deferred taxes, are limited by country, to
the lower of the unamortized cost or the cost ceiling, defined as the sum of the
present value of estimated unescalated future net revenues from proved reserves,
discounted at 10%, plus the cost of properties not being amortized, if any, plus
the lower of cost or estimated fair value of unproved properties included in the
costs being amortized, if any, less related income taxes. If the net capitalized
cost of crude oil and natural gas properties exceeds the ceiling limit, the
Company is subject to a ceiling limitation writedown to the extent of such
excess. A ceiling limitation writedown is a charge to earnings which does not
impact cash flow from operating activities. However, such writedowns do impact
the amount of the Company's stockholders' equity. The risk that the Company will
be required to writedown the carrying value of its oil and gas assets increases
when oil and gas prices are depressed or volatile. In addition, writedowns may
occur if the Company has substantial downward revisions in its estimated proved
reserves or if purchasers or governmental action cause an abrogation of, or if
the Company voluntarily cancels, long-term contracts for its natural gas. For
the year ended December 31, 1998, the Company recorded a writedown of $61.2
million related to its United States properties. No assurance can be given that
the Company will not experience additional writedowns in the future. Should
commodity prices continue to decline, a further writedown of the carrying value
of the Company's crude oil and natural gas properties may be required. See Note
17 of Notes to Consolidated Financial Statements.
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
Operating Revenue. During the year ended December 31, 1997, operating
revenue from crude oil, natural gas and natural gas liquids sales, and natural
gas processing revenues increased by $43.1 million from $26.3 million in 1996 to
$69.4 million in 1997. This increase was primarily attributable to increased
volumes which were partially offset by a decline in commodity prices.
.Production volume increased from 10,698 MMcfe to 32,624 MMcfe for the year
ended December 1997. Crude oil and natural gas liquids sales volumes increased
by 166% to 11,573 MMcfe during 1997 compared to 4,350 MMcfe in 1996, and natural
gas sales volumes increased by 231% to 21.1 Bcf in 1997 compared to 6.3 Bcf in
1996. The increases in volumes were attributable to a full year of production
from property acquisitions completed during the fourth quarter of 1996 as well
as increased production attributable to the Company's ongoing development
program on existing and acquired properties. Acquisitions and the subsequent
development of the acquired properties contributed 1,182 MBbls of oil and
natural gas liquids and 15.9 Bcf of natural gas. Development of existing
properties contributed 747 MBbls of oil and natural gas liquids and 5.2 Bcf of
natural gas during 1997. Average sales prices in 1997 were $18.63 per Bbl of
crude oil, $10.75 per Bbl of natural gas liquid and $1.79 per Mcf of natural gas
compared to $20.85 per Bbl of crude oil, $14.55 per Bbl of natural gas liquids
and $1.97 per Mcf of natural gas in 1996. The Company also had gas processing
revenue of $3.6 million in 1997 as a result of the acquisition of CGGS Canadian
Gas Gathering Systems, Inc. ("CGGS") in November 1996. Prior to the acquisition,
the Company was not engaged in third party gas processing.
Lease Operating Expense. LOE and natural gas processing costs increased
by $10.0 million from $6.1 million for the year ended December 31, 1996 to $16.1
million for the same period of 1997. LOE increased by $9.0 million to $14.9
million primarily due to the greater number of wells owned by the Company for
the year ended December 31, 1997 compared to the year ended December 31, 1996.
The Company's LOE on a per Mcfe basis for 1997 was $0.46 per Mcfe as compared to
$0.55 per Mcfe in 1996. Natural gas processing costs increased to $1.3 million
in 1997 as compared to $262,000 in 1996. The increase in gas processing expense
was due to the acquisition of CGGS in November 1996. Prior to the acquisition,
the Company was not engaged in third party gas processing
G&A Expense. G&A expense increased by $2.3 million from $1.9 million for
the year ended December 31, 1996 to $4.2 million for the year ended December 31,
1997, as a result of the Company's hiring additional staff, including an
increase in personnel to manage and develop properties acquired in the fourth
quarter of 1996. The Company's G&A expense on a per Mcfe basis was $0.13 per
Mcfe in 1997 compared to $0.18 per Mcfe for 1996.
29
DD&A Expense. Due to the increase in sales volumes of crude oil and
natural gas, DD&A expense increased by $21.0 million from $9.6 million for the
year ended December 31, 1996 to $30.6 million for the year ended December 31,
1997. The Company's DD&A expense on a per Mcfe basis for 1997 was $0.94 per Mcfe
as compared to $0.90 per Mcfe in 1996.
Interest Expense and Preferred Dividends. Interest expense and preferred
dividends increased by $18.1 million from $6.4 million to $24.5 million for the
year end December 31, 1997, compared to 1996. This increase was attributable to
increased borrowings by the Company to finance the acquisitions consummated
during 1996. In November 1996,the Company issued $215 million in principal
amount of the Series B Notes. During 1997, the Company made additional
borrowings under the Credit Facility. Long-term debt increased from $215.0
million at December 31, 1996 to $248.6 million at December 31, 1997. During
1997, the Company paid $183,000 in preferred dividends as compared to $366,000
in 1996. Preferred dividends were eliminated on July 1, 1997 as the result of
the conversion of all outstanding preferred stock into Abraxas common stock.
Ceiling Limitation Writedown. For the year ended December 31, 1997, the
Company recorded a writedown of $4.6 million, $3.0 million after tax, related to
its Canadian properties
Liquidity and Capital Resources
Current Liquidity Needs. The Company has historically funded its
operations and acquisitions primarily through its cash flow from operations and
borrowings under the Credit Facility and other credit sources. In March 1999 the
Company issued $63.5 million principal amount of the Secured Notes and repaid
all amounts outstanding under the Credit Facility and the New Cache Debt. Due to
severely depressed prices for crude oil and natural gas, the Company's cash flow
from operations has been substantially reduced.
The Company will have two principal sources of liquidity during the next
12 months: (i) cash on hand, including the proceeds from the sale of the Secured
Notes after the repayment of the Credit Facility and the New Cache Debt,and (ii)
cash generated by operations. While the availability of capital resources cannot
be predicted with certainty and is dependent upon a number of factors including
factors outside of management's control, management believes that the net
proceeds from the sale of the Secured Notes plus the Company's cash flow from
operations will be adequate to fund operations and planned capital expenditures
for the remainder of 1999.
The Company's ability to obtain additional financing will be
substantially limited under the terms of the Indentures. Substantially all of
the Company's crude oil and natural gas properties and natural gas processing
facilities are subject to a first lien or charge for the benefit of the holders
of the Secured Notes. Thus, the Company will be required to rely on its cash
flow from operations to fund its operations and service its debt. The Company
may also choose to issue equity securities or sell certain of its assets to fund
its operations, although the Indentures substantially limit the Company's use of
the proceeds of any such asset sales. Due to the Company's diminished cash flow
from operations and the resulting depressed prices for its common stock, there
can be no assurance that the Company would be able to obtain equity financing on
terms satisfactory to the Company.
30
General. Capital expenditures in 1996, 1997 and 1998 were $173.2
million, $87.8 million and $57.9 million, respectively. The table below sets
forth the components of these capital expenditures on a historical basis for the
three years ended December 31, 1996, 1997 and 1998.
Year Ended December 31,
--------------------------------
1996 1997 1998
------- ------- ------
(dollars in thousands)
Expenditure category:
Property acquisitions (1) $154,484 $24,210 $ 2,729
Development 18,465 61,414 51,821
Facilities and other 206 2,140 3,311
-------- ------- -------
Total $173,155 $87,764 $57,861
======== ======= =======
- ----------
(1)Acquisition cost includes 7,585,000 common shares and 4,000,000 special
warrants of Grey Wolf valued at approximately $3.7 million in 1997 and
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.
Acquisitions of crude oil and natural gas producing properties during
1996 accounted for the majority of the capital expenditures made by the Company
during 1996. During 1997 and 1998, expenditures were primarily for the
development of existing properties. These expenditures were funded through
internally generated cash flow, the issuance of the Series C Notes and
borrowings under the Credit Facility.
At December 31, 1998, the Company had current assets of $73.2 million
and current liabilities of $22.5 million resulting in working capital of $50.7
million. The material components of the Company's current liabilities at
December 31, 1998 include trade accounts payable of $10.5 million, revenues due
third parties of $5.8 million and accrued interest of $5.5 million.
Stockholders' equity decreased from $26.8 million at December 31, 1997 to
$(64.0) million at December 31, 1998, primarily due to a net loss incurred in
1998, including the impact of the impairment of the full cost pool. See "Ceiling
Limitation Writedown"
The Company's current budget for capital expenditures for 1999 other than
acquisition expenditures is $13.0 million, approximately $10.0 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 the Company currently has
no agreements, arrangements or undertakings regarding any material acquisitions.
The Company has no material long-term capital commitments and is consequently
able to adjust the level of its expenditures as circumstances dictate.
Additionally, the level of capital expenditures will vary during future periods
depending on market conditions and other related economic factors. Should the
prices of crude oil and natural gas continue to decline, the Company's cash
flows will decrease which may result in a further reduction of the capital
expenditures budget.
Operating activities for the year ended December 31, 1998 provided $4.8
million of cash to the Company. Investing activities provided $2.0 million
during 1998 $59.4 million was provided from the sale of oil and gas producing
properties, primarily the Wyoming Properties and $57.4 was used primarily for
the acquisition and development of producing properties. Financing provided
$52.5 million during 1998.
Operating activities for the year ended December 31, 1997 provided $36.6
million of cash to the Company. Investing activities required $74.5 million
during 1997 primarily for the acquisition and development of producing
properties. Financing provided $33.3 million during 1997.
Operating activities for the year ended December 31, 1996, provided
$13.5 million of cash. Investing activities required $172.6 million primarily
for the acquisition of producing properties. Financing provided $163.0 million
during 1996.
31
The Company is heavily dependent on crude oil and natural gas prices
which have historically been volatile. Although the Company has hedged a portion
of its natural gas production and intends to continue this practice, future
crude oil and natural gas price declines would have a material adverse effect on
the Company's overall results, and therefore, its liquidity. Furthermore, low
crude oil and natural gas prices could affect the Company's ability to raise
capital on terms favorable to the Company.
Hedging Activities. In August 1995, the Company entered into a rate swap
agreement with a previous lender relating to $25.0 million of principal amount
of outstanding indebtedness. This agreement was assumed by the Company's lenders
under the Credit Facility. Under the agreement, the Company paid a fixed rate of
6.15% while the Banks paid a floating rate equal to the USD-LIBOR-BBA rate for
one-month maturities, quoted on the eighteenth day of each month, to the
Company. Settlements were due monthly. The agreement terminated in August 1998.
In November 1996, the Company assumed hedge agreements extending through
October 2001 with a counterparty involving various quantities and fixed prices.
These hedge agreements provided for the Company to 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 the Company to the extent the market prices
were less than such fixed prices. The Company accounted for the related gains or
losses (a loss of $952,000 in 1997 and a gain of $268,000 in 1998) in crude oil
and natural gas revenue in the period of the hedged production. The Company
terminated these hedge agreements in January 1999 and was paid $750,000 by the
counterparty for such termination.
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 is
below the floor price and will pay the counterparty when the average monthly
price exceeds the ceiling price. During 1998, the Company realized a gain of
$282,000 on this agreement, which is accounted for in crude oil and natural gas
revenue. The Company has also entered into a hedge agreement with Barrett
Resources Corporation covering 1,000 Bbls per day of crude oil calling for the
Company to be paid an average NYMEX price of $13.98 per Bbl over the period
April 1, 1999 to October 31, 1999.
As of March 1, 1999, the Company had 37.0 MMBTUpd hedged at an average
NYMEX price of approximately $1.93 per MMBTU from April 1, 1999 to October 31,
1999 and 2.4 MMBTUpd at an average NYMEX price of approximately $1.10 per MMBTU
from November 1, 1998 to October 31, 2000. Of the 37.0 MMBTUpd hedged at $1.93
per MMBTU, 20.0 MMBTUpd is hedged with Barrett Resources Corporation, 11.0
MMBTUpd is hedged with Engage Energy Capital Canada LP, and 6.0 MMBTUpd is
hedged with Amoco. The 2.4 MMBTUpd hedged at $1.10 per MMBTU is hedged with
Engage Energy Capital Canada LP and was assumed by the Company in connection
with the acquisition of New Cache.
Long-Term Indebtedness
Series D 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 the 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 the Series D Notes
in June 1998.
Interest on the Series D 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 Series D
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:
32
Year Percentage
2000........................................ 105.750%
2001........................................ 102.875%
2002 and thereafter......................... 100.000%
In addition, at any time on or prior to November 1, 1999, Abraxas and
Canadian Abraxas may, at their option, redeem up to 35% of the aggregate
principal amount of the Series D Notes originally issued with the net cash
proceeds of one or more equity offerings, at a redemption price equal to 111.5%
of the aggregate principal amount of the Series D Notes to be redeemed, plus
accrued and unpaid interest to the date of redemption; provided, however, that
after giving effect to any such redemption, at least 65% of the aggregate
principal amount of the Series D Notes remains outstanding.
The Series D 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 Series D
Notes rank senior in right of payment to all future subordinated indebtedness of
Abraxas and Canadian Abraxas. The Series D Notes will, however, be effectively
subordinated to the Notes to the extent of the value of the Collateral. The
Series D Notes are unconditionally guaranteed, jointly and severally, by the
Subsidiary Guarantors. The guarantees are general unsecured obligations of the
Subsidiary Guarantors and rank pari passu in right of payment to all
unsubordinated indebtedness of the Subsidiary Guarantors and senior in right of
payment to all subordinated indebtedness of the Subsidiary Guarantors. The
Guarantees are effectively subordinated to the Notes to the extent of the value
of the Collateral.
Upon a Change of Control (as defined in the Series D Indenture), each
holder of the Series D Notes will have the right to require Abraxas and Canadian
Abraxas to repurchase all or a portion of such holder's Series D 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 Series D Notes at 100% of
the principal amount thereof plus accrued and unpaid interest to the date of
repurchase in the event of certain asset sales.
The Series D Indenture provides, among other things, that the Company
may not, and may not cause or permit certain of its subsidiaries, including
Canadian Abraxas, to, directly or indirectly, create or otherwise cause to
permit to exist or become effective any encumbrance or restriction on the
ability of such subsidiary to pay dividends or make distributions on or in
respect of its capital stock, make loans or advances or pay debts owed to
Abraxas, guarantee any indebtedness of Abraxas or transfer any of its assets to
Abraxas except for such encumbrances or restrictions existing under or by reason
of: (i) applicable law; (ii) the Series D Indenture; (iii) the Credit Facility
(as defined in the Series D Indenture); (iv) customary non-assignment provisions
of any contract or any lease governing leasehold interest of such subsidiaries;
(v) any instrument governing indebtedness assumed by the Company in an
acquisition, which encumbrance or restriction is not applicable to such
subsidiaries or the properties or assets of such subsidiaries other than the
entity or the properties or assets of the entity so acquired; (vi) customary
restrictions with respect to subsidiaries of the Company pursuant to an
agreement that has been entered into for the sale or disposition of capital
stock or assets of such subsidiaries to be consummated in accordance with the
terms of the Series D Indenture solely in respect of the assets or capital stock
to be sold or disposed of; (vii) any instrument governing certain liens
permitted by the Indenture, to the extent and only to the extent such instrument
restricts the transfer or other disposition of assets subject to such lien; or
(viii) an agreement governing indebtedness incurred to refinance the
indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (ii), (iii) or (v) above; provided, however, that the provisions relating
to such encumbrance or restriction contained in any such refinancing
indebtedness are no less favorable to the holders of the Series D Notes in any
material respect as determined by the Board of Directors of the Company 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 (ii), (iii) or (v).
33
Secured Notes. In March 1999 the Company consummated the sale of $63.5
million of the Secured Notes. Interest on the Secured Notes is payable
semi-annually in cash in arrears on March 15 and September 15, commencing
September 15, 1999. The Secured 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
Notes at a redemption price equal to 112.875% of the aggregate principal amount
of the Notes to be redeemed, plus accrued and unpaid interest and liquidating
damages, if any.
The 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 Secured Notes are unconditionally
guaranteed (the "Guarantees") on a senior basis, jointly and severally, by
Canadian Abraxas, New Cache and Sandia Oil & Gas Corporation ("Sandia"), a
wholly-owned subsidiary of Abraxas (collectively, the "Guarantors"). 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, each holder of the Secured Notes will have the right
to require Abraxas to repurchase such holder's Secured Notes at a redemption
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase. In addition, the Issuers will be obligated
to offer to repurchase the Secured 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 Secured Notes Indenture contains certain covenants that limit the ability of
Abraxas and certain of its subsidiaries, including the Guarantors (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 the Company.
The Secured Notes Indenture provides, among other things, that the
Company 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: (i) applicable law; (ii) the Indentures; (iii) customary
non-assignment provisions of any contract or any lease governing leasehold
interest of such subsidiaries; (iv) any instrument governing indebtedness
assumed by the Company 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; (v) agreements existing on the Issue Date (as defined in the Secured
Notes Indenture) to the extent and in the manner such agreements were in effect
on the Issue Date; (vi) customary restrictions with respect to subsidiary of the
Company pursuant to an agreement that has been entered into for the sale or
disposition of capital stock or assets of such Restricted Subsidiary to be
consummated in accordance with the terms of the Secured Notes Indenture or any
Security Documents (as defined in the Secured Notes Indenture) solely in respect
of the assets or capital stock to be sold or disposed of; (vii) any instrument
governing certain liens permitted by the Secured 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 (viii) an agreement governing
34
indebtedness incurred to refinance the indebtedness issued, assumed or incurred
pursuant to an agreement referred to in clause (ii), (iv) or (v) above;
provided, however, that the provisions relating to such encumbrance or
restriction contained in any such refinancing indebtedness are no less favorable
to the holders of the Secured Notes in any material respect as determined by the
Board of Directors of the Company 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 (ii), (iv) or (v).
Net Operating Loss Carryforwards. At December 31, 1998, the Company had,
subject to the limitations discussed below, $46.6 million of net operating loss
carryforwards for U.S. tax purposes, of which approximately $43.8 million are
available for utilization without limitation. These loss carryforwards will
expire from 2002 through 2010 if not utilized. At December 31, 1998, the Company
had approximately $11.9 million of net operating loss carryforwards for Canadian
tax purposes which expire in varying amounts in 2002-2005. 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 $4.9 million in net
operating loss carryforwards generated prior to December 31, 1991 will be
limited to approximately $235,000 per year. As a result of the issuance of
additional shares of common stock for acquisitions and sales of stock, an
additional ownership change under Section 382 occurred in October 1993.
Accordingly, it is expected that the use of all U.S. net operating loss
carryforwards generated through October 1993, or $8.9 million, will be limited
to approximately $1 million per year subject to the lower limitations described
above. Of the $8.9 million net operating loss carryforwards, it is anticipated
that the maximum net operating loss that may be utilized before it expires is
$6.1 million. Future changes in ownership may further limit the use of the
Company's carryforwards. In addition to the Section 382 limitations,
uncertainties exist as to the future utilization of the operating loss
carryforwards under the criteria set forth under FASB Statement No. 109.
Therefore, the Company has established a valuation allowance of $5.9 million and
$32.8 million for deferred tax assets at December 31, 1997 and 1998,
respectively.
Year 2000
The Company has been and is assessing the impact of the Year 2000 issue
on its operations, including the development and implementation of project plans
and cost estimates required to make its information system infrastructure Year
2000 compliant. Substantially all of the Company's computer software has been
obtained from third party vendors. The Company has been advised by vendors of
each of its most material hardware and software systems that such systems are
Year 2000 compliant. The Company has not undertaken independent testing to
verify the accuracy of such assertions.
To date, the Company has spent approximately $100,000 in replacing
computer hardware and software it did not believe to be Year 2000 compliant,
some of which the Company had already anticipated replacing for other reasons.
Such expenditures have been funded out of the Companys' operational cash flows.
Based on existing information, the Company does not anticipate having to spend
any material further amounts to become Year 2000 compliant and that any such
required amounts will not have a material effect on the financial position, cash
flows or results of operations of the Company.
There is a risk of Year 2000 related failures. These failures could
result in an interruption in or a failure of certain business activities or
functions. Such failures could materially and adversely affect the Company's
results of operations, liquidity or financial condition. Due to the uncertainty
surrounding the Year 2000 problem, including the uncertainty of the Year 2000
readiness of the Company's customers and contractors, the Company is unable at
this time to determine the true impact of the Year 2000 problem to the Company.
The principal areas of risk are thought to be oil and gas production control
systems, other imbedded operations control systems and third party Year 2000
readiness. There can be no assurance, however, that there will not be delay in,
or increased costs associated with the implementation of measures to address the
Year 2000 issue or that such measures will prove effective in resolving all Year
2000 related issues. Furthermore, there can be no assurance that critical
contractors, customers or other parties with which the Company does business
will not experience failures. A likely worst case scenario is that despite the
Company's efforts there could be failures of control systems, which might cause
some processes to be shut down. Such failures could have a material adverse
impact on the Company's operations. Their failure due to a Year 2000 problem
could prevent the Company from delivering product and cause a material impact to
Company cash flow.
35
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Commodity Price Risk
The Company's exposure to market risks rest primarily with the volatile
nature of crude oil, natural gas and natural gas liquids prices. The Company
manages crude oil and natural gas prices through the periodic use of commodity
price hedging agreements. See and "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources".
Assuming 1998 production levels, a 5% further decline in crude oil, natural gas
and natural gas liquid prices would have reduced the Company's operating revenue
cash flow and net income by approximately $2.5 million for the year ended
December 31, 1998.
Interest Rate Risk
At December 31, 1998, approximately 8% of the Company's long-term debt
bears interest at variable rates. See "MD&A-Liquidity and Capital Resources".
Accordingly, the Company's earnings and after tax cash flow are affected by
changes in interest rates. Assuming the current level of borrowings at variable
interest rates and assuming a two percentage point change in the 1998 average
interest rate under these borrowings, it is estimated that the Company's
interest expense would have changed by approximately $560,000. The borrowings by
the Company subject to variable interest rates are not material to the Company's
total debt. All borrowings subject to variable interest rates were paid in full
by fixed rate debt in March 1999. At December 31, 1998, $274 million of the
Company's debt was at a fixed rate with a market value of $212,350 million. The
assumed 2% change in the interest rate would not have a material impact on this
market value.
Foreign Currency
The Company's Canadian operations are measured in the local currency of
Canada. As a result , the Company's 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 loss of $9.6 million for
the year ended December 31, 1998. It is estimated that a 5% change in the value
of the U.S. dollar to the Canadian dollar would have changed the Company's net
income by approximately $.27 million. The Company does 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.
36
Item 8. Financial Statements.
For the financial statements and supplementary data required by this
Item 8, see the Index to Consolidated Financial Statements and Schedules.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
There is incorporated in this Item 10 by reference that portion of the
Company's definitive proxy statement for the 1999 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 the
Company's definitive proxy statement for the 1999 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 the
Company's definitive proxy statement for the 1999 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 the
Company's definitive proxy statement for the 1999 Annual Meeting of Stockholders
which appears therein under the caption "Certain Transactions."
37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)1. Consolidated Financial Statements Page
Report of Ernst & Young, LLP, Independent Auditors.................F-2
Consolidated Balance Sheets,
December 31, 1998 and 1997.......................................F-3
Consolidated Statements of Operations,
Years Ended December 31, 1998, 1997, and 1996....................F-5
Consolidated Statements of Stockholders' Equity (deficit)
Years ended December 31, 1998, 1997 and 1996....................F-7
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996.....................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 1998
Form 8-K dated November 30, 1998 and amended on January 27, 1999 Item 2.
Acquisition or Disposition of Assets - Divestiture of Wyoming Properties.
Item 7. Financial Statements and Exhibits - Pro Forma financial
statements.
(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 the Company's
Registration Statement on Form S-4, No. 33-36565 (the "S-4 Registration
Statement")).
3.2 Articles of Amendment to the Articles of Incorporation of Abraxas dated
October 22, 1990 (Filed as Exhibit 3.3 to the S-4 Registration Statement).
3.3 Articles of Amendment to the Articles of Incorporation of Abraxas dated
December 18, 1990. (Filed as Exhibit 3.4 to the S-4 Registration Statement).
3.4 Articles of Amendment to the Articles of Incorporation of Abraxas dated June
8, 1995. (Filed as Exhibit 3.4 to the Company's Registration Statement on Form
S-3, No. 333-398 (the "S-3 Registration Statement")).
3.5 Amended and Restated Bylaws of Abraxas. (Filed as Exhibit 3.5 to the S-3
Registration Statement).
38
4.1 Specimen Common Stock Certificate of Abraxas. (Filed as Exhibit 4.1 to the
S-4 Registration Statement).
4.2 Specimen Preferred Stock Certificate of Abraxas. (Filed as Exhibit 4.2 to
the Company's Annual Report on Form 10-K filed on March 31, 1995).
4.3 Rights Agreement dated as of December 6, 1994 between Abraxas and First
Union National Bank of North Carolina ("FUNB"). (Filed as Exhibit 4.1 to the
Company's Registration Statement on Form 8-A filed on December 6, 1994).
4.4 Amendment to Rights Agreement dated as of July 14, 1997 by and between
Abraxas and American Stock Transfer and Trust Company (Filed as Exhibit 1 to
Amendment No. 1 to the Company's Registration Statement on Form 8-A filed on
August 20, 1997).
4.5 Indenture dated January 27, 1998 by and among the Company, Canadian Abraxas
and IBJ Schroder Bank & Trust Company (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K dated February 5, 1998).
4.6 Indenture dated March 26, 1999 by and among the Company, Canadian Abraxas,
New Cache, Sandia and Norwest Bank Minnesota, National Association (Filed
herewith).
4.7 Form of Series D Note (Filed as Exhibit A to Exhibit 4.5).
4.8 Form of Secured Note (filed as Exhibit A to Exhibit 4.6).
*10.1 Abraxas Petroleum Corporation 1984 Non-Qualified Stock Option Plan, as
amended and restated. (Filed as Exhibit 10.7 to the Company's Annual Report on
Form 10-K filed April 14, 1993).
*10.2 Abraxas Petroleum Corporation 1984 Incentive Stock Option Plan, as amended
and restated. (Filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K
filed April 14, 1993).
*10.3 Abraxas Petroleum Corporation 1993 Key Contributor Stock Option Plan.
(Filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K filed April
14, 1993
*10.4 Abraxas Petroleum Corporation 401(k) Profit Sharing Plan. (Filed as
Exhibit 10.4 to the Exchange Offer Registration Statement).
*10.5 Abraxas Petroleum Corporation Director Stock Option Plan. (Filed as
Exhibit 10.5 to the Exchange Offer Registration Statement).
*10.6 Abraxas Petroleum Corporation Restricted Share Plan for Directors. (Filed
as Exhibit 10.20 to the Company's Annual Report on Form 10-K filed on April 12,
1994).
*10.7 Abraxas Petroleum Corporation 1994 Long Term Incentive Plan. (Filed as
Exhibit 10.21 to the Company's Annual Report on Form 10-K filed on April 12,
1994).
*10.8 Abraxas Petroleum Corporation Incentive Performance Bonus Plan. (Filed as
Exhibit 10.24 to the Company's Annual Report on Form 10-K filed on April 12,
1994).
10.9 Registration Rights and Stock Registration Agreement dated as of August 11,
1993 by and among Abraxas, EEP and Endowment Energy Partners II, Limited
Partnership ("EEP II"). (Filed as Exhibit 10.33 to the Company's Registration
Statement on Form S-1, Registration No. 33-66446 (the "S-1 Registration
Statement")).
39
10.10 First Amendment to Registration Rights and Stock Registration Agreement
dated June 30, 1994 by and among Abraxas, EEP and EEP II. (Filed as Exhibit 10.3
to the Registrant's Current Report on Form 8-K filed on July 14, 1994).
10.11 Second Amendment to Registration Rights and Stock Registration Agreement
dated September 2, 1994 by and among Abraxas, EEP and EEP II. (Filed as Exhibit
10.3 to the Company's Annual Report on Form 10-K filed March 31, 1995)
10.12 Third Amendment to Registration Rights and Stock Registration Agreement
dated November 17, 1995 by and among Abraxas, EEP and EEP II. (Filed as Exhibit
10.17 to the Company's Annual Report on Form 10-K filed March 31, 1995)
10.13 Common Stock Purchase Warrant dated as of December 18, 1991 between
Abraxas and EEP. (Filed as Exhibit 12.3 to the Company's Current Report on Form
8-K filed January 9, 1992).
10.14 Common Stock Purchase Warrant dated as of August 1, 1993 between Abraxas
and EEP. (Filed as Exhibit 10.35 to the S-1 Registration Statement).
10.15 Common Stock Purchase Warrant dated August 11, 1993 between Abraxas and
EEP II. (Filed as Exhibit 10.36 to the S-1 Registration Statement).
10.16 Common Stock Purchase Warrant dated August 11, 1993 between Abraxas and
Associated Energy Managers, Inc. (Filed as Exhibit 10.37 to the S-1 Registration
Statement).
10.17 Letter dated September 2, 1994 from Abraxas to EEP and EEP II. (Filed as
Exhibit 10.13 to the Company's Annual Report on Form 10-K filed March 31, 1995)
10.18 Warrant Agreement dated as of July 27, 1994 between Abraxas and FUNB.
(Filed as Exhibit 10.3 to the Company's Current Report on Form 8-K filed August
5, 1994).
10.19 Warrant Agreement dated as of December 16, 1994, between Abraxas and FUNB.
(Filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K filed March
31, 1995).
10.20 First Amendment to Warrant Agreement dated as of August 31, 1995 between
Abraxas and FUNB. (Filed as Exhibit 10.21 to the S-3 Registration Statement).
10.21 Form of Indemnity Agreement between Abraxas and each of its directors and
officers. (Filed as Exhibit 10.30 to the S-1 Registration Statement).
*10.22 Employment Agreement between Abraxas and Robert L. G. Watson. (Filed as
Exhibit 10.23 to the S-3 Registration Statement).
*10.23 Employment Agreement between Abraxas and Chris E. Williford. (Filed as
Exhibit 10.24 to the S-3 Registration Statement).
*10.24 Employment Agreement between Abraxas and Stephen T. Wendel. (Filed as
Exhibit 10.26 to the S-3 Registration Statement).
*10.25 Employment Agreement between Abraxas and Robert W. Carington, Jr. (Filed
herewith).
10.26 Registration Rights Agreement dated as of March 26, 1999 by and among
Abraxas, Canadian Abraxas, New Cache, Sandia and Jefferies & Company, Inc.
(Filed herewith).
10.27 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).
40
10.28 Agreement of Limited Partnership of Abraxas Wamsutter L.P. dated as of
November 12, 1998 by and between Wamsutter Holdings, Inc. and TIFD III-X Inc.
(Filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed
November 30,1998).
21.1 Subsidiaries of Abraxas. (Filed herewith).
23.1 Consent of Independent Auditors. (Filed herewith).
23.2 Consent of DeGolyer & MacNaughton. (Filed herewith).
23.3 Consent of McDaniel & Associates Consultants, Ltd. (Filed herewith).
27.1 Financial Data Schedule (Filed herewith).
* Management Compensatory Plan or Agreement.
41
INDEX TO FINANCIAL STATEMENTS
Page
Abraxas Petroleum Corporation and Subsidiaries
Report of Independent Auditors .............................................F-2
Consolidated Balance Sheets at December 31, 1997 and 1998 ..................F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 .........................................F-5
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996, 1997 and 1998 ......................F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 ..........................................F-8
Notes to Consolidated Financial Statements .................................F-10
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, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Abraxas
Petroleum Corporation and Subsidiaries at December 31, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Antonio, Texas
March 17, 1999
except for Note 2, as to which the date is
March 27, 1999
F-2
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
-------------------------------
1997 1998
--------------- ---------------
(In thousands)
Current assets:
Cash .......................................... $ 2,876 $ 61,390
Accounts receivable, less allowance for
doubtful accounts:
Joint owners .............................. 2,149 3,337
Oil and gas production sales .............. 11,194 6,098
Other ..................................... 1,259 1,070
--------------- ---------------
14,602 10,505
Equipment inventory ........................... 367 504
Other current assets .......................... 508 844
--------------- ---------------
Total current assets ........................ 18,353 73,243
Property and equipment........................... 385,442 374,316
Less accumulated depreciation, depletion, and
amortization .................................. 74,597 165,867
--------------- ---------------
Net property and equipment based on the full cost
method of accounting for oil and gas properties
of which $11,519 and $10,675 at
December 31, 1997 and 1998, respectively,
were excluded from amortization ............. 310,845 208,449
Deferred financing fees, net of accumulated
amortization of $1,540 and $2,911 at
December 31, 1997 and 1998,
respectively .................................. 8,072 8,059
Other assets .................................... 1,258 1,747
--------------- ---------------
Total assets .................................. $ 338,528 $ 291,498
=============== ===============
See accompanying notes.
F-3
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 31
-------------------------------
1997 1998
--------------- ---------------
(In thousands)
Current liabilities:
Accounts payable ................................ $ 17,120 $ 10,499
Oil and gas production payable .................. 2,819 5,846
Accrued interest ................................ 4,622 5,522
Income taxes payable ............................ 164 160
Other accrued expenses .......................... 2,732 527
--------------- --------------
Total current liabilities ..................... 27,457 22,554
Long-term debt:
Credit facility ................................. 31,500 15,700
Senior notes .................................... 215,000 277,471
Other............................................ 2,117 6,527
--------------- ---------------
248,617 299,698
Deferred income taxes ............................. 27,751 19,820
Minority interest in foreign subsidiary ........... 4,813 9,672
Future site restoration .......................... 3,077 3,276
Commitments and contingencies
Stockholders' equity (Deficit):
Convertible preferred stock, 8%, authorized
1,000,000 shares; -0- shares issued and
outstanding.................................... - -
Common stock, par value $.01 per share -
authorized 50,000,000 shares; issued
6,422,540 and 6,501,441 shares at
December 31, 1997 and 1998, respectively .... 63 65
Additional paid-in capital ...................... 51,118 51,695
Accumulated deficit ............................. (19,185) (103,145)
Treasury stock, at cost, 53,023 and 171,015 shares
at December 31, 1997 and 1998, respectively ... (281) (1,167)
Accumulated other comprehensive income (loss).... (4,902) (10,970)
-------------- ---------------
Total stockholders' equity (deficit) 26,813 (63,522)
--------------- ---------------
Total liabilities and stockholders' equity
(deficit).................................... $ 338,528 $ 291,498
=============== ===============
See accompanying notes.
F-4
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
-------------------------------------------
1996 1997 1998
-------------------------------------------
(In thousands except per share data)
Reveune:
Oil and gas production revenues ............... $ 25,749 $ 65,826 $ 54,263
Gas processing revenues ....................... 600 3,568 3,159
Rig revenues .................................. 139 334 469
Other ........................................ 165 1,203 2,193
------------- ------------ -------------
26,653 70,931 60,084
Operating costs and expenses:
Lease operating and production taxes .......... 5,858 14,881 16,841
Gas processing costs .......................... 262 1,252 1,250
Depreciation, depletion, and amortization ..... 9,605 30,581 31,226
Rig operations ................................ 169 296 521
Proved property impairment .................... - 4,600 61,224
General and administrative .................... 1,933 4,171 5,522
------------ ------------- ------------
17,827 55,781 116,584
------------ ------------- ------------
Operating income (loss).......................... 8,826 15,150 (56,500)
Other (income) expense:
Interest income ............................... (254) (320) (805)
Amortization of deferred financing fee ........ 280 1,260 1,571
Interest expense .............................. 6,241 24,620 30,848
Other ......................................... 373 (369) --
------------ ------------- ------------
6,640 25,191 31,614
------------ ------------- ------------
Income (loss) before taxes and extraordinary item 2,186 (10,041) (88,114)
Income tax expense (benefit):
Current ....................................... 176 244 231
Deferred ...................................... - (4,135) (4,389)
Minority interest in income of consolidated
foreign subsidiary ............................ 70 335 4
------------ ------------- ------------
Income (loss) before extraordinary item ......... 1,940 (6,485) (83,960)
Extraordinary item:
Debt extinguishment costs ................... $ (427) $ - $ -
------------ ------------- ------------
Net income (loss) ............................. 1,513 (6,485) (83,960)
Less dividend requirement on cumulative
preferred stock ............................. (366) (183) --
------------ ------------- ------------
Net income (loss) applicable to common stock .. $ 1,147 $ (6,668) $ (83,960)
------------ ------------- ------------
Earnings (loss) per common share:
Income (loss) before extraordinary item ... $ .27 $ (1.11) $ (13.26)
Extraordinary item ........................ (.07) - -
------------ ------------ ------------
Net income (loss) per common share ............ $ .20 $ (1.11) $ (13.26)
============ ============ ============
Earnings (loss) per common share - assuming dilution:
Income (loss) before extraordinary item ... $ .23 $ (1.11) $ (13.26)
Extraordinary item ........................ (.06) - -
------------ ------------ ------------
Net income (loss) per common share - assuming
dilution $ .17 $ (1.11) $ (13.26)
============ ============ ============
See accompanying notes
F-5
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands except share amounts)
Accumulated
Convertible Other
Preferred Stock Common Stock Treasury Stock Additional Comprehensive
--------------------------------------------------------- Paid-In Accumulated Income
Shares Amount Shares Amount Shares Amount Caprtal Deficit (Loss) Total
-------------------------------------------------------------------- ------------------------------------
Balance at December 31, 45,741 $ - 5,799,762 $ 58 2,571 $ (1) $ 50,914 $ (13,664) $ (244) $ 37,063
1995 .................
Comprehensive income
(loss):
Net income ......... - - - - - - - 1,513 - 1,513
Other comprehensive
income:
Change in
unrealized
holding loss on - - - - - - - - 244 244
securities .....
Foreign currency
translation - - - - - - - - (2,406) (2,406)
adjustment .....
----------------------------------------------------------------------------------------------------------
Comprehensive income - - - - - - - 1,513 (2,162) (649)
(loss)
Issuance of common
stock for - - 5,050 (2,500) 1 41 - - 42
compensation ....... - - -
Expenses paid related
to private - - - - - - (42) - - (42)
placement offering .
Options exercised .... - - 2,000 - - - 13 - - 13
Treasury stock - - - - 74,640 (405) - - - (405)
purchased ..........
Dividend on preferred - - - - - - - (366) - (366)
stock ..............
----------------------------------------------------------------------------------------------------------
Balance at December 31,
1996 ................. 45,471 - 5,806,812 58 74,711 (405) 50,926 (12,517) (2,406) 35,656
Comprehensive income
(loss):
Net loss ........... - - - - - - - (6,485) - (6,485)
Other comprehensive
income:
Foreign currency
translation - - - - - - - - (2,496) (2,496)
adjustment .....
----------------------------------------------------------------------------------------------------------
Comprehensive income - - - - - - - (6,485) (2,496) (8,981)
(loss)
Issuance of common
stock for - - 7,735 - (21,688) 124 186 - - 310
compensation .......
Conversion of
preferred stock (45,741) - 508,183 5 - - (5) - - -
into common stock ..
Options exercised .... - - 2,000 - - - 11 - - 11
Dividend on preferred - - - - - - - (183) - (183)
stock ..............
Warrants exercised ... - - 97,810 - - - - - - -
----------------------------------------------------------------------------------------------------------
Balance at December 31,
1997 ................. - $ _ 6,422,540 $ 63 53,023 $ (281) $ 51,118 $(19,185) $ (4,902) $ 26,813
F-6
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (continued)
(In thousands except share amounts)
Accumulated
Convertible Other
Preferred Stock Common Stock Treasury Stock Additional Comprehensive
--------------------------------------------------------- Paid-In Accumulated Income
Shares Amount Shares Amount Shares Amount Caprtal Deficit (Loss) Total
-------------------------------------------------------------------- ------------------------------------
Balance at December 31,
1997 ................. - $ _ 6,422,540 $ 63 53,023 $ (281) $ 51,118 $ (19,185) $ (4,902) $ 26,813
Comprehensive income
(loss):
Net loss ........... - - - - - - - (83,960) - (83,960)
Other comprehensive
income:
Foreign currency
translation (6,067) (6,067)
adjustment ..... - - - - - - - - -
---------
Comprehensive income
(loss): (90,027)
Issuance of common
stock for
compensation ....... - - 4,838 - (18,263) 94 114 - - 207
Purchase of treasury
stock .............. - - - - 136,255 (980) - - - (980)
Options exercised .... - - 3,000 - - - 16 - - 16
Issuance of common
stock for
acquisition of oil
and gas properties . - - 71,063 2 - - 447 - - 449
==========================================================================================================
Balance at December 31,
1998 ................. - $ - 6,501,441 65 171,015 $ (1,167) $ 51,695 $(103,145) $(10,970) $ (63,522)
==========================================================================================================
See accompanying notes.
F-7
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
----------------------------------------------------------
1996 1997 1998
------------------ ------------------ -------------------
(In thousands)
Operating Activities
Net income (loss) ........................ $ 1,513 $ (6,485) $ (83,960)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Minority interest in income of
foreign subsidiary ................ 70 335 4
Depreciation, depletion, and
amortization ...................... 9,605 30,581 31,226
Proved property impairment .......... - 4,600 61,224
Deferred income tax benefit.......... - (4,135) (4,389)
Amortization of deferred financing
fees............................... 280 1,260 1,571
Issuance of common stock for
compensation ...................... 42 310 207
Loss on marketable securities ....... 235 - -
Net loss from debt restructurings ... 427 - -
Changes in operating assets and
liabilities:
Accounts receivable ............. (6,013) (444) 4,739
Equipment inventory ............. (82) 76 (137)
Other assets .................... (133) (325) (468)
Accounts payable and accrued
expenses ...................... 7,009 10,402 (5,770)
Oil and gas production payable .. 591 466 598
------------------ ------------------ -------------------
Net cash provided by operating activities 13,544 36,641 4,845
Investing Activities
Capital expenditures, including purchases
and development of properties ......... (87,793) (84,111) (57,412)
Payment for purchase of CGGS,
net of cash acquired .................. (85,362) - -
Proceeds from sale of oil and gas
properties and equipment inventory .... 242 9,606 59,389
Proceeds from sale of marketable
securities ............................ 335 - -
------------------ ------------------ -------------------
Net cash (used) provided by investing
activities ............................ (172,578) (74,505) 1,977
F-8
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year Ended December 31
----------------------------------------------------------
1996 1997 1998
------------------ ------------------ ------------------
(In thousands)
Financing Activities
Preferred stock dividends .................. $ (366) $ (183) $ -
Issuance of common stock, net of expenses (29) 11 3,926
Purchase of treasury stock, net ............ (405) - (979)
Proceeds from long-term borrowings ......... 305,400 33,620 83,691
Payments on long-term borrowings ........... (131,969) - (32,433)
Deferred financing fees .................... (9,688) (123) (1,688)
Other ...................................... 87 - -
------------------ ------------------ -------------------
Net cash provided by financing activities .. 163,030 33,325 52,517
------------------ ------------------ -------------------
Increase (decrease) in cash ................ 3,996 (4,539) 59,339
------------------ ------------------ -------------------
Effect of exchange rate changes on cash .... - (1,005) (825)
------------------ ------------------ -------------------
Increase (decrease) in cash ................ 3,996 (5,544) 58,514
Cash at beginning of year .................. 4,384 8,380 2,876
------------------ ------------------ -------------------
Cash at end of year......................... $ 8,380 $ 2,836 $ 61,390
================== ================== ===================
Supplemental Disclosures
Supplemental disclosures of cash flow
information:
Interest paid ......................... $ 3,863 $ 24,170 $ 30,362
================== ================== ===================
Supplemental schedule of noncash investing and financing activities:
During 1996, the Company purchased all of the capital stock of CGGS
Canadian Gas Gathering Systems, Inc. for $85,362,000, net of cash
acquired. In conjunction with the acquisition, liabilities assumed were
as follows (in thousands):
Fair value of assets acquired ............................................... $ 123,970
Cash paid for the capital stock ............................................. (85,362)
-------------------
Liabilities assumed ......................................................... $ 38,608
===================
See accompanying notes.
F-9
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997, and 1998
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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Management
believes that it is reasonably possible that estimates of proved crude oil and
natural gas revenues could significantly change in the future.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to credit
risk consist principally of trade receivables, interest rate and crude oil and
natural gas price swap agreements. Accounts receivable are generally from
companies with significant oil and gas marketing activities. The Company
performs ongoing credit evaluations and, generally, requires no collateral from
its customers.
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 costs associated with acquisition
of properties and successful as well as unsuccessful exploration and development
activities are capitalized. The Company does not capitalize internal costs.
Depreciation, depletion, and amortization (DD&A) of capitalized crude oil and
natural gas properties and estimated future development costs, excluding
unevaluated, unproved properties, are based on the unit-of-production method
based on proved reserves. Net capitalized costs of crude oil and natural gas
properties, less related deferred taxes, are limited, by country, to the lower
of unamortized cost or the cost ceiling, defined as the sum of the present value
of estimated future net revenues from proved reserves based on unescalated
discounted at 10 percent, plus the cost of properties not being amortized, if
any, plus the lower of cost or estimated fair value of unproved properties
included in the costs being amortized, if any, less related income taxes. Excess
costs are charged to proved property impairment expense. No gain or loss is
recognized upon sale or disposition of crude oil and natural gas properties,
except in unusual circumstances.
F-10
Unevaluated properties not currently being amortized included in oil and
gas properties were approximately $11,519,000 and $10,675,000 at December 31,
1997 and 1998, respectively. The properties represented by these costs were
undergoing exploration activities or are properties on which the Company intends
to commence activities in the future. The Company believes that the unevaluated
properties at December 31, 1998 will be substantially evaluated in six to
thirty-six months and it will begin to amortize these costs at such time.
Other Property and Equipment
Other property and equipment are recorded on the basis of cost.
Depreciation of gas gathering and processing facilities and other property and
equipment is provided over the estimated useful lives using the straight-line
method. Major renewals and betterments are recorded as additions to the property
and equipment accounts. Repairs that do not improve or extend the useful lives
of assets are expensed.
Hedging
The Company periodically enters into contracts to hedge the risk of
future crude oil and natural gas price fluctuations. Such contracts may either
fix or support crude oil and natural gas prices or limit the impact of price
fluctuations with respect to the Company's sales of crude oil and natural gas.
Gains and losses on such hedging activities are recognized in oil and gas
production revenues when hedged production is sold.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("Statement 123") encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
Foreign Currency Translation
The functional currency for the Company's Canadian operations is the
Canadian dollar. The Company translates the functional currency into U.S.
dollars based on the current exchange rate at the end of the period for the
balance sheet and a weighted average rate for the period on the statement of
operations. Translation adjustments are reflected as Accumulated Other
Comprehensive Income (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.
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
F-11
remediation costs can be reasonably estimated. These amounts are the
undiscounted, future estimated costs under existing regulatory requirements and
using existing technology.
Revenue Recognition
The Company recognizes crude oil and natural gas revenue from its
interest in producing wells as crude oil and natural gas is sold from those
wells net of royalties. Revenue from the processing of natural gas is recognized
in the period the service is performed.
Deferred Financing Fees
Deferred financing fees are being amortized on a level yield basis over
the term of the related debt.
Federal Income Taxes
The Company records income taxes 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.
Reclassifications
Certain balances for 1996 and 1997 have been reclassified for
comparative purposes.
2. Liquidity
The Company's operating results have been adversely effected by the
decline in prices of crude oil and natural gas during 1998. In addition, the
Company has significant interest payments due on its Series D Notes in May and
November 1999. As a result of these conditions, the Company has issued $63.5
million of debt securities ("Senior Notes") in March, 1999. These securities
are secured by substantially all of the Company's crude oil and natural gas
properties and natural gas processing facilities and the shares of Grey Wolf
owned by the Company and bear interest at 12.875%, payable semi-annually on
March 15 and September 15, commencing September 15, 1999. The Senior Notes will
mature in 2003. Proceeds from the Senior Notes will be used to pay-off the
Company's existing Credit Facility, pay-off 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.
The Company has implemented a number of measures to conserve its cash
resources, including postponement of 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
Pacalta Properties Acquisition
In October 1997, Canadian Abraxas Petroleum Limited (Canadian Abraxas),
a wholly owned subsidiary of the Company, and Grey Wolf Exploration, Inc. (Grey
Wolf) completed the acquisition of the Canadian assets of Pacalta Resources Ltd.
(Pacalta Properties) for approximately $14,000,000 (CDN$20,000,000) and four
million Grey Wolf special warrants valued at approximately $1,375,000. Canadian
Abraxas acquired an approximate 92% interest in the Pacalta Properties, and Grey
Wolf acquired an approximate 8% interest. In July 1998 Grey Wolf acquired the
remaining interest in the Pacalta Properties from Canadian Abraxas.
F-12
The acquisition was accounted for as a purchase, and the purchase price
was allocated to the crude oil and natural gas properties based on the fair
values of the properties acquired. The transaction was financed through an
advance from the Company with funds which were obtained through borrowings under
the Company's Credit Facility. Results of operations from the Pacalta Properties
have been included in the consolidated financial statements since October 1997.
CGGS Acquisition
In November 1996, the Company, through its wholly owned subsidiary,
Canadian Abraxas purchased 100% of the outstanding capital stock of CGGS
Canadian Gas Gathering Systems Inc. (CGGS) for approximately $85,500,000, net of
the CGGS cash acquired and including transaction costs. CGGS owns producing oil
and gas properties in western Canada and adjacent gas gathering and processing
facilities as well as undeveloped leasehold properties. Immediately after the
purchase, CGGS was merged with and into Canadian Abraxas. The acquisition was
accounted for as a purchase and the purchase price was allocated to the assets
and liabilities based on estimated fair values. The transaction was financed by
a portion of the proceeds from the offering of $215,000,000 of Senior Notes.
Results of operations from Canadian Abraxas have been included in the
consolidated financial statements since November 1996.
Wyoming Properties Acquisition and Divestiture
In September 1996, the Company acquired interests in certain producing
crude oil and natural gas properties located in the Wamsutter area of
southwestern Wyoming (the Wyoming Properties) from Enserch Exploration, Inc. for
$47,500,000. The acquisition was accounted for as a purchase and the purchase
price was allocated to crude oil and natural gas properties based on the fair
values of the properties acquired. The transaction was financed through
borrowings under the Company's bridge facility referred to in Note 4. Results of
operations from the Wyoming Properties have been included in the consolidated
financial statements since September 1996.
In November 1998, the Company sold its interest in the 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. A subsidiary of the Company, Wamsutter Holdings, Inc. a
Wyoming corporation, (the "General Partner"), will initially own a one percent
interest and act as General Partner of the Partnership. After certain payback
requirements are satisfied, the Company's interest will increase to 35%
initially and could increase to as high as 65%. The Company will also receive a
management fee and reimbursement of certain overhead costs from the Partnership.
Portilla and Happy Fields Acquisition
In March 1996, the Company sold all of its interest in its Portilla and
Happy Fields to an unrelated purchaser (Purchaser or Limited Partner).
Simultaneously with this sale, the Limited Partner also acquired the 50%
overriding royalty interest in the Portilla Field owned by the Commingled
Pension Trust Fund Petroleum II, the trustee of which is Morgan Guaranty Trust
Company of New York (Pension Fund). In connection with the purchase of both the
Company's interest in the Portilla and Happy Fields and the Pension Fund's
interest in the Portilla Field (together, the Portilla and Happy Properties),
the Limited Partner obtained a loan (Bank Loan) secured by the Properties and
contributed the Properties to Portilla-1996, L.P., a Texas limited partnership
(Partnership). A subsidiary of the Company, Portilla-Happy Corporation
(Portilla-Happy), was the general partner of the Partnership. The aggregate
purchase price received by the Company was $17,600,000, of which $2,000,000 was
used to purchase a minority interest in the Partnership.
In November 1996, the Company closed an agreement with the Limited
Partner and certain noteholders (Noteholders) of the Partnership, pursuant to
which the Company obtained the Limited Partner's interest in the Partnership and
the Noteholders' notes in the aggregate principal amount of $5,920,000 (Notes),
resulting in the Company's owning, on a consolidated basis, all of the equity
interests in the Partnership. The aggregate consideration paid to the Limited
F-13
Partner and the Noteholders was $6,961,000. The Company also paid off the Bank
Loan which had an outstanding principal balance of approximately $20,051,000,
and assumed a crude oil and natural gas price swap agreement.
As a result of obtaining the Limited Partner's interest in the
Partnership, the Company reacquired those interests in the Portilla and Happy
Fields which it previously owned, as well as the interest in the Portilla Field
previously owned by the Pension Fund. The Company has included in its balance
sheet the amount previously removed from oil and gas properties in connection
with the sale of its interest in the Portilla and Happy Fields during the
quarter ended March 31, 1996, as well as the amount of the purchase price paid
for the Pension Fund's interest in the Portilla Field, and all development
drilling expenditures incurred on the properties, less the amount of DD&A
related to the properties from the formation of the Partnership through the
closing of the transaction. The purchase was financed by a portion of the
proceeds from the offering of the Senior Notes. The Company recorded its share
of the net loss of the Partnership from March 1996 to November 1996 of $513,000.
The Company also assumed and wrote off the remaining deferred financing fees and
organization costs of the Partnership. Gross revenues and expenses from both the
Company's original interest in the Portilla and Happy Fields as well as the
interest in the Portilla Field previously owned by the Pension Fund have been
included in the consolidated financial statements since November 1996.
Grey Wolf Acquisition
In January 1996, the Company made a $3,000,000 investment in Grey Wolf
Exploration Ltd. (Grey Wolf), a privately-held Canadian corporation, which, in
turn, invested these proceeds in newly-issued shares of Cascade, an Alberta,
Canada corporation whose common shares are traded on The Alberta Stock Exchange.
The acquisition was accounted for as a purchase and the purchase price was
allocated to the assets and liabilities based on the fair values. Results of
operations of Cascade have been included in the consolidated financial
statements since January 1996. During 1997, Cascade acquired 100% of the common
stock of Grey Wolf in exchange for the issuance of additional Cascade common
shares to the Grey Wolf shareholders and the cancellation of the common shares
of Cascade held by Grey Wolf. This transaction resulted in the share ownership
of Cascade previously held by Grey Wolf being passed to the Grey Wolf
shareholders, and Grey Wolf was merged into Cascade.
East White Point and Stedman Island Fields Acquisition
In November 1996, the Company obtained a release of the 50% overriding
royalty interest in the East White Point Field in San Patricia County, Texas and
the Stedman Island Field in Nueces County, Texas from the Pension Fund for
$9,271,000 before adjustment for accrual of net revenue to closing. The
acquisition was accounted for as a purchase and the purchase price was allocated
to crude oil and natural gas properties based on the fair values of the
properties acquired. The transaction was financed through proceeds of the sale
of the Senior Notes. Results of operatioins from these properties have been
included in the consolidated financial statements since November 1, 1996. The
Company recorded the net purchase price of approximately $9,271,000 to its oil
and gas properties.
4. Property and Equipment
The major components of property and equipment, at cost, are as follows:
Estimated
Useful Life 1997 1998
----------- ---------- ----------
Years (In thousands)
Land, buildings, and improvements ...... 15 $ 291 $ 309
Crude oil and natural gas properties ... - 344,199 335,207
Natural gas processing plants .......... 18 39,113 36,583
Equipment and other .................... 7 1,839 2,217
---------- -----------
$ 385,442 $ 374,316
========== ===========
F-14
5. Long-Term Debt
Long-term debt consists of the following:
December 31
1997 1998
------------- --------------
(In thousands)
11.5% Senior Notes due 2004, Series B (see below)... $ 215,000 $ 274,000
Unamortized premium on Senior Notes................. - 3,471
Credit facility due to Bankers Trust Company, ING
Capital and Union Bank of California (see below).. 31,500 15,700
Credit facility due to a Canadian bank,
providing for borrowings to approximately
$11,630,000 at the bank's prime rate plus
.125%, 6.20% at December 31, 1998................. 2,096 6,515
Other .............................................. 21 12
------------- --------------
248,617 299,698
Less current maturities ......................... - -
------------- --------------
$ 248,617 $ 299,698
============= ==============
On November 14, 1996, the Company and Canadian Abraxas completed the
sale of $215,000,000 aggregate principal amount of Senior Notes due November 1,
2004 (Notes). In January 1997, the Notes were exchanged for Series B Notes,
which have been registered under the Securities Act of 1933 (Series B Notes).
The form and terms of the Series B Notes are the same as the Notes issued on
November 14, 1996. Interest at 11.5% is payable semi-annually in arrears on May
1 and November 1 of each year, commencing on May 1, 1997. The Series B Notes are
general unsecured obligations of the Company and Canadian Abraxas and rank pari
passu in right of payment to all future subordinated indebtedness of the Company
and Canadian Abraxas. The Series B Notes are, however, effectively subordinated
in right of payment to all existing and future secured indebtedness to the
extent of the value of the assets securing such indebtedness. The Company and
Canadian Abraxas are joint and several obligors on the Series B Notes. The
Series B Notes are redeemable, in whole or in part, at the option of the Company
and Canadian Abraxas on or after November 1, 2000, at the redemption price of
105.75% through October 31, 2001, 102.87% through October 31, 2002 and 100.00%
thereafter plus accrued interest. In addition, any time on or prior to November
1, 1999, the Company and Canadian Abraxas may redeem up to 35% of the aggregate
principal amount of the Series B Notes originally issued with the cash proceeds
of one or more equity offerings at a redemption price of 111.5% of the aggregate
principal amount of the Series B Notes to be redeemed plus accrued interest,
provided, however, that after giving effect to such redemption, at least
$139,750,000 aggregate principal amount of Series B Notes remains outstanding.
The Series B Notes were issued under the terms of an Indenture dated November
14, 1996 that contains, among others, certain covenants which generally limit
the ability of the Company to incur additional indebtedness other than specific
indebtedness permitted under the Indenture, including the Credit Facility
discussed below, provided however, if no event of default is continuing, the
Company may incur indebtedness if after giving pro forma effect to the
incurrence of such debt both the Company's consolidated earnings before
interest, taxes, depletion and amortization (EBITDA) coverage ratio would be
greater than 2.25 to 1.0 if prior to November 1, 1997, and at least equal to 2.5
to 1.0 thereafter, and the Company's adjusted consolidated net tangible assets,
as defined, are greater than 150% of the aggregate consolidated indebtedness of
the Company or the Company's adjusted consolidated net tangible assets are
greater than 200% of the aggregate consolidated indebtedness of the Company. The
Indenture also contains other covenants affecting the Company's ability to pay
dividends on its common stock, sell assets and incur liens.
F-15
On September 30, 1996, the Company entered into a credit facility with
Bankers Trust Company (BTCo) and ING Capital (together the Lenders), providing a
bridge facility in the total amount of $90,000,000 and borrowed $85,000,000
which was used to repay all amounts due under its previous credit agreement and
to finance the purchase of the Wyoming Properties.
On November 14, 1996, the Company repaid all amounts outstanding under
the bridge facility with proceeds from the offering of $215,000,000 of Notes
described above and entered into an amended and restated credit agreement
(Credit Facility) with the Lenders and Union Bank of California. On October 14,
1997, the Company amended the Credit Facility to provide for a revolving line of
credit with an availability of $40,000,000, subject to a borrowing base
condition. At December 31, 1997 and 1998, $31,500,000 and $15,700,000 were
outstanding under the Credit Facility.
Commitments available under the Credit Facility are subject to borrowing
base redeterminations to be performed semi-annually and, at the option of each
of the Company and the Lenders, one additional time per year. Amounts due under
the Credit Facility will be secured by the Company's oil and gas properties and
plants. Any outstanding principal balance in excess of the borrowing base will
be due and payable in three equal monthly payments after a borrowing base
redetermination. The borrowing base will be determined in the agent's sole
discretion, subject to the approval of the Lenders, based on the value of the
Company's reserves as set forth in the reserve report of the Company's
independent petroleum engineers, with consideration given to other assets and
liabilities.
The Credit Facility has an initial revolving term of two years and a
reducing period of three years from the end of the initial two-year period. The
commitment under the Credit Facility will be reduced during such reducing period
by eleven equal quarterly reductions. Quarterly reductions will equal 8.2% per
quarter with the remainder due at the end of the three-year reducing period.
The applicable interest rate charged on the outstanding balance of the
Credit Facility is based on a facility usage grid. If the borrowings under the
Credit Facility represent an amount less than or equal to 33.3% of the available
borrowing base, then the applicable interest rate charged on the outstanding
balance will be either (a) an adjusted rate of the London Inter-Bank Offered
Rate ("LIBOR") plus 1.25% or (b) the prime rate of the agent (which is based on
the agent's published prime rate) plus 0.50%. If the borrowings under the Credit
Facility represent an amount greater than or equal to 33.3% but less than 66.7%
of the available borrowing base, then the applicable interest rate on the
outstanding principal will be either (a) LIBOR plus 1.75% or (b) the prime rate
of the agent plus 0.50%. If the borrowings under the Credit Facility represent
an amount greater than or equal to 66.7% of the available borrowing base, then
the applicable interest rate on the outstanding principal will be either (a)
LIBOR plus 2.00% or (b) the prime rate of the agent plus 0.50%. LIBOR elections
can be made for periods of one, three or six months. The interest rate at
December 31, 1998 was 6.57%.
The Credit Facility contains a number of covenants that, among other
things, restrict the ability of the Company to (i) incur certain indebtedness or
guarantee obligations, (ii) prepay other indebtedness including the Notes, (iii)
make investments, loans or advances, (iv) create certain liens, (v) make certain
payments, dividends and distributions, (vi) merge with or sell assets to another
person or liquidate, (vii) sell or discount receivables, (viii) engage in
certain intercompany transactions and transactions with affiliates, (ix) change
its business, (x) experience a change of control and (xi) make amendments to its
charter, by-laws and other debt instruments. In addition, under the Credit
Facility the Company is required to comply with specified financial ratios and
tests, including minimum debt service coverage ratios, maximum funded debt to
EBITDA tests, minimum net worth tests and minimum working capital tests. The
Company is obligated to pay the Lenders on a quarterly basis a commitment fee of
0.50% per annum on the average unused portion of the commitment in effect from
time to time. The Credit Facility contains customary events of default,
including nonpayment of principal, interest or fees, violation of covenants,
inaccuracy of representations or warranties in any material respect, cross
default and cross acceleration to certain other indebtedness, bankruptcy,
material judgments and liabilities and change of control. As of December 31,
1998, the Company was not in compliance with the EBITDA to interest expense
ratio requirement under the Credit Facility. This Credit Facility, however, was
fully redeemed with proceeds from the Company's issuance of the Senior Secured
Notes on March 26, 1999 as discussed in Note 2. Should crude oil prices continue
F-16
to decline, a further write-down of the Company's oil and gas properties may be
required (see Note 16).
In January 1998, the Company and Canadian Abraxas completed the sale of
$60,000,000 aggregate principal amount of 11.5% Senior Notes due 2004, Series C
(Series C Notes). The Series C Notes are general unsecured obligations of the
Company and Canadian Abraxas and rank pari passu in right to all existing and
future indebtedness of the Company and Canadian Abraxas and on parity with the
Series B Notes and senior in right of payment to all future subordinated
indebtedness of the Company and Canadian Abraxas. The Series C Senior Notes
carry similar redemption provisions to the Series B Notes and are subject to the
terms of the Indenture dated January 27, 1998 which is substantially similar to
the Indenture governing the Series B Notes. The Company and Canadian Abraxas
sold the Series C Notes at a premium of $4,050,000 which will be amortized over
the life of the Series C Notes resulting in an effective rate of interest of
10.5%. The net proceeds, after deducting estimated offering costs, were
$62,750,000, $33,400,000 of which was used to repay outstanding indebtedness
under the Credit Facility, except for $100,000 which remained outstanding with
the remainder used for general corporate purposes.
The Company's principal source of funds to meet debt service and capital
requirements is net cash flow provided by operating activities, which is
sensitive to the prices the Company receives for its crude oil and natural gas.
The Company periodically enters into hedge agreements to reduce its exposure to
price risk in the spot market for natural gas. However, a substantial portion of
the Company's production will remain subject to such price risk. Additionally,
significant capital expenditures are required for drilling and development, and
other equipment additions. The Company believes that cash provided by operating
activities and other financing sources, including, if necessary, the sale of
certain assets and additional long-term debt, will provide adequate liquidity
for the Company's operations, including its capital expenditure program, for the
next twelve months. No assurance, however, can be given that the Company's cash
flow from operating activities will be sufficient to meet planned capital
expenditures and debt service in the future. Should the Company be unable to
generate sufficient cash flow from operating activities to meet its obligations
and make planned capital expenditures, the Company could be forced to reduce
such expenditures, sell assets or be required to refinance all or a portion of
its existing debt or to obtain additional financing. There can be no assurance
that such refinancing would be possible or that any additional financing could
be obtained.
During 1996, 1997 and 1998, the Company capitalized $465,000, $966,000
and $414,000 of interest expense, respectively.
The fair value of the Notes was approximately $212,350,000 as of
December 31, 1998. The fair values of the credit facilities approximate their
carrying values as of December 31, 1998. The Company has approximately
$1,980,000 of standby letters of credit and a $30,000 performance bond open at
December 31, 1998. Approximately $30,000 of cash is restricted and in escrow
related to certain of the letters of credit and bond.
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 $20 one-half of one share of
common stock of the Company having a value of four times the purchase price. The
Company may redeem the Rights at any time for $.01 per Right prior to a
F-17
specified period of time after a tender or exchange offer. The Rights will
expire in November 2004, unless earlier exchanged or redeemed.
Treasury Stock
In March 1996, the Board of Directors authorized the purchase in the
open market of up to 500,000 shares of the Company's outstanding common stock,
the aggregate purchase price not to exceed $3,500,000. During the year ended
December 31, 1998 the Company purchased 136,255 shares of its common stock at a
cost of $980,000, which were recorded as treasury stock.
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 1,395,000
shares of the Company's common stock. All options granted have ten year terms
and vest and become fully exercisable over four years of continued service at
25% on each anniversary date. At December 31, 1998 approximately 279,000 options
remain available for grant.
Pro forma information regarding net income (loss) and earnings (loss)
per share is required by Statement 123, which also requires that the information
be determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996, 1997, and 1998, respectively: 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 .383, .529
and .667, respectively; and a weighted-average expected life of the option of
six 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 (in thousands except for earnings (loss) per share
information):
1996 1997 1998
-------------------------------
(In thousands)
Pro forma net income (loss) ................ $ 1,250 $(7,325) $(85,619)
Pro forma net income (loss) per common share $ .15 $ (1.25) $ (13.52)
Pro forma net income (loss) per common share
- assuming dilution ...................... $ .13 $ (1.25) $ (13.52)
F-18
A summary of the Company's stock option activity, and related
information for the years ended December 31, follows:
1996 1997 1998
-------------------------------------------------- ------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Options Exercise Price
(000s) (000s) Price(1) (000s)
-------- ----------------------------------------- -------- ---------------
Outstanding-beginning
of year ............ 219 $ 6.71 (1) 551 $ 6.63 834 $ 8.27
Granted .............. 358 6.58 285 11.26 792 7.37
Exercised ............ (2) 6.75 (2) 5.50 (3) 5.33
Forfeited ............ (24) 9.21 - - (51) 7.39
-------- --------- --------
Outstanding-end of
year ............... 551 $ 6.63 834 $ 8.27 1,572 $ 7.33
======== ========= ========
Exercisable at end of
year ............... 93 $ 6.65 222 $ 6.66 501 $ 6.71
======== ========= ========
Weighted-average fair
value of options
granted during the
year ............... $ 3.46 $ 8.00 $ 5.15
Exercise prices for options outstanding as of December 31, 1998 ranged
from $5.00 to $8.75 The weighted-average remaining contractual life of those
options is 8.9 years.
(1) In March 1996, the Company amended the exercise price to $6.75 per share on
all previously issued options with an exercise price greater than $6.75 per
share. 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.
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 1996, 1997, and
1998, the Company made direct awards of common stock of 1,000 shares, 14,748
shares and 18,263 shares, respectively, at weighted average fair values of
$5.00, $10.75 and $5.13 per share, respectively.
The Company also has adopted the Restricted Share Plan for Directors
which provides for awards of common stock to nonemployee directors of the
Company who did not, within the year immediately preceding the determination of
the director's eligibility, receive any award under any other plan of the
Company. In 1996, 1997, and 1998, the Company made direct awards of common stock
of 4,050 shares, 7,235 shares and 4,838 shares, respectively, at weighted
average fair values of $6.25, $9.87 and $14.75 per share, respectively.
During 1996, the Company's stockholders approved the Abraxas Petroleum
Corporation Director Stock Option Plan (Plan), which authorizes the grant of
nonstatutory options to acquire an aggregate of 104,000 common shares to those
persons who are directors and not officers of the Company. During 1996, each of
the seven eligible directors was granted an option to purchase 8,000 common
shares at $6.75. These options are included in the above table. No options were
granted during 1997, 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.
F-19
Stock Warrants
In connection with an amendment to one of the Company's previous credit
agreements, the Company granted stock warrants to the lender covering 424,000
shares of its common stock at an average price of $9.79 a share. The warrants
are exercisable in whole or in part through December 1999 and are
nontransferable without the consent of the Company. During 1997, the lender
exercised 212,000 of its warrants on a cashless basis and was issued 97,810
shares of the Company's common stock.
Additionally, warrants to purchase 13,500 shares of the Company's common
stock at $7.00 per share remain outstanding from previous grants.
At December 31, 1998, the Company has approximately 5,036,000 shares
reserved for future issuance for conversion of its stock options, warrants,
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
-----------------------
1997 1998
----------- -----------
(In thousands)
Deferred tax liabilities:
U.S. full cost pool .......................... $ 3,444 $ --
Canadian full cost pool ...................... 27,684 19,753
State taxes .................................. 67 67
Other ........................................ 103 14
----------- -----------
Total deferred tax liabilities ................. 31,298 19,834
Deferred tax assets:
U.S. full cost pool .......................... -- 15,803
Depletion .................................... 930 1,075
Net operating losses ......................... 8,520 15,841
Other ........................................ 12 117
----------- -----------
Total deferred tax assets ...................... 9,462 32,836
Valuation allowance for deferred tax assets .... (5,915) (32,822)
----------- -----------
Net deferred tax assets ........................ 3,547 14
----------- -----------
Net deferred tax liabilities ................... $ 27,751 $ 19,820
=========== ===========
Significant components of the provision (benefit) for income taxes are
as follows:
1997 1998
----------- -----------
Current:
Federal ...................................... $ - $ -
State ........................................ - -
Foreign ...................................... 244 231
----------- -----------
$ 244 $ 231
=========== ===========
Deferred:
Federal ...................................... $ - $ -
State ........................................ - -
Foreign ...................................... (4,135) (4,389)
----------- -----------
$(4,135) $(4,389)
=========== ===========
F-20
At December 31, 1998, the Company had, subject to the limitations
discussed below, $46,591,000 of net operating loss carryforwards for U.S. tax
purposes, of which it is estimated a maximum of $43,836,000 may be utilized
before it expires. These loss carryforwards will expire from 2002 through 2018
if not utilized. At December 31, 1998, the Company had approximately $11,900,000
of net operating loss carryforwards for Canadian tax purposes of which $200,000
will expire in 2002, $4,970,000 will expire in 2003, $3,200,000 will expire in
2004 and $3,530,000 will expire in 2005.
As a result of the acquisition of certain partnership interests and
crude oil and natural gas properties in 1990 and 1991, an ownership change under
Section 382 of the Internal Revenue Code of 1986, as amended (Section 382),
occurred in December 1991. Accordingly, it is expected that the use of the U.S.
net operating loss carryforwards generated prior to December 31, 1991 of
$4,909,000 will be limited to approximately $235,000 per year.
During 1992, the Company acquired 100% of the common stock of an
unrelated corporation. The use of net operating loss carryforwards of $837,000
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 $8,875,000 will be limited to approximately $1,034,000 per year, subject to
the lower limitations described above. Of the $8,875,000 net operating loss
carryforwards existing at October 1993, it is anticipated that the maximum net
operating loss that may be utilized before it expires is $6,120,000. Future
changes in ownership may further limit the use of the Company's carryforwards.
In addition to the Section 382 limitations, uncertainties exist as to
the future utilization of the operating loss carryforwards under the criteria
set forth under FASB Statement No. 109. Therefore, the Company has established a
valuation allowance of $5,915,000 and $32,822,000 for deferred tax assets at
December 31, 1997 and 1998, 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
---------------------------------------
1996 1997 1998
----------- ------------ --------------
(In thousands)
Tax (expense) benefit at
U.S. statutory rates (34%).. $ (743) $ 3,414 $ 29,958
(Increase) decrease in
deferred tax asset
valuation allowance ........ (1) (259) (26,907)
Higher effective rate of
foreign operations ......... (49) (244) (231)
Percentage depletion ......... 189 499 146
Other ........................ 428 481 1,192
----------- ------------ --------------
$ (176) $ 3,891 $ 4,158
=========== ============ ==============
F-21
9. Related Party Transactions
Accounts receivable from affiliates, officers, and stockholders
represent amounts receivable relating to joint interest billings on properties
which the Company operates and advances made to officers.
In January 1996, Grey Wolf purchased newly issued shares of Cascade
representing 66 2/3% of Cascade's capital stock. As described in Note 3, in 1997
Grey Wolf merged with Cascade and the name was changed to Grey Wolf Exploration,
Inc. ("Grey Wolf"). At December 31, 1998, the Company owns approximately 48% of
Grey Wolf. The Company's President as well as certain directors directly own
approximately 5% of Grey Wolf. Additionally the Company's President owns options
to purchase up to 800,000 shares of Grey Wolf capital stock at an exercise price
of CDN$.20 per share, and certain of the Company's directors own options to
purchase in the aggregate up to 1,000,000 shares of Grey Wolf capital stock at
an exercise price of CDN$.20 per share. Grey Wolf currently has approximately
127,000,000 shares of capital stock outstanding.
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 from CGGS and a 100% interest in the Pacalta Properties
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.
10. Commitments and Contingencies
Operating Leases
During the years ended December 31, 1996, 1997, and 1998, the Company
incurred rent expense of approximately $179,000, $228,000 and $292,000,
respectively. Future minimum rental payments are as follows at December 31,
1998:
1999 ................................................. $ 299,000
2000 ................................................. 313,000
2001 ................................................. 354,000
2002 ................................................. 247,000
2003 ................................................. 228,000
Thereafter ........................................... 626,000
Contingencies
In May 1995, certain plaintiffs filed a lawsuit against the Company
alleging negligence and gross negligence, tortious interference with contract,
conversion and waste. In March 1998, a jury found against the Company, on May
22, 1998 final judgement in the amount of approximately $1.3 million was
entered. The Company has filed an appeal. As of March 4, 1999, no ruling has
been made on the appeal. Management believes, based on the advice of legal
counsel, that the plaintiffs' claims are without merit and that damages should
not be recoverable under this action; however, the ultimate effect on the
Company's financial position and results of operations cannot be determined at
this time. The Company has not established a reserve for this matter at December
31, 1998.
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, 1998, the Company was not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on the Company.
F-22
11. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
1996 1997 1998
------------ ------------ ------------
Numerator:
Net income (loss) ............................. $ 1,513,000 $ (6,485,000) $(83,960,000)
Preferred stock dividends ..................... 366,000 183,000 --
------------ ------------ ------------
Numerator for basic earnings per share -
income (loss) available to common ........... 1,147,000 (6,668,000) (83,960,000)
stockholders
Effect of dilutive securities:
Preferred stock dividends ................... -- -- --
------------ ------------ ------------
Numerator for diluted earnings per share -
income available to common stockholders
after assumed conversions ................... 1,147,000 (6,668,000) (83,960,000)
Denominator:
Denominator for basic earnings per share -
weighted-average shares ..................... 5,757,105 6,025,294 6,331,292
Effect of dilutive securities:
Stock options and warrants .................. 24,277 -- --
Convertible preferred stock ................. -- -- --
Assumed issuance under the CVR Agreement .... 1,013,060 -- --
------------ ------------ ------------
1,037,337 -- --
------------ ------------ ------------
Dilutive potential common shares
Denominator for diluted earnings per share -
adjusted weighted-average shares
and assumed conversions .................... 6,794,442 6,025,294 6,331,292
Basic earnings (loss) per share:
Income (loss) before extraordinary item ..... $ .27 $ (1.11) $ (13.26)
Extraordinary item .......................... (.07) -- --
------------ ------------ ------------
$ .20 $ (1.11) $ (13.26)
============ ============ ============
Diluted earnings (loss) per share:
Income (loss) before extraordinary item ..... $ .23 $ (1.11) $ (13.26)
Extraordinary item .......................... (.06) -- --
------------ ------------ ------------
$ .17 $ (1.11) $ (13.26)
============ ============ ============
For the year ended December 31, 1998 none of the shares issuable in
connection with stock options or warrants are included in diluted shares. For
the year ended December 31, 1997, none of the shares issuable in connection with
stock options, warrants, or the conversion of preferred stock are included in
diluted shares. Inclusion of these shares would be antidilutive due to losses
incurred in those years. In addition, for the year ended December 31, 1996
shares issuable in connection with the conversion of the preferred stock were
not included in diluted shares because the effect was antidilutive.
Stock options and warrants to purchase approximately 875,000 shares of
common stock at a weighted average per share price of $8.36 were outstanding
during 1996. Since the exercise price of these warrants and options was greater
than the average market price of the common shares, they were not included in
the computations of diluted earnings per share. Inclusion of these shares would
be antidilutive.
F-23
12. Quarterly Results of Operations (Unaudited)
Selected results of operations for each of the fiscal quarters during
the years ended December 31, 1997 and 1998 are as follows:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------------- ------------- ----------------------------
(In thousands, except per share data)
Year Ended December 31, 1997
Net revenue ............... $ 19,216 $ 15,772 $ 15,703 $ 20,240
Operating income (loss) ... 7,791 4,090 3,902 (633)
Net income (loss) ......... 1,454 (2,010) (2,042) (3,887)
Earnings (loss) per common
share ................... .24 (.37) (.33) (.61)
Earnings (loss) per common
share - assuming
dilution ................ .22 (.37) (.33) (.61)
Year Ended December 31, 1998
Net revenue ............... $ 16,739 $ 15,471 $ 13,799 $ 14,075
Operating income (loss) ... 2,423 577 (765) (58,735)
Net income (loss) ......... (4,572) (6,105) (5,795) (67,488)
Earnings (loss) per common
share ................... (.72) (.96) (.92) (10.66)
Earnings (loss) per common
share - assuming
dilution ................ (.72) (.96) (.92) (10.66)
During the fourth quarter of 1997, the Company recorded a write-down of
its Canadian proved crude oil and natural gas properties of approximately
$4,600,000 ($3,000,000, net of taxes). During the fourth quarter of 1998, the
Company recorded a write-down of its United States proved crude oil and
properties of approximately $61,224,000 under the ceiling limitation.
13. Benefit Plans
The Company has a defined contribution plan (401(k)) covering all
eligible employees of the Company. During 1996, 1997, and 1998 the Company
contributed 2,500, 7,440, and 10,329 shares, respectively, of its common stock
held in the treasury to the Plan and recorded the fair value of $12,500,
$41,850, and $76,847 respectively, as compensation expense. The employee
contribution limitations are determined by formulas which limit the upper
one-third of the plan members from contributing amounts that would cause the
plan to be top-heavy. The employee contribution is limited to the lesser of 20%
of the employee's annual compensation or $10,000.
F-24
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 Series B Notes ($215,000,000), of
which $84,612,000 was utilized by Canadian Abraxas in connection with the
acquisition of CGGS. The Company has not presented separate financial statements
and other disclosures concerning Canadian Abraxas because management has
determined that such information is not material to the holders of the Notes.
December 31,
1997 1998
-------------- -------------
(In thousands)
BALANCE SHEET
Assets
Total current assets ....................................... $ 4,738 $ 6,144
Oil and gas and processing properties ..................... 109,968 91,115
Other assets .............................................. 3,761 3,854
============== =============
$118,467 $101,113
============== =============
Liabilities and Stockholder's Equity
Total current liabilities ................................. $ 3,625 $ 3,030
11.5% Senior Notes due 2004 ............................... 74,682 74,682
Notes payable to Abraxas Petroleum Corporation ............ 18,844 20,355
Other liabilities ......................................... 30,295 22,519
Stockholder's equity (deficit) ............................ (8,979) (19,473)
-------------- -------------
$118,467 $101,113
============== =============
November 14, 1996,
Date of
Acquisition, to Year Ended Year Ended
December 31, 1996 December 31, 1997 December 31, 1998
---------------------------------------------------------
(In Thousands)
STATEMENTS OF OPERATIONS
Revenues .............................. $ 3,972 $ 19,264 $ 18,624
Operating costs and expenses .......... (2,292) (16,617) (18,026)
Proved property impairment ............ - (4,600) --
Interest expense ...................... (1,331) (9,952) (10,356)
Other income .......................... 23 202 191
Income tax (expense) benefit .......... (175) 3,815 4,158
---------------------------------------------------------
Net income (loss) ................... $ 197 $ (7,888) $ (5,409)
=========================================================
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
F-25
credit risk relating to its customers and has not experienced significant credit
losses associated with such receivables.
In 1998 four customers accounted for approximately 58% of oil and
natural gas production and gas processing revenues. Three customers accounted
for approximately 54% of United States revenue and three customers accounted for
approximately 83% of revenue in Canada. In 1997 three customers accounted for
approximately 40% of oil and natural gas production revenues and gas processing
revenues. In 1996 four customers accounted for approximately 63% of oil and
natural gas production revenues and gas processing revenues.
Business segment information about the Company's 1996 operations in
different geographic areas is as follows:
U.S. Canada Total
----------- ---------- ----------
(In thousands)
Revenues ........................... $ 21,999 $ 4,654 $ 26,653
=========== ========== ==========
Operating profit ................... $ 8,987 $ 1,694 $ 10,681
=========== ==========
General corporate .................. (2,044)
Interest expense and amortization
of deferred financing fees ....... (6,521)
==========
Income before income taxes ....... $ 2,116
==========
Identifiable assets at December 31,
1996 ............................. $ 168,141 $ 126,266 $ 294,407
=========== ==========
Corporate assets ................... 10,435
----------
Total assets ..................... $ 304,842
==========
Business segment information about the Company's 1997 operations in
different geographic areas is as follows:
U.S. Canada Total
----------- ---------- ----------
(In thousands)
Revenues ........................... $ 50,172 $ 20,759 $ 70,931
=========== ========== ==========
Operating profit (loss)............. $ 19,938 $ (2,125) $ 17,813
=========== ==========
General corporate .................. (2,309)
Interest expense and amortization
of deferred financing fees ....... (25,880)
==========
Loss before income taxes ......... $ (10,376)
==========
Identifiable assets at December 31,
1997 ............................. $ 198,277 $ 130,969 $ 329,246
=========== ==========
Corporate assets ................... 9,282
----------
Total assets ..................... $ 338,528
==========
F-26
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 .................. (3,556)
Interest expense and amortization
of deferred financing fees ....... (32,419)
---------
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
=========
16. Commodity Swap Agreements
The Company enters into commodity swap agreements (Hedge Agreements) to
reduce its exposure to price risk in the spot market for crude oil and natural
gas. Pursuant to the Hedge Agreements, either the Company or the counterparty
thereto is required to make payment to the other at the end of each month.
In November 1996, the Company assumed Hedge Agreements extending through
October 2001 with a counterparty involving various quantities and fixed prices,
These Hedge Agreements provide for the Company to make payments to the
counterparty to the extent the market prices determined based on the price for
west Texas intermediate light sweet crude oil on the NYMEX for crude oil and the
Inside FERC, Tennessee Gas Pipeline Co.; Texas (Zone O) price for natural gas
exceeds the above fixed prices and for the counterparty to make payments to the
Company to the extent the market prices are less than the above fixed prices.
The Company accounts for the related gains or losses (a loss of $952,000 in 1997
and a gain of $268,000 in 1998) in crude oil and natural gas revenue in the
period of the hedged production. The Company terminated these hedge agreements
in January 1999 and was paid $750,000 by the counterparty for such termination
In March 1998 the Company entered into a costless collar for 2,000
barrels of crude oil with a floor price of $14.00 and a ceiling price of
$22.30.The agreement was effective April 1, 1998 and extends through March 31,
1999. Under the terms the Company will be paid when the average crude price is
below the floor price and pay the counterparty when the average price exceeds
the ceiling price. During 1998, the Company realized a gain of $282,000 on this
agreement, which is accounted for in crude oil and natural gas revenue.
17. Proved Property Impairment
In 1997 and 1998 the Company recorded a write-down of its proved crude
oil and natural gas properties of approximately $4,600,000, $3,000,000 after
taxes, and $61,224,000 under the ceiling limitation prescribed for companies
following the full cost method of accounting for its oil and gas properties. The
1997 write-down was related to the Company's Canadian oil and gas properties,
the 1998 write-down was related to the Company's United States oil and gas
properties. These write-downs were due primarily to a decrease in spot market
prices for the Company's crude oil and natural gas. Under full cost accounting
rules, the net capitalized costs of oil and gas properties, less related
deferred taxes, are limited by country, to the lower of unamortized cost or the
cost ceiling as discussed in Note 1. The risk that the Company will be required
to write-down the carrying value of its crude oil and natural gas properties
increases when crude oil and natural gas prices are depressed or volatile.
F-27
Should prices continue to decline, a further write-down of the Company's crude
oil and natural gas properties may be required. If such a write-down were large
enough, it could result in the occurrence of an event of default under the
Credit Facility that could require the sale of some of the Company's producing
properties under unfavorable market conditions or require the Company to seek
additional equity capital.
18. Subsequent Event
On January 13, 1999 the Company acquired approximately 14,026,467 common
shares and associated rights, representing approximately 98.8 percent of New
Cache Petroleums, LTD. ("New Cache") for approximately $78 million in cash and
the assumption of approximately $10 million of debt. The Company intends to
integrate the operations of New Cache into the existing operations of its wholly
owned subsidiary Canadian Abraxas.
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 Financial
Accounting Standards 69, "Disclosures about Oil and Gas Producing Activities."
Capitalized costs relating to oil and gas producing activities are as follows:
December 31
---------------------
1997 1998
---------- ----------
(In thousands)
Proved crude oil and natural gas properties . $ 332,680 $ 324,532
Unproved properties ......................... 11,519 10,675
---------- ----------
Total ....................................... 344,199 335,207
Accumulated depreciation, depletion, and
amortization, and impairment .............. (70,717) (161,593)
---------- ----------
Net capitalized costs ................... $ 273,482 $ 173,614
========= ==========
F-28
Costs incurred in oil and gas property acquisitions, exploration and
development activities are as follows:
Years Ended December 31
------------------------------------------------------------------------------------------------
1996 1997 1998
------------------------------ ------------------------------ ------------------------------
Total U.S. Canada Total U.S. Canada Total U.S. Canada
-------- -------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
Property acquisition costs:
Proved .................. $ 87,005 $ 37,609 $ 49,396 $ 13,800 $ -- $ 13,800 $ 2,729 $ 1,319 $ 1,410
Unproved ................ 37,268 8,230 29,038 8,958 -- 8,958 -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
$124,273 $ 45,839 $ 78,434 $ 22,758 $ -- $ 22,758 $ 2,729 $ 1,319 $ 1,410
======== ======== ======== ======== ======== ======== ======== ======== ========
Property development and
exploration costs ....... $ 18,133 $ 18,115 $ 18 $ 61,414 $ 53,363 $ 8,051 $ 51,821 $ 35,421 $ 16,400
======== ======== ======== ======== ======== ======== ======== ======== ========
The results of operations for oil and gas producing activities are as
follows:
Years Ended December 31
------------------------------------------------------------------------------------------------
1996 1997 1998
------------------------------ ------------------------------ ------------------------------
Total U.S. Canada Total U.S. Canada Total U.S. Canada
-------- -------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
Revenues ................. $ 25,749 $ 21,758 $ 3,991 $ 65,826 $ 49,031 $ 16,795 $ 54,263 $ 33,705 $ 20,558
Production costs ......... (5,858) (5,193) (665) (14,881) (10,749) (4,132) (16,841) (10,299) (6,542)
Depreciation,
depletion, and
amortization ........... (9,103) (7,695) (1,408) (27,803) (18,992) (8,811) (30,832) (17,239) (13,593)
Proved property ..........
impairnebt -- -- -- (4,600) -- (4,600) (61,223) (61,223) --
General and
administrative ......... (483) (401) (82) (1,042) (721) (321) (1,381) (992) (389)
Income taxes ............. (148) -- (148) 427 -- 427 (14) -- (14)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Results of operations from
oil and gas producing
activities (excluding
corporate overhead and
interest costs)........ $ 10,157 $ 8,469 $ 1,688 $ 17,927 $ 18,569 $ (642) $(56,028) $(56,048) $ 20
======== ======== ======== ======== ======== ======== ======== ======== ========
Depletion rate per
barrel of oil
equivalent .......... $ 5.12 $ 5.10 $ 5.29 $ 5.62 $ 5.05 $ 6.98 $ 5.36 $ 5.26 $ 5.49
======== ======== ======== ======== ======== ======== ======== ======== ========
F-29
Estimated Quantities of Proved Oil and Gas Reserves
The following table presents the Company's estimate of its net proved
crude oil and natural gas reserves as of December 31, 1996, 1997, and 1998. 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, 1995 ............ 8,267 54,569 8,267 54,569 - -
Revisions of previous estimates ....... 680 (2,561) 680 (2,561) - -
Extensions and discoveries ............ 1,752 10,194 1,746 10,060 6 134
Purchase of minerals in place ......... 8,062 121,408 6,694 65,135 1,368 56,273
Production ............................ (724) (6,350) (670) (5,042) (54) (1,308)
Sale of minerals in place ............. (2) - (2) - - -
--------- -------- ------ ------- ----- -------
Balance at December 31, 1996 ............ 18,035 177,260 16,715 122,161 1,320(1) 55,099
Revisions of previous estimates ....... (1,083) (4,554) (1,096) (10,343) 13 5,789
Extensions and discoveries ............ 2,262 48,405 2,190 40,877 72 7,528
Purchase of minerals in place ......... 585 27,575 197 150 388 27,425
Production ............................ (1,929) (21,050) (1,736) (12,508) (193) (8,542)
Sale of minerals in place ............. (93) (6,322) (9) (42) (84) (6,280)
--------- --------- ------- ------- ------ -------
Balance at December 31, 1997 ............ 17,777 221,314 16,261 140,295 1,516(1) 81,019(2)
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)
========= ========= ======= ======== ====== =======
(1) Includes 120,400; 260,200 and 475,400 barrels of liquid hydrocarbon reserves
owned by Grey Wolf of which approximately 57,600; 140,200 and 244,000barrels are
applicable to the minority interest's share of these reserves at December 31,
1996, 1997 and 1998, respectively.
(2) Includes 7,446 and 28,610 MMcf of natural
gas reserves owned by Grey Wolf of which 4,012 and 14,700 MMcf are applicable to
the minority interest's share of these reserves at December 31, 1997 and 1998,
respectively.
F-30
Estimated Quantities of Proved Oil and Gas Reserves (continued)
Total United States Canada
-------------------------------------------------------------------------
Liquid Natural Liquid Natural Liquid Natural
Hydrocarbons Gas Hydrocarbons Gas Hydrocarbons Gas
------------- --------- ------------- ------- ------------- ----------
(Barrels) (Mcf) (Barrels) (Mcf) (Barrels) (Mcf)
(In Thousands)
Proved developed reserves:
December 31, 1996....................... 14,961 157,660 13,641 103,639 1,320 54,021
=========== ========= ======== ========= ======= ========
December 31, 1997 ...................... 14,254 186,490 12,750 109,456 1,504 77,034
=========== ========= ======== ========= ======= ========
December 31, 1998 ...................... 5,819 144,588 4,138 65,075 1,681 79,513
=========== ========== ======== ========= ======= ========
F-31
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves
The following disclosures concerning the standardized measure of future
cash flows from proved crude oil and natural gas reserves are presented in
accordance with Statement of Financial Accounting Standards No. 69. The
standardized measure does not purport to represent the fair market value of the
Company's proved crude oil and natural gas reserves. An estimate of fair market
value would also take into account, among other factors, the recovery of
reserves not classified as proved, anticipated future changes in prices and
costs, and a discount factor more representative of the time value of money and
the risks inherent in reserve estimates.
Under the standardized measure, future cash inflows were estimated by
applying period-end prices at December 31, 1998, adjusted for fixed and
determinable escalations, to the estimated future production of year-end proved
reserves. Future cash inflows were reduced by estimated future production and
development costs based on year-end costs to determine pre-tax cash inflows.
Future income taxes were computed by applying the statutory tax rate to the
excess of pre-tax cash inflows over the tax basis of the properties. Operating
loss carryforwards, tax credits, and permanent differences to the extent
estimated to be available in the future were also considered in the future
income tax calculations, thereby reducing the expected tax expense.
Future net cash inflows after income taxes were discounted using a 10%
annual discount rate to arrive at the Standardized Measure.
F-32
Set forth below is the Standardized Measure relating to proved oil and
gas reserves for:
Years Ended December 31
------------------------------------ -------------------------------------- -------------------------------
1996 1997 1998
---------------------------------- --------------------------------- ---------------------------------
Total U.S. Canada Tota U.S. Canada Total U.S. Canada
----------- --------- -------- --------- --------- --------- --------- --------- ----------
(In thousands)
Future cash inflows ... $1,009,420 $ 824,776 $184,644 $ 714,048 $ 530,627 $ 183,421 $ 474,263 $ 268,821 $ 205,442
Future production and
development costs ... (251,749) (201,498) (50,251) (249,604) (186,445) (63,159) (169,736) (99,187) (70,549)
Future income tax
expense ............. (207,834) (157,508) (50,326) (82,998) (48,736) (34,262) (20,655) -- (20,655)
----------- --------- -------- --------- --------- --------- --------- --------- ----------
Future net cash flows . 549,837 465,770 84,067 381,446 295,446 86,000 283,872 169,634 114,238
Discount .............. (220,016) (193,221) (26,795) (129,367) (107,259) (22,108) (102,291) (75,389) (26,902)
----------- --------- -------- --------- --------- --------- --------- --------- ----------
Standardized Measure of
discounted future net
cash relating to
proved reserves ..... $ 329,821 $ 272,549 $ 57,272 $ 252,079 $ 188,187 $ 63,892 $ 181,581 $ 94,245 $ 87,336
=========== ========== ========= ========== ========= ========= ========= ========= ==========
F-33
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves
The following is an analysis of the changes in the Standardized Measure:
Year Ended December 31
------------------------------------------------
1996 1997 1998
--------------- --------------- ----------------
(In thousands)
Standardized Measure, beginning
of year .......................... $ 87,160 $ 329,821 $ 252,079
Sales and transfers of oil and
gas produced, net of production
costs ............................ (19,887) (50,945) (37,422)
Net changes in prices and
development and production
costs from prior year ............ 65,917 (190,174) (26,858)
Extensions, discoveries, and
improved recovery, less related
costs ............................ 30,699 49,471 36,187
Purchases of minerals in place ..... 244,930 27,586 28,079
Sales of minerals in place ......... (24) (5,720) (58,099)
Revision of previous quantity
estimates ........................ 2,257 (8,150) (12,514)
Change in future income tax expense (87,393) 70,858 (17,727)
Other .............................. (2,554) (12,389) (9,005)
Accretion of discount .............. 8,716 41,721 26,861
--------------- --------------- ----------------
Standardized Measure, end of year $ 329,821 $ 252,079 $ 181,581
=============== =============== ================
F-34
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
-------------------------- -----------------------
Robert L.G. Watson, Chris Williford
President and Principal 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, 4/13/99
Robert L.G. Watson President (Principal Executive Officer)
and Director
/s/ Chris Williford Exec. Vice President and 4/13/99
Chris Williford Treasurer (Principal Financial
and Accounting Officer) and
Director
/s/ Robert W. Carington Exec. Vice President and 4/13/99
Robert W. Carington Director
/s/ Franklin Burke Director 4/13/99
Franklin Burke
/s/ Robert D. Gershen Director 4/13/99
Robert D.Gershen
/s/ Richard M. Kleberg, III Director 4/13/99
Richard M. Kleberg, III
/s/ Harold Carter Director 4/13/99
Harold Carter
/s/ James C. Phelps Director 4/13/99
James C. Phelps
/s/ Paul A. Powell, Jr. Director 4/13/99
Paul A.Powell, Jr.
/s/ Richard M. Riggs Director 4/13/99
Richard M. Riggs
42
EXHIBIT 4.6
ABRAXAS PETROLEUM CORPORATION
as Issuer,
THE SUBSIDIARY GUARANTORS PARTY HERETO
and
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
as Trustee
INDENTURE
Dated as of March 26, 1999
$63,500,000
12.875% Senior Notes due 2003
CROSS-REFERENCE TABLE
TIA Indenture
Section Section
310(a)(1).........................................................7.10
(a)(2)......................................................7.10
(a)(3)......................................................N.A.
(a)(4)......................................................N.A.
(a)(5)......................................................7.08; 7.10,
..................................................................7.11
(b).........................................................7.08; 7.10,
.................................................................10.02
(c).........................................................N.A.
311(a)............................................................7.11
(b).........................................................7.11
(c).........................................................N.A.
312(a)............................................................2.05
(b)........................................................10.03
(c)........................................................10.03
313(a)............................................................7.06
(b)(1)......................................................N.A.
(b)(2)......................................................7.06
(c).........................................................7.06; 10.02
(d).........................................................7.06
314(a)............................................................4.06; 4.08;
.................................................................11.02
(b)........................................................12.02
(c)(1)......................................................7.02, 10.04
(c)(2)......................................................7.02, 10.04
(c)(3)......................................................N.A.
(d)........................................................12.03
(e)........................................................10.05
(f).........................................................N.A.
315(a)............................................................7.01(b)
(b).........................................................7.05; 10.02
(c).........................................................7.01(a)
(d).........................................................7.01(c)
(e).........................................................6.11
316(a)(last sentence).............................................2.09
(a)(1)(A)...................................................6.05
(a)(1)(B)...................................................6.04
(a)(2)......................................................N.A.
(b).........................................................6.07
(c).........................................................9.04
317(a)(1).........................................................6.08
(a)(2)......................................................6.09
(b).........................................................2.04
318(a)...........................................................10.01
(c)........................................................10.01
N.A. means Not Applicable
NOTE: This Cross-Reference Table is not and shall not, for any purpose, be
deemed to be a part of the Indenture.
TABLE OF CONTENTS
Page
ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions................................................1
SECTION 1.02. Incorporation by Reference of TIA.........................17
SECTION 1.03. Rules of Construction.....................................18
ARTICLE TWOTHE NOTES
SECTION 2.01. Principal Amount; Form and Dating.........................18
SECTION 2.02. Execution and Authentication; Aggregate Principal Amount..19
SECTION 2.03. Registrar and Paying Agent................................20
SECTION 2.04. Paying Agent To Hold Assets in Trust......................20
SECTION 2.05. Holder Lists..............................................20
SECTION 2.06. Transfer and Exchange.....................................20
SECTION 2.07. Replacement Notes.........................................21
SECTION 2.08. Outstanding Notes.........................................21
SECTION 2.09. Treasury Notes............................................21
SECTION 2.10. Temporary Notes...........................................22
SECTION 2.11. Cancellation..............................................22
SECTION 2.12. Defaulted Interest........................................22
SECTION 2.13. CUSIP Number..............................................22
SECTION 2.14. Deposit of Monies.........................................23
SECTION 2.15. Restrictive Legends.......................................23
SECTION 2.16. Book-Entry Provisions for Global Security.................24
SECTION 2.17. Special Transfer Provisions...............................25
SECTION 2.18. Liquidated Damages Under Registration Rights Agreement....26
ARTICLE THREE REDEMPTION
SECTION 3.01. Notices to Trustee........................................27
SECTION 3.02. Selection of Notes To Be Redeemed.........................27
SECTION 3.03. Optional Redemption.......................................27
SECTION 3.04. Notice of Redemption......................................28
SECTION 3.05. Effect of Notice of Redemption............................28
SECTION 3.06. Deposit of Redemption Price...............................28
SECTION 3.07. Notes Redeemed in Part....................................29
ARTICLE FOUR COVENANTS
SECTION 4.01. Payment of Notes..........................................29
SECTION 4.02. Maintenance of Office or Agency...........................29
SECTION 4.03. Corporate Existence.......................................29
SECTION 4.04. Payment of Taxes and Other Claims.........................29
ii
SECTION 4.05. Maintenance of Properties and Insurance...................30
SECTION 4.06. Compliance Certificate; Notice of Default.................30
SECTION 4.07. Compliance with Laws......................................31
SECTION 4.08. Reports to Holders........................................31
SECTION 4.09. Waiver of Stay, Extension or Usury Laws...................31
SECTION 4.10. Limitation on Restricted Payments.........................31
SECTION 4.11. Limitation on Transactions with Affiliates................33
SECTION 4.12. Limitation on Incurrence of Additional Indebtedness.......33
SECTION 4.13. Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries.........................34
SECTION 4.14. Limitation on Restricted and Unrestricted Subsidiaries....35
SECTION 4.15. Change of Control.........................................36
SECTION 4.16. Limitation on Asset Sales.................................37
SECTION 4.17. Limitations with Respect to Capital Stock
of Restricted Subsidiaries................................39
SECTION 4.18. Limitation on Liens.......................................40
SECTION 4.19. Limitation on Conduct of Business.........................40
SECTION 4.20. Additional Subsidiary Guarantees..........................40
SECTION 4.21. Limitation on Restrictive Covenants.......................40
SECTION 4.22. Impairment of Security Interest...........................40
SECTION 4.23. Additional Amounts........................................41
SECTION 4.24. Maintenance of Lien; Additional Collateral................41
ARTICLE FIVE SUCCESSOR CORPORATION
SECTION 5.01. Merger, Consolidation and Sale of Assets..................42
SECTION 5.02. Successor Corporation Substituted.........................43
ARTICLE SIX REMEDIES
SECTION 6.01. Events of Default.........................................43
SECTION 6.02. Acceleration..............................................45
SECTION 6.03. Other Remedies............................................45
SECTION 6.04. Waiver of Past Defaults...................................45
SECTION 6.05. Control by Majority.......................................45
SECTION 6.06. Limitation on Suits.......................................46
SECTION 6.07. Right of Holders To Receive Payment.......................46
SECTION 6.08. Collection Suit by Trustee................................46
SECTION 6.09. Trustee May File Proofs of Claim..........................46
SECTION 6.10. Priorities................................................47
SECTION 6.11. Undertaking for Costs.....................................47
SECTION 6.12. Restoration of Rights and Remedies........................47
ARTICLE SEVEN TRUSTEE
SECTION 7.01. Duties of Trustee.........................................47
SECTION 7.02. Rights of Trustee.........................................48
SECTION 7.03. Individual Rights of Trustee..............................49
iii
SECTION 7.04. Trustee's Disclaimer......................................50
SECTION 7.05. Notice of Default.........................................50
SECTION 7.06. Reports by Trustee to Holders.............................50
SECTION 7.07. Compensation and Indemnity................................50
SECTION 7.08. Replacement of Trustee....................................51
SECTION 7.09. Successor Trustee by Merger, Etc..........................51
SECTION 7.10. Eligibility; Disqualification.............................52
SECTION 7.11. Preferential Collection of Claims Against Issuer..........52
SECTION 7.12. Other Capacities..........................................52
ARTICLE EIGHT DISCHARGE OF INDENTURE; DEFEASANCE
SECTION 8.01. Termination of Issuer's Obligations.......................52
SECTION 8.02. Application of Trust Money................................54
SECTION 8.03. Repayment to the Issuer...................................54
SECTION 8.04. Reinstatement.............................................54
SECTION 8.05. Acknowledgment of Discharge by Trustee....................54
ARTICLE NINE MODIFICATION OF INDENTURE
SECTION 9.01. Without Consent of Holders................................55
SECTION 9.02. With Consent of Holders...................................55
SECTION 9.03. Compliance with TIA.......................................55
SECTION 9.04. Revocation and Effect of Consents.........................55
SECTION 9.05. Notation on or Exchange of Notes..........................56
SECTION 9.06. Trustee To Sign Amendments, Etc...........................56
SECTION 9.07. Evidence of Amendments, Supplements, Waivers..............56
ARTICLE TEN MISCELLANEOUS
SECTION 10.01. TIA Controls.............................................56
SECTION 10.02. Notices..................................................56
SECTION 10.03. Communications by Holders with Other Holders.............57
SECTION 10.04. Certificate and Opinion as to Conditions Precedent.......57
SECTION 10.05. Statements Required in Certificate or Opinion............58
SECTION 10.06. Rules by Trustee, Paying Agent, Registrar................58
SECTION 10.07. Legal Holidays...........................................58
SECTION 10.08. Governing Law............................................58
SECTION 10.09. No Adverse Interpretation of Other Agreements............58
SECTION 10.10. No Personal Liability....................................58
SECTION 10.11. Successors...............................................59
SECTION 10.12. Duplicate Originals......................................59
SECTION 10.13. Severability.............................................59
SECTION 10.14. Independence of Covenants................................59
SECTION 10.15. Currency Indemnity.......................................59
iv
ARTICLE ELEVEN GUARANTEE OF NOTES
SECTION 11.01. Unconditional Guarantee..................................59
SECTION 11.02. Limitations on Guarantees................................60
SECTION 11.03. Execution and Delivery of Guarantee......................61
SECTION 11.04. Release of a Subsidiary Guarantor........................61
SECTION 11.05. Waiver of Subrogation....................................61
SECTION 11.06. Immediate Payment........................................62
SECTION 11.07. No Set-Off...............................................62
SECTION 11.08. Obligations Absolute.....................................62
SECTION 11.09. Obligations Continuing...................................62
SECTION 11.10. Obligations Not Reduced..................................62
SECTION 11.11. Obligations Reinstated...................................63
SECTION 11.12. Obligations Not Affected.................................63
SECTION 11.13. Waiver...................................................64
SECTION 11.14. No Obligation To Take Action Against the Issuer..........64
SECTION 11.15. Dealing with the Issuer and Others.......................64
SECTION 11.16. Default and Enforcement..................................64
SECTION 11.17. Acknowledgment...........................................65
SECTION 11.18. Costs and Expenses.......................................65
SECTION 11.19. No Merger or Waiver; Cumulative Remedies.................65
SECTION 11.20. Survival of Obligations..................................65
SECTION 11.21. Guarantee in Addition to Other Obligations...............65
SECTION 11.22. Severability.............................................65
ARTICLE TWELVE SECURITY
SECTION 12.01. Grant of Security Interest; Remedies.....................66
SECTION 12.02. Recording and Opinions...................................66
SECTION 12.03. Release of Collateral....................................67
SECTION 12.04. Specified Releases of Collateral.........................67
SECTION 12.05. Rights of Purchasers; Form and Sufficiency of Release....69
SECTION 12.06. Authorization of Actions to Be Taken by the Trustee
Under the Security Documents.............................69
SECTION 12.07. Authorization of Receipt of Funds by the Trustee Under
the Security Documents...................................70
SECTION 12.08. Use of Trust Moneys......................................70
v
Exhibit A - Form of Initial Note............................................A-1
Exhibit B - Form of Exchange Note...........................................B-1
Exhibit C - Form of Certificate To Be Delivered in Connection with
Transfers to Non-QIB Accredited Investors.......................C-1
Exhibit D - Form of Certificate To Be Delivered in Connection with
Transfers Pursuant to Regulation S .............................D-1
Exhibit E - Guarantee.......................................................E-1
Exhibit F - Form of Supplemental Indenture..................................F-1
Note: This Table of Contents is not, and shall not, for any purpose, be deemed
to be part of the Indenture.
ix
INDENTURE, dated as of March 26, 1999, is among Abraxas Petroleum
Corporation, a Nevada corporation (the "Issuer"), Canadian Abraxas Petroleum
Limited, an Alberta corporation and wholly owned subsidiary of the Issuer
("Canadian Abraxas"), New Cache Petroleums, Ltd., an Alberta corporation and
wholly owned subsidiary of Canadian Abraxas ("New Cache"), Sandia Oil & Gas
Corporation, a Texas corporation and wholly owned subsidiary of the Issuer
("Sandia"), and Norwest Bank Minnesota, National Association, as Trustee (the
"Trustee").
The Issuer has duly authorized the creation of the 12f% Senior Notes
due 2003, Series A (the "Initial Notes") and 12f% Senior Notes due 2003, Series
B (the "Exchange Notes") to be issued in exchange for the Initial Notes pursuant
to the Registration Rights Agreement (as defined herein) and, to provide
therefor, the Issuer has duly authorized the execution and delivery of this
Indenture. The Notes (as defined herein) will be guaranteed on a senior secured
basis by Canadian Abraxas, New Cache, Sandia and each of the Issuer's future
Restricted Subsidiaries (as defined herein) which become Subsidiary Guarantors
as required in this Indenture. All things necessary to make the Notes, when duly
issued and executed by the Issuer, and authenticated and delivered hereunder,
the valid obligations of the Issuer, and to make this Indenture a valid and
binding agreement of the Issuer, have been done.
Each party hereto agrees as follows for the benefit of the other
parties and for the equal and ratable benefit of the Holders of the Notes.
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries (a) existing at the time such Person becomes a Restricted
Subsidiary or at the time it merges or consolidates with the Issuer or any of
its Restricted Subsidiaries, or (b) which becomes Indebtedness of the Issuer or
a Restricted Subsidiary in connection with the acquisition of assets from such
Person, in each case not incurred in connection with, or in anticipation or
contemplation of, such Person becoming a Restricted Subsidiary or such
acquisition, merger or consolidation.
"Adjusted Consolidated Net Tangible Assets" means (without
duplication), as of the date of determination: (1) the sum of: (A) discounted
future net revenues from proved oil and gas reserves of the Issuer and its
consolidated Restricted Subsidiaries, calculated in accordance with Commission
guidelines (before any state or federal income tax), as estimated by a
nationally recognized firm of independent petroleum engineers as of a date no
earlier than the date of the Issuer's latest annual consolidated financial
statements, as increased by, as of the date of determination, the estimated
discounted future net revenues from (i) estimated proved oil and gas reserves
acquired since the date of such year-end reserve report and (ii) estimated oil
and gas reserves attributable to upward revisions of estimates of proved oil and
gas reserves since the date of such year-end reserve report due to exploration,
development or exploitation activities, in each case calculated in accordance
with Commission guidelines (utilizing the prices utilized in such year-end
reserve report), and decreased by, as of the date of determination, the
estimated discounted future net revenues from (iii) estimated proved oil and gas
reserves produced or disposed of since the date of such year-end reserve report
and (iv) estimated oil and gas reserves attributable to downward revisions of
estimates of proved oil and gas reserves since the date of such year-end reserve
report due to changes in geological conditions or other factors which would, in
accordance with standard industry practice, cause such revisions, in each case
calculated in accordance with Commission guidelines (utilizing the prices
utilized in such year-end reserve report); provided, however, that, in the case
of each of the determinations made pursuant to clauses (i) through (iv), such
increases and decreases shall be as estimated by the Issuer's petroleum
engineers, unless in the event that there is a Material Change as a result of
such acquisitions, dispositions or revisions, then the discounted future net
revenues utilized for purposes of this clause (1)(A) shall be confirmed in
writing, by a nationally recognized firm of independent petroleum engineers
(which may be the Issuer's independent petroleum engineers who prepare the
Issuer's annual reserve report), plus (B) the capitalized costs that are
attributable to oil and gas properties of the Issuer and its consolidated
1
Restricted Subsidiaries to which no proved oil and gas reserves are
attributable, based on the Issuer's books and records as of a date no earlier
than the date of the Issuer's latest annual or quarterly financial statements,
plus (C) the Net Working Capital on a date no earlier than the date of the
Issuer's latest consolidated annual or quarterly financial statements, plus (D)
with respect to each other tangible asset of the Issuer or its consolidated
Restricted Subsidiaries specifically including, but not to the exclusion of any
other qualifying tangible assets, the Issuer's or its consolidated Restricted
Subsidiaries' gas producing facilities and unproved oil and gas properties (less
any remaining deferred income taxes which have been allocated to such gas
processing facilities in connection with the acquisition thereof), land,
equipment, leasehold improvements, investments carried on the equity method,
restricted cash and the carrying value of marketable securities, the greater of
(i) the net book value of such other tangible asset on a date no earlier than
the date of the Issuer's latest consolidated annual or quarterly financial
statements or (ii) the appraised value, as estimated by a qualified Independent
Advisor, of such other tangible assets of the Issuer and its Restricted
Subsidiaries, as of a date no earlier than the date of the Issuer's latest
audited financial statements minus (2) minority interests and, to the extent not
otherwise taken into account in determining Adjusted Consolidated Net Tangible
Assets, any gas balancing liabilities of the Issuer and its consolidated
Restricted Subsidiaries reflected in the Issuer's latest audited financial
statements.
In addition to, but without duplication of, the foregoing, for purposes
of this definition, "Adjusted Consolidated Net Tangible Assets" shall be
calculated after giving effect, on a pro forma basis, to: (1) any Investment not
prohibited by this Indenture, to and including the date of the transaction
giving rise to the need to calculate Adjusted Consolidated Net Tangible Assets
(the "Assets Transaction Date"), in any other Person that, as a result of such
Investment, becomes a Restricted Subsidiary of the Issuer, (2) the acquisition,
to and including the Assets Transaction Date (by merger, consolidation or
purchase of stock or assets), of any business or assets, including, without
limitation, Permitted Industry Investments, and (3) any sales or other
dispositions of assets permitted by this Indenture (other than sales of
Hydrocarbons or other mineral products in the ordinary course of business)
occurring on or prior to the Assets Transaction Date.
"Affiliate" means, with respect to any specified Person, (a) any other
Person who directly or indirectly through one or more intermediaries controls,
or is controlled by, or under common control with, such specified Person, and
(b) any Related Person of such Person. For purposes of this definition, the term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"Affiliate Transaction" has the meaning provided in Section 4.11.
"Agent" means any Registrar, Paying Agent, co-Registrar, authenticating
agent or securities custodian.
"Agent Members" has the meaning provided in Section 2.16.
"Asset Acquisition" means: (a) an Investment by the Issuer or any
Restricted Subsidiary in any other Person pursuant to which such Person shall
become a Restricted Subsidiary, or shall be merged with or into the Issuer or
any Restricted Subsidiary, or (b) the acquisition by the Issuer or any
Restricted Subsidiary of the assets of any Person (other than a Restricted
Subsidiary) which constitute all or substantially all of the assets of such
Person or comprise any division or line of business of such Person or any other
properties or assets of such Person other than in the ordinary course of
business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, exchange, lease (other than operating leases entered into in the
ordinary course of business), assignment or other transfer for value by the
Issuer or any of its Restricted Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than the Issuer or a Restricted Subsidiary of:
(a) any Capital Stock of any Restricted Subsidiary, or (b) any other property or
assets (including any interests therein) of the Issuer or any Restricted
Subsidiary, including any disposition by means of a merger, consolidation or
similar transaction; provided, however, that the following will not be deemed to
be an Asset Sale: (i) the sale, lease, conveyance, disposition or other transfer
of all or substantially all of the assets of the Issuer in a transaction which
is made in compliance with Article Five, (ii) any Investment in an Unrestricted
2
Subsidiary which is made in compliance with Section 4.10, (iii) disposals or
replacements of obsolete equipment in the ordinary course of business, (iv) the
sale, lease, conveyance, disposition or other transfer by the Issuer or any
Restricted Subsidiary of assets or property to the Issuer or one or more Wholly
Owned Restricted Subsidiaries, (v) any disposition of Hydrocarbons or other
mineral products for value in the ordinary course of business, (vi) the
abandonment, surrender, termination, cancellation, release, farmout, lease or
sublease of undeveloped oil and gas properties in the ordinary course of
business or oil and gas properties which are not capable of production in
economic quantities, (vii) the contemporaneous trade or exchange by the Issuer
or any of its Restricted Subsidiaries of any oil and gas property or interest
therein owned or held by such Person for any oil and gas property or interest
therein owned or held by another Person which the Board of Directors of the
Issuer determines in good faith by resolution to be of approximately equal
value, including any cash or Cash Equivalents necessary in order to achieve an
exchange of equivalent value; provided that such cash and Cash Equivalents are
subject to Section 4.16; provided, further, to the extent not prohibited by the
terms of any instruments evidencing Acquired Indebtedness associated with the
property received, that the property received by the Issuer or such Restricted
Subsidiary is made subject to the Lien of this Indenture and the Security
Documents to the extent that such property traded or exchanged was subject to
such Lien, provided that any such property received that constitutes Oil and Gas
Assets shall be subject to such Lien in any event; and provided, further, that
to the extent the property traded or exchanged by the Issuer and/or a Restricted
Subsidiary contains proved reserves, the property received contains an
approximately equal value of proved reserves, including cash or Cash Equivalents
to achieve an exchange of equivalent value, or (viii) the sale, lease,
conveyance, disposition or other transfer by the Issuer or any Restricted
Subsidiary of assets or property in the ordinary course of business; provided,
however, that the aggregate amount (valued at the fair market value of such
assets or property at the time of such sale, lease, conveyance, disposition or
transfer) of all such assets and property so sold, leased, conveyed, disposed or
transferred since the Issue Date pursuant to this clause (viii) shall not exceed
$1,000,000 in any one year.
"Authenticating Agent" has the meaning provided in Section 2.02.
"Available Proceeds Amount" means (a) the sum of all Collateral
Proceeds and all Non-Collateral Proceeds remaining after application to repay
any Indebtedness secured by the assets the subject of the Asset Sale giving rise
to such Non-Collateral Proceeds; and (b) for purposes of determining whether a
Net Proceeds Offer must be made as of any day and the amount of such offer, an
amount equal to: the amount set forth under clause (a) above minus the aggregate
amount of all such Asset Sale proceeds previously spent in compliance with the
terms of Section 12.08.
"Bankruptcy Law" means Title 11, U.S. Code or any similar Federal,
state or foreign law for the relief of debtors.
"Board of Directors" means, as for any Person, the board of directors
of such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Business Day" means any day other than a Saturday, Sunday or any other
day on which banking institutions in the City of New York are required or
authorized by law or other governmental action to be closed.
"Canadian Abraxas" means the party named as such in the first paragraph
of this Indenture until a successor replaces it pursuant to this Indenture and
thereafter means such successor.
"Capitalized Lease Obligation" means, as to any Person, the discounted
present value of the rental obligations of such Person under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed) that is required to be classified and accounted for as a capital lease
obligation at such date, determined in accordance with GAAP.
3
"Capital Stock" means: (a) with respect to any Person that is a
corporation, any and all shares, interests, participations or other equivalents
(however designated and whether or not voting) of corporate stock, including
each class of Common Stock and Preferred Stock of such Person and including any
warrants, options or rights to acquire any of the foregoing and instruments
convertible into any of the foregoing, and (b) with respect to any Person that
is not a corporation, any and all partnership or other equity interests of such
Person.
"Cash Equivalents" means: (a) marketable direct obligations issued by,
or unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (b)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either S&P or Moody's; (c) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (d)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any United States branch of a foreign bank having at the date of acquisition
thereof combined capital and surplus of not less than $250,000,000; (e)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clause (a) above entered into with any bank
meeting the qualifications specified in clause (d) above; and (f) money market
mutual or similar funds having assets in excess of $100,000,000.
"Change of Control" means the occurrence of one or more of the
following events: (a) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially all of
the assets of the Issuer to any Person or group of related Persons for purposes
of Section 13(d) of the Exchange Act (a "Group") (whether or not otherwise in
compliance with the provisions of this Indenture); (b) the approval by the
holders of Capital Stock of the Issuer of any plan or proposal for the
liquidation or dissolution of the Issuer (whether or not otherwise in compliance
with the provisions of this Indenture); (c) any Person or Group shall become the
owner, directly or indirectly, beneficially or of record, of shares representing
more than 35% of the aggregate ordinary voting power represented by the issued
and outstanding Capital Stock of the Issuer; or (d) the replacement of a
majority of the Board of Directors of the Issuer over a two-year period from the
directors who constituted the Board of Directors of the Issuer at the beginning
of such period with directors whose replacement shall not have been approved (by
recommendation, nomination or election, as the case may be) by a vote of at
least a majority of the Board of Directors of the Issuer then still in office
who either were members of such Board of Directors at the beginning of such
period or whose election as a member of such Board of Directors was previously
so approved.
"Change of Control Offer" has the meaning provided in Section 4.15.
"Change of Control Payment Date" has the meaning provided in Section
4.15.
"Collateral" means, collectively, all of the property and assets
(including, without limitation, Trust Moneys) that are from time to time subject
to, or purported to be subject to, the Lien of this Indenture or any of the
Security Documents.
"Collateral Account" shall have the meaning provided in Section 12.08.
"Collateral Proceeds" means any Net Cash Proceeds received from an
Asset Sale involving Collateral.
"Commission" means the SEC.
"Common Stock" of any Person means any and all shares, interests or
other participations in, and other equivalents (however designated and whether
voting or non-voting) of such Person's common stock, whether outstanding on the
Issue Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
4
"Consolidated EBITDA" means, for any period, the sum (without
duplication) of: (a) Consolidated Net Income, and (b) to the extent Consolidated
Net Income has been reduced thereby, (i) all income taxes of the Issuer and its
Restricted Subsidiaries paid or accrued in accordance with GAAP for such period
(other than income taxes attributable to extraordinary, unusual or nonrecurring
gains or losses or taxes attributable to sales or dispositions outside the
ordinary course of business), (ii) Consolidated Interest Expense, (iii) the
amount of any Preferred Stock dividends paid by the Issuer and its Restricted
Subsidiaries, and (iv) Consolidated Non-cash Charges, less any non-cash items
increasing Consolidated Net Income for such period, all as determined on a
consolidated basis for the Issuer and its Restricted Subsidiaries in accordance
with GAAP.
"Consolidated EBITDA Coverage Ratio" means, with respect to the Issuer,
the ratio of: (a) Consolidated EBITDA of the Issuer during the four full fiscal
quarters for which financial information in respect thereof is available (the
"Four Quarter Period") ending on or prior to the date of the transaction giving
rise to the need to calculate the Consolidated EBITDA Coverage Ratio (the
"Transaction Date") to (b) Consolidated Fixed Charges of the Issuer for the Four
Quarter Period.
For purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed
Charges" shall be calculated after giving effect (without duplication) on a pro
forma basis for the period of such calculation to: (a) the incurrence or
repayment of any Indebtedness of the Issuer or any of its Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period, and (b) any
Asset Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of the
Issuer or one of its Restricted Subsidiaries (including any Person who becomes a
Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming
or otherwise being liable for Acquired Indebtedness, and also including, without
limitation, any Consolidated EBITDA attributable to the assets which are the
subject of the Asset Acquisition or Asset Sale during the Four Quarter Period)
occurring during the Four Quarter Period or at any time subsequent to the last
day of the Four Quarter Period and on or prior to the Transaction Date, as if
such Asset Sale or Asset Acquisition (including the incurrence, assumption or
liability for any such Acquired Indebtedness) occurred on the first day of the
Four Quarter Period. If the Issuer or any of its Restricted Subsidiaries
directly or indirectly guarantees Indebtedness of a third Person, the preceding
sentence shall give effect to the incurrence of such guaranteed Indebtedness as
if the Issuer or the Restricted Subsidiary, as the case may be, had directly
incurred or otherwise assumed such guaranteed Indebtedness. Furthermore, in
calculating "Consolidated Fixed Charges" for purposes of determining the
denominator (but not the numerator) of this "Consolidated EBITDA Coverage
Ratio": (i) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal to
the rate of interest on such Indebtedness in effect on the Transaction Date;
(ii) if interest on any Indebtedness actually incurred on the Transaction Date
may optionally be determined at an interest rate based upon a factor of a prime
or similar rate, a eurocurrency interbank offered rate, or other rates, then the
interest rate in effect on the Transaction Date will be deemed to have been in
effect during the Four Quarter Period; (iii) notwithstanding clauses (i) and
(ii) above, interest on Indebtedness determined on a fluctuating basis, to the
extent such interest is covered by agreements relating to Interest Swap
Obligations, shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to the Issuer for any
period, the sum, without duplication, of: (a) Consolidated Interest Expense
(including any premium or penalty paid in connection with redeeming or retiring
Indebtedness of the Issuer and its Restricted Subsidiaries prior to the stated
maturity thereof pursuant to the agreements governing such Indebtedness), plus
(b) the product of (i) the amount of all dividend payments on any series of
Preferred Stock of the Issuer (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(ii) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local
income tax rate of such Person, expressed as a decimal.
5
"Consolidated Interest Expense" means, with respect to the Issuer for
any period, the sum of, without duplication: (a) the aggregate of the interest
expense of the Issuer and its Restricted Subsidiaries for such period determined
on a consolidated basis in accordance with GAAP, including without limitation,
(i) any amortization of original issue discount, (ii) the net costs under
Interest Swap Obligations, (iii) all capitalized interest and (iv) the interest
portion of any deferred payment obligation; and (b) the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or
accrued by the Issuer and its Restricted Subsidiaries during such period, as
determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to the Issuer for any
period, the aggregate net income (or loss) of the Issuer and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided, however, that there shall be excluded therefrom: (a)
after-tax gains from Asset Sales or abandonments or reserves relating thereto,
(b) after-tax items classified as extraordinary or nonrecurring gains, (c) the
net income of any Person acquired in a "pooling of interests" transaction
accrued prior to the date it becomes a Restricted Subsidiary or is merged or
consolidated with the Issuer or any Restricted Subsidiary, (d) the net income
(but not loss) of any Restricted Subsidiary to the extent that the declaration
of dividends or similar distributions by that Restricted Subsidiary of that
income is restricted by charter, contract, operation of law or otherwise, (e)
the net income of any Person in which the Issuer has an interest, other than a
Restricted Subsidiary, except to the extent of cash dividends or distributions
actually paid to the Issuer or to a Restricted Subsidiary by such Person, (f)
income or loss attributable to discontinued operations (including, without
limitation, operations disposed of during such period whether or not such
operations were classified as discontinued), and (g) in the case of a successor
to the Issuer by consolidation or merger or as a transferee of the Issuer's
assets, any net income (or loss) of the successor corporation prior to such
consolidation, merger or transfer of assets.
"Consolidated Net Worth" of any Person as of any date means the
consolidated stockholders' equity of such Person, determined on a consolidated
basis in accordance with GAAP, less (without duplication) amounts attributable
to Disqualified Capital Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to the Issuer, for
any period, the aggregate depreciation, depletion, amortization and other
non-cash expenses of the Issuer and its Restricted Subsidiaries reducing
Consolidated Net Income of the Issuer for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"consolidation" means, with respect to any Person, the consolidation of
the accounts of the Restricted Subsidiaries of such Person with those of such
Person, all in accordance with GAAP; provided, however, that "consolidation"
will not include consolidation of the accounts of any Unrestricted Subsidiary of
such Person with the accounts of such Person. The term "consolidated" has a
correlative meaning to the foregoing.
"Corporate Trust Office" means the office of the Trustee at which at
any particular time its corporate trust business shall be principally
administered, which office at the date of execution of this Indenture is located
at Sixth and Marquette, Minneapolis, Minnesota 55479-0069.
"Covenant Defeasance" has the meaning set forth in Section 8.01.
"Crude Oil and Natural Gas Business" means (i) the acquisition,
exploration, development, operation and disposition of interests in oil, gas and
other hydrocarbon properties located in North America, and (ii) the gathering,
marketing, treating, processing, storage, selling and transporting of any
production from such interests or properties of the Issuer or of others.
"Crude Oil and Natural Gas Hedge Agreements" means, with respect to any
Person, any oil and gas agreements and other agreements or arrangements or any
combination thereof entered into by such Person in the ordinary course of
business and that is designed to provide protection against oil and natural gas
price fluctuations.
6
"Crude Oil and Natural Gas Properties" means all Properties, including
equity or other ownership interests therein, owned by any Person which have been
assigned "proved oil and gas reserves" as defined in Rule 4-10 of Regulation S-X
of the Securities Act as in effect on the Issue Date.
"Crude Oil and Natural Gas Related Assets" means any Investment or
capital expenditure (but not including additions to working capital or
repayments of any revolving credit or working capital borrowings) by the Issuer
or any Restricted Subsidiary of the Issuer which is related to the business of
the Issuer and its Restricted Subsidiaries as it is conducted on the date of the
Asset Sale giving rise to the Net Cash Proceeds to be reinvested.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Issuer or any Restricted Subsidiary of the Issuer against fluctuations in
currency values.
"Custodian" means any receiver, trustee, assignee, liquidator,
sequestrator or similar official under any Bankruptcy Law.
"Default" means an event or condition the occurrence of which is, or
with the lapse of time or the giving of notice or both would be, an Event of
Default.
"Default Interest Payment Date" has the meaning set forth in Section.
2.12.
"Depository" means The Depository Trust Company, its nominees and
successors.
"Disqualified Capital Stock" means that portion of any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is mandatorily redeemable at the sole option of the
holder thereof, in whole or in part, in either case, on or prior to the final
maturity of the Notes.
"Equity Offering" means an offering of Qualified Capital Stock of the
Issuer.
"Event of Default" has the meaning provided in Section 6.01.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute or statutes thereto.
"Exchange Notes" has the meaning set forth in the second paragraph of
this Indenture.
"fair market value" means, with respect to any asset or property, the
price which could be negotiated in an arm's-length, free market transaction, for
cash, between an informed and willing seller and an informed and willing buyer,
neither of whom is under undue pressure or compulsion to complete the
transaction. Fair market value shall be determined by the Board of Directors of
the Issuer acting reasonably and in good faith and shall be evidenced by a Board
Resolution of the Issuer delivered to the Trustee; provided, however, that (a)
if the aggregate non-cash consideration to be received by the Issuer or any
Restricted Subsidiary from any Asset Sale shall reasonably be expected to exceed
$5,000,000 or (b) if the net worth of any Restricted Subsidiary to be designated
as an Unrestricted Subsidiary shall reasonably be expected to exceed
$10,000,000, then fair market value shall be determined by an Independent
Advisor.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board as of any date of determination.
"Global Notes" has the meaning provided in Section 2.01.
7
"Grey Wolf" means Grey Wolf Exploration Ltd., an Alberta corporation.
"guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other obligation
of any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part) (but if in part, only to the extent thereof); provided,
however, that the term "guarantee" shall not include (A) endorsements for
collection or deposit in the ordinary course of business and (B) guarantees
(other than guarantees of Indebtedness) by the Issuer in respect of assisting
one or more Restricted Subsidiaries in the ordinary course of their respective
businesses, including without limitation guarantees of trade obligations and
operating leases, on ordinary business terms. The term "guarantee" used as a
verb has a corresponding meaning.
"Guarantees" has the meaning set forth in Section 11.01.
"Holder" means any Person holding a Note.
"Hydrocarbons" means oil, gas, casinghead gas, drip gasoline, natural
gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and
all constituents, elements or compounds thereof and products processed
therefrom.
"incur" means, with respect to any Indebtedness, to create, incur,
assume, guarantee, acquire, become liable, contingently or otherwise, with
respect to such Indebtedness, or otherwise become responsible for the payment
thereof.
"Indebtedness" means with respect to any Person, without duplication:
(a) all Obligations of such Person for borrowed money, (b) all Obligations of
such Person evidenced by bonds, debentures, notes or other similar instruments,
(c) all Capitalized Lease Obligations of such Person, (d) all Obligations of
such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable), (e) all Obligations for the
reimbursement of any obligor on a letter of credit, banker's acceptance or
similar credit transaction, (f) guarantees and other contingent obligations in
respect of Indebtedness referred to in clauses (a) through (e) above and clause
(h) below, (g) all Obligations of any other Person of the type referred to in
clauses (a) through (f) above which are secured by any Lien on any property or
asset of such Person, the amount of such Obligation being deemed to be the
lesser of the fair market value of such property or asset or the amount of the
Obligation so secured, (h) all Obligations under Currency Agreements and
Interest Swap Obligations, and (i) all Disqualified Capital Stock issued by such
Person with the amount of Indebtedness represented by such Disqualified Capital
Stock being equal to the greater of its voluntary or involuntary liquidation
preference and its maximum fixed redemption price or repurchase price.
For purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to this Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined reasonably and in good
faith by the Board of Directors of the Issuer.
The "amount" or "principal amount" of Indebtedness at any time of determination
as used herein represented by: (1) any Indebtedness issued at a price that is
less than the principal amount at maturity thereof shall be the face amount of
the liability in respect thereof, (2) any Capitalized Lease Obligation shall be
the amount determined in accordance with the definition thereof, (3) any
Interest Swap Obligations included in the definition of Permitted Indebtedness
shall be zero, (4) all other unconditional obligations shall be the amount of
the liability thereof determined in accordance with GAAP, and (5) all other
contingent obligations shall be the maximum liability at such date of such
Person.
8
"Indenture" means this Indenture, as amended or supplemented from time
to time in accordance with the terms hereof.
"Independent Advisor" means a reputable accounting, appraisal or
nationally recognized investment banking, engineering or consulting firm which:
(a) does not, and whose directors, officers and employees or Affiliates do not,
have a direct or indirect material financial interest in the Issuer, and (b) in
the judgment of the Board of Directors of the Issuer, is otherwise
disinterested, independent and qualified to perform the task for which it is to
be engaged.
"Initial Notes" has the meaning set forth in the second paragraph of
this Indenture.
"Initial Purchaser" means Jefferies & Company, Inc.
"Institutional Accredited Investor" means an institution that is an
"accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7)
under the Securities Act.
"interest" when used with respect to any Note means the amount of all
interest accruing on such Note, including any applicable defaulted interest
pursuant to Section 2.12 and any Liquidated Damages pursuant to the Registration
Rights Agreement.
"Interest Payment Date" means the stated maturity of an installment of
interest on the Notes.
"Interest Swap Obligation" means the obligations of any Person pursuant
to any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended to the date hereof and from time to time hereafter.
"Investment" means, with respect to any Person, any direct or indirect:
(a) loan, advance or other extension of credit (including, without limitation, a
guarantee) or capital contribution (by means of any transfer of cash or other
property (valued at the fair market value thereof as of the date of transfer) to
others or any payment for property or services for the account or use of
others), (b) purchase or acquisition by such Person of any Capital Stock, bonds,
notes, debentures or other securities or evidences of Indebtedness issued by,
any other Person (whether by merger, consolidation, amalgamation or otherwise
and whether or not purchased directly from the issuer of such securities or
evidences of Indebtedness), (c) guarantee or assumption of the Indebtedness of
any other Person (other than the guarantee or assumption of Indebtedness of such
Person or a Restricted Subsidiary of such Person which guarantee or assumption
is made in compliance with Section 4.12, and (d) other items that would be
classified as investments on a balance sheet of such Person prepared in
accordance with GAAP. Notwithstanding the foregoing, "Investment" shall exclude
extensions of trade credit by the Issuer and its Restricted Subsidiaries on
commercially reasonable terms in accordance with normal trade practices of the
Issuer or such Restricted Subsidiary, as the case may be. The amount of any
Investment shall not be adjusted for increases or decreases in value, or
write-ups, write-downs or write-offs with respect to such Investment. If the
Issuer or any Restricted Subsidiary sells or otherwise disposes of any Capital
Stock of any Restricted Subsidiary such that, after giving effect to any such
sale or disposition, it ceases to be a Subsidiary of the Issuer, the Issuer
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Capital Stock of such
Restricted Subsidiary not sold or disposed of.
"Issue Date" means the date of original issuance of the Initial Notes.
"Issuer" means the party named as such in the first paragraph of this
Indenture until a successor replaces it pursuant to this Indenture and
thereafter means such successor.
9
"Issuer Properties" means all Properties, and equity, partnership or
other ownership interests therein, that are related or incidental to, or used or
useful in connection with, the conduct or operation of any business activities
of the Issuer or any of its Restricted Subsidiaries, which business activities
are not prohibited by the terms of this Indenture.
"Legal Defeasance" has the meaning set forth in Section 8.01.
"Legal Holiday" has the meaning provided in Section 10.07.
"Lien" means any lien, mortgage, deed of trust, pledge, security
interest, floating or other charge or encumbrance of any kind (including any
conditional sale or other title retention agreement, any lease in the nature
thereof and any agreement to give any security interest).
"Liquidated Damages" shall have the meaning set forth in the
Registration Rights Agreement.
"Material Change" means an increase or decrease of more than 10% during
a fiscal quarter in the discounted future net cash flows (excluding changes that
result solely from changes in prices) from proved oil and gas reserves of the
Issuer and consolidated Restricted Subsidiaries (before any state or federal
income tax); provided, however, that the following will be excluded from the
Material Change calculation: (i) any acquisitions during such fiscal quarter of
oil and gas reserves that have been estimated by independent petroleum engineers
and on which a report or reports exist, (ii) any disposition of properties
existing at the beginning of such fiscal quarter that have been disposed of as
provided in Section 4.16, and (iii) any reserves added during such fiscal
quarter attributable to the drilling or recompletion of wells not included in
previous reserve estimates, but which will be included in future quarters.
"Maturity Date" means March 15, 2003.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Mortgage" means any mortgage, deed of trust, assignment of production,
security agreement, fixture filing, guarantee of debts and liabilities, general
security agreement, financing statement or other instrument executed and
delivered by the Issuer or any Restricted Subsidiary of the Issuer and granting
a Lien in favor of the Trustee for the benefit of the Trustee and the Holders,
as the same may be amended, supplemented or modified from time to time in
accordance with the terms thereof and of this Indenture.
"Net Cash Proceeds" means, with respect to any Asset Sale, sale,
transfer or other disposition, the proceeds in the form of cash or Cash
Equivalents including payments in respect of deferred payment obligations when
received in the form of cash or Cash Equivalents received by the Issuer or any
of its Restricted Subsidiaries from such Asset Sale, sale, transfer or other
disposition net of: (a) reasonable out-of-pocket expenses and fees relating to
such Asset Sale, sale, transfer or other disposition (including, without
limitation, legal, accounting and investment banking fees and sales
commissions), (b) taxes paid or payable after taking into account any reduction
in consolidated tax liability due to available tax credits or deductions and any
tax sharing arrangements, (c) appropriate amounts (determined by the Chief
Financial Officer of the Issuer) to be provided by the Issuer or any Restricted
Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against
any post closing adjustments or liabilities associated with such Asset Sale,
sale, transfer or other disposition and retained by the Issuer or any Restricted
Subsidiary, as the case may be, after such Asset Sale, sale, transfer or other
disposition including, without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale, sale, transfer or other disposition (but excluding any payments which, by
the terms of the indemnities will not, be made during the term of the Notes),
and (d) the aggregate amount of cash and Cash Equivalents so received which is
used to retire any then existing Indebtedness (other than Indebtedness under the
Notes) of the Issuer or such Restricted Subsidiary which is secured by a Lien on
the property subject of the Asset Sale, sale, transfer or other disposition.
"Net Proceeds Offer" has the meaning set forth in Section 4.16.
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"Net Proceeds Offer Payment Date" has the meaning set forth in Section
4.16.
"Net Working Capital" means: (a) all current assets of the Issuer and
its consolidated Subsidiaries, minus (b) all current liabilities of the Issuer
and its consolidated Subsidiaries, except current liabilities included in
Indebtedness, in each case as set forth in financial statements of the Issuer
prepared in accordance with GAAP.
"New Cache" means the party named as such in the first paragraph of
this Indenture until a successor replaces it pursuant to this Indenture and
thereafter means such successor.
"Non-Collateral Proceeds" has the meaning set forth in Section 4.16.
"Non-Recourse Indebtedness" with respect to any Person means
Indebtedness of such Person for which: (a) the sole legal recourse for
collection of principal and interest on such Indebtedness is against the
specific property identified in the instruments evidencing or securing such
Indebtedness and such property was acquired with the proceeds of such
Indebtedness or such Indebtedness was incurred within 90 days after the
acquisition of such property, and (b) no other assets of such Person may be
realized upon in collection of principal or interest on such Indebtedness;
provided, however, that any such Indebtedness shall not cease to be
"Non-Recourse Indebtedness" solely as a result of the instrument governing such
Indebtedness containing terms pursuant to which such Indebtedness becomes
recourse upon: (i) fraud or misrepresentation by the Person in connection with
such Indebtedness, (ii) such Person failing to pay taxes or other charges that
result in the creation of Liens on any portion of the specific property securing
such Indebtedness or failing to maintain any insurance on such property required
under the instruments securing such Indebtedness, (iii) the conversion of any of
the collateral for such Indebtedness, (iv) such Person failing to maintain any
of the collateral for such Indebtedness in the condition required under the
instruments securing the Indebtedness, (v) any income generated by the specific
property securing such Indebtedness being applied in a manner not otherwise
allowed in the instruments securing such Indebtedness, (vi) the violation of any
applicable law or ordinance governing hazardous materials or substances or
otherwise affecting the environmental condition of the specific property
securing the Indebtedness, or (vii) the rights of the holder of such
Indebtedness to the specific property becoming impaired, suspended or reduced by
any act, omission or misrepresentation of such Person; provided, further, that
upon the occurrence of any of the foregoing clauses (i) through (vii) above, any
such Indebtedness which shall have ceased to be "Non-Recourse Indebtedness"
shall be deemed to have been Indebtedness incurred by such Person at such time.
"Non-U.S. Person" means a Person who is not a U.S. person, as defined
in Regulation S.
"Notes" means the Initial Notes and the Exchange Notes treated as a
single class of securities, as amended or supplemented from time to time in
accordance with the terms hereof, that are issued pursuant to this Indenture.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Offering Memorandum" means the confidential Offering Memorandum dated
March 27, 1999 of the Issuer relating to the offering of the Notes.
"Officer" means, with respect to any Person, the Chairman of the Board
of Directors, the Chief Executive Officer, the President, any Vice President,
the Chief Financial Officer, the Treasurer, the Controller, or the Secretary of
such Person, or any other officer designated by the Board of Directors serving
in a similar capacity.
"Officers' Certificate" means a certificate signed by two Officers of
the Issuer complying with the requirements of Sections 10.04 and 10.05, as they
relate to the giving of an Officers' Certificate.
"Oil and Gas Assets" means the Crude Oil and Natural Gas Properties and
natural gas processing facilities of the Issuer and/or Restricted Subsidiary,
except that for purposes of the Issuer's obligation to secure substantially all
of its Oil & Gas Assets acquired after the Issue Date, the T-Gas Assets shall be
excluded.
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"Opinion of Counsel" means a written opinion addressed to the Trustee
from legal counsel who is reasonably acceptable to the Trustee complying with
the requirements of Sections 10.04 and 10.05, as they relate to the giving of an
Opinion of Counsel.
"Paying Agent" has the meaning provided in Section 2.03, and includes
any additional Paying Agent.
"Payment Restriction" shall have the meaning set forth in Section 4.13.
"Permitted Indebtedness" means, without duplication, each of the
following: (a) Indebtedness under the Notes, the Exchange Notes, the Private
Exchange Notes, if any, this Indenture, the Guarantees and the Security
Documents; (b) Interest Swap Obligations of the Issuer or a Restricted
Subsidiary covering Indebtedness of the Issuer or any of its Restricted
Subsidiaries; provided, however, that such Interest Swap Obligations are entered
into to protect the Issuer and its Restricted Subsidiaries from fluctuations in
interest rates on Indebtedness incurred in accordance with this Indenture to the
extent the notional principal amount of such Interest Swap Obligations does not
exceed the principal amount of the Indebtedness to which such Interest Swap
Obligation relates; (c) Indebtedness of a Restricted Subsidiary to the Issuer or
to a Wholly Owned Restricted Subsidiary for so long as such Indebtedness is held
by the Issuer or a Wholly Owned Restricted Subsidiary, in each case subject to
no Lien held by a Person other than the Issuer or a Wholly Owned Restricted
Subsidiary; provided, however, that if as of any date any Person other than the
Issuer or a Wholly Owned Restricted Subsidiary owns or holds any such
Indebtedness or holds a Lien in respect of such Indebtedness, such date shall be
deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by
the issuer of such Indebtedness; (d) Indebtedness of the Issuer to a Wholly
Owned Restricted Subsidiary for so long as such Indebtedness is held by a Wholly
Owned Restricted Subsidiary, in each case subject to no Lien; provided, however,
that (i) any Indebtedness of the Issuer to any Wholly Owned Restricted
Subsidiary that is not a Subsidiary Guarantor is unsecured and subordinated,
pursuant to a written agreement, to the Issuer's obligations under this
Indenture and the Notes and (ii) if as of any date any Person other than a
Wholly Owned Restricted Subsidiary owns or holds any such Indebtedness or holds
a Lien in respect of such Indebtedness, such date shall be deemed the incurrence
of Indebtedness not constituting Permitted Indebtedness by the Issuer; (e)
Indebtedness arising from the honoring by a bank or other financial institution
of a check, draft or similar instrument inadvertently (except in the case of
daylight overdrafts) drawn against insufficient funds in the ordinary course of
business; provided, however, that such Indebtedness is extinguished within two
Business Days of incurrence; (f) Indebtedness of the Issuer or any of its
Restricted Subsidiaries represented by letters of credit for the account of the
Issuer or such Restricted Subsidiary, as the case may be, in order to provide
security for workers' compensation claims, payment obligations in connection
with self-insurance or similar requirements in the ordinary course of business;
(g) Refinancing Indebtedness; (h) Capitalized Lease Obligations of the Issuer
outstanding on the Issue Date; (i) Capitalized Lease Obligations and Purchase
Money Indebtedness of the Issuer or any of its Restricted Subsidiaries not to
exceed $5,000,000 at any one time outstanding; (j) Permitted Operating
Obligations; (k) Obligations arising in connection with Crude Oil and Natural
Gas Hedge Agreements of the Issuer or a Restricted Subsidiary; (l) Non-Recourse
Indebtedness; (m) Indebtedness under Currency Agreements; provided, however,
that in the case of Currency Agreements which relate to Indebtedness, such
Currency Agreements do not increase the Indebtedness of the Issuer and its
Restricted Subsidiaries outstanding other than as a result of fluctuations in
foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder; (n) additional Indebtedness of the Issuer or
any of its Restricted Subsidiaries in an aggregate principal amount at any time
outstanding not to exceed the greater of (i) $5,000,000 or (ii) 2.5% of Adjusted
Consolidated Net Tangible Assets; and (o) Indebtedness, including, but not
limited to, the Series D Notes, outstanding on the Issue Date (to the extent not
repaid with the proceeds of the sale of the Notes).
"Permitted Industry Investments" means: (a) capital expenditures,
including, without limitation, acquisitions of Issuer Properties and interests
therein; (b) (i) entry into operating agreements, joint ventures, working
interests, royalty interests, mineral leases, unitization agreements, pooling
arrangements or other similar or customary agreements, transactions, properties,
interests or arrangements, and Investments and expenditures in connection
therewith or pursuant thereto, in each case made or entered into in the ordinary
course of the oil and gas business, and (ii) exchanges of Issuer Properties for
other Issuer Properties of at least equivalent value as determined in good faith
by the Board of Directors of the Issuer; and (c) Investments of operating funds
on behalf of co-owners of Crude Oil and Natural Gas Properties of the Issuer or
the Subsidiaries pursuant to joint operating agreements.
12
"Permitted Investments" means: (a) Investments by the Issuer or any
Restricted Subsidiary in any Person that is or will become immediately after
such Investment a Restricted Subsidiary or that will merge or consolidate into
the Issuer or a Restricted Subsidiary that is not subject to any Payment
Restriction; (b) Investments in the Issuer by any Restricted Subsidiary;
provided, however, that any Indebtedness evidencing any such Investment held by
a Restricted Subsidiary that is not a Subsidiary Guarantor is unsecured and
subordinated, pursuant to a written agreement, to the Issuer's obligations under
the Notes and this Indenture; (c) investments in cash and Cash Equivalents; (d)
Investments made by the Issuer or its Restricted Subsidiaries as a result of
consideration received in connection with an Asset Sale made in compliance with
Section 4.16; and (e) Permitted Industry Investments.
"Permitted Liens" means each of the following types of Liens: (a) Liens
arising under this Indenture or the Security Documents; (b) Liens securing the
Notes and the Guarantees; (c) Liens for taxes, assessments or governmental
charges or claims either (i) not delinquent or (ii) contested in good faith by
appropriate proceedings and as to which the Issuer or a Restricted Subsidiary,
as the case may be, shall have set aside on its books such reserves as may be
required pursuant to GAAP; (d) statutory and contractual Liens of landlords to
secure rent arising in the ordinary course of business to the extent such Liens
relate only to the tangible property of the lessee which is located on such
property and Liens of carriers, warehousemen, mechanics, builders, suppliers,
materialmen, repairmen and other Liens imposed by law incurred in the ordinary
course of business for sums not yet delinquent or being contested in good faith,
if such reserve or other appropriate provision, if any, as shall be required by
GAAP shall have been made in respect thereof; (e) Liens incurred or deposits
made in the ordinary course of business: (i) in connection with workers'
compensation, unemployment insurance and other types of social security,
including any Lien securing letters of credit issued in the ordinary course of
business consistent with past practice in connection therewith, or (ii) to
secure the performance of tenders, statutory obligations, surety and appeal
bonds, bids, leases, government contracts, performance and return-of-money bonds
and other similar obligations (exclusive of obligations for the payment of
borrowed money); (f) easements, rights-of-way, zoning restrictions, restrictive
covenants, minor imperfections in title and other similar charges or
encumbrances in respect of real property not interfering in any material respect
with the ordinary conduct of the business of the Issuer or any of its Restricted
Subsidiaries; (g) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or assets
which is not leased property subject to such Capitalized Lease Obligation; (h)
Liens securing reimbursement obligations with respect to commercial letters of
credit which encumber documents and other property relating to such letters of
credit and products and proceeds thereof; (i) Liens encumbering deposits made to
secure obligations arising from statutory, regulatory, contractual, or warranty
requirements of the Issuer or any of its Restricted Subsidiaries, including
rights of offset and set-off; (j) Liens securing Interest Swap Obligations which
Interest Swap Obligations relate to Indebtedness that is otherwise permitted
under this Indenture and Liens securing Crude Oil and Natural Gas Hedge
Agreements; (k) Liens on pipeline or pipeline facilities, Hydrocarbons or
properties and assets of the Issuer and its Subsidiaries which arise out of
operation of law; (l) royalties, overriding royalties, revenue interests, net
revenue interests, net profit interests, revisionary interests, production
payments, production sales contracts, operating agreements and other similar
interests, properties, arrangements and agreements, all as ordinarily exist with
respect to Properties and assets of the Issuer and its Subsidiaries or otherwise
as are customary in the oil and gas business; (m) with respect to any Properties
and assets of the Issuer and its Subsidiaries, Liens arising under, or in
connection with, or related to, farm-out, farm-in, joint operation, area of
mutual interest agreements and/or other similar or customary arrangements,
agreements or interests that the Issuer or any Subsidiary determines in good
faith to be necessary for the economic development of such Property; (n) any (i)
interest or title of a lessor or sublessor under any lease, (ii) restriction or
encumbrance that the interest or title of such lessor or sublessor may be
subject to (including, without limitation, ground leases or other prior leases
of the demised premises, mortgages, mechanics' Liens, builders' Liens, tax
Liens, and easements), or (iii) subordination of the interest of the lessee or
sublessee under such lease to any restrictions or encumbrance referred to in the
preceding clause (ii); (o) Liens in favor of collecting or payor banks having a
right of setoff, revocation, refund or chargeback with respect to money or
instruments of the Issuer or any Restricted Subsidiary on deposit with or in
possession of such bank; (p) Liens securing Non-recourse Indebtedness; (q)
judgment and attachment Liens not giving rise to an Event of Default; (r) Liens
securing Acquired Indebtedness not to exceed $10,000,000 in the aggregate at any
one time outstanding incurred in accordance with Section 4.12; provided,
however, that (i) such Liens secured such Acquired Indebtedness at the time of
and prior to the incurrence of such Acquired Indebtedness by the Issuer or a
13
Restricted Subsidiary and were not granted in connection with, or in
anticipation of, the incurrence of such Acquired Indebtedness by the Issuer or a
Restricted Subsidiary and (ii) such Liens do not extend to or cover any property
or assets of the Issuer or of any of its Restricted Subsidiaries other than the
property or assets that secured the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Issuer or a Restricted
Subsidiary and are no more favorable to the lienholders than those securing the
Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness by
the Issuer or a Restricted Subsidiary; and (s) Liens existing on the Issue Date
(other than to the extent such Liens secure Indebtedness being repaid with the
proceeds of the Notes) and Liens securing Refinancing Indebtedness which is
incurred to Refinance any Indebtedness permitted under this Indenture and which
has been incurred in accordance with the provisions of this Indenture; provided,
however, that with respect to such Liens that already secure such Indebtedness
being Refinanced, such Liens (i) are no less favorable to the Holders and are
not more favorable to the lienholders with respect to such Liens than the Liens
in respect of the Indebtedness being Refinanced and (ii) do not extend to or
cover any new or additional property or assets, and with respect to such Liens
that are newly created, (A) such Liens are expressly junior to the Liens
securing the Notes, (B) such Refinancing results in an improvement on a pro
forma basis in the Issuer's Consolidated EBITDA Coverage Ratio, and (C) the
instruments creating such Liens expressly subject the foreclosure rights of the
holders of the Indebtedness being Refinanced to a stand-still of not less than
179 days.
"Permitted Operating Obligations" means Indebtedness of the Issuer or
any Restricted Subsidiary in respect of one or more standby letters of credit,
bid, performance or surety bonds, or other reimbursement obligations, issued for
the account of, or entered into by, the Issuer or any Restricted Subsidiary in
the ordinary course of business (excluding obligations related to the purchase
by the Issuer or any Restricted Subsidiary of Hydrocarbons for which the Issuer
or such Restricted Subsidiary has contracts to sell), or in lieu of any thereof
or in addition to any thereto, guarantees and letters of credit supporting any
such obligations and Indebtedness (in each case, other than for an obligation
for borrowed money, other than borrowed money represented by any such letter of
credit, bid, performance or surety bond, or reimbursement obligation itself, or
any guarantee and letter of credit related thereto).
"Person" means an individual, partnership, corporation, unincorporated
organization, limited liability company, trust, estate, or joint venture, or a
governmental agency or political subdivision thereof.
"Physical Notes" has the meaning provided in Section 2.01.
"Plan of Liquidation" means, with respect to any Person, a plan
(including by operation of law) that provides for, contemplates or the
effectuation of which is preceded or accompanied by (whether or not
substantially contemporaneously) (i) the sale, lease, conveyance or other
disposition of all or substantially all of the assets of such Person otherwise
than as an entirety or substantially as an entirety and (ii) the distribution of
all or substantially all of the proceeds of such sale, lease, conveyance or
other disposition and all or substantially all of the remaining assets of such
Person to holders of Capital Stock of such Person.
"Pledge Agreement" means those certain Security Agreements (Pledge)
dated as of the Issue Date pursuant to which the Capital Stock of Grey Wolf
owned by the Issuer and/or the Restricted Subsidiaries of the Issuer is pledged
to the Trustee for the benefit of the Holders, as the same may be amended,
modified or supplemented from time to time.
"Preferred Stock" of any Person means any Capital Stock of such Person
that has preferential rights to any other Capital Stock of such Person with
respect to dividends or redemptions or upon liquidation.
"principal" of any Indebtedness (including the Notes) means the
principal amount of such Indebtedness plus the premium, if any, on such
Indebtedness.
"Private Exchange Notes" has the meaning set forth in the Registration
Rights Agreement.
"Private Placement Legend" means the legend initially set forth on the
Notes in the form set forth in Section 2.15.
14
"pro forma" means, with respect to any calculation made or required to
be made pursuant to the terms of this Indenture, a calculation in accordance
with Article 11 of Regulation S-X under the Securities Act, as determined by the
Board of Directors of the Issuer in consultation with its independent public
accountants.
"Property" means, with respect to any Person, any interests of such
Person in any kind of property or asset, whether real, personal or mixed, or
tangible or intangible, including, without limitation, Capital Stock,
partnership interests and other equity or ownership interests in any other
Person.
"Purchase Money Indebtedness" means Indebtedness the net proceeds of
which are used to finance the cost (including the cost of construction) of
property or assets acquired in the normal course of business by the Person
incurring such Indebtedness.
"Qualified Capital Stock" means any Capital Stock that is not
Disqualified Capital Stock.
"Qualified Institutional Buyer" or "QIB" shall have the meaning
specified in Rule 144A under the Securities Act.
"Record Date" means the Record Dates specified in the Notes.
"Redemption Date," when used with respect to any Note to be redeemed,
means the date fixed for such redemption pursuant to this Indenture and the
Notes.
"Redemption Price," when used with respect to any Note to be redeemed,
means the price fixed for such redemption, including principal and premium, if
any, pursuant to this Indenture and the Notes.
"Reference Date" has the meaning set forth in Section 4.10.
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Issuer or any
Restricted Subsidiary of the Issuer of Indebtedness incurred in accordance with
Section 4.12 (other than pursuant to clause (b), (c), (d), (e), (f), (i), (j),
(k), (m) or (n) of the definition of Permitted Indebtedness), in each case that
does not: (1) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing (plus
the amount of any premium required to be paid under the terms of the instrument
governing such Indebtedness and plus the amount of reasonable expenses incurred
by the Issuer and its Restricted Subsidiaries in connection with such
Refinancing), or (2) create Indebtedness with (A) a Weighted Average Life to
Maturity that is less than the Weighted Average Life to Maturity of the
Indebtedness being Refinanced or (B) a final maturity earlier than the final
maturity of the Indebtedness being Refinanced; provided, however, that (a) if
such Indebtedness being Refinanced is Indebtedness of the Issuer or a Subsidiary
Guarantor, then such Refinancing Indebtedness shall be Indebtedness solely of
the Issuer and/or such Subsidiary Guarantor and (b) if such Indebtedness being
Refinanced is subordinate or junior to the Notes or a Guarantee, then such
Refinancing Indebtedness shall be subordinate to the Notes or such Guarantee, as
the case may be, at least to the same extent and in the same manner as the
Indebtedness being Refinanced.
"Registrar" has the meaning provided in Section 2.03.
"Registration Rights Agreement" means the Registration Rights Agreement
dated the Issue Date between the Issuer and the Initial Purchaser.
"Regulation S" means Regulation S under the Securities Act.
15
"Related Person" of any Person means any other Person directly or
indirectly owning 10% or more of the outstanding voting Common Stock of such
Person (or, in the case of a Person that is not a corporation, 10% or more of
the equity interest in such Person).
"Released Interests" has the meaning provided in Section 12.04.
"Replacement Assets" has the meaning provided in Section 4.16.
"Restricted Payment" shall have the meaning set forth in Section 4.10.
"Restricted Security" has the meaning assigned to such term in Rule
144(a)(3) under the Securities Act; provided, however, that the Trustee shall be
entitled to request and conclusively rely on an Opinion of Counsel with respect
to whether any Note constitutes a Restricted Security.
"Restricted Subsidiary" means any Subsidiary of the Issuer (including,
without limitation, Canadian Abraxas, New Cache and Sandia) that has not been
designated by the Board of Directors of the Issuer, by a Board Resolution
delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in
compliance with Section 4.14. Any such designation may be revoked by a Board
Resolution of the Issuer delivered to the Trustee, subject to the provisions of
such Section.
"Rule 144A" means Rule 144A under the Securities Act.
"S&P" means Standard & Poor's Rating Services, a division of The McGraw
Hill Companies, Inc., and its successors.
"Sale and Leaseback Transaction" means any direct or indirect
arrangement with any Person or to which any such Person is a party, providing
for the leasing to the Issuer or a Restricted Subsidiary of any Property,
whether owned by the Issuer or any Restricted Subsidiary at the Issue Date or
later acquired which has been or is to be sold or transferred by the Issuer or
such Restricted Subsidiary to such Person or to any other Person from whom funds
have been or are to be advanced by such Person on the security of such Property.
"Sandia" means the party named as such in the first paragraph of this
Indenture until a successor replaces it pursuant to this Indenture and
thereafter such successor.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Security Documents" means, collectively, the Mortgages, the Pledge
Agreement and all security agreements, mortgages, deeds of trust, collateral
assignments or other instruments evidencing or creating any security interests
in favor of the Trustee in all or any portion of the Collateral, in each case as
amended, supplemented or modified from time to time in accordance with their
terms and the terms of this Indenture.
"Series D Notes" means the $275,000,000 112 Senior Notes due 2004,
Series D of the Issuer and Canadian Abraxas.
"Stated Maturity Date" means March 15, 2003.
"Subordinated Indebtedness" means Indebtedness of the Issuer or a
Subsidiary Guarantor that is subordinated or junior in right of payment to the
Notes, the relevant Guarantee and the Security Documents, as applicable,
pursuant to a written agreement to that effect.
"Subsidiary," with respect to any Person, means: (a) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
16
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person, or (b) any
other Person of which at least a majority of the voting interests under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Subsidiary Guarantor" means Canadian Abraxas, New Cache, Sandia and
each of the Issuer's Restricted Subsidiaries that in the future executes a
supplemental indenture in which such Restricted Subsidiary agrees to be bound by
the terms of this Indenture as a Subsidiary Guarantor; provided, however, that
any Person constituting a Subsidiary Guarantor as described above shall cease to
constitute a Subsidiary Guarantor when its Guarantee is released in accordance
with the terms of this Indenture.
"Surviving Entity" shall have the meaning set forth in Section 5.01.
"T-Gas Assets" means (i) those certain oil and gas leasehold rights and
interests in Sweetwater and Carbon Counties, Wyoming, conveyed by Dalen
Resources Oil & Gas Co., as assignor, to Tgas Investments, L.L.C., by that
certain Assignment of Oil and Gas Leases with Reservation of Production Payment
dated effective August 1, 1995, as amended, the same interests being covered by
that certain Option to Purchase Oil and Gas Interests dated August 25, 1995,
between Tgas Investments, L.L.C., and Dalen Resources Oil & Gas Co., as amended,
said option now being held by the Issuer and/or Abraxas Wamsutter L.P.; and (ii)
those certain Credit Payments respecting tax credits to be made by Tgas
Investments, L.L.C. to Dalen Resources Oil & Gas Co. in that certain Purchase
and Sale Agreement dated August 1, 1995, as amended, evidenced by a Promissory
Note (Recourse) dated effective August 25, 1995, from Tgas Investments, L.L.C.,
to Dalen Resources Oil & Gas Co., as renewed and amended, now held by the
Issuer.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. " 77aaa-77bbbb),
as amended, as in effect on the date of this Indenture, except as otherwise
provided in Section 9.03.
"Trust Officer" means any officer or assistant officer within the
Corporate Trust Office of the Trustee (or any successor group of the Trustee)
assigned by the Trustee or successor Trustee to administer this Indenture, or in
the case of a successor trustee, an officer assigned to the department, division
or group performing the corporation trust work of such successor and assigned to
administer this Indenture.
"Trustee" means the party named as such in this Indenture until a
successor replaces it in accordance with the provisions of Article Seven of this
Indenture and thereafter means such successor.
"Trust Moneys" means all cash or Cash Equivalents received by the
Trustee: (a) upon the release of Collateral from the Lien of this Indenture and
the Security Documents, including investment earnings thereon; or (b) pursuant
to the provisions of any Mortgage; or (c) as proceeds of any other sale or other
disposition of all or any part of the Collateral by or on behalf of the Trustee
or any collection, recovery, receipt, appropriation or other realization of or
from all or any part of the Collateral pursuant to this Indenture or any of the
Security Documents or otherwise; or (d) for application under this Indenture as
provided for in this Indenture or the Security Documents, or whose disposition
is not elsewhere specifically provided for in this Indenture or in the Security
Documents; provided, however, that Trust Moneys shall not include any property
deposited with the Trustee pursuant to any Change of Control Offer, Net Proceeds
Offer or redemption or defeasance of any Notes.
"U.S. Government Obligations" mean direct obligations of, and
obligations guaranteed by, the United States of America for the payment of which
the full faith and credit of the United States of America is pledged.
"U.S. Legal Tender" means such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts.
"Unrestricted Subsidiary" means any Subsidiary of the Issuer designated
as such pursuant to and in compliance with Section 4.14; provided, however, that
Unrestricted Subsidiaries shall initially include Western and Grey Wolf, to the
extent, if any, it now or hereafter constitutes a "Subsidiary". Any such
designation may be revoked by a Board Resolution of the Issuer delivered to the
Trustee, subject to the provisions of such Section 4.14.
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"Valuation Date" has the meaning provided in Section 12.04.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing: (a) the then
outstanding aggregate principal amount of such Indebtedness into (b) the sum of
the total of the products obtained by multiplying: (i) the amount of each then
remaining installment, sinking fund, serial maturity or other required payment
of principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Western" means Western Associated Energy Corporation, a Texas
Corporation.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which all the outstanding voting securities normally entitled to vote in the
election of directors are owned by the Issuer or another Wholly Owned Restricted
Subsidiary.
SECTION 1.02. Incorporation by Reference of TIA.
Whenever this Indenture refers to a provision of the TIA, such
provision is incorporated by reference in, and made a part of, this Indenture.
The following TIA terms used in this Indenture have the following meanings:
"indenture securities" means the Notes.
"indenture security holder" means a Holder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Issuer, any Subsidiary
Guarantor or any other obligor on the Notes.
All other TIA terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by Commission rule and
not otherwise defined herein have the meanings assigned to them therein.
SECTION 1.03. Rules of Construction.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP of any date of determination;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and words in the
plural include the singular;
(5) "herein," "hereof" and other words of similar import refer
to this Indenture as a whole and not to any particular Article, Section
or other subdivision; and
(6) any reference to a statute, law or regulation means that
statute, law or regulation as amended and in effect from time to time
and includes any successor statute, law or regulation; provided,
however, that any reference to the Bankruptcy Law shall mean the
Bankruptcy Law as applicable to the relevant case.
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ARTICLE TWO
THE NOTES
SECTION 2.01. Principal Amount; Form and Dating.
(a) Principal Amount.
The aggregate principal amount of Notes which may be issued, executed,
authenticated and outstanding under this Indenture is $63,500,000.
(b) Form and Dating.
The Initial Notes and the Trustee's certificate of authentication
relating thereto shall be substantially in the form of Exhibit A hereto. The
Exchange Notes and the Trustee's certificate of authentication relating thereto
shall be substantially in the form of Exhibit B hereto. The Notes may have
notations, legends or endorsements required by law, stock exchange rule or
depository rule or usage. The Issuer and the Trustee shall approve the form of
the Notes and any notation, legend or endorsement on them. Each Note shall be
dated the date of its issuance and shall show the date of its authentication.
Each Note shall have an executed Guarantee endorsed thereon substantially in the
form of Exhibit E hereto.
The terms and provisions contained in the Notes, annexed hereto as
Exhibits A and B, shall constitute, and are hereby expressly made, a part of
this Indenture and, to the extent applicable, the Issuer and the Trustee, by
their execution and delivery of this Indenture, expressly agree to such terms
and provisions and to be bound thereby.
Notes offered and sold in reliance on Rule 144A, Notes offered and sold
to institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3)
or (7) under the Securities Act) and Notes offered and sold in reliance on
Regulation S shall be issued initially in the form of one or more permanent
global Notes in registered form, substantially in the form set forth in Exhibit
A (the "Global Notes"), deposited with the Trustee, as custodian for the
Depository, duly executed by the Issuer (and having an executed Guarantee
endorsed thereon) and authenticated by the Trustee as hereinafter provided and
shall bear the legend set forth in Section 2.15. The aggregate principal amount
of the Global Notes may from time to time be increased or decreased by
adjustments made on the records of the Trustee, as custodian for the Depository,
as hereinafter provided. Notes issued in exchange for interests in a Global Note
pursuant to Section 2.16 may be issued in the form of permanent certificated
Notes in registered form in substantially the form set forth in Exhibit A (the
"Physical Notes").
SECTION 2.02. Execution and Authentication; Aggregate Principal Amount.
Two Officers, or an Officer and an Assistant Secretary of the Issuer
and each Subsidiary Guarantor, shall sign, or one Officer shall sign and one
Officer or an Assistant Secretary (each of whom shall, in each case, have been
duly authorized by all requisite corporate actions) shall attest to, the Notes
for the Issuer and the Guarantees for the Subsidiary Guarantors by manual or
facsimile signature.
If an Officer or Assistant Secretary whose signature is on a Note or a
Guarantee was an Officer or Assistant Secretary at the time of such execution
but no longer holds that office or position at the time the Trustee
authenticates the Note, the Note shall nevertheless be valid.
A Note shall not be valid until an authorized signatory of the Trustee
manually signs the certificate of authentication on the Note. The signature
shall be conclusive evidence that the Note has been authenticated under this
Indenture.
The Trustee upon receipt of a written order in the form of an Officers'
Certificate shall authenticate (i) Initial Notes for original issue in the
aggregate principal amount not to exceed $63,500,000 and (ii) Exchange Notes
19
from time to time for issue only in exchange for a like principal amount of
Initial Notes or (iii) Private Exchange Notes, in each case upon a written order
of the Issuer in the form of an Officers' Certificate of the Issuer. Each such
written order shall specify the amount of Notes to be authenticated and the date
on which the Notes are to be authenticated, whether the Notes are to be Initial
Notes or Exchange Notes and whether the Notes are to be issued as Physical Notes
or Global Notes or such other information as the Trustee may reasonably request.
In addition, with respect to authentication pursuant to clauses (ii) or (iii) of
the first sentence of this paragraph, the first such written order from the
Issuer shall be accompanied by an Opinion of Counsel of the Issuer in a form
reasonably satisfactory to the Trustee stating that the issuance of the Exchange
Notes or Private Exchange Notes, as the case may be, does not give rise to an
Event of Default, complies with this Indenture and has been duly authorized by
the Issuer. The aggregate principal amount of Notes outstanding at any time may
not exceed $63,500,000, except as provided in Sections 2.07 and 2.08.
The Trustee may appoint an authenticating agent (the "Authenticating
Agent") reasonably acceptable to the Issuer to authenticate Notes. Unless
otherwise provided in the appointment, an Authenticating Agent may authenticate
Notes whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such Authenticating
Agent. An Authenticating Agent has the same rights as an Agent to deal with the
Issuer or with any Affiliate of the Issuer.
The Notes shall be issuable in fully registered form only, without
coupons, in denominations of $1,000 and any integral multiple thereof.
SECTION 2.03. Registrar and Paying Agent.
The Issuer shall maintain an office or agency where (a) Notes may be
presented or surrendered for registration of transfer or for exchange
("Registrar") which shall be the Corporate Trust Office, (b) Notes may be
presented or surrendered for payment ("Paying Agent") which shall initially be
the Norwest Corporate Trust c/o The Depository Trust Company, First Floor, TADS
Department, 55 Water Street, New York, New York 10041, and (c) notices and
demands to or upon the Issuer in respect of the Notes and this Indenture or to
or upon the Subsidiary Guarantors in respect of their Guarantee and this
Indenture may be served which shall be the office of the Paying Agent or the
Corporate Trust Office. The Registrar shall keep a register of the Notes and of
their transfer and exchange. The Issuer, upon prior written notice to the
Trustee, may have one or more co-Registrars and one or more additional Paying
Agents reasonably acceptable to the Trustee. The Issuer may act as its own
Paying Agent, except that for the purposes of payments on the Notes pursuant to
Sections 4.15 and 4.16, neither the Issuer nor any Affiliate of the Issuer may
act as Paying Agent; provided that any such co-Registrar or Paying Agent shall
deliver a certificate to the Trustee certifying that it agrees to perform its
duties in accordance with the procedures established by the Trustee and with the
terms of this Indenture.
The Issuer shall enter into an appropriate agency agreement with any
Agent not a party to this Indenture, which agreement shall incorporate the
provisions of the TIA and implement the provisions of this Indenture that relate
to such Agent. The Issuer shall notify the Trustee, in advance, of the name and
address of any such Agent. If the Issuer fails to maintain a Registrar or Paying
Agent, or fail to give the foregoing notice, the Trustee shall act as such.
The Issuer and the Subsidiary Guarantors initially appoint the Trustee
as Registrar, Paying Agent and agent for service of demands and notices in
connection with the Notes and the Guarantees, until such time as the Trustee has
resigned or a successor has been appointed. Any of the Registrar, the Paying
Agent or any other agent may resign upon 30 days' notice to the Issuer.
SECTION 2.04. Paying Agent To Hold Assets in Trust.
The Issuer shall require each Paying Agent other than the Trustee to
agree in writing that such Paying Agent shall hold in trust for the benefit of
the Holders or the Trustee all assets held by the Paying Agent for the payment
of principal of, premium, if any, or interest on, the Notes (whether such assets
have been distributed to it by the Issuer or any other obligor on the Notes),
and the Issuer and the Paying Agent shall notify the Trustee of any Default by
the Issuer (or any other obligor on the Notes) in making any such payment. The
Issuer at any time may require a Paying Agent to distribute all assets held by
it to the Trustee and account for any assets disbursed and the Trustee may at
20
any time during the continuance of any payment Default, upon written request to
a Paying Agent, require such Paying Agent to distribute all assets held by it to
the Trustee and to account for any assets distributed. Upon distribution to the
Trustee of all assets that shall have been delivered by the Issuer to the Paying
Agent, the Paying Agent shall have no further liability for such assets.
SECTION 2.05. Holder Lists.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
the Holders. If the Trustee is not the Registrar, the Issuer shall furnish or
cause the Registrar to furnish to the Trustee before each Record Date and at
such other times as the Trustee may request in writing a list as of such date
and in such form as the Trustee may reasonably require of the names and
addresses of the Holders, which list may be conclusively relied upon by the
Trustee.
SECTION 2.06. Transfer and Exchange.
When Notes are presented to the Registrar or a co-Registrar with a
request to register the transfer of such Notes or to exchange such Notes for an
equal principal amount of Notes or other authorized denominations, the Registrar
or co-Registrar shall register the transfer or make the exchange as requested if
its requirements for such transaction are met; provided, however, that the Notes
presented or surrendered for registration of transfer or exchange shall be duly
endorsed or accompanied by a written instrument of transfer in form satisfactory
to the Issuer, the Trustee and the Registrar or co-Registrar, duly executed by
the Holder thereof or his attorney duly authorized in writing. To permit
registration of transfers and exchanges, the Issuer shall execute and the
Trustee shall authenticate Notes and the Subsidiary Guarantors shall execute
Guarantees thereon at the Registrar's or co-Registrar's request. No service
charge shall be made for any registration of transfer or exchange, but the
Issuer may require payment of a sum sufficient to cover any transfer tax, fee or
similar governmental charge payable in connection therewith (other than any such
transfer taxes or similar governmental charge payable upon exchanges or
transfers pursuant to Sections 2.10, 3.04, 4.15, 4.16 or 9.05, in which event
the Issuer shall be responsible for the payment of such taxes).
The Registrar or co-Registrar shall not be required to register the
transfer of or exchange of any Note (i) during a period beginning at the opening
of business 15 days before the mailing of a notice of redemption of Notes and
ending at the close of business on the day of such mailing and (ii) selected for
redemption in whole or in part pursuant to Article Three, except the unredeemed
portion of any Note being redeemed in part.
Any Holder of a beneficial interest in a Global Note shall, by
acceptance of such Global Note, agree that transfers of beneficial interests in
such Global Note may be effected only through a book entry system maintained by
the Holder of such Global Note (or its agent), and that ownership of a
beneficial interest in the Note shall be required to be reflected in a book
entry system.
SECTION 2.07. Replacement Notes.
If a mutilated Note is surrendered to the Trustee or if the Holder of a
Note claims that the Note has been lost, destroyed or wrongfully taken and
submits evidence thereof satisfactory to the Trustee, the Issuer shall issue and
the Trustee, upon receipt of a written order in the form of an Officers'
Certificate, shall authenticate a replacement Note and the Subsidiary Guarantors
shall execute a Guarantee thereon if the Trustee's requirements are met. If
required by the Trustee or the Issuer, such Holder must provide an indemnity
bond or other indemnity of reasonable tenor, sufficient in the reasonable
judgment of the Issuer, the Subsidiary Guarantors and the Trustee, to protect
the Issuer, the Subsidiary Guarantors, the Trustee or any Agent from any loss
which any of them may suffer if a Note is replaced. Every replacement Note shall
constitute an additional obligation of the Issuer and the Subsidiary Guarantors.
21
SECTION 2.08. Outstanding Notes.
Notes outstanding at any time are all the Notes that have been
authenticated by the Trustee except those canceled by it, those delivered to it
for cancellation and those described in this Section as not outstanding. Subject
to the provisions of Section 2.09, a Note does not cease to be outstanding
because the Issuer or any of its Affiliates holds the Note.
If a Note is replaced pursuant to Section 2.07 (other than a mutilated
Note surrendered for replacement), it ceases to be outstanding unless the
Trustee receives proof satisfactory to it that the replaced Note is held by a
bona fide purchaser. A mutilated Note ceases to be outstanding upon surrender of
such Note and replacement thereof pursuant to Section 2.07.
If on a Redemption Date or the Maturity Date, the Paying Agent holds
U.S. Legal Tender or U.S. Government Obligations sufficient to pay all of the
principal, premium, if any, and interest due on the Notes payable on that date
and is not prohibited from paying such money to the Holders thereof pursuant to
the terms of this Indenture, then on and after that date such Notes shall be
deemed not to be outstanding and interest on them shall cease to accrue.
SECTION 2.09. Treasury Notes.
In determining whether the Holders of the required principal amount of
Notes have concurred in any direction, waiver, consent or notice, Notes owned by
the Issuer or an Affiliate of the Issuer shall be considered as though they are
not outstanding, except that for the purposes of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Notes which a Trust Officer of the Trustee actually knows are so owned shall be
so considered. The Issuer shall notify the Trustee, in writing, when it or, to
its knowledge, any of its Affiliates repurchases or otherwise acquires Notes, of
the aggregate principal amount of such Notes so repurchased or otherwise
acquired and such other information as the Trustee may reasonably request and
the Trustee shall be entitled to rely thereon.
SECTION 2.10. Temporary Notes.
Until definitive Notes are ready for delivery, the Issuer may prepare
and the Trustee shall authenticate temporary Notes upon receipt of a written
order of the Issuer in the form of an Officers' Certificate. The Officers'
Certificate shall specify the amount of temporary Notes to be authenticated and
the date on which the temporary Notes are to be authenticated. Temporary Notes
shall be substantially in the form of definitive Notes but may have variations
that the Issuer considers appropriate for temporary Notes and so indicate in the
Officers' Certificate. Without unreasonable delay, the Issuer shall prepare, the
Trustee shall authenticate and the Subsidiary Guarantors shall execute
Guarantees on, upon receipt of a written order of the Issuer pursuant to Section
2.02, definitive Notes in exchange for temporary Notes.
SECTION 2.11. Cancellation.
The Issuer at any time may deliver Notes to the Trustee for
cancellation. The Registrar and the Paying Agent shall forward to the Trustee
any Notes surrendered to them for transfer, exchange or payment. The Trustee, or
at the direction of the Trustee, the Registrar or the Paying Agent, and no one
else, shall cancel and, at the written direction of the Issuer, shall dispose,
in its customary manner, of all Notes surrendered for transfer, exchange,
payment or cancellation. Subject to Section 2.07, the Issuer may not issue new
Notes to replace Notes that it has paid or delivered to the Trustee for
cancellation. If the Issuer shall acquire any of the Notes, such acquisition
shall not operate as a redemption or satisfaction of the Indebtedness
represented by such Notes unless and until the same are surrendered to the
Trustee for cancellation pursuant to this Section 2.11.
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SECTION 2.12. Defaulted Interest.
The Issuer will pay interest on overdue principal from time to time on
demand at the rate of interest then borne by the Notes. The Issuer shall, to the
extent lawful, pay interest on overdue installments of interest (without regard
to any applicable grace periods) from time to time on demand at the rate of
interest then borne by the Notes. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months, and, in the case of a partial
month, the actual number of days elapsed.
If the Issuer defaults in a payment of interest on the Notes, it shall
pay the defaulted interest, plus (to the extent lawful) any interest payable on
the defaulted interest, to the Persons who are Holders on a subsequent special
record date, which special record date shall be the fifteenth day next preceding
the date fixed by the Issuer for the payment of defaulted interest or the next
succeeding Business Day if such date is not a Business Day. The Issuer shall
notify the Trustee in writing of the amount of defaulted interest proposed to be
paid on each Note and the date of the proposed payment (a "Default Interest
Payment Date"), and at the same time the Issuer shall deposit with the Trustee
an amount of money equal to the aggregate amount proposed to be paid in respect
of such defaulted interest or shall make arrangements satisfactory to the
Trustee for such deposit on or prior to the date of the proposed payment, such
money when deposited to be held in trust for the benefit of the Persons entitled
to such defaulted interest as provided in this Section; provided, however, that
in no event shall the Issuer deposit monies proposed to be paid in respect of
defaulted interest later than 11:00 a.m. New York City time of the proposed
Default Interest Payment Date. At least 15 days before the subsequent special
record date, the Issuer shall mail (or cause to be mailed) to each Holder, as of
a recent date selected by the Issuer, with a copy to the Trustee, a notice that
states the subsequent special record date, the Default Interest Payment Date and
the amount of defaulted interest, and interest payable on such defaulted
interest, if any, to be paid. Notwithstanding the foregoing, any interest which
is paid prior to the expiration of the 30-day period set forth in Section
6.01(a) shall be paid to Holders as of the regular record date for the Interest
Payment Date for which interest has not been paid. Notwithstanding the
foregoing, the Issuer may make payment of any defaulted interest in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Notes may be listed, and upon such notice as may be required by
such exchange.
SECTION 2.13. CUSIP Number.
The Issuer in issuing the Notes may use a "CUSIP" number, and, if so,
the Trustee shall use the CUSIP number in notices of redemption or exchange as a
convenience to Holders; provided, however, that no representation is hereby
deemed to be made by the Trustee as to the correctness or accuracy of the CUSIP
number printed in the notice or on the Notes, and that reliance may be placed
only on the other identification numbers printed on the Notes. The Issuer shall
promptly notify the Trustee in writing of any change in the CUSIP number.
SECTION 2.14. Deposit of Monies.
Prior to 11:00 a.m. New York City time on each Interest Payment Date,
Maturity Date, Redemption Date, Change of Control Payment Date and Net Proceeds
Offer Payment Date, the Issuer shall have deposited with the Paying Agent in
immediately available funds money sufficient to make cash payments, if any, due
on such Interest Payment Date, Maturity Date, Redemption Date, Change of Control
Payment Date and Net Proceeds Offer Payment Date, as the case may be, in a
timely manner which permits the Paying Agent to remit payment to the Holders on
such Interest Payment Date, Maturity Date, Redemption Date, Change of Control
Payment Date and Net Proceeds Offer Payment Date, as the case may be.
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SECTION 2.15. Restrictive Legends.
Each Global Note and Physical Note that constitutes a Restricted
Security shall bear the following legend (the "Private Placement Legend") on the
face thereof until after the third anniversary of the later of the Issue Date
and the last date on which the Issuer or any Affiliate of the Issuer was the
owner of such Note (or any predecessor security) (or such shorter period of time
as permitted by Rule 144(k) under the Securities Act or any successor provision
thereunder) (or such longer period of time as may be required under the
Securities Act or applicable state securities laws in the opinion of counsel for
the Issuer, unless otherwise agreed by the Issuer and the Holder thereof):
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION
HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT)
OR (B) IT IS AN "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1),
(2), (3), OR (7) UNDER THE SECURITIES ACT), (AN "ACCREDITED INVESTOR")
OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN
OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES
ACT, (2) AGREES THAT IT WILL NOT WITHIN TWO YEARS AFTER THE ORIGINAL
ISSUANCE OF THIS SECURITY RESELL OR OTHERWISE TRANSFER THIS SECURITY
EXCEPT (A) TO THE ISSUER THEREOF OR ANY SUBSIDIARY THEREOF, (B) INSIDE
THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH
RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN
ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES (OR HAS
FURNISHED ON ITS BEHALF BY A U.S. BROKER-DEALER) TO THE TRUSTEE A
SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS
RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS SECURITY (THE FORM OF
WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE FOR THIS SECURITY), (D)
OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH
RULE 904 UNDER THE SECURITIES ACT (PROVIDED THAT ANY SUCH SALE OR
TRANSFER IN CANADA OR TO OR FOR THE BENEFIT OF A CANADIAN RESIDENT MUST
BE EFFECTED PURSUANT TO AN EXEMPTION FROM THE PROSPECTUS AND
REGISTRATION REQUIREMENTS UNDER APPLICABLE CANADIAN SECURITIES LAWS),
(E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144
UNDER THE SECURITIES ACT (IF AVAILABLE), OR (F) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3)
AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN
CONNECTION WITH ANY TRANSFER OF THIS SECURITY WITHIN TWO YEARS AFTER
THE ORIGINAL ISSUANCE OF THIS SECURITY, IF THE PROPOSED TRANSFEREE IS
AN ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER,
FURNISH TO THE TRUSTEE AND THE ISSUER SUCH CERTIFICATIONS, LEGAL
OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE
TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION
FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS
OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANING GIVEN
TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
Each Global Note shall also bear the following legend on the face
thereof:
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR SECURITIES IN
DEFINITIVE FORM, THIS SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE
BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY, OR BY ANY SUCH
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NOMINEE OF THE DEPOSITORY, OR BY THE DEPOSITORY OR NOMINEE OF SUCH
SUCCESSOR DEPOSITORY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITORY OR A
NOMINEE OF SUCH SUCCESSOR DEPOSITORY. UNLESS THIS CERTIFICATE IS
PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT
HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH
AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR
THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS
GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH
THE RESTRICTIONS SET FORTH IN SECTION 2.17 OF THIS INDENTURE.
SECTION 2.16. Book-Entry Provisions for Global Security.
(a) The Global Notes initially shall (i) be registered in the name of
the Depository or the nominee of such Depository, (ii) be delivered to the
Trustee as custodian for such Depository and (iii) bear legends as set forth in
Section 2.15.
Members of, or participants in, the Depository ("Agent Members") shall
have no rights under this Indenture with respect to any Global Note held on
their behalf by the Depository, or the Trustee as its custodian, or under the
Global Notes, and the Depository may be treated by the Issuer, the Trustee and
any Agent of the Issuer or the Trustee as the absolute owner of such Global Note
for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall
prevent the Issuer, the Trustee or any Agent of the Issuer or the Trustee from
giving effect to any written certification, proxy or other authorization
furnished by the Depository or impair, as between the Depository and its Agent
Members, the operation of customary practices governing the exercise of the
rights of a Holder of any Note.
(b) Transfers of a Global Note shall be limited to transfers in whole,
but not in part, to the Depository, its successors or their respective nominees.
Interests of beneficial owners in a Global Note may be transferred or exchanged
for Physical Notes in accordance with the rules and procedures of the Depository
and the provisions of Section 2.17. In addition, Physical Notes shall be
transferred to all beneficial owners in exchange for their beneficial interests
in a Global Note if (i) the Depository notifies the Issuer that it is unwilling
or unable to continue as Depository for the Global Notes and a successor
depositary is not appointed by the Issuer within 90 days of such notice or (ii)
an Event of Default has occurred and is continuing and the Registrar has
received a written request from the Depository to issue Physical Notes.
(c) In connection with any transfer or exchange of a portion of the
beneficial interest in a Global Note to beneficial owners pursuant to paragraph
(b), the Registrar shall (if one or more Physical Notes are to be issued)
reflect on its books and records the date and a decrease in the principal amount
of such Global Note in an amount equal to the principal amount of the beneficial
interest in the Global Note to be transferred, and the Issuer shall execute, the
Subsidiary Guarantors shall execute Guarantees on, and the Trustee shall
authenticate and deliver, one or more Physical Notes of like tenor and amount.
(d) In connection with the transfer of an entire Global Note to
beneficial owners pursuant to paragraph (b), such Global Note shall be deemed to
be surrendered to the Trustee for cancellation, and the Issuer shall execute,
the Subsidiary Guarantors shall execute Guarantees on and the Trustee shall
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authenticate and deliver, to each beneficial owner identified by the Depository
in exchange for its beneficial interest in the Global Note, an equal aggregate
principal amount of Physical Notes of authorized denominations.
(e) Any Physical Note constituting a Restricted Security delivered in
exchange for an interest in a Global Note pursuant to paragraph (b) or (c)
shall, except as otherwise provided by paragraphs (a)(i)(x) and (c) of Section
2.17, bear the legend regarding transfer restrictions applicable to the Physical
Notes set forth in Section 2.15.
(f) The Holder of a Global Note may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests through Agent Members, to take any action which a Holder is entitled
to take under this Indenture or the Notes.
SECTION 2.17. Special Transfer Provisions.
(a) Transfers to Non-QIB Institutional Accredited Investors and
Non-U.S. Persons. The following provisions shall apply with respect to the
registration of any proposed transfer of a Note constituting a Restricted
Security to any Institutional Accredited Investor which is not a QIB or to any
Non-U.S. Person:
(i) the Registrar shall register the transfer of any Note
constituting a Restricted Security, whether or not such Note bears the
Private Placement Legend, if (x) the requested transfer is after the
second anniversary of the Issue Date (provided, however, that neither
the Issuer nor any Affiliate of the Issuer has held any beneficial
interest in such Note, or portion thereof, at any time on or prior to
the second anniversary of the Issue Date) or (y) (1) in the case of a
transfer to an Institutional Accredited Investor which is not a QIB
(excluding Non-U.S. Persons), the proposed transferee has delivered to
the Registrar a certificate substantially in the form of Exhibit C
hereto or (2) in the case of a transfer to a Non-U.S. Person, the
proposed transferor has delivered to the Registrar a certificate
substantially in the form of Exhibit D hereto; and
(ii) if the proposed transferor is an Agent Member holding a
beneficial interest in a Global Note, upon receipt by the Registrar of
(x) the certificate, if any, required by paragraph (i) above and (y)
written instructions given in accordance with the Depository's and the
Registrar's procedures,
whereupon (a) the Registrar shall reflect on its books and records the date and
(if the transfer does not involve a transfer of outstanding Physical Notes) a
decrease in the principal amount of such Global Note in an amount equal to the
principal amount of the beneficial interest in the Global Note to be
transferred, and (b) the Issuer shall execute, the Subsidiary Guarantors shall
execute the Guarantees on and the Trustee shall authenticate and deliver one or
more Physical Notes of like tenor and amount.
(b) Transfers to QIBs. The following provisions shall apply with
respect to the registration of any proposed transfer of a Note constituting a
Restricted Security to a QIB (excluding transfers to Non-U.S. Persons):
(i) the Registrar shall register the transfer if such
transfer is being made by a proposed transferor who has checked the box
provided for on the form of Note stating, or has otherwise advised the
Issuer and the Registrar in writing, that the sale has been made in
compliance with the provisions of Rule 144A to a transferee who has
signed the certification provided for on the form of Note stating, or
has otherwise advised the Issuer and the Registrar in writing, that it
is purchasing the Note for its own account or an account with respect
to which it exercises sole investment discretion and that it and any
such account is a QIB within the meaning of Rule 144A, and is aware
that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the Issuer
as it has requested pursuant to Rule 144A or has determined not to
request such information and that it is aware that the transferor is
relying upon its foregoing representations in order to claim the
exemption from registration provided by Rule 144A; and
(ii) if the proposed transferee is an Agent Member, and the
Notes to be transferred consist of Physical Notes which after transfer
are to be evidenced by an interest in a Global Note, upon receipt by
the Registrar of written instructions given in accordance with the
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Depository's and the Registrar's procedures, the Registrar shall
reflect on its books and records the date and an increase in the
principal amount of such Global Note in an amount equal to the
principal amount of the Physical Notes to be transferred, and the
Trustee shall cancel the Physical Notes so transferred.
(c) Private Placement Legend. Upon the transfer, exchange or
replacement of Notes not bearing the Private Placement Legend, the Registrar
shall deliver Notes that do not bear the Private Placement Legend. Upon the
transfer, exchange or replacement of Notes bearing the Private Placement Legend,
the Registrar shall deliver only Notes that bear the Private Placement Legend
unless (i) the requested transfer is after the third anniversary of the Issue
Date (provided, however, that neither the Issuer nor any Affiliate of the Issuer
has held any beneficial interest in such Note, or portion thereof, at any time
prior to or on the third anniversary of the Issue Date), or (ii) there is
delivered to the Registrar an Opinion of Counsel reasonably satisfactory to the
Issuer and the Trustee to the effect that neither such legend nor the related
restrictions on transfer are required in order to maintain compliance with the
provisions of the Securities Act.
(d) General. By its acceptance of any Note bearing the Private
Placement Legend, each Holder of such a Note acknowledges the restrictions on
transfer of such Note set forth in this Indenture and in the Private Placement
Legend and agrees that it will transfer such Note only as provided in this
Indenture.
The Registrar shall retain copies of all letters, notices and other
written communications received pursuant to Section 2.16 or this Section 2.17.
The Issuer shall have the right to inspect and make copies of all such letters,
notices or other written communications at any reasonable time during the
Registrar's normal business hours upon the giving of reasonable written notice
to the Registrar.
(e) Transfers of Notes Held by Affiliates. Any certificate (i)
evidencing a Note that has been transferred to an Affiliate of the Issuer within
three years after the Issue Date, as evidenced by a notation on the Assignment
Form for such transfer or in the representation letter delivered in respect
thereof or (ii) evidencing a Note that has been acquired from an Affiliate
(other than by an Affiliate) in a transaction or a chain of transactions not
involving any public offering, shall, until three years after the last date on
which the Issuer or any Affiliate of the Issuer was an owner of such Note, in
each case, bear a legend in substantially the form set forth in Section 2.15
hereof, unless otherwise agreed by the Issuer (with written notice thereof to
the Trustee).
SECTION 2.18. Liquidated Damages Under Registration Rights Agreement.
Under certain circumstances, the Issuer shall be obligated to pay
certain liquidated damages to the Holders, all as set forth in Section 4 of the
Registration Rights Agreement. The terms thereof are hereby incorporated herein
by reference.
ARTICLE THREE
REDEMPTION
SECTION 3.01. Notices to Trustee.
If the Issuer elects to redeem Notes pursuant to Section 3.03, it shall
notify the Trustee and the Paying Agent in writing of the Redemption Date and
the principal amount of the Notes to be redeemed.
The Issuer shall give each notice provided for in this Section 3.01 not
less than 5, but not more than 30, days (unless a shorter notice period shall be
satisfactory to the Trustee, as evidenced in a writing signed on behalf of the
Trustee) before the intended mailing date of the Notice of Redemption relating
thereto, together with an Officers' Certificate stating that such redemption
shall comply with the conditions contained herein and in the Notes.
SECTION 3.02. Selection of Notes To Be Redeemed.
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In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes, or portions thereof, for redemption will be made
by the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes are
not then listed on a national securities exchange, on a pro rata basis, by lot
or by such other method as the Trustee shall deem fair and appropriate;
provided, however, that no Notes of a principal amount of $1,000 or less shall
be redeemed in part; and provided, further, that if a partial redemption is made
with the proceeds of an Equity Offering, selection of the Notes or portions
thereof for redemption shall be made by the Trustee only on a pro rata basis or
on as nearly a pro rata basis as is practicable (subject to the procedures of
DTC), unless such method is otherwise prohibited. Notice of redemption shall be
mailed by first-class mail in accordance with the provisions of Section 3.04. If
any Note is to be redeemed in part only, the notice of redemption that relates
to such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in a principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. On and after the applicable Redemption Date, interest will
cease to accrue on Notes or portions thereof called for redemption as long as
the Issuer has deposited with the Paying Agent for the Notes funds in
satisfaction of the applicable Redemption Price.
SECTION 3.03. Optional Redemption.
The Notes will be redeemable, at the Issuer's option, in whole at any
time or in part from time to time, on and after March 15, 2001 at the following
Redemption Prices (expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period commencing on March 15 of the years set
forth below, plus, in each case, accrued and unpaid interest, if any, thereon to
the date of redemption:
Year Percentage
2001................................ 103.000%
2002 and thereafter................. 100.000%
At any time, or from time to time, prior to March 15, 2001, the Issuer
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 Notes at a Redemption Price equal to 112.875 % of the aggregate principal
amount of the Notes to be redeemed, plus accrued and unpaid interest, if any,
thereon to the date of redemption; provided, however, that at least 65% of the
aggregate original principal amount of the Notes remains outstanding immediately
after giving effect to any such redemption (it being expressly agreed that for
purposes of determining whether this condition is satisfied, Notes owned by the
Issuer or any of its Affiliates shall be deemed not to be outstanding). In order
to effect the foregoing redemption with the proceeds of any Equity Offering, the
Issuer shall make such redemption not more than 60 days after the consummation
of any such Equity Offering.
SECTION 3.04. Notice of Redemption.
At least 30 days but not more than 60 days before a Redemption Date,
the Issuer shall mail or cause to be mailed a notice of redemption by first
class mail to each Holder of Notes to be redeemed at its registered address,
with a copy to the Trustee and any Paying Agent. At the Issuer's request, the
Trustee shall give the notice of redemption in the Issuer's name and at the
Issuer's expense.
Each notice of redemption shall identify (including the CUSIP number)
the Notes to be redeemed and shall state:
(1) the Redemption Date;
(2) the Redemption Price and the amount of accrued interest,
if any, to be paid;
(3) the name and address of the Paying Agent;
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(4) the subparagraph of the Notes pursuant to which such
redemption is being made;
(5) that Notes called for redemption must be surrendered to
the Paying Agent to collect the Redemption Price plus accrued interest,
if any;
(6) that, unless the Issuer defaults in making the redemption
payment, interest on Notes or applicable portions thereof called for
redemption ceases to accrue on and after the Redemption Date, and the
only remaining right of the Holders of such Notes is to receive payment
of the Redemption Price plus accrued interest as of the Redemption
Date, if any, upon surrender to the Paying Agent of the Notes redeemed;
(7) if any Note is being redeemed in part, the portion of the
principal amount of such Note to be redeemed and that, after the
Redemption Date, and upon surrender of such Note, a new Note or Notes
in the aggregate principal amount equal to the unredeemed portion
thereof will be issued; and
(8) if fewer than all the Notes are to be redeemed, the
identification of the particular Notes (or portion thereof) to be
redeemed, as well as the aggregate principal amount of Notes to be
redeemed and the aggregate principal amount of Notes to be outstanding
after such partial redemption.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the purchase
of Notes.
SECTION 3.05. Effect of Notice of Redemption.
Once notice of redemption is mailed in accordance with Section 3.04,
such notice of redemption shall be irrevocable and Notes called for redemption
become due and payable on the Redemption Date at the Redemption Price plus
accrued interest as of such date, if any. Upon surrender to the Trustee or
Paying Agent, such Notes called for redemption shall be paid at the Redemption
Price plus accrued interest thereon to the Redemption Date, but installments of
interest, the maturity of which is on or prior to the Redemption Date, shall be
payable to Holders of record at the close of business on the relevant record
dates referred to in the Notes. Interest shall accrue on or after the Redemption
Date and shall be payable only if the Issuer defaults in payment of the
Redemption Price plus any accrued and unpaid interest as of the Redemption Date.
SECTION 3.06. Deposit of Redemption Price.
On or before the Redemption Date and in accordance with Section 2.14,
the Issuer shall deposit with the Paying Agent U.S. Legal Tender sufficient to
pay the Redemption Price plus accrued interest, if any, of all Notes to be
redeemed on that date. The Paying Agent shall promptly return to the Issuer any
U.S. Legal Tender so deposited which is not required for that purpose, except
with respect to monies owed as obligations to the Trustee pursuant to Article
Seven.
Unless the Issuer fails to comply with the preceding paragraph and
default in the payment of such Redemption Price plus accrued interest, if any,
interest on the Notes to be redeemed will cease to accrue on and after the
applicable Redemption Date, whether or not such Notes are presented for payment.
SECTION 3.07. Notes Redeemed in Part.
Upon surrender of a Note that is to be redeemed in part, the Trustee
shall authenticate for the Holder a new Note or Notes equal in principal amount
to the unredeemed portion of the Note surrendered.
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ARTICLE FOUR
COVENANTS
SECTION 4.01. Payment of Notes.
(a) The Issuer shall pay the principal of, premium, if any, and
interest on the Notes on the dates and in the manner provided in the Notes and
in this Indenture.
(b) An installment of principal of or interest on the Notes shall be
considered paid on the date it is due if the Trustee or Paying Agent (other than
the Issuer or any of its Affiliates) holds, prior to 11:00 a.m. New York City
time on that date, U.S. Legal Tender designated for and sufficient to pay the
installment in full and is not prohibited from paying such money to the Holders
pursuant to the terms of this Indenture or the Notes.
(c) Notwithstanding anything to the contrary contained in this
Indenture, the Issuer may, to the extent it is required to do so by law, deduct
or withhold income or other similar taxes imposed by the United States of
America from principal or interest payments hereunder.
SECTION 4.02. Maintenance of Office or Agency.
The Issuer shall maintain the office or agency required under Section
2.03. The Issuer shall give prior written notice to the Trustee of the location,
and any change in the location, of such office or agency. If at any time the
Issuer shall fail to maintain any such required office or agency or shall fail
to furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the address of the Trustee set
forth in Section 10.02.
SECTION 4.03. Corporate Existence.
Except as otherwise permitted by Article Five, the Issuer shall do or
cause to be done, at its own cost and expense, all things necessary to preserve
and keep in full force and effect its respective corporate existence and the
corporate existence of each of its Restricted Subsidiaries in accordance with
the respective organizational documents of each such Restricted Subsidiary and
the material rights (charter and statutory) and franchises of the Issuer and
each such Restricted Subsidiary; provided, however, that the Issuer shall not be
required to preserve, with respect to itself, any material right or franchise
and, with respect to any of its Restricted Subsidiaries, any such existence,
material right or franchise, if the Board of Directors of the Issuer shall
determine in good faith that the preservation thereof is no longer desirable in
the conduct of the business of the Issuer and its Subsidiaries, taken as a
whole.
SECTION 4.04. Payment of Taxes and Other Claims.
The Issuer shall pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (i) all material taxes, assessments and
governmental charges (including withholding taxes and any penalties, interest
and additions to taxes) levied or imposed upon it or any of its Subsidiaries or
its properties or any of its Subsidiaries' properties and (ii) all material
lawful claims for labor, materials and supplies that, if unpaid, might by law
become a Lien upon the property of the Issuer or any of its Subsidiaries;
provided, however, that the Issuer shall not be required to pay or discharge or
cause to be paid or discharged any such tax, assessment, charge or claim whose
amount, applicability or validity is being contested in good faith by
appropriate negotiations or proceedings properly instituted and diligently
conducted for which adequate reserves, to the extent required under GAAP, have
been taken.
30
SECTION 4.05. Maintenance of Properties and Insurance.
(a) The Issuer shall, and shall cause each of its Restricted
Subsidiaries to, maintain all properties used or useful in the conduct of its
business in good working order and condition (subject to ordinary wear and tear)
and make all necessary repairs, renewals, replacements, additions, betterments
and improvements thereto and actively conduct and carry on its business;
provided, however, that nothing in this Section 4.05 shall prevent the Issuer or
any of its Restricted Subsidiaries from discontinuing the operation and
maintenance of any of its properties, if such discontinuance is (i) in the
ordinary course of business pursuant to customary business terms or (ii) in the
good faith judgment of the respective Boards of Directors or other governing
body of the Issuer or Restricted Subsidiary, as the case may be, desirable in
the conduct of their respective businesses and is not disadvantageous in any
material respect to the Holders.
(b) The Issuer shall provide or cause to be provided, for itself and
each of the Restricted Subsidiaries, insurance (including appropriate
self-insurance) against loss or damage of the kinds that, in the good faith
judgment of the Issuer, is adequate and appropriate for the conduct of the
business of the Issuer and its Restricted Subsidiaries in a prudent manner, with
reputable insurers or with the government of the United States of America,
Canada or an agency or instrumentality thereof, in such amounts, with such
deductibles, and by such methods as shall be customary, in the good faith
judgment of the Issuer, for companies similarly situated in the industry.
SECTION 4.06. Compliance Certificate; Notice of Default.
(a) The Issuer shall deliver to the Trustee, within 60 days after the
end of each of its fiscal quarters (other than such fiscal quarter that ends on
the same day upon which Issuer's fiscal year ends) and 105 days after the end of
each of its fiscal years, an Officers' Certificate (provided, however, that one
of the signatories to each such Officers' Certificate shall be the Issuer's
principal executive officer, principal financial officer or principal accounting
officer), as to such Officers' knowledge, without independent investigation, of
the Issuer's compliance with all conditions and covenants under this Indenture
(without regard to any period of grace or requirement of notice provided
hereunder) and in the event any Default exists, such Officers shall specify the
nature of such Default. Each such Officers' Certificate shall also notify the
Trustee should the Issuer elect to change the manner in which it fixes its
fiscal year end.
(b) So long as not contrary to the then current recommendations of the
American Institute of Certified Public Accountants, the annual financial
statements delivered pursuant to Section 4.08 shall be accompanied by a written
report of the Issuer's independent certified public accountants (who shall be a
firm of established national reputation) stating (A) that their audit
examination has included a review of the terms of this Indenture and the form of
the Notes as they relate to accounting matters, and (B) whether, in connection
with their audit examination, any Default or Event of Default has come to their
attention and if such a Default or Event of Default has come to their attention,
specifying the nature and period of existence thereof; provided, however, that,
without any restriction as to the scope of the audit examination, such
independent certified public accountants shall not be liable by reason of any
failure to obtain knowledge of any such Default or Event of Default that would
not be disclosed in the course of an audit examination conducted in accordance
with generally accepted auditing standards.
(c) (i) If any Default or Event of Default has occurred and is
continuing or (ii) if any Holder seeks to exercise any remedy hereunder with
respect to a claimed Default under this Indenture or the Notes, the Issuer shall
deliver to the Trustee, at its address set forth in Section 10.02 hereof, by
registered or certified mail or by facsimile transmission followed by hard copy
by registered or certified mail an Officers' Certificate specifying such event,
notice or other action within 10 days of its becoming aware of such occurrence.
31
SECTION 4.07. Compliance with Laws.
The Issuer shall comply, and shall cause each of its Subsidiaries to
comply, with all applicable statutes, rules, regulations, orders and
restrictions of the United States of America, all states and municipalities
thereof, and of any governmental department, commission, board, regulatory
authority, bureau, agency and instrumentality of the foregoing, in respect of
the conduct of their respective businesses and the ownership of their respective
properties, except for such noncompliances as could not singly or in the
aggregate reasonably be expected to have a material adverse effect on the
financial condition, business, prospects or results of operations of the Issuer
and its Subsidiaries taken as a whole.
SECTION 4.08. Reports to Holders.
The Issuer will deliver to the Trustee within 15 days after filing the
same with the Commission, copies of the quarterly and annual reports and of the
information, documents and other reports, if any, which the Issuer is required
to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act.
Notwithstanding that the Issuer may not be subject to the reporting requirements
of Section 13 or 15(d) of the Exchange Act, the Issuer will file with the
Commission, to the extent permitted, and provide the Trustee and Holders with
such annual reports and such information, documents and other reports specified
in Sections 13 and 15(d) of the Exchange Act. The Issuer will also comply with
the other provisions of Section 314(a) of the TIA.
SECTION 4.09. Waiver of Stay, Extension or Usury Laws.
The Issuer and each Subsidiary Guarantor covenant (to the extent that
it may lawfully do so) that it will not at any time insist upon, plead, or in
any manner whatsoever claim or take the benefit or advantage of, any stay or
extension law or any usury law or other law that would prohibit or forgive the
Issuer or such Subsidiary Guarantor from paying all or any portion of the
principal of or interest on the Notes as contemplated herein, wherever enacted,
now or at any time hereafter in force, or which may affect the covenants or the
performance of this Indenture; and (to the extent that it may lawfully do so)
the Issuer and each Subsidiary Guarantor hereby expressly waive all benefit or
advantage of any such law, and covenant that it will not hinder, delay or impede
the execution of any power herein granted to the Trustee, but will suffer and
permit the execution of every such power as though no such law had been enacted.
SECTION 4.10. Limitation on Restricted Payments.
The Issuer will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly,
(a) declare or pay any dividend or make any distribution (other
than dividends or distributions payable solely in Qualified
Capital Stock of the Issuer) on or in respect of shares of the
Issuer's Capital Stock to holders of such Capital Stock,
(b) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Issuer or any warrants, rights or options
to purchase or acquire shares of any class of such Capital
Stock other than through the exchange therefor solely of
Qualified Capital Stock of the Issuer or warrants, rights or
options to purchase or acquire shares of Qualified Capital
Stock of the Issuer,
(c) make any principal payment on, purchase, defease, redeem,
prepay, decrease or otherwise acquire or retire for value,
prior to any scheduled final maturity, scheduled repayment or
scheduled sinking fund payment, any Subordinated Indebtedness
of the Issuer or a Subsidiary Guarantor that is subordinate or
junior in right of payment to the Notes or such Subsidiary
Guarantor's Guarantee, as the case may be, or
(d) make any Investment (other than a Permitted Investment)
(each of the foregoing actions set forth in clauses (a) through (d) being
referred to as a "Restricted Payment"), if at the time of such Restricted
Payment or immediately after giving effect thereto,
32
(i) a Default or an Event of Default shall have occurred and be
continuing,
(ii) the Issuer is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance
with Section 4.12, or
(iii) the aggregate amount of Restricted Payments (including such
proposed Restricted Payment) made subsequent to the Issue Date
(the amount expended for such purposes, if other than in cash,
being the fair market value of such property as determined
reasonably and in good faith by the Board of Directors of the
Issuer) shall exceed the sum of:
(A) 50% of the cumulative Consolidated Net Income (or if
cumulative Consolidated Net Income shall be a loss,
minus 100% of such loss) of the Issuer earned
subsequent to the Issue Date and on or prior to the
last date of the Issuer's fiscal quarter immediately
preceding such Restricted Payment (the "Reference
Date") (treating such period as a single accounting
period), plus
(B) 100% of the aggregate net cash proceeds received by
the Issuer from any Person (other than a Restricted
Subsidiary of the Issuer) from the issuance and sale
subsequent to the Issue Date and on or prior to the
Reference Date of Qualified Capital Stock of the
Issuer, plus
(C) without duplication of any amounts included in clause
(iii)(B) above, 100% of the aggregate net cash
proceeds of any equity contribution received by the
Issuer from a holder of the Issuer's Capital Stock
(excluding, in the case of clauses (iii)(B) and this
clause (iii)(C), any net cash proceeds from an Equity
Offering to the extent used to redeem the Notes),
plus
(D) an amount equal to the net reduction in Investments
in Unrestricted Subsidiaries resulting from
dividends, interest payments, repayments of loans or
advances, or other transfers of cash, in each case to
the Issuer or to any Restricted Subsidiary of the
Issuer from Unrestricted Subsidiaries (but without
duplication of any such amount included in
calculating cumulative Consolidated Net Income of the
Issuer), or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (in each case
valued as provided in Section 4.14), not to exceed,
in the case of any Unrestricted Subsidiary, the
amount of Investments previously made by the Issuer
or any Restricted Subsidiary in such Unrestricted
Subsidiary and which was treated as a Restricted
Payment under this Indenture, plus
(E) without duplication of the immediately preceding
subclause (D), an amount equal to the lesser of the
cost or net cash proceeds received upon the sale or
other disposition of any Investment made after the
Issue Date which had been treated as a Restricted
Payment (but without duplication of any such amount
included in calculating cumulative Consolidated Net
Income of the Issuer), plus
(F) $5,000,000.
Notwithstanding the foregoing, the provisions set forth in the
immediately preceding paragraph shall not prohibit:
(1) the payment of any dividend or redemption payment within 60
days after the date of declaration of such dividend or the
applicable redemption if the dividend or redemption payment,
as the case may be, would have been permitted on the date of
declaration,
(2) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any shares of Capital Stock of
33
the Issuer, either (A) solely in exchange for shares of
Qualified Capital Stock of the Issuer or (B) through the
application of net proceeds of a substantially concurrent sale
for cash (other than to a Restricted Subsidiary of the Issuer)
of shares of Qualified Capital Stock of the Issuer,
(3) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any Indebtedness of the Issuer
or a Subsidiary Guarantor that is subordinate or junior in
right of payment to the Notes or such Subsidiary Guarantor's
Guarantee, as the case may be, either (A) solely in exchange
for shares of Qualified Capital Stock of the Issuer, or (B)
through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Restricted
Subsidiary of the Issuer) of (I) shares of Qualified Capital
Stock of the Issuer or (II) Refinancing Indebtedness, and
(4) the initial designation of Western and Grey Wolf as
Unrestricted Subsidiaries under this Indenture. In determining
the aggregate amount of Restricted Payments made subsequent to
the Issue Date in accordance with clause (iii) of the
immediately preceding paragraph, amounts expended pursuant to
clauses (1) and (2)(B) shall be included in such calculation.
SECTION 4.11. Limitation on Transactions with Affiliates.
(a) The Issuer will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, enter into, amend or permit
or suffer to exist any transaction or series of related transactions (including,
without limitation, the purchase, sale, lease or exchange of any property, the
guaranteeing of any Indebtedness or the rendering of any service) with, or for
the benefit of, any of their respective Affiliates (each an "Affiliate
Transaction"), other than (i) Affiliate Transactions permitted under Section
4.11(b) and (ii) Affiliate Transactions that are on terms that are fair and
reasonable to the Issuer or the applicable Restricted Subsidiary and are no less
favorable to the Issuer or the applicable Restricted Subsidiary than those that
might reasonably have been obtained in a comparable transaction at such time on
an arm's-length basis from a Person that is not an Affiliate of the Issuer or
such Restricted Subsidiary. All Affiliate Transactions (and each series of
related Affiliate Transactions which are similar or part of a common plan)
involving aggregate payments or other property with a fair market value in
excess of $1,000,000 shall be approved by the Board of Directors of the Issuer,
such approval to be evidenced by a Board Resolution stating that the Board of
Directors has determined that such transaction complies with the foregoing
provisions. If the Issuer or any Restricted Subsidiary enters into an Affiliate
Transaction (or a series of related Affiliate Transactions related to a common
plan) that involves an aggregate fair market value of more than $10,000,000, the
Issuer shall, prior to the consummation thereof, obtain a favorable opinion as
to the fairness of such transaction or series of related transactions to the
Issuer or the relevant Restricted Subsidiary, as the case may be, from a
financial point of view, from an Independent Advisor and file the same with the
Trustee.
(b) The restrictions set forth in Section 4.11(a) shall not apply to
(i) reasonable fees and compensation paid to and indemnity provided on behalf
of, officers, directors, employees or consultants of the Issuer or any
Restricted Subsidiary as determined in good faith by the Board of Directors or
senior management of the Issuer or such Restricted Subsidiary, as the case may
be; (ii) transactions exclusively between or among the Issuer and any of its
Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries; provided, however, that such transactions are not otherwise
prohibited by this Indenture; and (iii) Restricted Payments permitted by this
Indenture.
SECTION 4.12. Limitation on Incurrence of Additional Indebtedness.
The Issuer will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, incur any Indebtedness; provided,
however, that if no Default or Event of Default shall have occurred and be
continuing at the time of or as a consequence of the incurrence of any such
Indebtedness, the Issuer and the Subsidiary Guarantors or any of them may incur
Indebtedness (including, without limitation, Acquired Indebtedness), in each
case, if on the date of the incurrence of such Indebtedness, after giving pro
forma effect to the incurrence thereof and the receipt and application of the
proceeds therefrom,
(a) both (i) the Issuer's Consolidated EBITDA Coverage Ratio would
have been at least equal to 2.5 to 1.0 and (ii) the Issuer's
Adjusted Consolidated Net Tangible Assets are equal to or
34
greater than 150% of the aggregate consolidated Indebtedness
of the Issuer and its Restricted Subsidiaries, or
(b) the Issuer's Adjusted Consolidated Net Tangible Assets are
equal to or greater than 200% of the aggregate consolidated
Indebtedness of the Issuer and its Restricted Subsidiaries.
Notwithstanding the preceding, if no Event of Default shall have
occurred and be continuing at the time or as a consequence of the incurrence of
such Indebtedness, the Issuer and any of its Restricted Subsidiaries may incur
Permitted Indebtedness.
For purposes of determining any particular amount of Indebtedness under
this Section 4.12, guarantees of Indebtedness otherwise included in the
determination of such amount shall not also be included.
Indebtedness of a Person existing at the time such Person becomes a
Restricted Subsidiary (whether by merger, consolidation, acquisition of Capital
Stock or otherwise) or is merged with or into the Issuer or any Restricted
Subsidiary or which is secured by a Lien on an asset acquired by the Issuer or a
Restricted Subsidiary (whether or not such Indebtedness is assumed by the
acquiring Person) shall be deemed incurred at the time the Person becomes a
Restricted Subsidiary or at the time of the asset acquisition, as the case may
be.
The Issuer will not, and will not permit any Subsidiary Guarantor to
incur any Indebtedness which by its terms (or by the terms of any agreement
governing such Indebtedness) is subordinated in right of payment to any other
Indebtedness of the Issuer or such Subsidiary Guarantor unless such Indebtedness
is also by its terms (or by the terms of any agreement governing such
Indebtedness) made expressly subordinate in right of payment to the Notes or the
Guarantee of such Subsidiary Guarantor, as the case may be, pursuant to
subordination provisions that are substantively identical to the subordination
provisions of such Indebtedness (or such agreement) that are most favorable to
the holders of any other Indebtedness of the Issuer or such Subsidiary
Guarantor, as the case may be.
SECTION 4.13. Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries.
The Issuer will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or permit to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to:
(a) pay dividends or make any other distributions on or in respect
of its Capital Stock,
(b) make loans or advances to, or pay any Indebtedness or other
obligation owed to, the Issuer or any other Restricted
Subsidiary,
(c) guarantee any Indebtedness or any other obligation of the
Issuer or any Restricted Subsidiary, or
(d) transfer any of its property or assets to the Issuer or any
other Restricted Subsidiary (each such encumbrance or
restriction, a "Payment Restriction").
The preceding will not apply, however, to encumbrances or restrictions
existing under or by reason of the following (which are excluded from the term
"Payment Restriction"): (i) applicable law, (ii) this Indenture, this Indenture
governing the Series D Notes or any Security Document, (iii) customary
non-assignment provisions of any contract or any lease governing a leasehold
interest of any Restricted Subsidiary, (iv) any instrument governing Acquired
Indebtedness, which encumbrance or restriction is not applicable to such
Restricted Subsidiary, or the properties or assets of such Restricted
Subsidiary, other than the Person or the properties or assets of the Person so
acquired, (v) agreements existing on the Issue Date to the extent and in the
manner such agreements were in effect on the Issue Date, (vi) customary
restrictions with respect to a Restricted Subsidiary of the Issuer 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 this Indenture solely in respect of the assets or Capital
Stock to be sold or disposed of, (vii) any instrument governing a Permitted
Lien, to the extent and only to the extent such instrument restricts the
transfer or other disposition of assets subject to such Permitted Lien, or
35
(viii) an agreement governing Refinancing Indebtedness incurred to Refinance the
Indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (ii), (iv) or (v) above; provided, however, that the provisions relating
to such encumbrance or restriction contained in any such Refinancing
Indebtedness are no less favorable to the Holders in any material respect as
determined by the Board of Directors of the Issuer in its reasonable and good
faith judgment than the provisions relating to such encumbrance or restriction
contained in the applicable agreement referred to in such clause (ii), (iv) or
(v).
SECTION 4.14. Limitation on Restricted and Unrestricted Subsidiaries.
The Board of Directors may, if no Default or Event of Default shall
have occurred and be continuing or would arise therefrom, designate an
Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that
(i) any such redesignation shall be deemed to be an incurrence as of the date of
such redesignation by the Issuer and its Restricted Subsidiaries of the
Indebtedness (if any) of such redesignated Subsidiary for purposes of Section
4.12, (ii) unless such redesignated Subsidiary shall not have any Indebtedness
outstanding, other than Indebtedness which would be Permitted Indebtedness, no
such designation shall be permitted if immediately after giving effect to such
redesignation and the incurrence of any such additional Indebtedness the Issuer
could not incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to Section 4.12 and (iii) such Subsidiary assumes by
execution of a supplemental indenture all of the obligations of a Subsidiary
Guarantor under a Guarantee.
The Board of Directors of the Issuer also may, if no Default or Event
of Default shall have occurred and be continuing or would arise therefrom,
designate any Restricted Subsidiary none of whose properties are subject to any
Liens of the Security Documents to be an Unrestricted Subsidiary if (i) such
designation is at that time permitted under Section 4.10 and (ii) immediately
after giving effect to such designation, the Issuer could incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to Section
4.12.
Any such designation or redesignation by the Board of Directors shall
be evidenced to the Trustee by the filing with the Trustee of a certified copy
of the resolution of the Board of Directors giving effect to such designation or
redesignation and an Officers' Certificate certifying that such designation or
redesignation complied with the foregoing conditions and setting forth in
reasonable detail the underlying calculations. In the event that any Restricted
Subsidiary is designated an Unrestricted Subsidiary in accordance with this
Section 4.14, such Restricted Subsidiary's Guarantee will be released.
For purposes of Section 4.10, (i) an "Investment" shall be deemed to
have been made at the time any Restricted Subsidiary is designated as an
Unrestricted Subsidiary in an amount (proportionate to the Issuer's equity
interest in such Subsidiary) equal to the net worth of such Restricted
Subsidiary at the time that such Restricted Subsidiary is designated as an
Unrestricted Subsidiary; (ii) at any date the aggregate amount of all Restricted
Payments made as Investments since the Issue Date shall exclude and be reduced
by an amount (proportionate to the Issuer's equity interest in such Subsidiary)
equal to the net worth of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary, not to exceed, in
the case of any such redesignation of an Unrestricted Subsidiary as a Restricted
Subsidiary, the amount of Investments previously made by the Issuer and the
Restricted Subsidiaries in such Unrestricted Subsidiary (in each case (i) and
(ii) "net worth" to be calculated based upon the fair market value of the assets
of such Subsidiary as of any such date of designation); and (iii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer.
Notwithstanding the foregoing, the Board of Directors may not designate
any Subsidiary of the Issuer to be an Unrestricted Subsidiary if, after such
designation, (a) the Issuer or any Restricted Subsidiary (i) provides credit
support for, or a guarantee of, any Indebtedness of such Subsidiary (including
any undertaking, agreement or instrument evidencing such Indebtedness) or (ii)
is directly or indirectly liable for any Indebtedness of such Subsidiary or (b)
such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any
property of, any Restricted Subsidiary which is not a Subsidiary of the
Subsidiary to be so designated.
Notwithstanding the foregoing, the provisions set forth above will not
prohibit the initial designation of each of Grey Wolf and Western as
Unrestricted Subsidiaries.
36
Subsidiaries of the Issuer that are not designated by the Board of
Directors as Restricted or Unrestricted Subsidiaries will be deemed to be
Restricted Subsidiaries. All Subsidiaries of an Unrestricted Subsidiary will be
Unrestricted Subsidiaries.
SECTION 4.15. Change of Control.
(a) Upon the occurrence of a Change of Control, each Holder will have
the right to require that the Issuer repurchase all or a portion of such
Holder's Notes pursuant to the offer described below (the "Change of Control
Offer"), at a purchase price equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, thereon to the date of purchase.
(b) Within 30 days following the date upon which the Change of Control
occurred, the Issuer must send, by first class mail, a notice to each Holder at
such Holder's last registered address, with a copy to the Trustee, which notice
shall govern the terms of the Change of Control Offer. The notice to the Holders
shall contain all instructions and materials necessary to enable such Holders to
tender Notes pursuant to the Change of Control Offer. Such notice shall state:
(i) that the Change of Control Offer is being made pursuant
to this Section 4.15, that all Notes tendered and not withdrawn will be
accepted for payment and that the Change of Control Offer shall remain
open for a period of 20 Business Days or such longer period as may be
required by law;
(ii) the purchase price (including the amount of accrued
interest) and the purchase date (which shall be no earlier than 30 days
nor later than 45 days from the date such notice is mailed, other than
as may be required by law) (the "Change of Control Payment Date");
(iii) that any Note not tendered will continue to accrue
interest;
(iv) that, unless the Issuer defaults in making payment
therefor, any Note accepted for payment pursuant to the Change of
Control Offer shall cease to accrue interest after the Change of
Control Payment Date;
(v) that Holders electing to have a Note purchased pursuant
to a Change of Control Offer will be required to surrender the Note,
with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Note completed, to the Paying Agent at the address
specified in the notice prior to the close of business on the third
Business Day prior to the Change of Control Payment Date;
(vi) that Holders will be entitled to withdraw their election
if the Paying Agent receives, not later than the second Business Day
prior to the Change of Control Payment Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder,
the principal amount of the Notes the Holder delivered for purchase and
a statement that such Holder is withdrawing his election to have such
Notes purchased;
(vii) that Holders whose Notes are purchased only in part will
be issued new Notes in a principal amount equal to the unpurchased
portion of the Notes surrendered; provided, however, that each Note
purchased and each new Note issued shall be in an original principal
amount of $1,000 or integral multiples thereof; and
(viii) the circumstances and relevant facts regarding such
Change of Control.
On or before the Change of Control Payment Date, the Issuer shall (i)
accept for payment Notes or portions thereof tendered pursuant to the Change of
Control Offer, (ii) deposit with the Paying Agent in accordance with Section
2.14 U.S. Legal Tender sufficient to pay the purchase price plus accrued
interest, if any, of all Notes so tendered and (iii) deliver to the Trustee
37
Notes so accepted together with an Officers' Certificate stating the Notes or
portions thereof being purchased by the Issuer. Upon receipt by the Paying Agent
of the monies specified in clause (ii) above and a copy of the Officers'
Certificate specified in clause (iii) above, the Paying Agent shall promptly
mail to the Holders of Notes so accepted payment in an amount equal to the
purchase price plus accrued interest, if any, and the Trustee shall promptly
authenticate and mail to such Holders new Notes equal in principal amount to any
unpurchased portion of the Notes surrendered. Any Notes not so accepted shall be
promptly mailed by the Issuer to the Holder thereof. For purposes of this
Section 4.15, the Trustee shall act as the Paying Agent.
The Issuer shall not be required to make a Change of Control Offer upon
a Change of Control if a third party makes the Change of Control Offer at the
Change of Control Purchase Price, at the same times and otherwise in compliance
with the requirements applicable to a Change of Control Offer made by the Issuer
and purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
Neither the Board of Directors of the Issuer nor the Trustee may waive
the provisions of this Section 4.15 relating to the Issuer's obligation to make
a Change of Control Offer.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the
provisions of this Section 4.15, the Issuer shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the provisions of this Section 4.15 by virtue thereof.
SECTION 4.16. Limitation on Asset Sales.
(a) The Issuer will not, and will not cause or permit any of its
Restricted Subsidiaries to, consummate an Asset Sale unless:
(i) the Issuer or the applicable Restricted Subsidiary, as the
case may be, receives consideration at the time of such Asset Sale at
least equal to the fair market value of the assets sold or otherwise
disposed of (as determined in good faith by the Issuer's Board of
Directors or senior management of the Issuer);
(ii) (A) at least 70% of the consideration received by the
Issuer or the Restricted Subsidiary, as the case may be, from such
Asset Sale shall be in the form of cash or Cash Equivalents and is
received at the time of such disposition and (B) at least 15% of such
consideration received if in a form other than cash or Cash Equivalents
is converted into or exchanged for cash or Cash Equivalents within 90
days of such disposition.
(b) Within 180 days after the receipt of any Net Cash Proceeds from an
Asset Sale, the Issuer or such Restricted Subsidiary shall apply the Net Cash
Proceeds of such Asset Sale as follows:
(i) to the extent such Net Cash Proceeds are received from an
Asset Sale not involving the sale, transfer or disposition of
Collateral ("Non-Collateral Proceeds"), to repay any Indebtedness
secured by the assets involved in such Asset Sale together with a
concomitant permanent reduction in the amount of such Indebtedness so
repaid; and
(ii) with respect to any Non-Collateral Proceeds remaining
after application pursuant to the preceding clause (i) and any Net Cash
Proceeds received from an Asset Sale involving Collateral, the Issuer
shall make an offer within such 180 days to purchase (the "Net Proceeds
Offer") from all Holders up to a maximum principal amount (expressed as
an integral multiple of $1,000) of Notes equal to the Available
Proceeds Amount at a purchase price equal to 100% of the principal
amount thereof plus accrued and unpaid interest thereon to the date of
purchase (the "Net Proceeds Offer Payment Date"); provided that the
Issuer will not be required to apply pursuant to this clause (ii) Net
Cash Proceeds received from any Asset Sale if, and only to the extent
that such Net Cash Proceeds are applied to, within 180 days of such
38
Asset Sale, (i) an investment or investments in Crude Oil and Natural
Gas Related Assets or (ii) an investment or investments in properties
or assets that replace the properties or assets that were the subject
of such Asset Sale or in properties or assets that will be used in the
Crude Oil and Natural Gas Business of the Issuer and its Restricted
Subsidiaries ("Replacement Assets"), and the assets constituting such
Crude Oil and Natural Gas Related Assets or Replacement Assets and any
non-cash consideration received are made subject to the Lien of this
Indenture and the Security Documents in the manner contemplated in this
Indenture to the extent the Net Cash Proceeds used to purchase such
assets arose from the sale of property that was subject to such Lien,
provided that any such assets that are Oil and Gas Assets shall be made
subject to such Lien in any event; further provided, however, that if
at the end of the 180 day period referred to above, the Issuer or one
of its Restricted Subsidiaries has delivered to the Trustee an
Officers' Certificate (A) otherwise in compliance with the terms of
this Indenture, (B) stating that attached thereto is a definitive,
executed purchase and sale agreement for a Crude Oil and Natural Gas
Related Assets investment or for Replacement Assets, and (C) setting
forth the aggregate cash consideration to be paid in connection with
such purchase from the Available Proceeds Amount, then the Issuer shall
have an additional 90 day period during which it may defer making a Net
Proceeds Offer with respect to the Available Proceeds Amount subject of
such purchase and sale.
If at any time any consideration (other than cash or Cash Equivalents)
received by the Issuer or any Restricted Subsidiary of the Issuer, as the case
may be, in connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash, then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this Section 4.16.
The Issuer may defer the Net Proceeds Offer until there is an aggregate
unutilized Available Proceeds Amount equal to or in excess of $5,000,000
resulting from one or more Asset Sales (at which time the entire unutilized
Available Proceeds Amount, and not just the amount in excess of $5,000,000,
shall be applied as required pursuant to this Section 4.16). To the extent the
Net Proceeds Offer is not fully subscribed to by Holders, the Issuer may obtain
a release of the unutilized portion of the Collateral Proceeds from the Lien of
this Indenture and the Security Documents.
Notwithstanding the terms of the four preceding paragraphs above, the
Issuer and its Restricted Subsidiaries will be permitted to consummate an Asset
Sale without complying with such paragraphs to the extent (a) the consideration
for such Asset Sale constitutes Replacement Assets and/or Crude Oil and Natural
Gas Related Assets and (b) such Asset Sale is for fair market value; provided,
however, that any consideration not constituting Replacement Assets and Crude
Oil and Natural Gas Related Assets received by the Issuer or any of its
Restricted Subsidiaries in connection with any Asset Sale permitted to be
consummated under this paragraph shall constitute Net Cash Proceeds subject to
the provisions of this Section 4.16; further provided, however, that, to the
extent that the property transferred or conveyed constitutes an Oil and Gas
Asset, the property received in exchange therefor constitutes an Oil and Gas
Asset.
All Collateral Proceeds shall constitute Trust Moneys and shall be
delivered by the Issuer to the Trustee and shall be deposited in the Collateral
Account in accordance with this Indenture. Collateral Proceeds so deposited may
be withdrawn from the Collateral Account for application by the Issuer in
accordance with clause (ii) above or otherwise pursuant to this Indenture in
accordance with Section 12.08.
In the event of the transfer of substantially all (but not all) of the
consolidated assets of the Issuer as an entirety to a Person in a transaction
permitted under Section 5.01, the successor corporation shall be deemed to have
sold the consolidated assets of the Issuer not so transferred for purposes of
this covenant, and shall comply with the provisions of this Section 4.16 with
respect to such deemed sale as if it were an Asset Sale. In addition, the fair
market value of such consolidated assets of the Issuer deemed to be sold shall
be deemed to be Net Cash Proceeds for purposes of this Section 4.16.
(c) Each notice of a Net Proceeds Offer pursuant to this Section 4.16
shall be mailed or caused to be mailed, by first class mail, by the Issuer not
less than 30 days nor more than 60 days before the Net Proceeds Offer Payment
Date to all Holders at their last registered addresses, with a copy to the
Trustee. The notice shall contain all instructions and materials necessary to
39
enable such Holders to tender Notes pursuant to the Net Proceeds Offer and shall
state the following terms:
(i) that the Net Proceeds Offer is being made pursuant to
Section 4.16, that all Notes tendered will be accepted for payment;
provided, however, that if the aggregate principal amount of Notes
tendered in a Net Proceeds Offer plus accrued interest at the
expiration of such offer exceeds the aggregate amount of the Net
Proceeds Offer, the Issuer shall select the Notes to be purchased on a
pro rata basis (with such adjustments as may be deemed appropriate by
the Issuer so that only Notes in denominations of $1,000 or multiples
thereof shall be purchased) and that the Net Proceeds Offer shall
remain open for a period of 20 Business Days or such longer period as
may be required by law;
(ii) the purchase price (including the amount of accrued
interest) and the Net Proceeds Offer Payment Date;
(iii) that any Note not tendered will continue to accrue
interest;
(iv) that, unless the Issuer defaults in making payment
therefor, any Note accepted for payment pursuant to the Net Proceeds
Offer shall cease to accrue interest after the Net Proceeds Offer
Payment Date;
(v) that Holders electing to have a Note purchased pursuant
to a Net Proceeds Offer will be required to surrender the Note, with
the form entitled "Option of Holder to Elect Purchase" on the reverse
of the Note completed, to the Paying Agent at the address specified in
the notice prior to the close of business on the third Business Day
prior to the Net Proceeds Offer Payment Date;
(vi) that Holders will be entitled to withdraw their election
if the Paying Agent receives, not later than the third Business Day
prior to the Net Proceeds Offer Payment Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder,
the principal amount of the Notes the Holder delivered for purchase and
a statement that such Holder is withdrawing his election to have such
Note purchased; and
(vii) that Holders whose Notes are purchased only in part will
be issued new Notes in a principal amount equal to the unpurchased
portion of the Notes surrendered; provided, however, that each Note
purchased and each new Note issued shall be in an original principal
amount of $1,000 or integral multiples thereof;
On or before the Net Proceeds Offer Payment Date, the Issuer shall (A)
accept for payment Notes or portions thereof tendered pursuant to the Net
Proceeds Offer which are to be purchased in accordance with item (c)(i) above,
(B) deposit with the Paying Agent in accordance with Section 2.14 U.S. Legal
Tender sufficient to pay the purchase price plus accrued interest, if any, of
all Notes to be purchased and (C) deliver to the Trustee all Notes so accepted
together with an Officers' Certificate stating the Notes or portions thereof
being purchased by the Issuer. The Paying Agent shall promptly mail to the
Holders of Notes so accepted payment in an amount equal to the purchase price
plus accrued interest, if any. For purposes of this Section 4.16, the Trustee
shall act as the Paying Agent.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the provisions of
this Section 4.16, the Issuer shall comply with the applicable securities laws
and regulations and shall not be deemed to have breached its obligations under
the provisions of this Section 4.16 by virtue thereof.
SECTION 4.17. Limitations with Respect to Capital Stock of Restricted
Subsidiaries.
The Issuer will not cause or permit any of its Restricted Subsidiaries
to issue any Preferred Stock (other than to the Issuer or to a Wholly Owned
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Restricted Subsidiary) or permit any Person (other than the Issuer or a Wholly
Owned Restricted Subsidiary) to own any Preferred Stock of any Restricted
Subsidiary. The Issuer will not and will not cause or permit any of its
Restricted Subsidiaries to sell or otherwise dispose of any shares of Capital
Stock of any Restricted Subsidiary, and shall not permit any of its Restricted
Subsidiaries, directly or indirectly, to issue or sell or otherwise dispose of
any of its Capital Stock except: (a) to the Issuer or a Wholly-Owned Restricted
Subsidiary of the Issuer, or (b) if all shares of Capital Stock of such
Restricted Subsidiary are sold or otherwise disposed of. In connection with any
sale or disposition of Capital Stock of any Restricted Subsidiary of the Issuer
under clause (b), the Issuer will be required to comply with Section 4.16 and
the Guarantee given by such Restricted Subsidiary, if any, as well as all
Collateral owned by such Person shall be released.
SECTION 4.18. Limitation on Liens.
The Issuer will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or permit or
suffer to exist or remain in effect any Liens:
(a) upon any item of Collateral other than the Liens created by
this Indenture and the Security Documents and the Liens
expressly permitted by the applicable Security Documents; and
(b) upon any other Properties of the Issuer or of any of its
Restricted Subsidiaries, whether owned on the Issue Date or
acquired after the Issue Date, or on any income or profits
therefrom, or assign or otherwise convey any right to receive
income or profits thereon other than, with respect to this
clause (b): (i) Liens existing on the Issue Date to the extent
and in the manner such Liens are in effect on the Issue Date,
and (ii) Permitted Liens.
SECTION 4.19. Limitation on Conduct of Business.
The Issuer will not, and will not permit any of its Restricted
Subsidiaries to, engage in the conduct of any business other than the Crude Oil
and Natural Gas Business.
SECTION 4.20. Additional Subsidiary Guarantees.
If the Issuer or any of its Restricted Subsidiaries transfers or causes
to be transferred, in one transaction or a series of related transactions, any
property to any Restricted Subsidiary that is not a Subsidiary Guarantor, or if
the Issuer or any of its Restricted Subsidiaries shall organize, acquire or
otherwise invest in or hold an Investment in another Restricted Subsidiary
having total consolidated assets with a book value in excess of $500,000 that is
not a Subsidiary Guarantor, then such transferee or acquired or other Restricted
Subsidiary shall (a) execute and deliver to the Trustee substantially the form
of Exhibit F, pursuant to which such Restricted Subsidiary shall unconditionally
guarantee all of the Issuer's obligations under the Notes and this Indenture on
the terms set forth in this Indenture, (b) grant to the Trustee a Lien on
substantially all its Oil and Gas Assets, and (c) deliver to the Trustee an
Opinion of Counsel and an Officers' Certificate, stating that no Event of
Default shall occur as a result of such supplemental indenture, that it complies
with the terms of this Indenture and that such supplemental indenture has been
duly authorized, executed and delivered by such Restricted Subsidiary and
constitutes a legal, valid, binding and enforceable obligation of such
Restricted Subsidiary. Thereafter, such Restricted Subsidiary shall be a
Subsidiary Guarantor for all purposes of this Indenture.
SECTION 4.21. Limitation on Restrictive Covenants.
Notwithstanding any other provisions of this Indenture, the restrictive
covenants set forth herein for so long as the Series D Indenture remains in
effect, shall be and shall be deemed limited to the extent necessary so that the
creation, existence and effectiveness of such restrictive covenant shall not
result in a breach of the covenant of the Series D Indenture relating to
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries."
SECTION 4.22. Impairment of Security Interest.
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Neither the Issuer nor any of its Subsidiaries will take or omit to
take any action which action or omission would have the result of adversely
affecting or impairing any Lien granted in favor of the Trustee, for its benefit
and the benefit of the Holders, with respect to the Collateral, and neither the
Issuer nor any of its Subsidiaries shall grant to any Person, or suffer any
Person (other than the Issuer and its Restricted Subsidiaries) to have (other
than to the Trustee on behalf of the Trustee and the Holders) any interest
whatsoever in the Collateral other than Permitted Liens. Neither the Issuer nor
any of its Subsidiaries will enter into any agreement or instrument that by its
terms requires the proceeds received from any sale of Collateral to be applied
to repay, redeem, defease or otherwise acquire or retire any Indebtedness, other
than pursuant to this Indenture and the Security Documents.
SECTION 4.23. Additional Amounts.
All payments made by any Subsidiary Guarantor under or with respect to
the Notes or its Guarantee will be made free and clear of, and without
withholding or deduction for or on account of, any present or future tax, duty,
levy, impost, assessment or other governmental charge imposed or levied by or on
behalf of the Government of Canada or of any province or territory thereof or by
any authority or agency therein or thereof having power to tax (or the
jurisdiction of incorporation of any successor of any Subsidiary Guarantor)
(hereunder "Taxes"), unless the applicable Subsidiary Guarantor or any
successor, as the case may be, is required to withhold or deduct Taxes by law or
by the interpretation or administration thereof by the relevant governmental
authority or agency. If any Subsidiary Guarantor or any successor, as the case
may be, is so required to withhold or deduct any amount for or on account of
Taxes from any payment made under or with respect to the Notes or any Guarantee,
such Subsidiary Guarantor will pay such additional amounts ("Additional
Amounts") as may be necessary so that the net amount received by each Holder
(including Additional Amounts) after such withholding or deduction will not be
less than the amount the Holder would have received if such Taxes had not been
withheld or deducted; provided that no Additional Amounts will be payable with
respect to a payment made to a Holder (an "Excluded Holder") in respect of a
beneficial owner (a) with which the Issuer or such Subsidiary Guarantor does not
deal at arm's-length (within the meaning of the Income Tax Act (Canada)) at the
time of making such payment or (b) which is subject to such Taxes by reason of
its being connected with Canada or any province or territory thereof otherwise
than by the mere acquisition, holding or disposition of the Notes or the receipt
of payments thereunder. The Subsidiary Guarantors will also (i) make such
withholding or deduction and (ii) remit the full amount deducted or withheld to
the relevant governmental authority in accordance with applicable law. The
Subsidiary Guarantors will furnish to the Holders, within 30 days after the date
the payment of any Taxes is due pursuant to applicable law, certified copies of
tax receipts evidencing such payment. The Subsidiary Guarantors will, jointly
and severally, indemnify and hold harmless each Holder (other than an Excluded
Holder) and upon written request reimburse each such Holder for the amount of
(A) any Taxes so levied or imposed on and paid by such Holder as a result of
payments made under or with respect to the Notes or any Guarantee, (B) any
liability (including penalties, interest and expenses) arising therefrom or with
respect thereto, and (C) any Taxes imposed with respect to any reimbursement
under (A) or (B) so that the net amount received by such Holder after such
reimbursement will not be less than the net amount the Holder would have
received if Taxes on such reimbursement had not been imposed. At least 30 days
prior to each date on which any payment under or with respect to the Notes is
due and payable, if a Subsidiary Guarantor will be obligated to pay Additional
Amounts with respect to such payment, such Subsidiary Guarantor will deliver to
the Trustee an Officers' Certificate stating the fact that such Additional
Amounts will be payable, the amounts so payable and will set forth such other
information necessary to enable the Trustee to pay such Additional Amounts to
Holders on the payment date. Whenever in this Indenture there is mentioned, in
any context, the payment of principal (and premium, if any), redemption price,
Change of Control payment, purchase price, interest or any other amount payable
under or with respect to any Note, such mention shall be deemed to include
mention of the payment of Additional Amounts to the extent that, in such
context, Additional Amounts are, were or would be payable in respect thereof.
The Issuer will pay any present or future stamp, court or documentary taxes
or any other excise or property taxes, charges or similar levies that arise in
any jurisdiction from the execution, delivery, enforcement or registration of
the Notes or any other document or instrument in relation thereto, or from the
receipt of any payments with respect to the Notes, excluding such taxes, charges
or similar levies imposed by any jurisdiction outside of Canada, the
jurisdiction of incorporation of any successor of the Issuer or any jurisdiction
in which a paying agent is located, and has agreed to indemnify the Holders for
any such taxes paid by such Holders.
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The foregoing obligations shall survive any termination, defeasance or
discharge of this Indenture and the payment of all amounts owing under or with
respect to the Notes and any Guarantee.
SECTION 4.24. Maintenance of Lien; Additional Collateral.
(a) If, after the Issue Date, the Issuer or any of its Restricted
Subsidiaries shall (i) acquire any material Oil and Gas Assets or (ii) engage in
successful drilling and exploration activities resulting in the creation of new
material Crude Oil and Natural Gas Properties, then the Issuer shall, and shall
cause each of its Restricted Subsidiaries to, execute and file in the
appropriate filing offices mortgages, deeds of trust, security agreements,
financing statements and other instruments granting to the Trustee for the
benefit of the Holders a first priority Lien, subject only to Permitted Liens,
as is necessary or appropriate to ensure that the Lien of this Indenture and the
Security Documents covers such new Oil and Gas Assets ; provided, however, that
in no event shall the Issuer shall be obligated to grant a Lien to the T-Gas
Assets if the sale or disposition thereof results in Net Cash Proceeds to the
Issuer in excess of $500,000.
(b) Without limitation of clause (a) of this Section 4.24, on the date
any Replacement Assets shall be acquired pursuant to Section 4.16 and on the
date of any Oil and Gas Assets are received in exchange or trade for other
properties as contemplated by clause (G) of the definition of "Asset Sale," the
Issuer shall, and shall cause each of its Restricted Subsidiaries to, execute
and file in the appropriate filing offices mortgages, deeds of trust, security
agreements, financing statements and other instruments granting to the Trustee,
for the benefit of the Holders, a first priority Lien, subject only to Permitted
Liens, on substantially all of such material Replacement Assets or other
material Oil and Gas Assets received in exchange or trade.
(c) In connection with any Security Documents executed and filed under
clause (a) or (b) of Section 4.24, the Issuer shall also comply with the terms
of Section 12.02 to the extent applicable.
(d) On March 15th in each year, beginning with March 15, 2000, the
Issuer shall review its and its Restricted Subsidiaries' Oil and Gas Assets to
ascertain whether or not substantially all of such assets are then subject to
the Lien of this Indenture and the Security Documents. If a substantial portion
of such assets are not then subject to the Lien of this Indenture and the
Security Documents, then the Issuer shall, and shall cause its Restricted
Subsidiaries, to execute and file in the appropriate filing offices mortgages,
deeds of trust, security agreements, financing statements and other instruments
granting to the Trustee for the benefit of the Holders a first priority Lien,
subject only to Permitted Liens, as is necessary or appropriate to accomplish
such objective.
ARTICLE FIVE
SUCCESSOR CORPORATION
SECTION 5.01. Merger, Consolidation and Sale of Assets.
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The Issuer will not, in a single transaction or series of related
transactions, consolidate or merge with or into any Person, or sell, assign,
transfer, lease, convey or otherwise dispose of (or cause or permit any
Restricted Subsidiary to sell, assign, transfer, lease, convey or otherwise
dispose of) all or substantially all of the Issuer's assets (determined on a
consolidated basis for the Issuer and its Restricted Subsidiaries), whether as
an entirety or substantially as an entirety to any Person unless: (a) either (i)
the Issuer or such Restricted Subsidiary, as the case may be, shall be the
surviving or continuing corporation or (ii) the Person (if other than the
Issuer) formed by such consolidation or into which the Issuer is merged or the
Person which acquires by sale, assignment, transfer, lease, conveyance or other
disposition the properties and assets of the Issuer and its Restricted
Subsidiaries substantially as an entirety (the "Surviving Entity") (x) shall be
a corporation organized and validly existing under the laws of the United States
or any state thereof or the District of Columbia (or if such Restricted
Subsidiary was formed under the laws of Canada or any province or territory
thereof, such Surviving Entity shall be a corporation organized and validly
existing under the laws of Canada or any province or territory thereof) and (y)
shall expressly assume, by supplemental indenture (in form and substance
satisfactory to the Trustee), executed and delivered to the Trustee, the due and
punctual payment of the principal of, premium, if any, and interest on all of
the Notes and the performance of every covenant of the Notes, this Indenture,
the Security Documents and the Registration Rights Agreement on the part of the
Issuer to be performed or observed; (b) immediately after giving effect to such
transaction and the assumption contemplated by clause (a)(ii)(y) above
(including giving effect to any Indebtedness incurred or anticipated to be
incurred and any Lien granted in connection with or in respect of such
transaction), the Issuer or such Surviving Entity, as the case may be, (i) shall
have a Consolidated Net Worth equal to or greater than the Consolidated Net
Worth of the Issuer immediately prior to such transaction and (ii) shall be able
to incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to Section 4.12 hereof; (c) immediately before and
immediately after giving effect to such transaction and the assumption
contemplated by clause (a)(ii)(y) above (including, without limitation, giving
effect to any Indebtedness incurred or anticipated to be incurred and any Lien
granted in connection with or in respect of the transaction), no Default or
Event of Default shall have occurred or be continuing; and (d) the Issuer or the
Surviving Entity, as the case may be, shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, sale, assignment, transfer, lease, conveyance or other
disposition and, if a supplemental indenture is required in connection with such
transaction, such supplemental indenture comply with the applicable provisions
hereof and that all conditions precedent in this Indenture relating to such
transaction have been satisfied; provided, however, that such counsel may rely,
as to matters of fact, on a certificate or certificates of officers of the
Issuer.
For purposes of the foregoing, the transfer (by lease, assignment, sale
or otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Issuer, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Issuer.
Each Subsidiary Guarantor (other than any Subsidiary Guarantor whose
Guarantee is to be released in accordance with the terms of the Guarantee and
this Indenture in connection with any transaction complying with the provisions
of this Indenture described under this Section 5.01) will not, and the Issuer
will not cause or permit any Subsidiary Guarantor to, consolidate with or merge
with or into any Person other than the Issuer or another Subsidiary Guarantor
that is a Wholly Owned Restricted Subsidiary unless: (a) the entity formed by or
surviving any such consolidation or merger (if other than the Subsidiary
Guarantor) or to which such sale, lease, conveyance or other disposition shall
have been made is a corporation organized and existing under the laws of the
United States or any state thereof or the District of Columbia (or if such
Restricted Subsidiary was formed under the laws of Canada or any province or
territory thereof, such Surviving Entity shall be a corporation organized and
validly existing under the laws of Canada or any province or territory thereof);
(b) such entity assumes by execution of a supplemental indenture all of the
obligations of the Subsidiary Guarantor under its Guarantee; (c) immediately
after giving effect to such transaction, no Default or Event of Default shall
have occurred and be continuing; and (d) immediately after giving effect to such
transaction and the use of any net proceeds therefrom on a pro forma basis, the
Issuer could satisfy the provisions of clause (b) of the first paragraph of this
Section 5.01. Any merger or consolidation of a Subsidiary Guarantor with and
into the Issuer (with the Issuer being the Surviving Entity) or another
Subsidiary Guarantor that is a Wholly Owned Restricted Subsidiary need only
comply with clause (d) of the first paragraph of this Section 5.01.
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SECTION 5.02. Successor Corporation Substituted.
Upon any consolidation, combination or merger or any transfer of all or
substantially all of the assets of the Issuer in accordance with the foregoing,
in which the Issuer is not the Surviving Entity, the Surviving Entity formed by
such consolidation or into which the Issuer is merged or to which such
conveyance, lease or transfer is made shall succeed to, and be substituted for,
and may exercise every right and power of, the Issuer under this Indenture and
the Notes with the same effect as if such Surviving Entity had been named as
such, and thereafter (except in the case of a lease), the predecessor
corporation will be relieved of all further obligations and covenants under this
Indenture and the Notes.
ARTICLE SIX
REMEDIES
SECTION 6.01. Events of Default.
An "Event of Default" means any of the following events:
(a) the failure to pay interest (including any Liquidated
Damages) on any Notes when the same becomes due and payable and such
default continues for a period of 20 days;
(b) the failure to pay the principal of any Notes when such
principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase Notes
tendered pursuant to a Change of Control Offer or a Net Proceeds
Offer);
(c) a default in the observance or performance of any other
covenant or agreement contained in this Indenture which default
continues for a period of 20 days after the Issuer or any Subsidiary
Guarantor receives written notice specifying the default (and demanding
that such default be remedied) from the Trustee or the Holders of at
least 25% of the outstanding principal amount of the Notes (except in
the case of a default with respect to observance or performance of any
of the terms or provisions of Section 4.15, 4.16 or 5.01 which will
constitute an Event of Default with such notice requirement but without
such passage of time requirement);
(d) a default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or
evidenced any Indebtedness of the Issuer or any Restricted Subsidiary
(or the payment of which is guaranteed by the Issuer or any Restricted
Subsidiary), whether such Indebtedness now exists, or is created after
the Issue Date, which default (i) is caused by a failure to pay
principal of or premium, if any, or interest on such Indebtedness after
any applicable grace period provided in such Indebtedness (a "payment
default") or (ii) results in the acceleration of such Indebtedness
prior to its express maturity and, in each case, the principal amount
of any such Indebtedness, together with the principal amount of any
other such Indebtedness under which there has been a payment default or
the maturity of which has been so accelerated, aggregates $5,000,000 or
more;
(e) one or more judgments in an aggregate amount in excess of
$5,000,000 (unless covered by insurance by a reputable insurer as to
which the insurer has acknowledged coverage) shall have been rendered
against the Issuer or any of its Restricted Subsidiaries and such
judgments remain undischarged, unvacated, unpaid or unstayed for a
period of 60 days after such judgment or judgments become final and
non-appealable;
(f) the Issuer or any of its Subsidiaries pursuant to or under
or within the meaning of any Bankruptcy Law:
(i) commences a voluntary case or proceeding;
(ii) consents to the entry of an order for relief
against it in an involuntary case or proceeding;
45
(iii) consents to the appointment of a Custodian of
it or for all or substantially all of its property;
(iv) makes a general assignment for the benefit of
its creditors; or
(v) shall generally not pay its debts when such debts
become due or shall admit in writing its inability to pay its
debts generally;
(g) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(i) is for relief against the Issuer or any
Subsidiary of the Issuer in an involuntary case or proceeding,
(ii) appoints a Custodian of the Issuer or any
Subsidiary of the Issuer for all or substantially all of its
Properties, or
(iii) orders the liquidation of the Issuer or any
Subsidiary of the Issuer, and in each case the order or decree
remains unstayed and in effect for 60 days; or
(h) any of the Guarantees or any of the Security Documents
cease to be in full force and effect or any of the Guarantees or the
Security Documents are declared to be null and void or invalid and
unenforceable or any of the Subsidiary Guarantors denies or disaffirms
its liability under its Guarantees (other than by reason of release of
a Subsidiary Guarantor in accordance with the terms of this Indenture)
or any obligor or any Related Person denies or disaffirms its liability
under any Security Document to which it is party.
SECTION 6.02. Acceleration.
Upon the happening of any Event of Default specified in Section 6.01,
the Trustee may, or the holders of at least 25% in aggregate principal amount of
outstanding Notes may, declare the principal of, premium, if any, and accrued
and unpaid interest on all the Notes to be due and payable by notice in writing
to the Issuer and the Trustee specifying the respective Event of Default and
that it is a "notice of acceleration" and the same shall become immediately due
and payable. If an Event of Default of the type described in clause (f) or (g)
above occurs and is continuing, then such amount will ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder.
At any time after a declaration of acceleration with respect to the
Notes as described in the preceding paragraph, the Holders of a majority in
aggregate principal amount of the Notes then outstanding by written notice to
the Issuer and the Trustee may rescind and cancel such declaration and its
consequences (a) if the rescission would not conflict with any judgment or
decree, (b) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of such
acceleration, (c) to the extent the payment of such interest is lawful, interest
on overdue installments of interest and overdue principal, which has become due
otherwise than by such declaration of acceleration, has been paid, (d) if the
Issuer has paid the Trustee its reasonable compensation and reimbursed the
Trustee for its expenses, disbursements and advances, and (e) in the event of
the cure or waiver of an Event of Default of the type described in clause (f) or
(g) of the description of Events of Default above, the Trustee shall have
received an Officers' Certificate and an Opinion of Counsel that such Event of
Default has been cured or waived; provided, however, that such counsel may rely,
as to matters of fact, on a certificate or certificates of officers of the
Issuer. No such rescission shall affect any subsequent Default or impair any
right consequent thereto.
SECTION 6.03. Other Remedies.
46
If an Event of Default occurs and is continuing, the Trustee may pursue
any available remedy by proceeding at law or in equity to collect the payment of
the principal of, premium, if any, or interest on the Notes or to enforce the
performance of any provision of the Notes or this Indenture.
All rights of action and claims under this Indenture or the Notes may
be enforced by the Trustee even if it does not possess any of the Notes or does
not produce any of them in the proceeding. A delay or omission by the Trustee or
any Holder in exercising any right or remedy accruing upon an Event of Default
shall not impair the right or remedy or constitute a waiver of or acquiescence
in the Event of Default. No remedy is exclusive of any other remedy. All
available remedies are cumulative to the extent permitted by law.
SECTION 6.04. Waiver of Past Defaults.
Prior to the declaration of acceleration of the Notes, the Holders of
not less than a majority in aggregate principal amount of the Notes then
outstanding by written notice to the Trustee may, on behalf of the Holders of
all the Notes, waive any existing Default or Event of Default and its
consequences under this Indenture, except a Default or Event of Default
specified in Section 6.01(a) or (b) or in respect of any provision hereof which
cannot be modified or amended without the consent of the Holder so affected
pursuant to Section 9.02. When a Default or Event of Default is so waived, it
shall be deemed to be cured and shall cease to exist. This Section 6.04 shall be
in lieu of ' 316(a)(1)(B) of the TIA and such ' 316(a)(1)(B) of the TIA is
hereby expressly excluded from this Indenture and the Notes, as permitted by the
TIA.
SECTION 6.05. Control by Majority.
Holders of the Notes may not enforce this Indenture or the Notes except
as provided in this Article Six and under the TIA. The Holders of not less than
a majority in aggregate principal amount of the outstanding Notes shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred on
the Trustee, provided, however, that the Trustee may refuse to follow any
direction (a) that conflicts with any rule of law or this Indenture, (b) that
the Trustee determines may be unduly prejudicial to the rights of another
Holder, or (c) that may expose the Trustee to personal liability for which
reasonable security and indemnity provided to the Trustee against such liability
shall be inadequate; provided, further, however, that the Trustee may take any
other action deemed proper by the Trustee that is not inconsistent with such
direction or this Indenture. This Section 6.05 shall be in lieu of '
316(a)(1)(A) of the TIA, and such ' 316(a)(1)(A) of the TIA is hereby expressly
excluded from this Indenture and the Notes, as permitted by the TIA.
SECTION 6.06. Limitation on Suits.
No Holder of any Notes shall have any right to institute any proceeding
with respect to this Indenture, the Notes, any Guarantee or any Security
Document or any remedy hereunder or thereunder, unless the Holders of at least
25% in aggregate principal amount of the outstanding Notes have made written
request, and offered reasonable security and indemnity, to the Trustee to
institute such proceeding as Trustee under the Notes and this Indenture, the
Trustee has failed to institute such proceeding within 60 days after receipt of
such notice, request and offer of security and indemnity and the Trustee, within
such 60-day period, has not received directions inconsistent with such written
request by Holders of not less than a majority in aggregate principal amount of
the outstanding Notes.
The foregoing limitations shall not apply to a suit instituted by a
Holder of a Note for the enforcement of the payment of the principal of,
premium, if any, or interest on, such Note on or after the respective due dates
expressed or provided for in such Note.
A Holder may not use this Indenture to prejudice the rights of any
other Holders or to obtain priority or preference over such other Holders.
SECTION 6.07. Right of Holders To Receive Payment.
47
Notwithstanding any other provision in this Indenture, the right of any
Holder of a Note to receive payment of the principal of, premium, if any, and
interest on such Note, on or after the respective due dates expressed or
provided for in such Note, or to bring suit for the enforcement of any such
payment on or after the respective due dates, is absolute and unconditional and
shall not be impaired or affected without the consent of the Holder.
SECTION 6.08. Collection Suit by Trustee.
If an Event of Default specified in clause (a) or (b) of Section 6.01
occurs and is continuing, the Trustee may recover judgment in its own name and
as trustee of an express trust against the Issuer, or any other obligor on the
Notes for the whole amount of the principal of, premium, if any, and accrued
interest remaining unpaid, together with interest on overdue principal and, to
the extent that payment of such interest is lawful, interest on overdue
installments of interest, in each case at the rate per annum provided for by the
Notes and such further amount as shall be sufficient to cover the costs and
expenses of collection, including the reasonable compensation, fees, expenses,
disbursements and advances of the Trustee, its agents and counsel.
SECTION 6.09. Trustee May File Proofs of Claim.
The Trustee may file such proofs of claim and other papers or documents
as may be necessary or advisable in order to have the claims of the Trustee
(including any claim for the reasonable compensation, fees, expenses,
disbursements and advances of the Trustee, its agents, counsel, accountants and
experts) and the Holders allowed in any judicial proceedings relative to the
Issuer, any Subsidiary Guarantor or Restricted Subsidiary (or any other obligor
upon the Notes), their creditors or their property and shall be entitled and
empowered to collect and receive any monies or other property payable or
deliverable on any such claims and to distribute the same, and any Custodian in
any such judicial proceedings is hereby authorized by each Holder to make such
payments to the Trustee and, in the event that the Trustee shall consent to the
making of such payments directly to the Holders, to pay to the Trustee any
amount due to it for the reasonable compensation, fees, expenses, disbursements
and advances of the Trustee, its agent and counsel, and any other amounts due
the Trustee under Section 7.07. Nothing herein contained shall be deemed to
authorize the Trustee to authorize or consent to or accept or adopt on behalf of
any Holder any plan of reorganization, arrangement, adjustment or composition
affecting the Notes or the rights of any Holder thereof, or to authorize the
Trustee to vote in respect of the claim of any Holder in any such proceeding.
SECTION 6.10. Priorities.
If the Trustee collects any money pursuant to this Article Six it shall
pay out such money in the following order:
First: to the Trustee (including any predecessor Trustee) for
amounts due under Section 7.07;
Second: to Holders for interest accrued on the Notes, ratably,
without preference or priority of any kind, according to the amounts
due and payable on the Notes for interest;
Third: to Holders for the principal amounts (including any
premium) owing under the Notes, ratably, without preference or priority
of any kind, according to the amounts due and payable on the Notes for
the principal (including any premium); and
Fourth: the balance, if any, to the Issuer.
The Trustee, upon prior written notice to the Issuer, may fix a record
date and payment date for any payment to Holders pursuant to this Section 6.10.
SECTION 6.11. Undertaking for Costs.
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In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court may in its discretion require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section 6.11 does not apply to any suit by the Trustee, any suit by a
Holder pursuant to Section 6.06, or a suit by a Holder or Holders of more than
10% in aggregate principal amount of the outstanding Notes.
SECTION 6.12. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture, any Guarantee or any Note and such
proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to the Trustee or to such Holder, then and in every such
case the Issuer, the Subsidiary Guarantors, the Trustee and the Holders shall,
subject to any determination in such proceeding, be restored severally and
respectively to their former positions hereunder, and thereafter all rights and
remedies of the Trustee and the Holders shall continue as though no such
proceeding had been instituted.
ARTICLE SEVEN
TRUSTEE
SECTION 7.01. Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture and
use the same degree of care and skill in its exercise thereof as a prudent
person would exercise or use under the circumstances in the conduct of his own
affairs.
(b) Except during the continuance of an Event of Default:
(1) The Trustee need perform only those duties as are
specifically set forth in this Indenture and no covenants or
obligations shall be implied in this Indenture that are adverse to the
Trustee.
(2) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture. However, in the case of any such certificates or
opinions that by any provision hereof are specifically required to be
furnished to the Trustee, the Trustee shall examine the certificates
and opinions to determine whether or not they conform to the
requirements of this Indenture.
(c) Notwithstanding anything to the contrary herein contained, the
Trustee may not be relieved from liability for its own negligent action, its own
negligent failure to act, or its own willful misconduct, except that:
(1) This paragraph does not limit the effect of paragraph (b)
of this Section 7.01.
(2) The Trustee shall not be liable for any error of judgment
made in good faith by a Trust Officer, unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts.
(3) The Trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.02, 6.04 or 6.05.
(d) No provision of this Indenture shall require the Trustee to expend
or risk its own funds or otherwise incur any financial liability in the
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performance of any of its duties hereunder or in the exercise of any of its
rights or powers if it shall have reasonable grounds for believing that
repayment of such funds or adequate security and indemnity against such risk or
liability is not reasonably assured to it.
(e) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b), (c) and (d) of this Section 7.01 and
Section 7.02.
(f) The Trustee shall not be liable for interest on any money or assets
received by it except as the Trustee may agree in writing with the Issuer.
Assets held in trust by the Trustee need not be segregated from other assets
except to the extent required by law.
SECTION 7.02. Rights of Trustee.
Subject to Section 7.01:
(a) The Trustee may rely and shall be fully protected in
acting or refraining from acting upon any document believed by it to be
genuine and to have been signed or presented by the proper Person. The
Trustee need not investigate any fact or matter stated in the document,
but the Trustee, in its discretion, may make such further inquiry or
investigation into such facts or matters as it may see fit, and if the
Trustee shall determine to make such further inquiry or investigation,
it shall be entitled to examine the books, records and premises of the
Company, personally or by agent or attorney.
(b) Before the Trustee acts or refrains from acting, it may
consult with counsel of its selection and may require an Officers'
Certificate or an Opinion of Counsel, which shall conform to Sections
10.04 and 10.05. The Trustee shall not be liable for any action it
takes or omits to take in good faith in reliance on such Officers'
Certificate or Opinion of Counsel.
(c) The Trustee may act through its attorneys and agents and
shall not be responsible for the misconduct or negligence of any agent
appointed with due care.
(d) The Trustee shall not be liable for any action that it
takes or omits to take in good faith which it reasonably believes to be
authorized or within the discretion, rights or powers conferred upon it
by this Indenture.
(e) The Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, notice, request, direction, consent,
order, bond, debenture, or other paper or document, but the Trustee, in
its discretion, may make such further inquiry or investigation into
such facts or matters as it may see fit, and, if the Trustee shall
determine to make such further inquiry or investigation, it shall be
entitled, upon reasonable notice to the Issuer, to examine the books,
records, and premises of the Issuer, personally or by agent or attorney
and to consult with the officers and representatives of the Issuer,
including the Issuer's accountants and attorneys.
(f) The Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request,
order or direction of any of the Holders pursuant to the provisions of
this Indenture, unless such Holders shall have offered, and if
requested, provided to the Trustee security and indemnity satisfactory
to the Trustee against the costs, expenses and liabilities which may be
incurred by it in compliance with such request, order, direction or
exercise.
(g) The Trustee shall not be required to give any bond or
surety in respect of the performance of its powers and duties
hereunder.
(h) Delivery of reports, information and documents to the
Trustee under Section 4.08 is for informational purposes only and the
Trustee's receipt of the foregoing shall not constitute constructive
notice of any information contained therein or determinable from
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information contained therein, including the Issuer's and any
Subsidiary Guarantor's compliance with any of their covenants hereunder
(as to which the Trustee is entitled to rely exclusively on Officers'
Certificates).
(i) No permissive right of the Trustee to act hereunder shall
be construed as a duty.
(j) Whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established
prior to taking, suffering or omitting any action hereunder, the
Trustee (unless other evidence be herein specifically prescribed) may,
in the absence of bad faith on its part, rely upon an Officers'
Certificate, a written Opinion of Counsel, or both.
(k) Except with respect to Section 4.01 hereof, the Trustee
shall have no duty to inquire as to the performance of the Company's
covenants in Article Four hereof. In addition, the Trustee shall not be
deemed to have knowledge of any Default or Event of Default except (i)
any Event of Default occurring pursuant to Sections 6.01(a) and 6.01(b)
hereof or (ii) any Default or Event of Default of which the Trustee
shall have received written notification or obtained actual knowledge.
(l) The Trustee shall not be deemed to have notice or
knowledge of any matter unless a Trust Officer has actual knowledge
thereof or unless written notice thereof is received by the Trustee at
the Corporate Trust Office of the Trustee and such notice references
the Notes generally, the Company or this Indenture.
(m) The Trustee shall be authorized to exercise its rights and
remedies under this Indenture and the Security Documents through one or
more agents.
SECTION 7.03. Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become the
owner or pledgee of Notes and may otherwise deal with the Issuer, any of its
Subsidiaries, or their respective Affiliates with the same rights it would have
if it were not Trustee. Any Agent may do the same with like rights. However, the
Trustee must comply with Sections 7.10 and 7.11.
SECTION 7.04. Trustee's Disclaimer.
The Trustee makes no representation as to the validity or adequacy of
this Indenture, the Guarantees, the Registration Rights Agreement or the Notes,
and it shall not be accountable for the Issuer's use of the proceeds from the
Notes, and it shall not be responsible for any statement of the Issuer in this
Indenture or the Notes other than the Trustee's certificate of authentication.
SECTION 7.05. Notice of Default.
If a Default or an Event of Default occurs and is continuing and if (i)
the Trustee receives written notice thereof or (ii) such default is an Event of
Default under Section 6.01(a) or (b), the Trustee shall mail to each Holder
notice of the uncured Default or Event of Default within 90 days after obtaining
knowledge thereof. Except in the case of a Default or an Event of Default in
payment of principal of, or interest on, any Note, including an accelerated
payment, a Default in payment on the Change of Control Payment Date pursuant to
a Change of Control Offer or on the Net Proceeds Offer Payment Date pursuant to
a Net Proceeds Offer and a Default in compliance with Article Five hereof, the
Trustee may withhold the notice if and so long as its Board of Directors, the
executive committee of its Board of Directors or a committee of its directors
and/or Trust Officers in good faith determines that withholding the notice is in
the interest of the Holders. The foregoing sentence of this Section 7.05 shall
be in lieu of the proviso to ' 315(b) of the TIA and such proviso to ' 315(b) of
the TIA is hereby expressly excluded from this Indenture and the Notes, as
permitted by the TIA.
SECTION 7.06. Reports by Trustee to Holders.
51
Within 60 days after November 1 of each year beginning with 1998, the
Trustee shall, to the extent that any of the events described in TIA ' 313(a)
occurred within the previous twelve months, but not otherwise, mail to each
Holder a brief report dated as of such date that complies with TIA ' 313(a). The
Trustee also shall comply with TIA " 313(b), (c) and (d).
A copy of each report at the time of its mailing to Holders shall be
mailed to the Issuer and filed with the Commission and each stock exchange, if
any, on which the Notes are listed.
The Issuer shall promptly notify the Trustee if the Notes become listed
on any stock exchange and the Trustee shall comply with TIA ' 313(d).
SECTION 7.07. Compensation and Indemnity.
The Issuer shall pay to the Trustee from time to time such compensation
for its services as has been agreed to by the Issuer and the Trustee. The
Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Issuer shall reimburse the Trustee upon request
for all reasonable out-of-pocket expenses incurred or made by it in connection
with the performance of its duties under this Indenture. Such expenses shall
include the reasonable fees and expenses of the Trustee's agents, counsel,
accountants and experts.
The Issuer and the Subsidiary Guarantors shall jointly and severally
indemnify each of the Trustee (or any predecessor Trustee) and its agents,
employees, stockholders, Affiliates and directors and officers for, and hold
them each harmless against, any and all loss, liability, damage, claim or
expense (including reasonable fees and expenses of counsel), including taxes
(other than taxes based on the income of the Trustee) incurred by them except
for such actions to the extent caused by any negligence, bad faith or willful
misconduct on their part, relating to or arising out of or in connection with
(i) the acceptance or administration of this trust including the reasonable
costs and expenses of defending themselves against any claim or liability in
connection with the exercise or performance of any of their rights, powers or
duties hereunder, or (ii) the validity, invalidity, adequacy or inadequacy of
this Indenture, the Subsidiary Guarantees, the Notes, the Registration Rights
Agreement and the Offering Memorandum. The Trustee shall notify the Issuer
promptly of any claim asserted against the Trustee for which it intends to seek
indemnity. At the Trustee's sole discretion, the Issuer shall defend the claim
and the Trustee shall cooperate and may participate in the defense; provided,
however, that any settlement of a claim shall be approved in writing by the
Trustee if such settlement would result in an admission of liability by the
Trustee or if such settlement would not be accompanied by a full release of the
Trustee for all liability arising out of the events giving rise to such claim.
Alternatively, the Trustee may at its option have separate counsel of its own
choosing and the Issuer shall pay the reasonable fees and expenses of such
counsel.
To secure the Issuer's payment obligations in this Section 7.07, the
Trustee shall have a lien prior to the Notes on all assets or money held or
collected by the Trustee, in its capacity as Trustee, except assets or money
held in trust to pay principal of or premium, if any, or interest on particular
Notes.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.01(f) or (g) occurs, such expenses and the
compensation for such services are intended to constitute expenses of
administration under any Bankruptcy Law.
The provisions of this Section 7.07 shall survive the termination of
this Indenture.
SECTION 7.08. Replacement of Trustee.
The Trustee may resign at any time by so notifying the Issuer. The
Holders of a majority in principal amount of the outstanding Notes may remove
the Trustee and appoint a successor Trustee with the Issuer's consent, by so
notifying the Issuer and the Trustee. The Issuer may by resolution of its Board
of Directors remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
52
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the
Trustee or its property; or
(4) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Issuer shall notify each Holder of such
event and shall promptly appoint a successor Trustee. Within one year after the
successor Trustee takes office, the Holders of a majority in aggregate principal
amount of the outstanding Notes may appoint a successor Trustee to replace the
successor Trustee appointed by the Issuer.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Issuer. Immediately after that,
the retiring Trustee shall transfer all property held by it as Trustee to the
successor Trustee, subject to the Lien provided in Section 7.07, the resignation
or removal of the retiring Trustee shall become effective, and the successor
Trustee shall have all the rights, powers and duties of the Trustee under this
Indenture. The Issuer shall mail notice of such successor Trustee's appointment
to each Holder.
If a successor Trustee does not take office within 30 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Issuer or the
Holders of at least 10% in aggregate principal amount of the outstanding Notes
may petition any court of competent jurisdiction for the appointment of a
successor Trustee.
If the Trustee fails to comply with Section 7.10, any Holder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
Notwithstanding any resignation or replacement of the Trustee pursuant
to this Section 7.08, the Issuer's obligations under Section 7.07 shall continue
for the benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger, Etc.
If the Trustee consolidates with, merges or converts into, or transfers
all or substantially all of its corporate trust business to, another
corporation, the resulting, surviving or transferee corporation without any
further act shall, if such resulting, surviving or transferee corporation is
otherwise eligible hereunder, be the successor Trustee; provided, however, that
such corporation shall be otherwise qualified and eligible under this Article
Seven.
SECTION 7.10. Eligibility; Disqualification.
This Indenture shall always have a Trustee who satisfies the
requirement of TIA " 310(a)(1), (2) and (5). The Trustee (or, in the case of a
Trustee that is a corporation included in a bank holding company system, the
related bank holding company) shall have a combined capital and surplus of at
least $150 million as set forth in its most recent published annual report of
condition, and have a Corporate Trust Office in the City of New York. In
addition, if the Trustee is a corporation included in a bank holding company
system, the Trustee, independently of such bank holding company, shall meet the
capital requirements of TIA ' 310(a)(2). The Trustee shall comply with TIA '
310(b); provided, however, that there shall be excluded from the operation of
TIA ' 310(b)(1) any indenture or indentures under which other securities, or
certificates of interest or participation in other securities, of the Issuer are
outstanding, if the requirements for such exclusion set forth in TIA ' 310(b)(1)
are met. The provisions of TIA ' 310 shall apply to the Issuer and the
Subsidiary Guarantors, as obligors of the Notes.
SECTION 7.11. Preferential Collection of Claims Against Issuer.
The Trustee shall comply with TIA ' 311(a), excluding any creditor
relationship listed in TIA ' 311(b). A Trustee who has resigned or been removed
shall be subject to TIA ' 311(a) to the extent indicated therein. The provisions
of TIA ' 311 shall apply to the Issuer and the Subsidiary Guarantors, as
obligors on the Notes.
53
SECTION 7.12. Other Capacities.
All references in this Indenture to the Trustee shall be deemed to
refer to the Trustee in its capacity as Trustee and in its capacities as any
Agent, to the extent acting in such capacities, and every provision of this
Indenture relating to the conduct or affecting the liability or offering
protection, immunity or indemnity to the Trustee shall be deemed to apply with
the same force and effect to the Trustee acting in its capacities as any Agent.
ARTICLE EIGHT
DISCHARGE OF INDENTURE; DEFEASANCE
SECTION 8.01. Termination of Issuer's Obligations.
This Indenture, the Guarantees and the Security Documents will be
discharged and will cease to be of further effect (except as to surviving rights
of registration of transfer or exchange of the Notes, as expressly provided for
in this Indenture) as to all outstanding Notes when (a) either (i) all Notes,
theretofore authenticated and delivered (except lost, stolen or destroyed Notes
which have been replaced or paid and Notes for whose payment money has
theretofore been deposited in trust or segregated and held in trust by the
Issuer and thereafter repaid to the Issuer or discharged from such trust) have
been delivered to the Trustee for cancellation or (ii) all Notes not theretofore
delivered to the Trustee for cancellation have become due and payable and the
Issuer has irrevocably deposited or caused to be deposited with the Trustee
funds in an amount sufficient to pay and discharge the entire Indebtedness on
the Notes not theretofore delivered to the Trustee for cancellation, for
principal of, premium, if any, and interest on the Notes to the date of deposit
together with irrevocable written instructions in the form of an Officers'
Certificate from the Issuer directing the Trustee to apply such funds to the
payment thereof at maturity or redemption, as the case may be; (b) the Issuer
has paid all other sums payable under this Indenture by the Issuer; and (c) the
Issuer has delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel stating that all conditions precedent under this Indenture relating to
the satisfaction and discharge of this Indenture have been complied with;
provided, however, that such counsel may rely, as to matters of fact, on a
certificate or certificates of officers of the Issuer.
The Issuer may, at its option and at any time, elect to have its
obligations and the corresponding obligations of the Subsidiary Guarantors
discharged with respect to the outstanding Notes ("Legal Defeasance"). Such
Legal Defeasance means that the Issuer and the Subsidiary Guarantors shall be
deemed to have paid and discharged the entire indebtedness represented by the
outstanding Notes, and satisfied all of their obligations with respect to the
Notes, except for (a) the rights of Holders to receive payments in respect of
the principal of, premium, if any, and interest on the Notes when such payments
are due, (b) the Issuer's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payments, (c) the
rights, powers, trust, duties and immunities of the Trustee and the Issuer's
obligations in connection therewith and (d) the Legal Defeasance provisions of
this Section 8.01. In addition, the Issuer may, at its option and at any time,
elect to have the obligations of the Issuer and the Subsidiary Guarantors, if
any, released with respect to covenants contained in Sections 4.04, 4.08 and
4.10 through 4.20 and Article Five ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or Event
of Default with respect to the Notes. In the event of Covenant Defeasance, those
events described under Section 6.01 (except those events described in Section
6.01(a),(b),(f) and (g)) will no longer constitute an Event of Default with
respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(a) the Issuer must irrevocably deposit with the Trustee, in
trust, for the benefit of the Holders U.S. Legal Tender, non-callable
U.S. Government Obligations, or a combination thereof, in such amounts
as will be sufficient, in the opinion of a nationally recognized firm
of independent public accountants, to pay the principal of, premium, if
any, and interest on the Notes on the stated date for payment thereof
or on the applicable Redemption Date, as the case may be;
54
(b) in the case of Legal Defeasance, the Issuer shall have
delivered to the Trustee an Opinion of Counsel in the United States
reasonably acceptable to the Trustee confirming that (i) the Issuer has
received from, or there has been published by, the Internal Revenue
Service a ruling or (ii) since the Issue Date, there has been a change
in the applicable federal income tax law, in either case to the effect
that, and based thereon such Opinion of Counsel shall confirm that, the
Holders will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred;
(c) in the case of Covenant Defeasance, the Issuer shall have
delivered to the Trustee an Opinion of Counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders will
not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not
occurred;
(d) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as Events of Default
under Section 6.01(f) or (g) from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the
date of deposit;
(e) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under this
Indenture or any other agreement or instrument to which the Issuer or
any of its Restricted Subsidiaries is a party or by which the Issuer or
any of its Restricted Subsidiaries is bound;
(f) the Issuer shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the
Issuer with the intent of preferring the Holders over any other
creditors of the Issuer or with the intent of defeating, hindering,
delaying or defrauding any other creditors of the Issuer or others;
(g) the Issuer shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance, as the case may be, have been complied
with; provided, however, that such counsel may rely, as to matters of
fact, on a certificate or certificates of officers of the Issuer;
(h) the Issuer shall have delivered to the Trustee an Opinion
of Counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; and
(i) certain other customary conditions precedent are
satisfied.
SECTION 8.02. Application of Trust Money.
The Trustee or Paying Agent shall hold in trust U.S. Legal Tender or
U.S. Government Obligations deposited with it pursuant to Section 8.01, and
shall apply the deposited U.S. Legal Tender and the money from U.S. Government
Obligations in accordance with this Indenture to the payment of the principal of
and interest on the Notes. The Trustee shall be under no obligation to invest
said U.S. Legal Tender or U.S. Government Obligations except as it may agree in
writing with the Issuer.
The Issuer shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the Legal Tender or U.S. Government
Obligations deposited pursuant to Section 8.01 or the principal and interest
received in respect thereof other than any such tax, fee or other charge which
by law is for the account of the Holders of outstanding Notes. The provisions of
this Section 8.02 shall survive the termination of this Indenture.
SECTION 8.03. Repayment to the Issuer.
55
Subject to Section 8.01, the Trustee and the Paying Agent shall
promptly pay to the Issuer upon request any excess U.S. Legal Tender or U.S.
Government Obligations held by them at any time and thereupon shall be relieved
from all liability with respect to such money. The Trustee and the Paying Agent
shall pay to the Issuer upon receipt of a written order in the form of an
Officers' Certificate requesting any money held by them for the payment of
principal or interest that remains unclaimed for one year; provided, however,
that the Trustee or such Paying Agent, before being required to make any
payment, may at the expense of the Issuer cause to be published once in a
newspaper of general circulation in the City of New York or mail to each Holder
entitled to such money notice that such money remains unclaimed and that after a
date specified therein which shall be at least 30 days from the date of such
publication or mailing any unclaimed balance of such money then remaining will
be repaid to the Issuer. After payment to the Issuer, Holders entitled to such
money must look to the Issuer for payment as general creditors unless an
applicable law designates another Person.
SECTION 8.04. Reinstatement.
If the Trustee or Paying Agent is unable to apply any U.S. Legal Tender
or U.S. Government Obligations in accordance with Section 8.01 by reason of any
legal proceeding or by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, then the Issuer's obligations under this Indenture and the Notes
shall be revived and reinstated as though no deposit had occurred pursuant to
Section 8.01 until such time as the Trustee or Paying Agent is permitted to
apply all such U.S. Legal Tender or U.S. Government Obligations in accordance
with Section 8.01; provided, however, that if the Issuer has made any payment of
interest on or principal of any Notes because of the reinstatement of its
obligations, the Issuer shall be subrogated to the rights of the Holders of such
Notes to receive such payment from the U.S. Legal Tender or U.S. Government
Obligations held by the Trustee or Paying Agent.
SECTION 8.05. Acknowledgment of Discharge by Trustee.
After (i) the conditions of Section 8.01 have been satisfied, (ii) the
Issuer has paid or caused to be paid all other sums payable hereunder by the
Issuer and (iii) the Issuer has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent referred to in clause (i) above relating to the satisfaction and
discharge of this Indenture have been complied with, the Trustee upon written
request of the Issuer in the form of an Officers' Certificate shall acknowledge
in writing the discharge of the Issuer's obligations under this Indenture except
for those surviving obligations specified in Sections 7.07 and 8.02.
ARTICLE NINE
MODIFICATION OF INDENTURE
SECTION 9.01. Without Consent of Holders.
Subject to the provisions of Section 9.02, the Issuer, the Subsidiary
Guarantors and the Trustee may amend, waive or supplement this Indenture or any
Security Document without notice to or consent of any Holder: (a) to cure any
ambiguity, defect or inconsistency; (b) to comply with Section 5.01 of this
Indenture; (c) to provide for uncertificated Notes in addition to certificated
Notes; (d) to comply with any requirements of the Commission in order to effect
or maintain the qualification of this Indenture under the TIA; or (e) to make
any change that would provide any additional benefit or rights to the Holders or
that does not adversely affect the rights of any Holder. Notwithstanding the
foregoing, the Trustee and the Issuer may not make any change that adversely
affects the rights of any Holder under this Indenture or any Security Document
without the consent of such Holder. In formulating its opinion on such matters,
the Trustee will be entitled to rely on such evidence as it deems appropriate,
including, without limitation, solely on an Opinion of Counsel; provided,
however, that in delivering such Opinion of Counsel, such counsel may rely as to
matters of fact, on a certificate or certificates of officers of the Issuer.
SECTION 9.02. With Consent of Holders.
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All other amendments, supplements or waivers of this Indenture, the
Notes, the Guarantees or any Security Document may be made with the consent of
the Holders of not less than a majority of the then outstanding principal amount
of the then outstanding Notes, except that, without the consent of each Holder
of the Notes affected thereby, no amendment, supplement or waiver may, directly
or indirectly: (i) reduce the amount of Notes whose Holders must consent to any
amendment; (ii) reduce the rate of or change the time for payment of interest,
including defaulted interest, on any Notes or reduce the amount of liquidated
damages payable under the Registration Rights Agreement; (iii) reduce the
principal of or change the fixed maturity of any Notes, or change the date on
which any Notes may be subject to redemption or repurchase, or reduce the
redemption or repurchase price therefor; (iv) make any Notes payable in currency
other than that stated in the Notes; (v) make any change in provisions of this
Indenture protecting the right of each Holder of a Note to receive payment of
principal of and interest on such Note on or after the due date thereof or to
bring suit to enforce such payment or permitting Holders of a majority in
aggregate principal amount of the then outstanding Notes to waive Defaults or
Events of Default; (vi) amend, change or modify in any material respect the
obligation of the Issuer to make and consummate a Change of Control Offer in the
event of a Change of Control or make and consummate a Net Proceeds Offer with
respect to any Asset Sale that has been consummated or modify any of the
provisions or definitions with respect thereto; (vii) modify or change any
provision of this Indenture, any Security Document or Section 1.01 affecting the
ranking of the Notes or any Guarantee in a manner which adversely affects the
Holders; or (viii) release any Subsidiary Guarantor from any of its obligations
under its Guarantee or this Indenture otherwise than in accordance with the
terms of this Indenture.
SECTION 9.03. Compliance with TIA.
Every amendment, waiver or supplement of this Indenture or the Notes
shall comply with the TIA as then in effect; provided, however, that this
Section 9.03 shall not of itself require that this Indenture or the Trustee be
qualified under the TIA or constitute any admission or acknowledgment by any
party hereto that any such qualification is required prior to the time this
Indenture and the Trustee are required by the TIA to be so qualified.
SECTION 9.04. Revocation and Effect of Consents.
Until an amendment, waiver or supplement becomes effective, a consent
to it by a Holder is a continuing consent by the Holder and every subsequent
Holder of a Note or portion of a Note that evidences the same debt as the
consenting Holder's Note, even if notation of the consent is not made on any
Note. Subject to the following paragraph, any such Holder or subsequent Holder
may revoke the consent as to such Holder's Note or portion of such Note by
notice to the Trustee or the Issuer received before the date on which the
Trustee receives an Officers' Certificate certifying that the Holders of the
requisite principal amount of Notes have consented (and not theretofore revoked
such consent) to the amendment, supplement or waiver. An amendment, supplement
or waiver becomes effective upon receipt by the Trustee of such Officers'
Certificate and evidence of consent by the Holders of the requisite percentage
in principal amount of outstanding Notes.
The Issuer may, but shall not be obligated to, fix a Record Date for
the purpose of determining the Holders entitled to consent to any amendment,
supplement or waiver, which Record Date shall be at least 30 days prior to the
first solicitation of such consent. If a Record Date is fixed, then
notwithstanding the second sentence of the immediately preceding paragraph,
those Persons who were Holders at such Record Date (or their duly designated
proxies), and only those Persons, shall be entitled to revoke any consent
previously given, whether or not such Persons continue to be Holders after such
Record Date. No such consent shall be valid or effective for more than 90 days
after such Record Date unless consents from Holders of the requisite percentage
in principal amount of outstanding Notes required hereunder for the
effectiveness of such consents shall have also been given and not revoked within
such 90 day period.
SECTION 9.05. Notation on or Exchange of Notes.
If an amendment, supplement or waiver changes the terms of a Note, the
Trustee may require the Holder of such Note to deliver it to the Trustee. The
Trustee may place an appropriate notation on the Note about the changed terms
and return it to the Holder. Alternatively, if the Issuer or the Trustee so
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determines, the Issuer in exchange for the Note shall issue and the Trustee upon
receipt of a written order in the form of an Officers' Certificate shall
authenticate a new Note that reflects the changed terms.
SECTION 9.06. Trustee To Sign Amendments, Etc.
The Trustee shall execute any amendment, supplement or waiver approved
by the Board of Directors of the Issuer and authorized pursuant to this Article
Nine; provided, however, that the Trustee may, but shall not be obligated to,
execute any such amendment, supplement or waiver which affects the Trustee's own
rights, duties or immunities under this Indenture. In executing such supplement
or waiver the Trustee shall be entitled to receive security and indemnity
satisfactory to it, and shall be fully protected in relying upon an Opinion of
Counsel and an Officers' Certificate of the Issuer, each stating that (a) no
Event of Default shall occur as a result of such amendment, supplement or
waiver, (b) such amendment, supplement or waiver has been approved by the Board
of Directors of the Issuer and (c) the execution of any amendment, supplement or
waiver authorized pursuant to this Article Nine is authorized or permitted by
this Indenture, provided the legal counsel delivering such Opinion of Counsel
may rely as to matters of fact on one or more Officers' Certificates of the
Issuer. Such Opinion of Counsel shall not be an expense of the Trustee.
SECTION 9.07. Evidence of Amendments, Supplements, Waivers. This
Indenture, the Notes, the Guarantees and the Security Documents may only be
amended, supplemented or waived by a written instrument duly signed as
contemplated in Section 9.01 or 9.02.
ARTICLE TEN
MISCELLANEOUS
SECTION 10.01. TIA Controls.
If any provision of this Indenture limits, qualifies, or conflicts with
another provision which is required to be included in this Indenture by the TIA,
the required provision shall control; provided, however, that this Section 10.01
shall not of itself require that this Indenture or the Trustee be qualified
under the TIA or constitute any admission or acknowledgment by any party hereto
that any such qualification is required prior to the time this Indenture and the
Trustee are required by the TIA to be so qualified.
SECTION 10.02. Notices.
Any notices or other communications required or permitted hereunder
shall be in writing, and shall be sufficiently given if made by hand delivery,
by telex, by telecopier or registered or certified mail, postage prepaid, return
receipt requested, addressed as follows:
if to the Issuer or any Subsidiary Guarantor:
c/o Abraxas Petroleum Corporation
500 North Loop 1604 East
Suite 100
San Antonio, Texas 78232
Telecopier Number: (210) 490-8816
Attn: Chief Executive Officer
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if to the Trustee:
Norwest Bank Minnesota, National Association
Sixth and Marquette
Minneapolis, Minnesota 55479-0069
Attn: Corporate Trust Department
Telephone Number: (612) 667-9764
Each of the Issuer, the Subsidiary Guarantors and the Trustee by
written notice to the others may designate additional or different addresses for
notices to such Person. Any notice or communication to the Issuer, the
Subsidiary Guarantors or the Trustee shall be deemed to have been given or made
as of the date so delivered if hand delivered; when answered back, if telexed;
when receipt is acknowledged, if faxed; and five (5) calendar days after mailing
if sent by registered or certified mail, postage prepaid (except that a notice
of change of address shall not be deemed to have been given until actually
received by the addressee).
Any notice or communication mailed to a Holder shall be mailed to him
by first class mail or other equivalent means at his address as it appears on
the registration books of the Registrar ten (10) days prior to such mailing and
shall be sufficiently given to him if so mailed within the time prescribed.
Failure to mail a notice or communication to a Holder or any defect in
it shall not affect its sufficiency with respect to other Holders. If a notice
or communication is mailed in the manner provided above, it is duly given,
whether or not the addressee receives it, except for notices or communications
to the Trustee which shall be effective only upon actual receipt thereof.
SECTION 10.03. Communications by Holders with Other Holders.
Holders may communicate pursuant to TIA ' 312(b) with other Holders
with respect to their rights under this Indenture or the Notes. The Issuer, the
Subsidiary Guarantors, the Trustee, the Registrar and any other Person shall
have the protection of TIA ' 312(c).
SECTION 10.04. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Issuer to the Trustee to take
any action under this Indenture, the Issuer shall furnish to the Trustee:
(1) an Officers' Certificate, in form and substance
satisfactory to the Trustee, stating that, in the opinion of the
signers, all conditions precedent to be performed by the Issuer, if
any, provided for in this Indenture relating to the proposed action
have been complied with; and
(2) an Opinion of Counsel stating that, in the opinion of such
counsel, all such conditions precedent to be performed by the Issuer,
if any, provided for in this Indenture relating to the proposed action
have been complied with (which counsel, as to factual matters, may rely
on an Officers' Certificate).
SECTION 10.05. Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a condition
or covenant provided for in this Indenture, other than the Officers' Certificate
required by Section 4.06, shall include:
(1) a statement that the Person making such certificate or
opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
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(3) a statement that, in the opinion of such Person, he has
made such examination or investigation as is reasonably necessary to
enable him to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
(4) a statement as to whether or not, in the opinion of each
such Person, such condition or covenant has been complied with.
SECTION 10.06. Rules by Trustee, Paying Agent, Registrar.
The Trustee may make reasonable rules in accordance with the Trustee's
customary practices for action by or at a meeting of Holders. The Paying Agent
or Registrar may make reasonable rules for its functions.
SECTION 10.07. Legal Holidays.
A "Legal Holiday" used with respect to a particular place of payment is
a Saturday, a Sunday or a day on which banking institutions in New York, New
York or at such place of payment are not required to be open. If a payment date
is a Legal Holiday at such place, payment may be made at such place on the next
succeeding day that is not a Legal Holiday, and no interest shall accrue for the
intervening period.
SECTION 10.08. Governing Law.
THIS INDENTURE, THE NOTES AND THE GUARANTEES SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Each of the
parties hereto agrees to submit to the jurisdiction of the courts of the State
of New York in any action or proceeding arising out of or relating to this
Indenture.
SECTION 10.09. No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Issuer, any Subsidiary Guarantor or any of their
Subsidiaries. Any such indenture, loan or debt agreement may not be used to
interpret this Indenture.
SECTION 10.10. No Personal Liability.
No director, officer, employee or stockholder, as such, of the Issuer
or any Subsidiary Guarantor, as such, shall have any liability for any
obligations of the Issuer or any Subsidiary Guarantor under the Notes, this
Indenture, the Guarantees or the Registration Rights Agreement or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of Notes by accepting a Note waives and releases all such liability.
The waiver and release are part of the consideration for the issuance of the
Notes.
SECTION 10.11. Successors.
All agreements of the Issuer and the Subsidiary Guarantors in this
Indenture, the Notes and the Guarantees shall bind their successors. Except as
permitted under Article Five, neither the Issuer nor any Subsidiary Guarantor
may assign any or all of its rights hereunder. All agreements of the Trustee in
this Indenture shall bind its successors.
SECTION 10.12. Duplicate Originals.
All parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together shall represent the
same agreement.
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SECTION 10.13. Severability.
In case any one or more of the provisions in this Indenture or in the
Notes shall be held invalid, illegal or unenforceable, in any respect for any
reason, the validity, legality and enforceability of any such provision in every
other respect and of the remaining provisions shall not in any way be affected
or impaired thereby, it being intended that all of the provisions hereof shall
be enforceable to the full extent permitted by law.
SECTION 10.14. Independence of Covenants.
All covenants and agreements in this Indenture and the Notes shall be
given independent effect so that if any particular action or condition is not
permitted by any of such covenants, the fact that it would be permitted by an
exception to, or otherwise be within the limitations of, another covenant shall
not avoid the occurrence of a Default or an Event of Default if such action is
taken or condition exists.
SECTION 10.15. Currency Indemnity. This is an international loan
transaction in which the specification of U.S. Dollars is of the essence, and
the stipulated currency shall in each instance be the currency of account and
payment in all instances. A payment obligation in U.S. Dollars hereunder or
under the Notes (the "Original Currency") shall not be discharged by an amount
paid in another currency (the "Other Currency"), whether pursuant to any
judgment expressed in or converted into any Other Currency or in another place
except to the extent that such tender or recovery results in the effective
receipt by the Holders of the full amount of the Original Currency payable to it
under this Indenture or the Notes. If for the purpose of obtaining judgment in
any court it is necessary to convert a sum due hereunder in the Original
Currency into the Other Currency, the rate of exchange that shall be applied
shall be that at which in accordance with normal banking procedures the Trustee
could purchase Original Currency at its principal office with the Other Currency
on the Business Day next preceding the day on which such judgment is rendered.
The obligation of the Issuer and the Subsidiary Guarantors in respect of any
such sum due from them to the Trustee or any Holder hereunder or under any other
document (in this Section 10.15 called an "Entitled Person") shall,
notwithstanding the rate of exchange actually applied in rendering such
judgment, be discharged only to the extent that on the Business Day following
receipt by such Entitled Person of any sum adjudged to be due hereunder in the
Other Currency such Entitled Person may in accordance with normal banking
procedures purchase and transfer the Original Currency to New York with the
amount of the judgment currency so adjudged to be due; and the Issuer and the
Subsidiary Guarantors each hereby, as a separate obligation and notwithstanding
any such judgment, agrees jointly and severally to indemnify such Entitled
Person against, and to pay such Entitled Person on demand, in the Original
Currency, the amount (if any) by which the sum originally due to such Entitled
Person in the Original Currency hereunder exceeds the amount of the Original
Currency so purchased and transferred.
ARTICLE ELEVEN
GUARANTEE OF NOTES
SECTION 11.01. Unconditional Guarantee.
Subject to the provisions of this Article Eleven, each Subsidiary
Guarantor, if any, hereby, jointly and severally, unconditionally and
irrevocably guarantees, on a senior basis (such guarantee to be referred to
herein as a "Guarantee") to each Holder of a Note authenticated and delivered by
the Trustee and to the Trustee and its successors and assigns, irrespective of
the validity and enforceability of this Indenture, the Notes or the obligations
of the Issuer or any Subsidiary Guarantor to the Holders or the Trustee
hereunder or thereunder, that: (a) the principal of, premium, if any, and
interest on the Notes (and any Liquidated Damages payable thereon) shall be duly
and punctually paid in full when due, whether at maturity, upon redemption at
the option of Holders pursuant to the provisions of the Notes relating thereto,
by acceleration or otherwise, and interest on the overdue principal and (to the
extent permitted by law) interest, if any, on the Notes and all other
obligations of the Issuer or the Subsidiary Guarantors to the Holders or the
Trustee hereunder or thereunder (including amounts due the Trustee under Section
7.07 hereof) and all other obligations shall be promptly paid in full or
performed, all in accordance with the terms hereof and thereof; and (b) in case
of any extension of time of payment or renewal of any Notes or any of such other
61
obligations, the same shall be promptly paid in full when due or performed in
accordance with the terms of the extension or renewal, whether at maturity, by
acceleration or otherwise. Failing payment when due of any amount so guaranteed,
or failing performance of any other obligation of the Issuer to the Holders
under this Indenture or under the Notes, for whatever reason, each Subsidiary
Guarantor shall be obligated jointly or severally to pay or to perform, or cause
the performance of, the same immediately. An Event of Default under this
Indenture or the Notes shall entitle the Holders of Notes to accelerate the
obligations of the Subsidiary Guarantors hereunder in the same manner and to the
same extent as the obligations of the Issuer.
Each of the Subsidiary Guarantors hereby agrees that its obligations
hereunder shall be unconditional, irrespective of the validity, regularity or
enforceability of the Notes or this Indenture, the absence of any action to
enforce the same, any waiver or consent by any Holder of the Notes with respect
to any provisions hereof or thereof, any release of any other Subsidiary
Guarantor, the recovery of any judgment against the Issuer, any action to
enforce the same, whether or not a Guarantee is affixed to any particular Note,
or any other circumstance which might otherwise constitute a legal or equitable
discharge or defense of a guarantor. Each of the Subsidiary Guarantors hereby
waives the benefit of diligence, presentment, demand of payment, filing of
claims with a court in the event of insolvency or bankruptcy of the Issuer, any
right to require a proceeding first against the Issuer, protest, notice and all
demands whatsoever and covenants that its Guarantee shall not be discharged
except by complete performance of the obligations contained in the Notes, this
Indenture and this Guarantee. This Guarantee is a guarantee of payment and not
of collection. If any Holder or the Trustee is required by any court or
otherwise to return to the Issuer or to any Subsidiary Guarantor, or any
custodian, trustee, liquidator or other similar official acting in relation to
the Issuer or such Subsidiary Guarantor, any amount paid by the Issuer or such
Subsidiary Guarantor to the Trustee or such Holder, this Guarantee, to the
extent theretofore discharged, shall be reinstated in full force and effect.
Each Subsidiary Guarantor further agrees that, as between it, on the one hand,
and the Holders of Notes and the Trustee, on the other hand, (a) subject to this
Article Eleven, the maturity of the obligations guaranteed hereby may be
accelerated as provided in Article Six hereof for the purposes of this
Guarantee, notwithstanding any stay, injunction or other prohibition preventing
such acceleration in respect of the obligations guaranteed hereby, and (b) in
the event of any acceleration of such obligations as provided in Article Six
hereof, such obligations (whether or not due and payable) shall forthwith become
due and payable by the Subsidiary Guarantors for the purpose of this Guarantee.
No stockholder, officer, director, employee or incorporator, past,
present or future, or any Subsidiary Guarantor, as such, shall have any personal
liability under this Guarantee solely by reason of his, her or its status as
such stockholder, officer, director, employee or incorporator.
Each Subsidiary Guarantor that makes a payment or distribution under
its Guarantee shall be entitled to a contribution from each other Subsidiary
Guarantor, determined in accordance with GAAP.
SECTION 11.02. Limitations on Guarantees.
The obligations of each Subsidiary Guarantor in the United States under
its Guarantee will be limited to the maximum amount which, after giving effect
to all other contingent and fixed liabilities of such Subsidiary Guarantor and
after giving effect to any collections from or payments made by or on behalf of
any other Subsidiary Guarantor in respect of the obligations of such other
Subsidiary Guarantor under its Guarantee or pursuant to its contribution
obligations under this Indenture, will result in the obligations of such
Subsidiary Guarantor under the Guarantee not constituting a fraudulent
conveyance or fraudulent transfer under federal or state law.
SECTION 11.03. Execution and Delivery of Guarantee.
To further evidence the Guarantee set forth in Section 11.01, each
Subsidiary Guarantor hereby agrees that a notation of such Guarantee,
substantially in the form of Exhibit E herein, shall be endorsed on each Note
authenticated and delivered by the Trustee. Such Guarantee shall be executed on
behalf of each Subsidiary Guarantor by either manual or facsimile signature of
two Officers of each Subsidiary Guarantor, each of whom, in each case, shall
have been duly authorized to so execute by all requisite corporate action. The
validity and enforceability of any Guarantee shall not be affected by the fact
that it is not affixed to any particular Note.
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Each of the Subsidiary Guarantors hereby agrees that its Guarantee set
forth in Section 11.01 shall remain in full force and effect notwithstanding any
failure to endorse on each Note a notation of such Guarantee.
If an Officer of a Subsidiary Guarantor whose signature is on this
Indenture or a Guarantee no longer holds that office at the time the Trustee
authenticates the Note on which such Guarantee is endorsed or at any time
thereafter, such Subsidiary Guarantor's Guarantee of such Note shall be valid
nevertheless.
The delivery of any Note by the Trustee, after the authentication
thereof hereunder, shall constitute due delivery of any Guarantee set forth in
this Indenture on behalf of each Subsidiary Guarantor.
SECTION 11.04. Release of a Subsidiary Guarantor.
(a) If no Default exists or would exist under this Indenture, upon the
sale or disposition of all of the Capital Stock of a Subsidiary Guarantor by the
Issuer or a Restricted Subsidiary of the Issuer in a transaction constituting an
Asset Sale the Net Cash Proceeds of which are applied in accordance with Section
4.16, or upon the consolidation or merger of a Subsidiary Guarantor with or into
any Person in compliance with Article Five (in each case, other than to the
Issuer or an Affiliate of the Issuer or a Restricted Subsidiary), such
Subsidiary Guarantor and each Subsidiary of such Subsidiary Guarantor that is
also a Subsidiary Guarantor shall be deemed released from all obligations under
this Article Eleven without any further action required on the part of the
Trustee or any Holder and all Collateral owned by such Person shall be released
to the extent set forth in Section 12.04; provided, however, that each such
Subsidiary Guarantor is sold or disposed of in accordance with this Indenture.
Any Subsidiary Guarantor not so released or the entity surviving such Subsidiary
Guarantor, as applicable, shall remain or be liable under its Guarantee as
provided in this Article Eleven.
(b) The Trustee shall deliver to the Issuer an appropriate instrument
evidencing the release of a Subsidiary Guarantor upon receipt of a written
request by the Issuer or such Subsidiary Guarantor accompanied by an Officers'
Certificate and an Opinion of Counsel certifying as to the compliance with this
Section 11.04, provided the legal counsel delivering such Opinion of Counsel may
rely as to matters of fact on one or more Officers' Certificates of the Issuer.
The Trustee shall execute any documents reasonably requested by the
Issuer or a Subsidiary Guarantor in order to evidence the release of such
Subsidiary Guarantor from its obligations under its Guarantee endorsed on the
Notes and under this Article Eleven.
Except as set forth in Articles Four and Five and this Section 11.04,
nothing contained in this Indenture or in any of the Notes shall prevent any
consolidation or merger of a Subsidiary Guarantor with or into the Issuer or
another Subsidiary Guarantor or shall prevent any sale or conveyance of the
property of a Subsidiary Guarantor as an entirety or substantially as an
entirety to the Issuer or another Subsidiary Guarantor.
SECTION 11.05. Waiver of Subrogation.
Until this Indenture is discharged and all of the Notes are discharged
and paid in full, each Subsidiary Guarantor hereby irrevocably waives and agrees
not to exercise any claim or other rights which it may now or hereafter acquire
against the Issuer that arise from the existence, payment, performance or
enforcement of the Issuer's obligations under the Notes or this Indenture and
such Subsidiary Guarantor's obligations under this Guarantee and this Indenture,
in any such instance including, without limitation, any right of subrogation,
reimbursement, exoneration, contribution, indemnification, and any right to
participate in any claim or remedy of the Holders against the Issuer, whether or
not such claim, remedy or right arises in equity, or under contract, statute or
common law, including, without limitation, the right to take or receive from the
Issuer, directly or indirectly, in cash or other property or by set-off or in
any other manner, payment or security on account of such claim or other rights.
If any amount shall be paid to any Subsidiary Guarantor in violation of the
preceding sentence and any amounts owing to the Trustee or the Holders of Notes
63
under or in connection with the Notes, this Indenture, or any other document or
instrument delivered under or in connection with such agreements or instruments,
shall not have been paid in full, such amount shall have been deemed to have
been paid to such Subsidiary Guarantor for the benefit of, and held in trust for
the benefit of, the Trustee or the Holders and shall forthwith be paid to the
Trustee for the benefit of itself or such Holders to be credited and applied to
the obligations in favor of the Trustee or the Holders, as the case may be,
whether matured or unmatured, in accordance with the terms of this Indenture.
Each Subsidiary Guarantor acknowledges that it will receive direct and indirect
benefits from the financing arrangements contemplated by this Indenture and that
the waiver set forth in this Section 11.05 is knowingly made in contemplation of
such benefits.
SECTION 11.06. Immediate Payment.
Each Subsidiary Guarantor agrees to make immediate payment to the
Trustee on behalf of the Holders of all Obligations owing or payable to the
respective Holders upon receipt of a demand for payment therefor by the Trustee
to such Subsidiary Guarantor in writing.
SECTION 11.07. No Set-Off.
Each payment to be made by a Subsidiary Guarantor hereunder in respect
of the Obligations shall be payable in the currency or currencies in which such
Obligations are denominated, and shall be made without set-off, counterclaim,
reduction or diminution of any kind or nature.
SECTION 11.08. Obligations Absolute.
The obligations of each Subsidiary Guarantor hereunder are and shall be
absolute and unconditional and any monies or amounts expressed to be owing or
payable by each Subsidiary Guarantor hereunder which may not be recoverable from
such Subsidiary Guarantor on the basis of a Guarantee shall be recoverable from
such Subsidiary Guarantor as a primary obligor and principal debtor in respect
thereof.
SECTION 11.09. Obligations Continuing.
The obligations of each Subsidiary Guarantor hereunder shall be
continuing and shall remain in full force and effect until all the obligations
have been paid and satisfied in full. Each Subsidiary Guarantor agrees with the
Trustee that it will from time to time deliver to the Trustee suitable written
acknowledgments of its continued liability hereunder and under any other
instrument or instruments in such form as counsel to the Trustee may advise and
as will prevent any action brought against it in respect of any default
hereunder being barred by any statute of limitations now or hereafter in force
and, in the event of the failure of a Subsidiary Guarantor so to do, it hereby
irrevocably appoints the Trustee the attorney and agent of such Subsidiary
Guarantor to make, execute and deliver such written acknowledgment or
acknowledgments or other instruments as may from time to time become necessary
or advisable, in the judgment of the Trustee on the advice of counsel, to fully
maintain and keep in force the liability of such Subsidiary Guarantor hereunder;
provided, however, that notwithstanding anything herein to the contrary, nothing
in this Section 11.09 shall be construed to obligate the Trustee to take any
action not otherwise allowed by this Indenture or the TIA, and under no
circumstances shall Trustee be required to take any actions in compliance with
this Section 11.09 which would incur any liability whatsoever under the terms of
this Indenture or otherwise except to the extent that it is provided with
security or indemnity satisfactory to it, nor shall Trustee's actions hereunder
be deemed to be a breach of any other provision of this Indenture.
SECTION 11.10. Obligations Not Reduced.
The obligations of each Subsidiary Guarantor hereunder shall not be
satisfied, reduced or discharged solely by the payment of such principal,
premium, if any, interest, fees and other monies or amounts as may at any time
prior to discharge of this Indenture pursuant to Article 8 be or become owing or
payable under or by virtue of or otherwise in connection with the Notes or this
Indenture.
SECTION 11.11. Obligations Reinstated.
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The obligations of each Subsidiary Guarantor hereunder shall continue
to be effective or shall be reinstated, as the case may be, if at any time any
payment which would otherwise have reduced the obligations of any Subsidiary
Guarantor hereunder (whether such payment shall have been made by or on behalf
of the Issuer or by or on behalf of a Subsidiary Guarantor) is rescinded or
reclaimed from any of the Holders upon the insolvency, bankruptcy, liquidation
or reorganization of the Issuer or any Subsidiary Guarantor or otherwise, all as
though such payment had not been made. If demand for, or acceleration of the
time for, payment by the Issuer is stayed upon the insolvency, bankruptcy,
liquidation or reorganization of the Issuer, all such Indebtedness otherwise
subject to demand for payment or acceleration shall nonetheless be payable by
each Subsidiary Guarantor as provided herein.
SECTION 11.12. Obligations Not Affected.
The obligations of each Subsidiary Guarantor hereunder shall not be
affected, impaired or diminished in any way by any act, omission, matter or
thing whatsoever, occurring before, upon or after any demand for payment
hereunder (and whether or not known or consented to by any Subsidiary Guarantor
or any of the Holders) which, but for this provision, might constitute a whole
or partial defense to a claim against any Subsidiary Guarantor hereunder or
might operate to release or otherwise exonerate any Subsidiary Guarantor from
any of its obligations hereunder or otherwise affect such obligations, whether
occasioned by default of any of the Holders or otherwise, including, without
limitation:
(a) any limitation of status or power, disability, incapacity
or other circumstance relating to the Issuer or any other Person,
including any insolvency, bankruptcy, liquidation, reorganization,
readjustment, composition, dissolution, winding-up or other proceeding
involving or affecting the Issuer or any other Person;
(b) any irregularity, defect, unenforceability or invalidity
in respect of any indebtedness or other obligation of the Issuer or any
other Person under this Indenture, the Notes or any other document or
instrument;
(c) any failure of the Issuer, whether or not without fault on
its part, to perform or comply with any of the provisions of this
Indenture or the Notes, or to give notice thereof to a Subsidiary
Guarantor;
(d) the taking or enforcing or exercising or the refusal or
neglect to take or enforce or exercise any right or remedy from or
against the Issuer or any other Person or their respective assets or
the release or discharge of any such right or remedy;
(e) the granting of time, renewals, extensions, compromises,
concessions, waivers, releases, discharges and other indulgences to the
Issuer or any other Person;
(f) any change in the time, manner or place of payment of, or
in any other term of, any of the Notes, or any other amendment,
variation, supplement, replacement or waiver of, or any consent to
departure from, any of the Notes or this Indenture, including, without
limitation, any increase or decrease in the principal amount of or
premium, if any, or interest on any of the Notes;
(g) any change in the ownership, control, name, objects,
businesses, assets, capital structure or constitution of the Issuer or
a Subsidiary Guarantor;
(h) any merger or amalgamation of the Issuer or a Subsidiary
Guarantor with any Person or Persons;
(i) the occurrence of any change in the laws, rules,
regulations or ordinances of any jurisdiction by any present or future
action of any governmental authority or court amending, varying,
reducing or otherwise affecting, or purporting to amend, vary, reduce
or otherwise affect, any of the Obligations or the obligations of a
Subsidiary Guarantor under its Guarantee; and
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(j) any other circumstance, including release of the
Subsidiary Guarantor pursuant to Section 11.04 (other than by complete,
irrevocable payment) that might otherwise constitute a legal or
equitable discharge or defense of the Issuer under this Indenture or
the Notes or of a Subsidiary Guarantor in respect of its Guarantee
hereunder.
SECTION 11.13. Waiver.
Without in any way limiting the provisions of Section 11.01 hereof,
each Subsidiary Guarantor hereby waives notice of acceptance hereof, notice of
any liability of any Subsidiary Guarantor hereunder, notice or proof of reliance
by the Holders upon the obligations of any Subsidiary Guarantor hereunder, and
diligence, presentment, demand for payment on the Issuer, protest, notice of
dishonor or non-payment of any of the Obligations, or other notice or
formalities to the Issuer or any Subsidiary Guarantor of any kind whatsoever.
SECTION 11.14. No Obligation To Take Action Against the Issuer.
Neither the Trustee nor any other Person shall have any obligation to
enforce or exhaust any rights or remedies or to take any other steps under any
security for the Obligations or against the Issuer or any other Person or any
Property of the Issuer or any other Person before the Trustee is entitled to
demand payment and performance by any or all Subsidiary Guarantors of their
liabilities and obligations under their Guarantees or under this Indenture.
SECTION 11.15. Dealing with the Issuer and Others.
The Holders, without releasing, discharging, limiting or otherwise
affecting in whole or in part the obligations and liabilities of any Subsidiary
Guarantor hereunder and without the consent of or notice to any Subsidiary
Guarantor, may
(a) grant time, renewals, extensions, compromises,
concessions, waivers, releases, discharges and other indulgences to the
Issuer or any other Person;
(b) take or abstain from taking security or collateral from
the Issuer or any other Person or from perfecting security or
collateral of the Issuer or any other Person;
(c) release, discharge, compromise, realize, enforce or
otherwise deal with or do any act or thing in respect of (with or
without consideration) any and all collateral, mortgages or other
security given by the Issuer or any third party with respect to the
obligations or matters contemplated by this Indenture or the Notes;
(d) accept compromises or arrangements from the Issuer;
(e) apply all monies at any time received from the Issuer or
from any security upon such part of the Obligations as the Holders may
see fit or change any such application in whole or in part from time to
time as the Holders may see fit; and
(f) otherwise deal with, or waive or modify their right to
deal with, the Issuer and all other Persons and any security as the
Holders or the Trustee may see fit.
SECTION 11.16. Default and Enforcement.
If any Subsidiary Guarantor fails to pay in accordance with Section
11.06 hereof, the Trustee may proceed in its name as trustee hereunder in the
enforcement of the Guarantee of any such Subsidiary Guarantor and such
Subsidiary Guarantor's obligations thereunder and hereunder by any remedy
provided by law, whether by legal proceedings or otherwise, and to recover from
such Subsidiary Guarantor the obligations.
SECTION 11.17. Acknowledgment.
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Each Subsidiary Guarantor hereby acknowledges communication of the
terms of this Indenture and the Notes and consents to and approves of the same.
SECTION 11.18. Costs and Expenses.
Each Subsidiary Guarantor shall pay on demand by the Trustee any and
all costs, fees and expenses (including, without limitation, legal fees on a
solicitor and client basis) incurred by the Trustee, its agents, advisors and
counsel or any of the Holders in enforcing any of their rights under any
Guarantee.
SECTION 11.19. No Merger or Waiver; Cumulative Remedies.
No Guarantee shall operate by way of merger of any of the obligations
of a Subsidiary Guarantor under any other agreement, including, without
limitation, this Indenture. No failure to exercise and no delay in exercising,
on the part of the Trustee or the Holders, any right, remedy, power or privilege
hereunder or under this Indenture or the Notes, shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, remedy, power or
privilege hereunder or under this Indenture or the Notes preclude any other or
further exercise thereof or the exercise of any other right, remedy, power or
privilege. The rights, remedies, powers and privileges in the Guarantee and
under this Indenture, the Notes and any other document or instrument between a
Subsidiary Guarantor and/or the Issuer and the Trustee are cumulative and not
exclusive of any rights, remedies, powers and privilege provided by law.
SECTION 11.20. Survival of Obligations.
Without prejudice to the survival of any of the other obligations of
each Subsidiary Guarantor hereunder, the obligations of each Subsidiary
Guarantor under Section 11.01 shall survive the payment in full of the
Obligations and shall be enforceable against such Subsidiary Guarantor without
regard to and without giving effect to any defense, right of offset or
counterclaim available to or which may be asserted by the Issuer or any
Subsidiary Guarantor.
SECTION 11.21. Guarantee in Addition to Other Obligations.
The obligations of each Subsidiary Guarantor under its Guarantee and
this Indenture are in addition to and not in substitution for any other
obligations to the Trustee or to any of the Holders in relation to this
Indenture or the Notes and any guarantees or security at any time held by or for
the benefit of any of them.
SECTION 11.22. Severability.
Any provision of this Article Eleven which is prohibited or
unenforceable in any jurisdiction shall not invalidate the remaining provisions
and any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other jurisdiction
unless its removal would substantially defeat the basic intent, spirit and
purpose of this Indenture and this Article Eleven.
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ARTICLE TWELVE
SECURITY
SECTION 12.01. Grant of Security Interest; Remedies.
(a) In order to secure the obligations of the Issuer hereunder, the
Issuer hereby covenants to and to cause each Subsidiary Guarantor owning Oil and
Gas Assets to execute and deliver on or before the Issue Date one or more
Mortgages and other Security Documents, as reasonably determined by the Trustee
to obtain a Lien on substantially all of the Oil and Gas Assets of the Issuer
and the Subsidiary Guarantors as of the Issue Date and on the Capital Stock of
Grey Wolf owned by the Issuer and Canadian Abraxas. Each such Security Document,
when executed and delivered, shall be deemed hereby incorporated by reference
herein to the same extent and as fully as if set forth in their entirety at this
place, and reference is made hereby to each such Security Document for a more
complete description of the terms and provisions thereof. Each Holder, by
accepting a Note, agrees to all of the terms and provisions of each Security
Document and the Trustee agrees to all of the terms and provisions of each
Security Document.
(b) If (i) the Notes become due and payable prior to the Maturity Date
or are not paid in full at the Maturity Date or (ii) an Event of Default has
occurred and is continuing, the Trustee may take all actions it deems necessary
or appropriate, including, but not limited to, foreclosing upon the Collateral
in accordance with the Security Documents and applicable law. The proceeds
received from the sale of any Collateral that is the subject of a foreclosure or
collection suit shall be applied in accordance with the priorities Section 6.10.
The Trustee has the power to institute and maintain such suits and proceedings
as it may deem expedient to prevent impairment of, or to preserve or protect its
and the Holders' interest in, the Collateral in the manner set forth in Article
Seven.
(c) Unless an Event of Default shall have occurred and be continuing,
the Issuer and the Subsidiary Guarantors will have the right to remain in
possession and retain exclusive control of the Collateral securing the Notes
(other than any cash, securities, obligations and Cash Equivalents constituting
part of the Collateral and deposited with the Trustee in the Collateral Account
and other than as set forth in the Security Documents), to freely operate the
Collateral and to collect, invest and dispose of any income thereon or
therefrom.
SECTION 12.02. Recording and Opinions.
(a) The Issuer shall take or cause to be taken all action required to
perfect, maintain, preserve and protect the Lien in the Collateral granted by
the Security Documents, including, without limitation, the filing of financing
statements, continuation statements and any instruments of further assurance, in
such manner and in such places as may be required by law fully to preserve and
protect the rights of the Holders and the Trustee under this Indenture and the
Security Documents to all property comprising the Collateral. The Issuer shall
from time to time promptly pay all financing and continuation statement
recording and/or filing fees, charges and taxes relating to this Indenture, the
Security Documents, any amendments thereto and any other instruments of further
assurance required pursuant to the Security Documents.
(b) The Issuer shall, to the extent required by the TIA, furnish to the
Trustee, at closing and at such other time as required by ' 314(b) of the TIA,
Opinion(s) of Counsel either (i) substantially to the effect that, in the
opinion of such counsel, this Indenture and the grant of a Lien in the
Collateral intended to be made by the Security Documents and all other
instruments of further assurance, including, without limitation, financing
statements, have been properly recorded and filed to the extent necessary to
perfect the Lien in the Collateral created by the Security Documents (other than
as stated in such opinion) and reciting the details of such action, and stating
that as to the Lien created pursuant to the Security Documents, such recordings
and filings are the only recordings and filings necessary to give notice thereof
and that no re-recordings or refilings are necessary to maintain such notice
(other than as stated in such opinion), or (ii) to the effect that, in the
opinion of such counsel, no such action is necessary to perfect such Lien. In
rendering such opinions, legal counsel may rely on certificates of officers of
the Issuer and/or the Restricted Subsidiaries with respect to factual matters.
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(c) To the extent required by the TIA, the Issuer shall furnish to the
Trustee on March 15th in each year, beginning with March 15, 2000, an Opinion of
Counsel, dated as of such date, either (i)(A) stating that, in the opinion of
such counsel, all required action has been taken with respect to the recording,
filing, re-recording and refiling of all supplemental indentures, financing
statements, continuation statements and other documents as is necessary to
maintain the Lien of the Security Documents (other than as stated in such
opinion) and reciting with respect to the Lien in the Collateral the details of
such action or referring to prior Opinions of Counsel in which such details are
given, and (B) stating that, based on relevant laws as in effect on the date of
such Opinion of Counsel, all financing statements, continuation statements and
other documents have been executed and filed that are necessary as of such date
and during the succeeding 24 months fully to maintain the Lien of the Holders
and the Trustee hereunder and under the Security Documents with respect to the
Collateral (other than as stated in such opinion), or (ii) stating that, in the
opinion of such counsel, no such action is necessary to maintain such Lien. In
rendering such opinions, legal counsel may rely on certificates of officers of
the Issuer and/or the Restricted Subsidiaries with respect to factual matters.
SECTION 12.03. Release of Collateral.
(a) The Trustee, in its capacity as secured party under the
Security Documents, shall not at any time release Collateral from the Lien
created by this Indenture and the Security Documents unless such release is in
accordance with the provisions of this Indenture and the Security Documents.
(b) At any time when an Event of Default shall have occurred
and be continuing, the Trustee shall not release any Liens granted for the
benefit of the Holders and no release of Collateral given at such time pursuant
to the provisions of this Indenture and the Security Documents shall be
effective as against the Holders of the Notes.
(c) The release of any Collateral from the terms of the
Security Documents shall not be deemed to impair the security under this
Indenture in contravention of the provisions hereof if and to the extent the
Collateral is released pursuant to this Indenture and the Security Documents. To
the extent applicable, the Issuer shall cause TIA ' 314(d) relating to the
release of property from the Lien of the Security Documents and relating to the
substitution therefor of any property to be subjected to the Lien of the
Security Documents to be complied with. Any certificate or opinion required by
TIA ' 314(d) may be made by an Officer of the Issuer, except in cases where TIA
' 314(d) requires that such certificate or opinion be made by an independent
Person, which Person shall be an independent engineer, appraiser or other expert
selected or approved by the Trustee. A Person is "independent" if such Person
(a) is in fact independent, (b) does not have any direct financial interest or
any material indirect financial interest in the Issuer, any of its Subsidiaries
or in any Affiliate of the Issuer and (c) is not an officer, employee, promoter,
underwriter, trustee, partner or director or Person performing similar functions
to any of the foregoing for either the Issuer or any of its Subsidiaries. The
Trustee shall be entitled to receive and rely upon a certificate provided by any
such Person confirming that such Person is independent within the foregoing
definition.
SECTION 12.04. Specified Releases of Collateral.
(a) The Issuer and the Subsidiary Guarantors shall be entitled
to obtain a full release of all of the Collateral from the Lien of this
Indenture and of the Security Documents upon compliance with the conditions
precedent set forth in Section 8.01 for satisfaction and discharge of this
Indenture or for Legal Defeasance pursuant to Section 8.01. Upon delivery by the
Issuer to the Trustee of an Officers' Certificate and an Opinion of Counsel,
each to the effect that such conditions precedent have been complied with (and
which may be the same Officers' Certificate and Opinion of Counsel required by
Article Eight), the Trustee shall forthwith take all necessary action (at the
request of and the expense of the Issuer) to release and reconvey to the
relevant Person all of the Collateral, and shall deliver such Collateral in its
possession to the Issuer, including, without limitation, the execution and
delivery of releases and satisfactions wherever required.
(b) Upon compliance by the Issuer with the conditions set
forth below in respect of any sale, transfer or other disposition, the Trustee
shall release the Released Interests from the Lien of this Indenture and the
Security Documents and reconvey the Released Interests to the Issuer or the
grantor of the Lien on such property. The Issuer will have the right to obtain a
release of items of Collateral (the "Released Interests") subject to any sale,
69
transfer or other disposition, or owned by a Restricted Subsidiary the Capital
Stock of which is sold in compliance with the terms of this Indenture such that
it ceases to be a Restricted Subsidiary, upon compliance with the condition that
such Issuer deliver to the Trustee the following:
(i) a written notice in the form of an Officers' Certificate from the
Issuer requesting the release of Released Interests:
(A) describing the proposed Released Interests,
(B) specifying the value of such Released Interests or such
Capital Stock, as the case may be, on a date within 60 days of the Issuer notice
(the "Valuation Date"),
(C) stating that the consideration to be received is at least
equal to the fair market value of the Released Interests,
(D) stating that the release of such Released Interests will
not interfere with the Trustee's ability to realize the value of the remaining
Collateral and will not impair the maintenance and operation of the remaining
Collateral,
(E) confirming the sale or exchange of, or an agreement to
sell or exchange, such Released Interests or such Capital Stock, as the case may
be, is a bona fide sale to or exchange with a Person that is not an Affiliate of
the Issuer or, in the event that such sale or exchange is to or with a Person
that is an Affiliate, confirming that such sale or exchange is made in
compliance with the provisions set forth in Section 4.11,
(F) in the event there is to be a contemporaneous substitution
of property for the Collateral subject to the sale, transfer or other
disposition, specifying the property intended to be substituted for the
Collateral to be disposed of;
(ii) an Officers' Certificate of the Issuer stating that:
(A) such sale, transfer or other disposition or such
redesignation, as the case may be, complies with the terms and conditions of
this Indenture, including the provisions set forth in Sections 4.10, 4.11, 4.14
and 4.16, to the extent any of the foregoing are applicable,
(B) all Net Cash Proceeds from the sale, transfer or other
disposition of any of the Released Interests or such Capital Stock, as the case
may be, will be applied pursuant to the provisions of this Indenture in respect
of the deposit of proceeds into the Collateral Account as contemplated by this
Indenture and in respect of Asset Sales, to the extent applicable,
(C) there is no Default or Event of Default in effect or
continuing on the date thereof or the date of such sale, transfer or other
disposition or such redesignation, as the case may be,
(D) the release of the Collateral will not result in a Default
or Event of Default under this Indenture,
(E) upon the delivery of such Officers' Certificate, all
conditions precedent in this Indenture relating to the release in question will
have been complied with,
(F) such sale, transfer or other disposition is not between
the Issuer or any Restricted Subsidiary or between Restricted Subsidiaries, and
(G) such sale, transfer or other disposition is not a sale,
transfer or other disposition that is excluded from the definition of "Asset
70
Sale" because it was a sale, lease, conveyance, disposition or other transfer of
all or substantially all of the assets of the Issuer in a transaction which made
in compliance with the provisions of Section 5.01.
(iii) all documentation required by the TIA, if any, prior to the
release of Collateral by the Trustee and, in the event there
is to be a contemporaneous substitution of property for the
Collateral subject to such sale, transfer or other
disposition, all documentation necessary to effect the
substitution of such new Collateral.
(c) Notwithstanding the provisions of Section 12.04(b), so long as no
Event of Default shall have occurred and be continuing, the Issuer may, without
satisfaction of the conditions set forth in Section 12.04(b) above, all to the
extent consistent with Sections 4.03, 4.05 and 4.07: (i) sell or otherwise
dispose of any equipment or inventory subject to the Lien of this Indenture and
the Security Documents, which may have become worn out or obsolete, (ii)
abandon, terminate, cancel, release or make alterations in or substitutions of
any leases or contracts subject to the Lien of this Indenture or any of the
Security Documents, (iii) surrender or modify any franchise, license or permit
subject to the Lien of this Indenture or any of the Security Documents which it
may own or under which it may be operating, (iv) alter, repair, replace, change
the location or position of and add to its structures, machinery, systems,
equipment, fixtures and appurtenances, (v) demolish, dismantle, tear down or
scrap any obsolete Collateral or abandon any portion thereof, (vi) grant
farm-outs, leases or sub-leases in respect of real property to the extent the
foregoing does not constitute an Asset Sale, and (vii) dispose of Hydrocarbons
or other mineral products for value in the ordinary course of business all in
accordance with the terms of the TIA.
SECTION 12.05. Rights of Purchasers; Form and Sufficiency of Release.
No purchaser or grantee of any property or rights purporting to be
released herefrom shall be bound to ascertain the authority of the Trustee to
execute the release or to inquire as to the existence of any conditions herein
prescribed for the exercise of such authority; nor shall any purchaser or
grantee of any property or rights permitted by this Indenture to be sold or
otherwise disposed of by the Issuer or any Restricted Subsidiary be under any
obligation to ascertain or inquire into the authority of the Issuer or
Restricted Subsidiary to make such sale or other disposition. In the event that
any Person has sold, exchanged, or otherwise disposed of or proposes to sell,
exchange or otherwise dispose of any portion of the Collateral that may be sold,
exchanged or otherwise disposed of, and the Issuer or Restricted Subsidiary
makes written request to the Trustee to furnish a written disclaimer, release or
quit-claim of any interest in such property under this Indenture and the
Security Documents, the Trustee, in its capacity as secured party under the
Security Documents, shall execute, acknowledge and deliver to the Issuer or
Restricted Subsidiary (in proper form) such an instrument promptly after
satisfaction of the conditions set forth herein for delivery of any such
release. Notwithstanding the preceding sentence, all purchasers and grantees of
any property or rights purporting to be released herefrom shall be entitled to
rely upon any release executed by the Trustee hereunder as sufficient for the
purpose of this Indenture and the Security Documents and as constituting a good
and valid release of the property therein described from the Lien of this
Indenture or of the Security Documents.
SECTION 12.06. Authorization of Actions to Be Taken by the Trustee
Under the Security Documents.
Subject to the provisions of the applicable Security Document, (a) the
Trustee may, in its sole discretion and without the consent of the Holders, take
all actions it deems necessary or appropriate in order to (i) enforce any of the
terms of the Security Documents and (ii) collect and receive any and all amounts
payable in respect of the Obligations of the Issuer hereunder and (b) the
Trustee shall have power to institute and to maintain such suits and proceedings
as it may deem expedient to prevent any impairment of the Collateral by any act
that may be unlawful or in violation of the Security Documents or this
Indenture, and such suits and proceedings as the Trustee may deem expedient to
preserve or protect its interests and the interests of the Holders in the
Collateral (including the power to institute and maintain suits or proceedings
to restrain the enforcement of or compliance with any legislative or other
governmental enactment, rule or order that may be unconstitutional or otherwise
invalid if the enforcement of, or compliance with, such enactment, rule or order
would impair the security interest thereunder or be prejudicial to the interests
of the Holders or of the Trustee).
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SECTION 12.07. Authorization of Receipt of Funds by the Trustee Under
the Security Documents.
The Trustee is authorized to receive any funds for the benefit of the
Holders distributed under the Security Documents, and to make further
distributions of such funds to the Holders in accordance with the provisions of
Section 6.10 and the other provisions of this Indenture.
SECTION 12.08. Use of Trust Moneys.
The Net Cash Proceeds associated with any Asset Sale and any Net Cash
Proceeds associated with any sale, transfer or other disposition of Collateral,
to the extent such sale, transfer or other disposition is not an "Asset Sale" by
virtue of clause (viii) of the definition thereof, insurance proceeds and
condemnation (or similar) proceeds shall be deposited into a securities account
maintained by the Trustee at its Corporate Trust Office or at any securities
intermediary selected by the Trustee having a combined capital and surplus of at
least $250,000,000 and having a long-term debt rating of at least "A3" by
Moody's and at least "AC" by S&P styled the "Abraxas Collateral Account" (such
account being the "Collateral Account") which shall be under the exclusive
dominion and control of the Trustee. All amounts on deposit in the Collateral
Account shall be treated as financial assets and cash funds on deposit in the
Collateral Account may be invested by the Trustee, at the written direction of
the Issuer, in Cash Equivalents; provided, however, in no event shall the Issuer
have the right to withdraw funds or assets from the Collateral Account except in
compliance with the terms of this Indenture, and all assets credited to the
Collateral Account shall be subject to a Lien in favor of the Trustee and the
Holders.
Any such funds may be released to the Issuer by its delivering to the
Trustee an Officers' Certificate stating:
(1) no Event of Default has occurred and is continuing as of the date
of the proposed release; and
(2) (A) if such Trust Moneys represent Collateral Proceeds in respect of
an Asset Sale, that the application of such funds are otherwise being
applied in accordance with Section 4.16, or (B) if such Trust Moneys
represent proceeds in respect of a casualty, expropriation or taking, that
the application of such funds will be applied to repair or replace property
subject of a casualty or condemnation or reimburse the Issuer for amounts
spent to repair or replace such property and that attached thereto are
invoices or other evidence reflecting the amounts spent or to be spent, or
(C) if such Trust Moneys represent proceeds derived from any other manner,
that such amounts are being utilized in connection with business of the
Issuer and its Restricted Subsidiaries in compliance with the terms of this
Indenture; and
(3) all conditions precedent in this Indenture relating to the release
in question have been complied with; and
(4) all documentation required by the TIA, if any, prior to the release
of such Trust Moneys by the Trustee has been delivered to the Trustee.
Notwithstanding the foregoing, (A) if the maturity of the Notes has been
accelerated, which acceleration has not been rescinded as permitted by this
Indenture, the Trustee shall apply the Trust Moneys credited to the Collateral
Account to pay the principal of, premium, if any and accrued and unpaid interest
on the Notes to the extent of such Trust Moneys, (B) if the Issuer so elects, by
giving written notice to the Trustee, the Trustee shall apply Trust Moneys
credited to the Collateral Account to the payment of interest due on any
interest payment date, and (C) if the Issuer so elects, by giving written notice
to the Trustee, the Trustee shall apply Trust Moneys credited to the Collateral
Account to the payment of the principal of, and premium, if any, and accrued and
unpaid interest on any Notes on the Stated Maturity Date or upon redemption or
to the purchase of Notes upon tender or in the open market or at private sale or
upon any exchange or in any one or more of such ways, in each case in compliance
with this Indenture.
[Remainder of Page Intentionally Left Blank]
72
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, all as of the date first written above.
ABRAXAS PETROLEUM CORPORATION, as Issuer
By:
Name:
Title:
CANADIAN ABRAXAS PETROLEUM LIMITED, as a
Subsidiary Guarantor
By:
Name:
Title:
NEW CACHE PETROLEUMS, LTD., as a Subsidiary
Guarantor
By:
Name:
Title:
SANDIA OIL & GAS CORPORATION, as a Subsidiary
Guarantor
By:
Name:
Title:
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
as Trustee
By:
Name:
Title:
73
EXHIBIT A
CUSIP No.: [ ]
ABRAXAS PETROLEUM CORPORATION
12.875% SENIOR NOTE DUE 2003, SERIES A
No. [ ] $[ ]
ABRAXAS PETROLEUM CORPORATION, a Nevada corporation (the "Issuer",
which term includes any successor entities), for value received promises to pay
to [ ] or registered assigns the principal sum of [ ] Dollars on March 15, 2003.
Interest Payment Dates: September 15 and March 15, commencing September
15, 1999
Record Dates: September 1 and March 1
Reference is made to the further provisions of this Note contained
herein, which will for all purposes have the same effect as if set forth at this
place.
IN WITNESS WHEREOF, the Issuer has caused this Note to be signed
manually or by facsimile by its duly authorized officers and a facsimile of its
corporate seal to be affixed hereto or imprinted hereon.
ABRAXAS PETROLEUM CORPORATION
By:
Name:
Title:
Dated:
Certificate of Authentication
This is one of the 12.875% Senior Notes due 2003, Series A referred to
in the within-mentioned Indenture.
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
as Trustee
By:
Authorized Signatory
Date of Authentication:
A-1
(REVERSE OF SECURITY)
12.875% Senior Note due 2003, Series A
(1) Interest. ABRAXAS PETROLEUM CORPORATION, a Nevada corporation (the
"Issuer"), promises to pay interest on the principal amount of this Note at the
rate per annum shown above. Interest on the Notes will accrue from the most
recent date on which interest has been paid or, if no interest has been paid,
from March 26, 1999. The Issuer will pay interest semi-annually in arrears on
each Interest Payment Date, commencing September 15, 1999. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
The Issuer shall pay interest on overdue principal and on overdue
installments of interest from time to time on demand at the rate borne by the
Notes and on overdue installments of interest (without regard to any applicable
grace periods) to the extent lawful.
2. Method of Payment. The Issuer shall pay interest on the Notes
(except defaulted interest) to the Persons who are the registered Holders at the
close of business on the Record Date immediately preceding the Interest Payment
Date even if the Notes are cancelled on registration of transfer or registration
of exchange (including pursuant to an Exchange Offer (as defined in the
Registration Rights Agreement)) after such Record Date. Holders must surrender
Notes to a Paying Agent to collect principal payments. The Issuer shall pay
principal and interest in money of the United States that at the time of payment
is legal tender for payment of public and private debts ("U.S. Legal Tender").
However, the Issuer may pay principal and interest by its check payable in such
U.S. Legal Tender. The Issuer may deliver any such interest payment to the
Paying Agent or to a Holder at the Holder's registered address.
3. Paying Agent and Registrar. Initially, Norwest Bank Minnesota,
National Association (the "Trustee") will act as Paying Agent and Registrar. The
Issuer may change any Paying Agent, Registrar or co-Registrar without notice to
the Holders.
4. Indenture. The Issuer issued the Notes under an Indenture, dated as
of March 26, 1999 (the "Indenture"), between the Issuer and the Trustee. This
Note is one of a duly authorized issue of Initial Notes of the Issuer designated
as its 12 f% Senior Notes due 2003, Series A (the "Initial Notes"). The Notes
are limited in aggregate principal amount to $63,500,000. The Notes include the
Initial Notes and the Exchange Notes issued in exchange for the Initial Notes
pursuant to the Registration Rights Agreement. The Initial Notes and the
Exchange Notes are treated as a single class of securities under the Indenture.
Capitalized terms herein are used as defined in the Indenture unless otherwise
defined herein. The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of 1939
(15 U.S. Code " 77aaa-77bbbb) (the "TIA"), as in effect on the date of the
Indenture. Notwithstanding anything to the contrary herein, the Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and said Act for a statement of them. The Notes are general unsecured
obligations of the Issuer.
5. Indenture. Each Holder, by accepting a Note, agrees to be bound by
all of the terms and provisions of the Indenture, as the same may be amended
from time to time in accordance with its terms.
6. Redemption. The Notes will be redeemable, at the Issuer's option, in
whole at any time or in part from time to time, on and after March 15, 2001,
upon not less than 30 nor more than 60 days' notice, at the following Redemption
Prices (expressed as percentages of the principal amount thereof) if redeemed
during the twelve-month period commencing on March 15 of the years set forth
below, plus, in each case, accrued and unpaid interest, if any, thereon to the
date of redemption:
A-2
Year Percentage
2001.................................. 103.000%
2002 and thereafter................. .. 100.000%
At any time, or from time to time, prior to March 15, 2001, the Issuer
may, at its option, use all or a portion of the net cash proceeds of one or more
Equity Offerings (as defined in the Indenture) to redeem up to 35% of the
aggregate original principal amount of the Notes at a Redemption Price equal to
112.875% of the aggregate principal amount of the Notes to be redeemed, plus
accrued and unpaid interest, if any, thereon to the date of redemption;
provided, however, that at least 65% of the aggregate original principal amount
of the Notes remains outstanding immediately after giving effect to any such
redemption (it being expressly agreed that for purposes of determining whether
this condition is satisfied, Notes owned by either Issuer or any of its
Affiliates shall be deemed not to be outstanding). In order to effect the
foregoing redemption with the proceeds of any Equity Offering, the Issuer shall
make such redemption not more than 60 days after the consummation of any Equity
Offering.
7. Notice of Redemption. Notice of redemption will be mailed at least
30 days but not more than 60 days before the Redemption Date to each Holder of
Notes to be redeemed at such Holder's registered address. Notes in denominations
larger than $1,000 may be redeemed in part.
Except as set forth in the Indenture, if monies for the redemption of
the Notes called for redemption shall have been deposited with the Paying Agent
for redemption on such Redemption Date, then, unless the Issuer defaults in the
payment of such Redemption Price plus accrued interest, if any, the Notes called
for redemption will cease to bear interest from and after such Redemption Date
and the only right of the Holders of such Notes will be to receive payment of
the Redemption Price plus accrued interest, if any.
8. Offers to Purchase. Sections 4.15 and 4.16 of the Indenture provide
that, after certain Net Proceeds Offers (as defined in the Indenture) and upon
the occurrence of a Change of Control (as defined in the Indenture), and subject
to further limitations contained therein, the Issuer will make an offer to
purchase certain amounts of the Notes in accordance with the procedures set
forth in the Indenture.
9. Registration Rights. Pursuant to the Registration Rights Agreement
between the Issuer and the Initial Purchaser, the Issuer and the Subsidiary
Guarantors will be obligated to consummate an exchange offer pursuant to which
the Holder of this Note shall have the right to exchange this Note for the
Issuer's 12f % Senior Notes due 2003, Series B (the "Exchange Notes"), which
have been registered under the Securities Act, in like principal amount and
having terms identical in all material respects as the Initial Notes. The
Holders of the Initial Notes shall be entitled to receive certain additional
interest payments in the event such exchange offer is not consummated and upon
certain other conditions, all pursuant to and in accordance with the terms of
the Registration Rights Agreement.
10. Denominations; Transfer; Exchange. The Notes are in registered
form, without coupons, and (except Notes issued as payment of Interest) in
denominations of $1,000 and integral multiples of $1,000. A Holder shall
register the transfer of or exchange Notes in accordance with the Indenture. The
Registrar may require a Holder, among other things, to furnish appropriate
endorsements and transfer documents and to pay certain transfer taxes or similar
governmental charges payable in connection therewith as permitted by the
Indenture. The Registrar need not register the transfer of or exchange of any
Notes or portions thereof selected for redemption.
11. Persons Deemed Owners. The registered Holder of a Note shall be
treated as the owner of it for all purposes.
12. Unclaimed Money. If money for the payment of principal or interest
remains unclaimed for one year, the Trustee and the Paying Agent will pay the
money back to the Issuer. After that, all liability of the Trustee and such
Paying Agent with respect to such money shall cease.
A-3
13. Discharge Prior to Redemption or Maturity. If the Issuer at any
time deposits with the Trustee U.S. Legal Tender or U.S. Government Obligations
sufficient to pay the principal of and interest on the Notes to redemption or
maturity and comply with the other provisions of the Indenture relating thereto,
the Issuer will be discharged from certain provisions of the Indenture and the
Notes (including certain covenants, but including, under certain circumstances,
its obligation to pay the principal of and interest on the Notes but without
affecting the rights of the Holders to receive such amounts from such deposits).
14. Amendment; Supplement; Waiver. Subject to certain exceptions set
forth in the Indenture, the Indenture or the Notes may be amended or
supplemented with the written consent of the Holders of not less than a majority
in aggregate principal amount of the Notes then outstanding, and any past
Default or Event of Default or noncompliance with any provision may be waived
with the written consent of the Holders of not less than a majority in aggregate
principal amount of the Notes then outstanding. Without notice to or consent of
any Holder, the parties thereto may amend or supplement the Indenture or the
Notes to, among other things, cure any ambiguity, defect or inconsistency,
provide for uncertificated Notes in addition to or in place of certificated
Notes, comply with any requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the TIA or comply with Article
Five of the Indenture or make any other change that does not adversely affect
the rights of any Holder of a Note.
15. Restrictive Covenants. The Indenture imposes certain limitations on
the ability of the Issuer and the Restricted Subsidiaries to, among other
things, incur additional Indebtedness, make payments in respect of its Capital
Stock or certain Indebtedness, make certain Investments, create or incur liens,
enter into transactions with Affiliates, create dividend or other payment
restrictions affecting Restricted Subsidiaries, issue Preferred Stock of its
Restricted Subsidiaries, and on the ability of the Issuer and its Restricted
Subsidiaries to merge or consolidate with any other Person or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of the
Issuer's and its Restricted Subsidiaries' assets or adopt a plan of liquidation.
Such limitations are subject to a number of important qualifications and
exceptions. Pursuant to Section 4.06 of the Indenture, the Issuer must annually
report to the Trustee on compliance with such limitations.
16. Successors. When a successor assumes, in accordance with the
Indenture, all the obligations of its predecessor under the Notes and the
Indenture, the predecessor, subject to certain exceptions, will be released from
those obligations.
17. Defaults and Remedies. If an Event of Default occurs and is
continuing, the Trustee or the Holders of not less than 25% in aggregate
principal amount of Notes then outstanding may declare all the Notes to be due
and payable in the manner, at the time and with the effect provided in the
Indenture. Holders of Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee is not obligated to enforce the Indenture
or the Notes unless it has received security and indemnity satisfactory to it.
The Indenture permits, subject to certain limitations therein provided, Holders
of a majority in aggregate principal amount of the Notes then outstanding to
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of Notes notice of any continuing Default or Event of
Default (except a Default in payment of principal or interest when due, for any
reason or a Default in compliance with Article Five of the Indenture) if it
determines that withholding notice is in its interest.
18. Trustee Dealings with Issuer. The Trustee under the Indenture, in
its individual or any other capacity, may become the owner or pledgee of Notes
and may otherwise deal with the Issuer, its Subsidiaries or its respective
Affiliates as if it were not the Trustee.
19. No Recourse Against Others. No partner, director, officer, employee
or stockholder, as such, of Issuer or any Subsidiary Guarantor, as such, shall
have any liability for any obligations of Issuer or any Subsidiary Guarantor
under the Notes, the Indenture, the Guarantees or the Registration Rights
Agreement or for any claim based on, in respect of, or by reason of, such
obligations or its creation. Each Holder of Notes by accepting a Note waives and
releases all such liability. The waiver and release are part of the
consideration for the issuance of the Notes.
A-4
20. Guarantees. This Note will be entitled to the benefits of certain
Guarantees, if any, made for the benefit of the Holders. Reference is hereby
made to the Indenture for a statement of the respective rights, limitations of
rights, duties and obligations thereunder of the Subsidiary Guarantors, the
Trustee and the Holders.
21. Authentication. This Note shall not be valid until the Trustee or
Authenticating Agent manually signs the certificate of authentication on this
Note.
22. Governing Law. This Note and the Indenture shall be governed by and
construed in accordance with the laws of the State of New York, as applied to
contracts made and performed within the State of New York. Each of the parties
hereto agrees to submit to the jurisdiction of the courts of the State of New
York in any action or proceeding arising out of or relating to this Note.
23. Abbreviations and Defined Terms. Customary abbreviations may be
used in the name of a Holder of a Note or an assignee, such as: TEN COM ('
tenants in common), TEN ENT (' tenants by the entireties), JT TEN (' joint
tenants with right of survivorship and not as tenants in common), CUST ('
Custodian), and U/G/M/A (' Uniform Gifts to Minors Act).
24. CUSIP Numbers. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Issuer has caused
CUSIP numbers to be printed on the Notes as a convenience to the Holders of the
Notes. No representation is made as to the accuracy of such numbers as printed
on the Notes and reliance may be placed only on the other identification numbers
printed hereon.
The Issuer will furnish to any Holder of a Note upon written request
and without charge a copy of the Indenture, which has the text of this Note.
Requests may be made to: Abraxas Petroleum Corporation, 500 North Loop 1604
East, Suite 100, San Antonio, Texas 78232.
A-5
ASSIGNMENT FORM
If you the Holder want to assign this Note, fill in the form below and
have your signature guaranteed:
I or we assign and transfer this Note to:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type name, address and zip code and
social security or tax ID number of assignee)
and irrevocably appoint ______________ , agent to transfer this Note on the
books of the Issuer. The agent may substitute another to act for him.
Dated:_________________ Signed:_________________________________________________
(Sign exactly as your name appears
on the other side of this Note)
Signature Guarantee:____________________________________________________________
In connection with any transfer of this Note occurring prior to the
date which is the earlier of (i) the date of the declaration by the Commission
of the effectiveness of a registration statement under the Securities Act of
1933, as amended (the "Securities Act") covering resales of this Note (which
effectiveness shall not have been suspended or terminated at the date of the
transfer) and (ii) March 27, 2000, the undersigned confirms that it has not
utilized any general solicitation or general advertising in connection with the
transfer:
A-6
[Check One]
(1) __ to the Issuer or a Subsidiary thereof; or
(2) __ pursuant to and in compliance with Rule 144A under the
Securities Act of 1933, as amended; or
(3) __ to an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act of 1933,
as amended) that has furnished to the Trustee a signed letter
containing certain representations and agreements (the form of
which letter can be obtained from the Trustee); or
(4) __ outside the United states to a "foreign person" in compliance
with Rule 904 of Regulation S under the Securities Act of
1933, as amended; or
(5) __ pursuant to the exemption from registration provided by Rule
144 under the Securities Act of 1933, as amended; or
(6) __ pursuant to an effective registration statement under the
Securities Act of 1933, as amended; or
(7) __ pursuant to another available exemption from the registration
requirements of the Securities Act of 1933, as amended.
and unless the box below is checked, the undersigned confirms that such Note is
not being transferred to an "affiliate" of the Issuer as defined in Rule 144
under the Securities Act of 1933, as amended (an "Affiliate"):
o The transferee is an Affiliate of the Issuer.
Unless one of the items is checked, the Trustee will refuse to register any of
the Notes evidenced by this certificate in the name of any Person other than the
registered Holder thereof; provided, however, that if item (3), (4), (5) or (7)
is checked, the Issuer or the Trustee may require, prior to registering any such
transfer of the Notes, in its sole discretion, such written legal opinions,
certifications (including an investment letter in the case of box (3) or (4))
and other information as the Trustee or the Issuer has reasonably requested to
confirm that such transfer is being made pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act
of 1933, as amended.
A-7
If none of the foregoing items are checked, the Trustee or Registrar shall not
be obligated to register this Note in the name of any Person other than the
Holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Section 2.17 of the Indenture shall have
been satisfied.
Dated:____________________ Signed:_________________________________________
(Sign exactly as name
appears on the other side
of this Note)
Signature Guarantee:_______________________
TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED
The undersigned represents and warrants that it is purchasing this Note
for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, as amended and is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding the
Issuer as the undersigned has requested pursuant to Rule 144A or has determined
not to request such information and that it is aware that the transferor is
relying upon the undersigned's foregoing representations in order to claim the
exemption from registration provided by Rule 144A.
Dated:_____________ _______________________________________
NOTICE: To be executed by
an executive officer
A-8
[OPTION OF HOLDER TO ELECT PURCHASE]
If you want to elect to have this Note purchased by the Issuer pursuant
to Section 4.15 or Section 4.16 of the Indenture, check the appropriate box:
Section 4.15 [ ]
Section 4.16 [ ]
If you want to elect to have only part of this Note purchased by the
Issuer pursuant to Section 4.15 or Section 4.16 of the Indenture, state the
amount you elect to have purchased:
$________________
Dated: __________________ ____________________________________________________
NOTICE: The signature on this
assignment must correspond with
the name as it appears upon the
face of the within Note in every
particular without alteration or
enlargement or any change
whatsoever and be guaranteed.
Signature Guarantee:____________________________
A-9
EXHIBIT B
CUSIP No.: [ ]
ABRAXAS PETROLEUM CORPORATION
12.875% SENIOR NOTE DUE 2003, SERIES B
No. [ ] $[ ]
ABRAXAS PETROLEUM CORPORATION, a Nevada corporation (the "Issuer",
which term includes any successor entities), for value received promise to pay
to [ ] or registered assigns the principal sum of [ ] Dollars on March 15, 2003.
Interest Payment Dates: September 15 and March 15, commencing September
15, 1999
Record Dates: September 1 and March 1
Reference is made to the further provisions of this Note contained
herein, which will for all purposes have the same effect as if set forth at this
place.
IN WITNESS WHEREOF, the Issuer has caused this Note to be signed
manually or by facsimile by its duly authorized officers and a facsimile of its
corporate seal to be affixed hereto or imprinted hereon.
ABRAXAS PETROLEUM CORPORATION
By:
Name:
Title:
Dated:
Certificate of Authentication
This is one of the 12f% Senior Notes due 2003, Series B referred to in
the within-mentioned Indenture.
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
as Trustee
By:
Authorized Signatory
Date of Authentication:
B-1
(REVERSE OF SECURITY)
12.875% Senior Note due 2003, Series B
1. Interest. ABRAXAS PETROLEUM CORPORATION, a Nevada corporation (the
"Issuer"), promises to pay interest on the principal amount of this Note at the
rate per annum shown above. Interest on the Notes will accrue from the most
recent date on which interest has been paid or, if no interest has been paid,
from March 26, 1999. The Issuer will pay interest semi-annually in arrears on
each Interest Payment Date, commencing September 15, 1999. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
The Issuer shall pay interest on overdue principal and on overdue
installments of interest from time to time on demand at the rate borne by the
Notes and on overdue installments of interest (without regard to any applicable
grace periods) to the extent lawful.
2. Method of Payment. The Issuer shall pay interest on the Notes
(except defaulted interest) to the Persons who are the registered Holders at the
close of business on the Record Date immediately preceding the Interest Payment
Date even if the Notes are cancelled on registration of transfer or registration
of exchange after such Record Date. Holders must surrender Notes to a Paying
Agent to collect principal payments. The Issuer shall pay principal and interest
in money of the United States that at the time of payment is legal tender for
payment of public and private debts ("U.S. Legal Tender"). However, the Issuer
may pay principal and interest by its check payable in such U.S. Legal Tender.
The Issuer may deliver any such interest payment to the Paying Agent or to a
Holder at the Holder's registered address.
3. Paying Agent and Registrar. Initially, Norwest Bank Minnesota,
National Association (the "Trustee") will act as Paying Agent and Registrar. The
Issuer may change any Paying Agent, Registrar or co-Registrar without notice to
the Holders.
4. Indenture. The Issuer issued the Notes under an Indenture, dated as
of March 26, 1999 (the "Indenture"), between the Issuer, the Subsidiary
Guarantors and the Trustee. This Note is one of a duly authorized issue of
Exchange Notes of the Issuer designated as its 12f% Senior Notes due 2003,
Series B (the "Exchange Notes"). The Notes are limited in aggregate principal
amount to $63,500,000. The Notes include the 12f% Notes due 2003 (the "Initial
Notes") and the Exchange Notes, issued in exchange for the Initial Notes
pursuant to the Registration Rights Agreement. The Initial Notes and the
Exchange Notes are treated as a single class of securities under the Indenture.
Capitalized terms herein are used as defined in the Indenture unless otherwise
defined herein. The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of 1939
(15 U.S. Code " 77aaa-77bbbb) (the "TIA"), as in effect on the date of the
Indenture. Notwithstanding anything to the contrary herein, the Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and said Act for a statement of them. The Notes are general unsecured
obligations of the Issuer.
5. Indenture. Each Holder, by accepting a Note, agrees to be bound by
all of the terms and provisions of the Indenture, as the same may be amended
from time to time in accordance with its terms.
6. Redemption. The Notes will be redeemable, at the Issuer's option, in
whole at any time or in part from time to time, on and after March 15, 2001,
upon not less than 30 nor more than 60 days' notice, at the following Redemption
Prices (expressed as percentages of the principal amount thereof) if redeemed
during the twelve-month period commencing on March 15 of the years set below,
plus, in each case, accrued and unpaid interest, if any, thereon to the date of
redemption:
B-2
Year Percentage
2001............................... 103.000%
2002 and thereafter................ 100.000%
At any time, or from time to time, prior to March 15, 2001, the Issuer
may, at its option, use all or a portion of the net cash proceeds of one or more
Equity Offerings (as defined in the Indenture) to redeem up to 35% of the
aggregate original principal amount of the Notes at a Redemption Price equal to
112.875% of the aggregate principal amount of the Notes to be redeemed, plus
accrued and unpaid interest, if any, thereon to the date of redemption;
provided, however, that at least 65% of the aggregate original principal amount
of the Notes remains outstanding immediately after giving effect to any such
redemption (it being expressly agreed that for purposes of determining whether
this condition is satisfied, Notes owned by Issuer or any of its Affiliates
shall be deemed not to be outstanding). In order to effect the foregoing
redemption with the proceeds of any Equity Offering, the Issuer shall make such
redemption not more than 60 days after the consummation of any Equity Offering.
7. Notice of Redemption. Notice of redemption will be mailed at least
30 days but not more than 60 days before the Redemption Date to each Holder of
Notes to be redeemed at such Holder's registered address. Notes in denominations
larger than $1,000 may be redeemed in part.
Except as set forth in the Indenture, if monies for the redemption of
the Notes called for redemption shall have been deposited with the Paying Agent
for redemption on such Redemption Date, then, unless the Issuer defaults in the
payment of such Redemption Price plus accrued interest, if any, the Notes called
for redemption will cease to bear interest from and after such Redemption Date
and the only right of the Holders of such Notes will be to receive payment of
the Redemption Price plus accrued interest, if any.
8. Offers to Purchase. Sections 4.15 and 4.16 of the Indenture provide
that, after certain Net Proceeds Offers (as defined in the Indenture) and upon
the occurrence of a Change of Control (as defined in the Indenture), and subject
to further limitations contained therein, the Issuer will make an offer to
purchase certain amounts of the Notes in accordance with the procedures set
forth in the Indenture.
9. Denominations; Transfer; Exchange. The Notes are in registered form,
without coupons, and (except Notes issued as payment of Interest) in
denominations of $1,000 and integral multiples of $1,000. A Holder shall
register the transfer of or exchange Notes in accordance with the Indenture. The
Registrar may require a Holder, between other things, to furnish appropriate
endorsements and transfer documents and to pay certain transfer taxes or similar
governmental charges payable in connection therewith as permitted by the
Indenture. The Registrar need not register the transfer of or exchange of any
Notes or portions thereof selected for redemption.
10. Persons Deemed Owners. The registered Holder of a Note shall be
treated as the owner of it for all purposes.
11. Unclaimed Money. If money for the payment of principal or interest
remains unclaimed for one year, the Trustee and the Paying Agent will pay the
money back to the Issuer. After that, all liability of the Trustee and such
Paying Agent with respect to such money shall cease.
12. Discharge Prior to Redemption or Maturity. If the Issuer at any
time deposits with the Trustee U.S. Legal Tender or U.S. Government Obligations
sufficient to pay the principal of and interest on the Notes to redemption and
comply with the other provisions of the Indenture relating thereto, the Issuer
will be discharged from certain provisions of the Indenture and the Notes
(including certain covenants, including, under certain circumstances, its
obligation to pay the principal of and interest on the Notes but without
affecting the rights of the Holders to receive such amounts from such deposits).
B-3
13. Amendment; Supplement; Waiver. Subject to certain exceptions set
forth in the Indenture, the Indenture or the Notes may be amended or
supplemented with the written consent of the Holders of not less than a majority
in aggregate principal amount of the Notes then outstanding, and any past
Default or Event of Default or noncompliance with any provision may be waived
with the written consent of the Holders of not less than a majority in aggregate
principal amount of the Notes then outstanding. Without notice to or consent of
any Holder, the parties thereto may amend or supplement the Indenture or the
Notes to, among other things, cure any ambiguity, defect or inconsistency,
provide for uncertificated Notes in addition to or in place of certificated
Notes, comply with any requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the TIA or comply with Article
Five of the Indenture or make any other change that does not adversely affect
the rights of any Holder of a Note.
14. Restrictive Covenants. The Indenture imposes certain limitations on
the ability of the Issuer and the Restricted Subsidiaries to, among other
things, incur additional Indebtedness, make payments in respect of its Capital
Stock or certain Indebtedness, make certain Investments, create or incur liens,
enter into transactions with Affiliates, create dividend or other payment
restrictions affecting Restricted Subsidiaries, issue Preferred Stock of its
Restricted Subsidiaries, and on the ability of the Issuer and its Restricted
Subsidiaries to merge or consolidate with any other Person or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of the
Issuer's and its Restricted Subsidiaries' assets or adopt a plan of liquidation.
Such limitations are subject to a number of important qualifications and
exceptions. Pursuant to Section 4.06 of the Indenture, the Issuer must annually
report to the Trustee on compliance with such limitations.
15. Successors. When a successor assumes, in accordance with the
Indenture, all the obligations of its predecessor under the Notes and the
Indenture, the predecessor, subject to certain exceptions, will be released from
those obligations.
16. Defaults and Remedies. If an Event of Default occurs and is
continuing, the Trustee or the Holders of not less than 25% in aggregate
principal amount of Notes then outstanding may declare all the Notes to be due
and payable in the manner, at the time and with the effect provided in the
Indenture. Holders of Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee is not obligated to enforce the Indenture
or the Notes unless it has received security and indemnity satisfactory to it.
The Indenture permits, subject to certain limitations therein provided, Holders
of a majority in aggregate principal amount of the Notes then outstanding to
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of Notes notice of any continuing Default or Event of
Default (except a Default in payment of principal or interest when due, for any
reason or a Default in compliance with Article Five of the Indenture) if it
determines that withholding notice is in its interest.
17. Trustee Dealings with Issuer. The Trustee under the Indenture, in
its individual or any other capacity, may become the owner or pledgee of Notes
and may otherwise deal with the Issuer, its Subsidiaries or its respective
Affiliates as if it were not the Trustee.
18. No Recourse Against Others. No partner, director, officer, employee
or stockholder, as such, of Issuer or any Subsidiary Guarantor, as such, shall
have any liability for any obligations of Issuer or any Subsidiary Guarantor
under the Notes, the Indenture, the Guarantees or the Registration Rights
Agreement or for any claim based on, in respect of, or by reason of, such
obligations or its creation. Each Holder of Notes by accepting a Note waives and
releases all such liability. The waiver and release are part of the
consideration for the issuance of the Notes.
19. Guarantees. This Note will be entitled to the benefits of certain
Guarantees, if any, made for the benefit of the Holders. Reference is hereby
made to the Indenture for a statement of the respective rights, limitations of
rights, duties and obligations thereunder of the Subsidiary Guarantors, the
Trustee and the Holders.
20. Authentication. This Note shall not be valid until the Trustee or
Authenticating Agent manually signs the certificate of authentication on this
Note.
B-4
21. Governing Law. This Note and the Indenture shall be governed by and
construed in accordance with the laws of the State of New York, as applied to
contracts made and performed within the State of New York. Each of the parties
hereto agrees to submit to the jurisdiction of the courts of the State of New
York in any action or proceeding arising out of or relating to this Note.
22. Abbreviations and Defined Terms. Customary abbreviations may be
used in the name of a Holder of a Note or an assignee, such as: TEN COM ('
tenants in common), TEN ENT (' tenants by the entireties), JT TEN (' joint
tenants with right of survivorship and not as tenants in common), CUST ('
Custodian), and U/G/M/A (' Uniform Gifts to Minors Act).
23. CUSIP Numbers. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Issuer has caused
CUSIP numbers to be printed on the Notes as a convenience to the Holders of the
Notes. No representation is made as to the accuracy of such numbers as printed
on the Notes and reliance may be placed only on the other identification numbers
printed hereon.
The Issuer will furnish to any Holder of a Note upon written request
and without charge a copy of the Indenture, which has the text of this Note.
Requests may be made to: Abraxas Petroleum Corporation, 500 North Loop 1604
East, Suite 100, San Antonio, Texas 78232.
B-5
ASSIGNMENT FORM
If you the Holder want to assign this Note, fill in the form below and
have your signature guaranteed:
I or we assign and transfer this Note to:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type name, address and zip code and
social security or tax ID number of assignee)
and irrevocably appoint________________________________________________________,
agent to transfer this Note on the books of the Issuer. The agent may substitute
another to act for him.
Dated:____________________________ Signed:_______________________________
(Sign exactly as name appears
on the other side of this Note)
Signature Guarantee:
B-6
[OPTION OF HOLDER TO ELECT PURCHASE]
If you want to elect to have this Note purchased by the Issuer pursuant
to Section 4.15 or Section 4.16 of the Indenture, check the appropriate box:
Section 4.15 [ ]
Section 4.16 [ ]
If you want to elect to have only part of this Note purchased by the
Issuer pursuant to Section 4.15 or Section 4.16 of the Indenture, state the
amount you elect to have purchased:
$___________________
Dated: _________________ __________________________________________________
NOTICE: The signature on this
assignment must correspond with
the name as it appears upon the
face of the within Note in every
particular without alteration or
enlargement or any change
whatsoever and be guaranteed.
Signature Guarantee:
B-7
EXHIBIT C
Form of Certificate To Be
Delivered in Connection with
Transfers to Non-QIB Accredited Investors
[ ], [ ]
[ ]
[ ]
[ ]
Ladies and Gentlemen:
In connection with our proposed purchase of 12f% Senior Notes due 2003
(the "Notes") of Abraxas Petroleum Corporation ("Abraxas"), we confirm that:
I. We have received a copy of the Offering Memorandum (the
"Offering Memorandum"), dated March 27, 1999, relating to the Notes and
such other information as we deem necessary in order to make our
investment decision. We acknowledge that we have read and agreed to the
matters stated in the section entitled "Notice to Investors" of such
Offering Memorandum.
2. We understand that any subsequent transfer of the Notes is
subject to certain restrictions and conditions set forth in the
Indenture relating to the Notes (the "Indenture") as described in the
Offering Memorandum and the undersigned agrees to be bound by, and not
to resell, pledge or otherwise transfer the Notes except in compliance
with, such restrictions and conditions and the Securities Act of 1933,
as amended (the "Securities Act"), and all applicable State securities
laws.
3. We understand that the offer and sale of the Notes have not
been registered under the Securities Act, and that the Notes may not be
offered or sold within the United States or to, or for the account or
benefit of, U.S. Persons except as permitted in the following sentence.
We agree, on our own behalf and on behalf of any accounts for which we
are acting as hereinafter stated, that if we should sell any Notes, we
will do so only (i) to Abraxas or any subsidiary thereof, (ii) inside
the United States in accordance with Rule 144A under the Securities Act
to a "qualified institutional buyer" (as defined in Rule 144A
promulgated under the Securities Act) that, prior to such transfer,
furnishes (or has furnished on its behalf by a U.S. broker-dealer) to
the Trustee (as defined in the Indenture) a signed letter containing
certain representations and agreements relating to the restrictions on
transfer of the Notes (the form of which letter can be obtained from
the Trustee), (iii) outside the United States in accordance with Rule
904 of Regulation S promulgated under the Securities Act (provided that
any such sale or transfer in Canada or to or for the benefit of a
Canadian resident must be effected pursuant to an exemption from the
prospectus and registration requirements under applicable Canadian
securities laws), (iv) pursuant to the exemption from registration
provided by Rule 144 under the Securities Act (if available), or (v)
pursuant to an effective registration statement under the Securities
Act, and we further agree to provide to any Person purchasing any of
the Notes from us a notice advising such purchaser that resales of the
Notes are restricted as stated herein.
4. We understand that, on any proposed resale of any Notes, we
will be required to furnish to the Trustee and Abraxas such
certification, legal opinions and other information as the Trustee and
Abraxas may reasonably require to confirm that the proposed sale
complies with the foregoing restrictions. We further understand that
the Notes purchased by us will bear a legend to the foregoing effect.
C-1
5. We are an institutional "accredited investor" (as defined
in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities
Act) and have such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of our
investment in the Notes, and we and any accounts for which we are
acting are each able to bear the economic risk of our or its
investment, as the case may be.
6. We are acquiring the Notes purchased by us for our account
or for one or more accounts (each of which is an institutional
"accredited investor") as to each of which we exercise sole investment
discretion.
You, Abraxas and the Trustee and others are entitled to rely
upon this letter and are irrevocably authorized to produce this letter or a copy
hereof to any interested party in any administrative or legal proceeding or
official inquiry with respect to the matters covered hereby.
Very truly yours,
[Name of Transferee]
By:
Name:
Title:
C-2
EXHIBIT D
Form of Certificate To Be Delivered
in Connection with Transfers
Pursuant to Regulation S
[ ], [ ]
[ ]
[ ]
[ ]
[ ]
Re: Abraxas Petroleum Corporation (the "Issuer")
12.875% Senior Notes due 2003 (the "Notes")
Ladies and Gentlemen:
In connection with our proposed sale of $[______] aggregate principal
amount of the Notes, we confirm that such sale has been effected pursuant to and
in accordance with Regulation S under the U.S. Securities Act of 1933, as
amended (the "Securities Act"), and, accordingly, we represent that:
(1) the offer of the Notes was not made to a Person in the
United States;
(2) either (a) at the time the buy offer was originated, the
transferee was outside the United States or we and any Person acting on
our behalf reasonably believed that the transferee was outside the
United States, or (b) the transaction was executed in, on or through
the facilities of a designated off-shore securities market and neither
we nor any Person acting on our behalf knows that the transaction has
been pre-arranged with a buyer in the United States;
(3) no directed selling efforts have been made in the United
States in contravention of the requirements of Rule 903(b) or Rule
904(b) of Regulation S, as applicable;
(4) the transaction is not part of a plan or scheme to evade
the registration requirements of the Securities Act; and
(5) we have advised the transferee of the transfer
restrictions applicable to the Notes.
You, the Issuer and counsel for the Issuer are entitled to
rely upon this letter and are irrevocably authorized to produce this letter or a
copy hereof to any interested party in any administrative or legal proceedings
or official inquiry with respect to the matters covered hereby. Terms used in
this certificate have the meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:
Authorized Signature
D-1
EXHIBIT E
GUARANTEE
For value received, the undersigned hereby unconditionally guarantees,
as principal obligor and not only as a surety, to the Holder of this Note the
cash payments in United States dollars of principal of, premium, if any, and
interest on this Note (and including Additional Interest payable thereon) in the
amounts and at the times when due and interest on the overdue principal,
premium, if any, and interest, if any, of this Note, if lawful, and the payment
or performance of all other obligations of the Issuer under the Indenture or the
Notes, to the Holder of this Note and the Trustee, all in accordance with and
subject to the terms and limitations of this Note, Article Eleven of the
Indenture and this Guarantee. This Guarantee will become effective in accordance
with Article Eleven of the Indenture and its terms shall be evidenced therein.
The validity and enforceability of any Guarantee shall not be affected by the
fact that it is not affixed to any particular Note. Capitalized terms used but
not defined herein shall have the meanings ascribed to them in the Indenture
dated as of March 26, 1999, among Abraxas Petroleum Corporation, a Nevada
corporation, as Issuer (the "Issuer"), the Subsidiary Guarantors party thereto,
and Norwest Bank Minnesota, National Association, as trustee (the "Trustee"), as
amended or supplemented (the "Indenture").
The obligations of the undersigned to the Holders of Notes and to the
Trustee pursuant to this Guarantee and the Indenture are expressly set forth in
Article Eleven of the Indenture and reference is hereby made to the Indenture
for the precise terms of the Guarantee and all of the other provisions of the
Indenture to which this Guarantee relates.
THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF
CONFLICTS OF LAW. Each Subsidiary Guarantor hereby agrees to submit to the
jurisdiction of the courts of the State of New York in any action or proceeding
arising out of or relating to this Guarantee.
This Guarantee is subject to release upon the terms set forth in the
Indenture.
E-1
IN WITNESS WHEREOF, each Subsidiary Guarantor has caused its Guarantee
to be duly executed.
Date: ____________________
NEW CACHE PETROLEUMS, LTD., as Guarantor
By:
Name:
Title:
By:
Name:
Title:
CANADIAN ABRAXAS PETROLEUM, LTD., as Guarantor
By:
Name:
Title:
By:
Name:
Title:
SANDIA OIL & GAS CORPORATION, as Guarantor
By:
Name:
Title:
By:
Name:
Title:
E-2
EXHIBIT F
FORM OF SUPPLEMENTAL INDENTURE
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture") is dated as of ,
among [SUBSIDIARY GUARANTOR] (the "New Subsidiary Guarantor"), a subsidiary of
Abraxas Petroleum Corporation (or its successor), a Nevada corporation (the
"Issuer") under the Indenture referred to below, and NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION, as trustee under the indenture referred to below (the
"Trustee").
RECITALS:
WHEREAS the Issuer, Canadian Abraxas Petroleum Corporation, an Alberta
corporation ("Canadian Abraxas"), New Cache Petroleums, Ltd., an Alberta
corporation ("New Cache"), and Sandia Oil & Gas Corporation, a Texas corporation
("Sandia" and together with Canadian Abraxas and New Cache, the "Subsidiary
Guarantors") have heretofore executed and delivered to the Trustee an Indenture
(the "Indenture") dated as of March 26, 1999, providing for the issuance of an
aggregate principal amount of up to $63,500,000 of 12 f% Senior Notes due 2003
(the "Notes"); and
WHEREAS Section 4.20 of the Indenture provides that under certain
circumstances the Issuer is required to cause the New Subsidiary Guarantor to
execute and deliver to the Trustee a supplemental indenture pursuant to which
the New Subsidiary Guarantor shall unconditionally guarantee all the Issuer's
obligations under the Notes and the Indenture pursuant to a Guarantee on the
terms and conditions set forth herein;
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the New
Subsidiary Guarantor, the Issuer and the Trustee mutually covenant and agree for
the equal and ratable benefit of the Holders as follows:
1. Agreement to Guarantee. The New Subsidiary Guarantor hereby agrees,
to unconditionally guarantee the Issuer's obligations under the Notes and the
Indenture on the terms and subject to the conditions set forth in Article XI of
the Indenture and to be bound by all other applicable provisions of the
Indenture.
2. Ratification of Indenture; Supplemental Indenture Part of Indenture.
The Indenture, as supplemented hereby, is in all respects ratified and confirmed
and all the terms, conditions and provisions thereof shall remain in full force
and effect. This Supplemental Indenture shall form a part of the Indenture for
all purposes, and every holder of Notes heretofore or hereafter authenticated
and delivered shall be bound hereby.
3. Governing Law. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
4. Trustee Makes No Representation. The Trustee makes no representation
as to the validity or sufficiency of this Supplemental Indenture.
5. Counterparts. The parties may sign any number of copies of this
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
6. Effect of Headings. The Section headings herein are for convenience
only and shall not effect the construction thereof.
F-1
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed as of the date first above written.
[NEW SUBSIDIARY GUARANTOR]
By:
Name:
Title:
ABRAXAS PETROLEUM CORPORATION
By:
Name:
Title:
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, as Trustee
By:
Name:
Title:
F-2
Exhibit 22.1
SUBSIDIARIES OF ABRAXAS
Abraxas Petroleum Corporation
A Nevada Corporation ("Abraxas")
CanadianAbraxas Petroleum Limited, a Canada corporation ("Canadian Abraxas")
and wholly owned subsidiary of Abraxas
Grey Wolf Exploration Inc.
an Alberta corporation ("Grey Wolf")
Abraxas owns 48% of the capital stock of Grey Wolf
Western Associated Energy Corporation
a Texas corporation and wholly owned subsidiary
of Abraxas
Sandia Oil & Gas Corporation
a Texas corporation ("Sandia") and wholly owned subsidiary
of Abraxas
New Cache Petroleums, LTD
an Alberta corporation ("New Cache")
Canadian Abraxas owns 100% of the capital stock of
New Cache
EXHIBIT 10.25
ABRAXAS PETROLEUM CORPORATION
500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
May 21, 1998
Robert W. Carington, Jr.
Abraxas Petroleum Corporation
500 North Loop 1604 East, Suite 100
San Antonio, Texas 78232
Dear Robert:
The Board of Directors (the "Board") of Abraxas Petroleum Corporation
(the "Company") has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of the
Company's management, including yourself, to their assigned duties. In order to
induce you to remain in the employ of the Company, in consideration of your
agreement to continue employment with the Company, and in consideration of your
agreement to the termination of any existing employment or severance agreement
you may have with the Company, the Company agrees that you shall receive, upon
the terms and conditions set forth herein, the benefits set forth in this letter
agreement ("Agreement") during the term hereof.
1. Terms of Agreement. This Agreement shall commence on the date hereof
and shall continue in effect through December 31, 1998 (the "Term"); provided,
however, that commencing on January 1, 1999 and each January 1 thereafter, the
Term shall automatically be extended for an additional year unless, not later
than December 1 of the preceding year, either party shall have given notice that
it does not wish to extend the Term. Except in the event of a Change in Control
(as defined in Section 4 hereof), at all times during the Term or extended Term
your employment shall remain at will and may be terminated by the Company for
any reason without notice or Cause (as hereinafter defined). If a Change in
Control shall have occurred during the original or extended Term, the Term shall
continue in effect for a period of 48 months beyond the Term in effect
immediately before such Change in Control.
2. Term of Employment. During the Term, you agree to be a full-time
employee of the Company serving in the position of Executive Vice President, to
devote substantially all of your working time and attention to the business and
affairs of the Company and, to the extent necessary to discharge the
responsibilities associated with your position, to use your best efforts to
perform faithfully and efficiently such responsibilities. In addition, you agree
to serve in such other capacities or offices to which you may be assigned,
appointed or elected from time to time by the Board. Nothing herein shall
prohibit you from devoting your time to civic and community activities or
managing personal investments, as long as the foregoing do not interfere with
the performance of your duties hereunder.
3. Compensation. (a) As compensation for your services under this
Agreement, you shall be entitled to receive base salary and other compensation
to be determined from time to time by the Board in its sole discretion. In
addition, you shall be entitled to participate in any additional bonus,
incentive compensation or employee benefit arrangement which may be established
from time to time by the Company in its sole discretion. Notwithstanding
anything to the contrary provided in this Agreement, prior to a Change in
Control you shall not be entitled to receive any compensation from the Company
upon termination, voluntary or involuntary, of your employment with the Company,
regardless of the reason for such termination.
(b) The Company shall reimburse you, in accordance with Company policy
in effect from time to time, for all reasonable travel, entertainment and other
business expenses incurred by you in the performance of your responsibilities
under this Agreement promptly upon receipt of written substantiation of such
expenses.
4. Change in Control. For purposes of this Agreement, a Change in
Control shall be deemed to have occurred if (a) any "person" or "group" (as such
terms are used in Section 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended, (the "Exchange Act")) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act as in effect on the date hereof,
except that a person shall be deemed to be the "beneficial owner" of all shares
that any such person has the right to acquire pursuant to any agreement or
arrangement or upon exercise of conversion rights, warrants, options or
otherwise, without regard to the sixty day period referred to in such Rule),
directly or indirectly, of securities representing 20% or more of the combined
voting power of the Company's then outstanding securities, (b) any person or
group shall make a tender offer or an exchange offer for 20% or more of the
combined voting power of the Company's then outstanding securities, (c) at any
time during any period of two consecutive years (not including any period prior
to the execution of this Agreement), individuals who at the beginning of such
period constituted the Board and any new directors, whose election by the Board
or nomination for election by the Company's stockholders was approved by a vote
of at least two-thirds (2/3) of the Company directors then still in office who
either were the Company directors at the beginning of the period or whose
election or nomination for election was previously so approved ("Current
Directors"), cease for any reason to constitute a majority thereof, (d) the
Company shall consolidate, merge or exchange securities with any other entity
and the stockholders of the Company immediately before the effective time of
such transaction do not beneficially own, immediately after the effective time
of such transaction, shares entitling such stockholders to a majority of all
votes (without consideration of the rights of any class of stock entitled to
elect directors by a separate class vote) to which all stockholders of the
corporation issuing cash or securities in the consolidation, merger or share
exchange would be entitled for the purpose of electing directors or where the
Current Directors immediately after the effective time of the consolidation,
merger or share exchange would not constitute a majority of the Board of
Directors of the corporation issuing cash or securities in the consolidation,
merger or share exchange, or (e) any person or group acquires 50% or more of the
Company's assets.
Notwithstanding the foregoing, however, a Change in Control shall not
be deemed to occur merely by reason of an acquisition of Company securities by,
or any consolidation, merger or exchange of securities with, any entity that,
immediately prior to such acquisition, consolidation, merger or exchange of
securities, was a "subsidiary", as such term is defined below. For these
purposes, the term "subsidiary" means (i) any corporation of which 80% of the
capital stock of such corporation is owned, directly or indirectly, by the
Company and (ii) any unincorporated entity in respect of which the Company has,
directly or indirectly, an equivalent degree of ownership.
5. Termination of Employment Following Change in Control. Prior to a
Change in Control, your employment shall remain at will and may be terminated by
the Company for any reason without notice or Cause. From and after a Change in
Control, you shall be entitled to the benefits provided in Subsection 6(d)
hereof upon the subsequent termination of your employment during the Term or
extended Term unless such termination is because of your death or Retirement, by
the Company for Cause or Disability, or by you other than for Good Reason.
(a) Disability; Retirement. If, as a result of your incapacity due to
physical or mental illness, you shall have been absent from the full-time
performance of your duties with the Company for six (6) consecutive months, and
within thirty (30) days after written Notice of Termination is given you shall
not have returned to the full-time performance of your duties, the Company may
terminate your employment for "Disability." Any question as to the existence of
your Disability upon which you and the Company cannot agree shall be determined
by a qualified independent physician selected by you (or, if you are unable to
make such selection, it shall be made by any adult member of your immediate
family), and approved by the Company. The determination of such physician made
in writing to the Company and to you shall be final and conclusive for all
purposes of this Agreement. Termination by the Company or you of your employment
based on "Retirement" shall mean termination in accordance with the Company's
retirement policy, generally applicable to its salaried employees or in
accordance with any retirement arrangement established with your consent with
respect to you.
(b) Cause. Termination by the Company of your employment for "Cause"
shall mean termination upon (i) the willful and continued failure by you to
substantially perform your duties with the Company (other than any such failure
resulting from your incapacity due to physical or mental illness or any such
actual or anticipated failure resulting from termination by you for Good Reason)
after a written demand for substantial performance is delivered to you by the
Board, which demand specifically identifies the manner in which the Board
believes that you have not substantially performed your duties, or (ii) the
willful engaging by you in conduct which is demonstrably and materially
injurious to the Company, monetarily or otherwise. For purposes of this
Subsection, no act, or failure to act, on your part shall be deemed "willful"
unless done, or omitted to be done, by you not in good faith and without
reasonable belief that your action or omission was in the best interest of the
Company. Notwithstanding the foregoing, you shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to you a
copy of a resolution duly adopted by the affirmative vote (which cannot be
delegated) of not less than a majority of the members of the Board who are not
officers of the Company at a meeting of the Board called and held for such
purposes (after reasonable notice to you and an opportunity for you, together
with your counsel, to be heard before the Board), finding that in the good faith
opinion of the Board you were guilty of conduct set forth above in clauses (i)
or (ii) of the first sentence of this Subsection and specifying the particulars
thereof in detail.
(c) Good Reason. You shall be entitled to terminate your employment for
Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without
your express written consent, any of the following:
(i) a material adverse alteration in the nature or status of
your position, duties or responsibilities from those in effect immediately prior
to a Change in Control, other than any such alteration primarily attributable to
the fact that the Company may no longer be a public company or may be a
subsidiary of another entity;
(ii) a reduction in your annual base salary as in effect
immediately prior to the Change in Control or as the same may be increased from
time to time;
(iii) a change in the principal place of your employment, as
in effect at the time of a Change in Control, to a location more than fifty (50)
miles from such principal place of employment, excluding required travel on the
Company's business to an extent substantially consistent with your present
business travel obligations;
(iv) the failure by the Company, without your consent, to pay
to you any portion of your current compensation, or to pay to you any portion of
any deferred compensation, within ten (10) days of the date any such
compensation payment is due;
(v) the failure by the Company to continue in effect any
compensation plan in which you participate, or any substitute plans adopted
prior to the Change in Control, unless an equitable arrangement (embodied in an
ongoing substitute or alternative plan) has been made with respect to such plan
in connection with the Change in Control, or the failure by the Company to
continue your participation therein on the same basis, both in terms of the
amount of benefits provided and the level of your participation relative to
other participants, as existed at the time of the Change in Control;
(vi) the failure by the Company to continue to provide you
with benefits at least as favorable to those enjoyed by you under any of the
Company's pension, life insurance, medical, health and accident, disability,
deferred compensation or savings plans in which you were participating at the
time of the Change in Control, the taking of any action by the Company which
would directly or indirectly materially reduce any of such benefits or deprive
you of any material fringe benefit enjoyed by you at the time of the Change in
Control, or the failure by the Company to provide you with the number of paid
vacation days to which you are entitled on the basis of the Company's practice
with respect to you as in effect at the time of the Change in Control;
(vii) the failure of the Company to obtain a satisfactory
agreement from any successor to assume and agree to perform this Agreement, as
contemplated in Section 7 hereof; or
(viii) any purported termination of your employment which is
not effected pursuant to a Notice of Termination satisfying the requirements of
Subsection (d) below (and, if applicable, the requirements of Subsection (b)
above); for purposes of this Agreement, no such purported termination shall be
effective.
(d) Notice of Termination. Prior to a Change in Control, you may be
terminated with or without notice. From and after a Change in Control, any
purported termination of your employment by the Company or by you shall be
communicated by written notice to the other party hereto in accordance with
Section 8 hereof ("Notice of Termination"). Such Notice of Termination shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of your employment under the provisions so
indicated.
(e) Date of Termination, Etc. Prior to a Change in Control, "Date of
Termination" shall mean the date your employment is terminated. From and after a
Change in Control, "Date of Termination" shall mean (i) if your employment is
terminated for Disability, 30 days after Notice of Termination is given
(provided that you shall not have returned to the full-time performance of your
duties during such 30 day period), and (ii) if your employment is terminated
pursuant to Subsections 5(b) or 5(c) above or for any other reason (other than
Disability), the date specified in the Notice of Termination (which, in the case
of a termination pursuant to Subsection 5(b) above shall not be less than 10
days, and in the case of a termination pursuant to Subsection 5(c) above shall
not be less than 30 nor more than 60 days, respectively, from the date such
Notice of Termination is given) (except for a termination pursuant to Subsection
5(c)(vii), in which event the date upon which any succession referred to therein
becomes effective shall be deemed the Date of Termination); provided that if at
any time from and after a Change in Control within 30 days after any Notice of
Termination is given the party receiving such Notice of Termination notifies the
other party that a dispute exists concerning the termination, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (which
is not appealable or the time for appeal therefrom having expired and no appeal
having been perfected); provided further that at any time from and after a
Change in Control the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence. From
and after a Change in Control, the Company will continue to pay you your full
compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to, base salary) or, if higher, the compensation in
effect as of the Change in Control, and continue you as a participant in all
compensation, benefit and insurance plans in which you were participating when
the notice giving rise to the dispute was given, until the dispute is finally
resolved in accordance with this Subsection 5(e), notwithstanding the pendency
of any such dispute. Amounts paid under this Subsection 5(e) from and after a
Change in Control are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement. Prior to a Change in Control, you shall not be entitled to be paid
any compensation or other amounts due under this Agreement from and after the
Date of Termination.
6. Compensation Upon Termination or During Disability. From and after a
Change in Control, upon termination of your employment or during a period of
Disability you shall be entitled to the following benefits:
(a) During any period that you fail to perform your full-time duties
with the Company as a result of your Disability, you shall continue to receive
your base salary at the rate in effect at the commencement of any such period,
together with all compensation payable to you under the Company's disability
plan or other plan during such period, until this Agreement is terminated
pursuant to Subsection 5(a) hereof. Thereafter, your benefits shall be
determined in accordance with the Company's long-term disability plan as in
effect immediately prior to a Change in Control.
(b) If your employment shall be terminated by the Company for Cause or
by you other than for Good Reason, Disability, death or Retirement, the Company
shall pay you your full base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given and any amounts to be paid
to you pursuant to the Company's retirement and other benefits plans of the
Company then in effect, and the Company shall have no further obligations to you
under this Agreement.
(c) If your employment shall be terminated by the Company or by you for
Retirement, or by reason of your death, your benefits shall be determined in
accordance with the Company's retirement, benefit and insurance programs then in
effect.
(d) If your employment by the Company shall be terminated by the Company
other than for Cause and other than because of your death, Disability or
Retirement or by you for Good Reason then, effective as of the Date of
Termination, in lieu of any severance benefits which you otherwise would be
eligible to receive under the Company's severance plan or policy as in effect
immediately prior to the Change in Control, you shall be entitled to the
benefits provided below:
(i) The Company shall pay you your full base salary through the
Date of Termination at the rate in effect at the time the Notice of Termination
is given, plus all other amounts to which you are entitled under any
compensation or benefit plan of the Company (excluding any severance benefits
under the Company's severance plan or policy) at the time such payments are due
under the terms of such plans.
(ii) In lieu of any further salary payments to you for periods
subsequent to the Date of Termination, the Company shall pay to you, not later
than the fifth day following the Date of Termination, a lump sum payment equal
to four times your annual base salary.
(iii) The Company shall also pay to you all legal fees and
expenses incurred by you as a result of such termination (including all such
fees and expenses, if any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any right or benefit provided by
this Agreement) in the event that you prevail in any claim brought against the
Company in connection with such termination.
(iv) Notwithstanding any other provision of this Agreement, if
any amount payable hereunder ("Payments") 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 and any
applicable regulations thereunder (the "Code") which would require the payment
by you of the excise tax imposed by Section 4999 of the Code or any interest or
penalty (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then you shall be
entitled to receive an additional Payment (the "Gross-Up Payment") in an amount
such that after the payment by you of all taxes (including any interest or
penalties imposed with respect to such taxes) including, without limitation, any
income taxes (and any interest and penalties with respect thereto) and the
Excise Tax imposed upon the Gross-Up Payment, you shall retain an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the total Payments to be
received by you pursuant to this Agreement. The determination of whether the
Gross-Up Payment shall be paid shall be made by a nationally recognized
accounting firm selected by you and such determination shall be binding upon you
and the Company for purposes of this Agreement. The costs and expenses of such
accounting firm shall be paid by the Company.
(e) Except as specifically provided in this Section 6, you shall not be
required to mitigate the amount of any payment provided for in this Section 6 by
seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Section 6 be reduced by any compensation earned by
you as the result of employment by another employer or by retirement benefits
after the Date of Termination, or otherwise.
(f) In addition to all other amounts payable to you under this Section
6, you shall be entitled to receive all benefits payable to you under any other
plan or agreement relating to retirement benefits in accordance with the terms
of such plan or agreement.
7. Successors; Binding Agreement. (a) The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. Such assumption and agreement shall be
obtained prior to the effectiveness of any such succession. As used in this
Agreement, "Company" shall mean the Company as herein before defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise. Prior to a Change in
Control, the term "Company" shall also mean any affiliate of the Company to
which you may be transferred and Company shall cause such successor employer to
be considered the "Company" bound by the terms of this Agreement and this
Agreement shall be amended to so provide. Following a Change in Control the term
"Company" shall not mean any affiliate of the Company to which you may be
transferred unless you shall have previously approved of such transfer in
writing, in which case the Company shall cause such successor employer to be
considered "Company" bound by the terms of this Agreement and this Agreement
shall be amended to so provide.
(b) This Agreement shall inure to the benefit of and be enforceable by
your personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If you should die while any amount
would still be payable to you hereunder if you had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or, if there
is no such designee, to your estate.
8. Notice. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
that all notices to the Company shall be directed to the attention of the Board
with a copy to the Secretary of the Company, or to such other address as either
party may have furnished to the other in writing in accordance herewith, except
that notice of change of address shall be effective only upon receipt.
9 Miscellaneous. No provision of this Agreement shall be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by you and such officer as may be specifically designated
by the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement. THE VALIDITY,
INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED
BY THE LAWS OF THE STATE OF TEXAS.
10 Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
11. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
12. Arbitration. THIS AGREEMENT IS SUBJECT TO ARBITRATION UNDER THE
TEXAS ARBITRATION ACT. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in San Antonio,
Texas in accordance with the rules of the American Arbitration Association then
in effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction; provided, however, that you shall be entitled to seek specific
performance of your right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with this
Agreement.
13. Entire Agreement. This Agreement contains the entire agreement by
the parties with respect to the matters covered herein and supersedes any prior
agreement (including, without limitation, any prior employment or severance
agreement), condition, practice, custom, usage and obligation with respect to
such matters insofar as any such prior agreement, condition, practice, custom,
usage or obligation might have given rise to any enforceable right.
If this letter sets forth our agreement on the subject matter hereof,
kindly sign and return to the Company the enclosed copy of this letter which
will then constitute our agreement on this subject.
Sincerely,
ABRAXAS PETROLEUM CORPORATION
By:
Robert L. G. Watson
Chief Executive Officer
Agreed to this ___ day of
_______________, 1998
Robert W. Carington, Jr.
43
EXHIBIT 10.26
REGISTRATION RIGHTS AGREEMENT
Dated as of March 26, 1999
By and Among
ABRAXAS PETROLEUM CORPORATION,
CANADIAN ABRAXAS PETROLEUM LIMITED,
NEW CACHE PETROLEUMS LTD.,
SANDIA OIL AND GAS CORPORATION
and
JEFFERIES & COMPANY, INC.,
as Initial Purchaser
12.875% Senior Secured Notes due 2003
TABLE OF CONTENTS
Page
1. Definitions .................................................... 1
2. Exchange Offer................................................... 5
3. Shelf Registration............................................... 9
4. Liquidated Damages...............................................11
5. Registration Procedures..........................................13
6. Registration Expenses............................................25
7. Indemnification..................................................26
8. Rules 144 and 144A...............................................31
9. Underwritten Registrations.......................................31
10. Miscellaneous....................................................32
(a) No Inconsistent Agreements..............................32
(b) Adjustments Affecting Transfer Restricted Securities....32
(c) Amendments and Waivers..................................32
(d) Notices.................................................33
(e) Successors and Assigns..................................33
(f) Release of Subsidiary Guarantors........................34
(g) Counterparts............................................34
(h) Headings................................................34
(i) Governing Law...........................................34
(j) Severability............................................34
(k) Securities Held by the Issuers or Their
Affiliates..........................................34
(l) Third Party Beneficiaries...............................34
(m) Entire Agreement........................................35
(n) Information Supplied by the Participants................35
(o) Subsidiary Guarantor a Party............................35
i
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is dated
as of March 26, 1999, by and among ABRAXAS PETROLEUM CORPORATION, a Nevada
corporation (the "Company"), CANADIAN ABRAXAS PETROLEUM LIMITED, an Alberta
corporation and a wholly-owned subsidiary of the Company ("Canadian Abraxas")
and NEW CACHE PETROLEUMS LTD., an Alberta corporation and a wholly-owned
subsidiary of Canadian Abraxas ("New Cache") and SANDIA OIL AND GAS CORPORATION,
a Texas corporation and a wholly-owned subsidiary of the Company ("Sandia"), and
JEFFERIES & COMPANY, INC. as initial purchaser (the "Initial Purchaser"). The
Company, Canadian Abraxas, New Cache and Sandia are referred to herein as the
"Issuers".
This Agreement is entered into in connection with the Purchase
Agreement, dated as of March 19, 1999, by and among the Issuers and the Initial
Purchaser (the "Purchase Agreement"), which provides for the sale by the
Company, Canadian Abraxas and New Cache to the Initial Purchaser of $63,500,000
aggregate principal amount of such companies' 12.875% Senior Secured Notes due
2003, Series A (the "Notes"), unconditionally guaranteed on a senior secured
basis by Sandia, initially, and by each of the Company's future Restricted
Subsidiaries (as defined in the Indenture) (collectively, the "Subsidiary
Guarantors"). In order to induce the Initial Purchaser to enter into the
Purchase Agreement, the Issuers have agreed to provide the registration rights
set forth in this Agreement for the benefit of the Initial Purchaser and any
subsequent holder or holders of the Notes. The execution and delivery of this
Agreement is a condition to the Initial Purchaser's obligation to purchase the
Notes under the Purchase Agreement.
The parties hereby agree as follows:
1. Definitions
As used in this Agreement, the following terms shall have the
following meanings:
Advice: See Section 5 hereof.
Agreement: See the introductory paragraphs hereto.
Applicable Period: See Section 2 hereof.
Canadian Abraxas: See the introductory paragraphs hereto.
Company: See the introductory paragraphs hereto.
1
Damages Payment Date: With respect to the Notes, each Interest
Payment Date.
Effectiveness Date: With respect to any Registration
Statement, the 60th day after the Filing Date with respect thereto.
Effectiveness Period: See Section 3 hereof.
Event Date: See Section 4 hereof.
Exchange Act: The Securities Exchange Act of 1934, as amended,
and the rules and regulations of the SEC promulgated thereunder.
Exchange Notes: See Section 2 hereof.
Exchange Offer: See Section 2 hereof.
Exchange Offer Registration Statement: See Section 2 hereof.
Filing Date: If no Registration Statement has been filed by
the Issuers pursuant to this Agreement, the 75th day after the Issue Date;
provided, however, that if a Shelf Notice is given, then the Filing Date with
respect to the Initial Shelf Registration shall be the 60th calendar day after
the date of the giving of such Shelf Notice.
Holder: Any holder of a Transfer Restricted Security or
Transfer Restricted Securities.
Indemnified Person: See Section 7(c) hereof.
Indemnifying Person: See Section 7(c) hereof.
Indenture: The Indenture, dated as of March 26, 1999, by and
among the Issuers and Norwest Bank Minnesota, N.A., as trustee, pursuant to
which the Notes are being issued, as the same may be amended or supplemented
from time to time in accordance with the terms thereof.
Initial Purchaser: See the introductory paragraphs hereto.
Initial Shelf Registration: See Section 3(a) hereof.
Inspectors: See Section 5(o) hereof.
Interest Payment Date: As defined in the Indenture and the
Notes.
2
Issue Date: March 26, 1999, the date of original issuance of
the Notes.
Issuers: See the introductory paragraphs hereto.
Liquidated Damages: See Section 4 hereof.
New Cache: See the introductory paragraph hereto.
NASD: See Section 5(t) hereof.
Participant: See Section 7(a) hereof.
Participating Broker-Dealer: See Section 2 hereof.
Person: An individual, trustee, corporation, partnership,
joint stock company, trust, unincorporated association, union, business
association, firm or other legal entity.
Private Exchange: See Section 2 hereof.
Private Exchange Notes: See Section 2 hereof.
Prospectus: The prospectus included in any Registration
Statement (including, without limitation, any prospectus subject to completion
and a prospectus that includes any information previously omitted from a
prospectus filed as part of an effective registration statement in reliance upon
Rule 430A promulgated under the Securities Act and any term sheet filed pursuant
to Rule 434 under the Securities Act), as amended or supplemented by any
prospectus supplement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.
Purchase Agreement: See the introductory paragraphs hereof.
Records: See Section 5(o) hereof.
Registration Default: As defined in Section 4.
Registration Statement: Any registration statement of the
Issuers and the Subsidiary Guarantors (if any) that covers any of the Notes, the
Exchange Notes or the Private Exchange Notes filed with the SEC under the
Securities Act, including the Prospectus, amendments and supplements to such
registration statement, including post-effective amendments, all exhibits, and
3
all material incorporated by reference or deemed to be incorporated by reference
in such registration statement.
Rule 144: Rule 144 promulgated under the Securities Act, as
such Rule may be amended from time to time, or any similar rule (other than Rule
144A) or regulation hereafter adopted by the SEC providing for offers and sales
of securities made in compliance therewith resulting in offers and sales by
subsequent holders that are not affiliates of an issuer of such securities being
free of the registration and prospectus delivery requirements of the Securities
Act.
Rule 144A: Rule 144A promulgated under the Securities Act, as
such Rule may be amended from time to time, or any similar rule (other than Rule
144) or regulation hereafter adopted by the SEC.
Rule 415: Rule 415 promulgated under the Securities Act, as
such Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the SEC.
Sandia: See the introductory paragraph hereto.
SEC: The Securities and Exchange Commission.
Securities Act: The Securities Act of 1933, as amended, and
the rules and regulations of the SEC promulgated thereunder.
Security Documents: The Security Documents as defined in the
Purchase Agreement.
Shelf Notice: See Section 2 hereof.
Shelf Registration: See Section 3(b) hereof.
Subsequent Shelf Registration: See Section 3(b) hereof.
Subsidiary Guarantor: See the introductory paragraphs hereto.
TIA: The Trust Indenture Act of 1939, as amended.
Transfer Restricted Securities. Each Note until (i) the date
on which such Note has been exchanged by a person other than a Broker-Dealer for
an Exchange Note in the Exchange Offer, (ii) following the exchange by a
Broker-Dealer in the Exchange Offer of a Note for an Exchange Note, the date on
which such Exchange Note is sold to a purchaser who receives from such
Broker-Dealer on or prior to the date of such sale a copy of the Prospectus
4
contained in the Exchange Offer Registration Statement, (iii) the date on which
such Note has been effectively registered under the Act and disposed of in
accordance with the Shelf Registration Statement or (iv) the date on which such
Note is distributed to the public pursuant to Rule 144 under the Act or may be
distributed to the public pursuant to Rule 144(k) under the Act.
Trustee: The trustee under the Indenture and the trustee (if
any) under any indenture governing the Exchange Notes and Private Exchange
Notes.
Underwritten registration or underwritten offering: A
registration in which securities of the Issuers are sold to an underwriter for
reoffering to the public.
2. Exchange Offer
(a) To the extent permitted by applicable law or applicable
interpretation of the staff of the Division of Corporation Finance of the SEC,
the Issuers shall file with the SEC, no later than the Filing Date, a
Registration Statement (the "Exchange Offer Registration Statement") on an
appropriate registration form with respect to a registered offer (the "Exchange
Offer") to exchange any and all of the Transfer Restricted Securities for a like
aggregate principal amount of notes (the "Exchange Notes") of the Issuers,
guaranteed by any then existing Subsidiary Guarantor and secured by the same
collateral as the Notes, that are identical in all material respects to the
Notes except that the Exchange Notes (and the guarantees, if any, of the
Subsidiary Guarantors) shall contain no restrictive legend thereon. The Exchange
Offer shall comply with all applicable tender offer rules and regulations under
the Exchange Act and other applicable law. The Issuers shall use their
respective best efforts to (x) cause the Exchange Offer Registration Statement
to be declared effective under the Securities Act on or before the Effectiveness
Date; (y) keep the Exchange Offer open for at least 30 days (or longer if
required by applicable law) after the date that notice of the Exchange Offer is
mailed to Holders; and (z) consummate the Exchange Offer on or prior to the
165th day following the Issue Date. If, after the Exchange Offer Registration
Statement is initially declared effective by the SEC, the Exchange Offer or the
issuance of the Exchange Notes thereunder is interfered with by any stop order,
injunction or other order or requirement of the SEC or any other governmental
agency or court, the Exchange Offer Registration Statement shall be deemed not
to have become effective for purposes of this Agreement.
Each Holder that participates in the Exchange Offer will be
required to represent that any Exchange Notes to be received by it will be
acquired in the ordinary course of its business, that at the time of the
consummation of the Exchange Offer such Holder will have no arrangement or
5
understanding with any Person to participate in the distribution of the Exchange
Notes in violation of the provisions of the Securities Act, and that such Holder
is not an affiliate of any of the Issuers within the meaning of the Securities
Act.
No securities other than the Exchange Notes shall be included
in the Exchange Offer Registration Statement.
(b) The Issuers shall include within the Prospectus contained
in the Exchange Offer Registration Statement a section entitled "Plan of
Distribution," reasonably acceptable to the Holders, which shall contain a
summary statement of the positions taken or policies made by the staff of the
SEC with respect to the potential "underwriter" status of any broker-dealer that
is the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of
Exchange Notes received by such broker-dealer in the Exchange Offer (a
"Participating Broker-Dealer"), whether such positions or policies have been
publicly disseminated by the staff of the SEC or such positions or policies
represent the prevailing views of the staff of the SEC. Such "Plan of
Distribution" section shall also expressly permit, to the extent permitted by
applicable policies and regulations of the SEC, the use of the Prospectus by all
Persons subject to the prospectus delivery requirements of the Securities Act,
including, to the extent permitted by applicable policies and regulations of the
SEC, all Participating Broker-Dealers, and include a statement describing the
means by which Participating Broker-Dealers may resell the Exchange Notes in
compliance with the Securities Act.
The Issuers shall use their respective best efforts to keep
the Exchange Offer Registration Statement effective and to amend and supplement
the Prospectus contained therein in order to permit such Prospectus to be
lawfully delivered by all Persons subject to the prospectus delivery
requirements of the Securities Act for such period of time as is necessary to
comply with applicable law in connection with any resale of the Exchange Notes
covered thereby; provided, however, that such period shall not exceed 180 days
after such Exchange Offer Registration Statement is declared effective (or such
longer period if extended pursuant to the last paragraph of Section 5 hereof)
(the "Applicable Period").
If, prior to consummation of the Exchange Offer, any Holder
holds any Notes acquired by it that have, or that are reasonably likely to be
determined to have, the status of an unsold allotment in an initial
distribution, or any Holder is not entitled to participate in the Exchange
Offer, the Issuers upon the request of any such Holder shall simultaneously with
the delivery of the Exchange Notes in the Exchange Offer, issue and deliver to
any such Holder, in exchange (the "Private Exchange") for such Notes held by any
6
such Holder, a like principal amount of notes (the "Private Exchange Notes") of
the Issuers, guaranteed by any then existing Subsidiary Guarantor and secured by
the same collateral as the Exchange Notes, that are identical in all material
respects to the Exchange Notes. The Private Exchange Notes shall be issued
pursuant to the same indenture as the Exchange Notes and bear the same CUSIP
number as the Exchange Notes.
Interest on the Exchange Notes and the Private Exchange Notes
will accrue from (A) the later of (i) the last interest payment date on which
interest was paid on the Notes surrendered in exchange therefor or (ii) if the
Notes are surrendered for exchange on a date in a period which includes the
record date for an interest payment date to occur on or after the date of such
exchange and as to which interest will be paid, the date of such interest
payment date or (B) if no interest has been paid on the Notes, from the date of
the original issuance of the Notes.
In connection with the Exchange Offer, the Issuers shall:
(1) mail, or cause to be mailed, to each Holder entitled to
participate in the Exchange Offer a copy of the Prospectus forming part
of the Exchange Offer Registration Statement, together with an
appropriate letter of transmittal and related documents;
(2) keep the Exchange Offer open for not less than 30 days
after the date that notice of the Exchange Offer is mailed to Holders
(or longer if required by applicable law);
(3) utilize the services of a depositary for the Exchange
Offer with an address in the Borough of Manhattan, The City of New
York;
(4) permit Holders to withdraw tendered Notes at any time
prior to the close of business, New York time, on the last business day
on which the Exchange Offer shall remain open; and
(5) otherwise comply in all material respects with all
applicable laws, rules and regulations.
As soon as practicable after the close of the Exchange Offer
and the Private Exchange, if any, the Issuers shall:
(1) accept for exchange all Transfer Restricted Securities
validly tendered and not validly withdrawn pursuant to the Exchange
Offer and the Private Exchange, if any;
(2) deliver to the Trustee for cancellation all Transfer
Restricted Securities so accepted for exchange; and
7
(3) cause the Trustee to authenticate and deliver promptly to
each Holder of Notes, Exchange Notes or Private Exchange Notes, as the
case may be, equal in principal amount to the Notes of such Holder so
accepted for exchange.
The Exchange Offer and the Private Exchange shall not be
subject to any conditions, other than that (i) the Exchange Offer or Private
Exchange, as the case may be, does not violate applicable law or any applicable
interpretation of the staff of the SEC, (ii) no action or proceeding shall have
been instituted or threatened in any court or by any governmental agency which
might materially impair the ability of the Issuers to proceed with the Exchange
Offer or the Private Exchange, and no material adverse development shall have
occurred in any existing action or proceeding with respect to the Issuers and
(iii) all governmental approvals shall have been obtained, which approvals the
Issuers deem necessary for the consummation of the Exchange Offer or Private
Exchange.
The Exchange Notes and the Private Exchange Notes shall be
issued under (i) the Indenture or (ii) an indenture identical in all material
respects to the Indenture and which, in either case, has been qualified under
the TIA or is exempt from such qualification and shall provide that the Exchange
Notes shall not be subject to the transfer restrictions set forth in the
Indenture and that the Exchange Notes, the Private Exchange Notes and the Notes,
if any, will be deemed one class of security (subject to the provisions of the
Indenture) and entitled to participate in all the security granted by the
Issuers pursuant to the Security Documents and in any Subsidiary Guarantee (as
such terms are defined in the Indenture) on an equal and ratable basis. The
Indenture or such indenture shall provide that the Exchange Notes, the Private
Exchange Notes and the Notes shall vote and consent together on all matters as
one class and that none of the Exchange Notes, the Private Exchange Notes or the
Notes will have the right to vote or consent as a separate class on any matter.
(c) If, (i) the Issuers are not required to file an Exchange
Offer Registration Statement or permitted to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or Commission
policy (after the procedures set forth in Section 5 below have been complied
with) or (ii) any Holder of Transfer Restricted Securities notifies the Issuers
prior to the 20th day following the consummation of the Exchange Offer (A) that
such Holder is prohibited by applicable law or Commission policy from
participating in the Exchange Offer or (B) that such Holder may not resell the
Exchange Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and that the Prospectus contained in the Exchange Offer
Registration Statement is not available for such resales by such Holder, then
the Issuers shall promptly deliver to the Holders and the Trustee written notice
thereof (the "Shelf Notice") and shall file a Shelf Registration pursuant to
Section 3 hereof.
8
3. Shelf Registration
If at any time a Shelf Notice is delivered as contemplated by
Section 2(c) hereof, then:
(a) Shelf Registration. The Issuers shall file with the SEC a
Registration Statement for an offering to be made on a continuous basis pursuant
to Rule 415 covering all of the Transfer Restricted Securities covered by
Section 2(c)(ii) above (the "Initial Shelf Registration"). The Issuers shall use
their respective diligent best efforts to file with the SEC the Initial Shelf
Registration on or before the applicable Filing Date. The Initial Shelf
Registration shall be on Form S-1 or another appropriate form permitting
registration of such Transfer Restricted Securities for resale by Holders in the
manner or manners designated by them (including, without limitation, one or more
underwritten offerings). The Issuers shall not permit any securities other than
the Transfer Restricted Securities to be included in the Initial Shelf
Registration or any Subsequent Shelf Registration (as defined below).
The Issuers shall use their respective best efforts to cause
the Initial Shelf Registration to be declared effective under the Securities Act
on or prior to the Effectiveness Date and to keep the Initial Shelf Registration
continuously effective under the Securities Act until the date which is two
years from the Effectiveness Date, subject to extension pursuant to the last
paragraph of Section 5 hereof (the "Effectiveness Period"), or such shorter
period ending when (i) all Transfer Restricted Securities covered by the Initial
Shelf Registration have been sold in the manner set forth and as contemplated in
the Initial Shelf Registration or (ii) a Subsequent Shelf Registration covering
all of the Transfer Restricted Securities covered by and not sold under the
Initial Shelf Registration or an earlier Subsequent Shelf Registration has been
declared effective under the Securities Act; provided, however, that the
Effectiveness Period in respect of the Initial Shelf Registration shall be
extended to the extent required to permit dealers to comply with the applicable
prospectus delivery requirements of Rule 174 under the Securities Act and as
otherwise provided herein and shall be subject to reduction to the extent that
the applicable provisions of Rule 144 are amended or revised.
No holder of Transfer Restricted Securities may include any of
its Transfer Restricted Securities in any Shelf Registration Statement pursuant
to this Agreement unless and until such holder furnishes to the Issuers in
writing, within 30 days after receipt of a request therefor, such information as
the Issuers may reasonably request for use in connection with any Shelf
Registration Statement or Prospectus or preliminary prospectus included therein.
No holder of Transfer Restricted Securities shall be entitled to Liquidated
Damages pursuant to Section 4 hereof unless and until such holder shall have
9
provided all such reasonably requested information. Each holder of Transfer
Restricted Securities as to which any Shelf Registration Statement is being
effected agrees to furnish promptly to the Issuers all information required to
be disclosed in order to make information previously furnished to the Issuers by
such Holder not materially misleading.
(b) Subsequent Shelf Registrations. If the Initial Shelf
Registration or any Subsequent Shelf Registration ceases to be effective for any
reason at any time during the Effectiveness Period (other than because of the
sale of all of the securities registered thereunder), the Issuers shall use
their respective best efforts to obtain the prompt withdrawal of any order
suspending the effectiveness thereof, and in any event shall within 30 days of
such cessation of effectiveness amend the Initial Shelf Registration in a manner
to obtain the withdrawal of the order suspending the effectiveness thereof, or
file an additional "shelf" Registration Statement pursuant to Rule 415 covering
all of the Transfer Restricted Securities covered by and not sold under the
Initial Shelf Registration or an earlier Subsequent Shelf Registration (each, a
"Subsequent Shelf Registration"). If a Subsequent Shelf Registration is filed,
the Issuers shall use their respective best efforts to cause the Subsequent
Shelf Registration to be declared effective under the Securities Act as soon as
practicable after such filing and to keep such subsequent Shelf Registration
continuously effective for a period equal to the number of days in the
Effectiveness Period less the aggregate number of days during which the Initial
Shelf Registration or any Subsequent Shelf Registration was previously
continuously effective. As used herein the term "Shelf Registration" means the
Initial Shelf Registration and any Subsequent Shelf Registration.
(c) Supplements and Amendments. The Issuers shall promptly
supplement and amend any Shelf Registration if required by the rules,
regulations or instructions applicable to the registration form used for such
Shelf Registration, if required by the Securities Act, or if reasonably
requested by the Holders of a majority in aggregate principal amount of the
Transfer Restricted Securities covered by such Registration Statement or by any
underwriter of such Transfer Restricted Securities.
4. Liquidated Damages
(a) The Issuers and the Initial Purchaser agree that the
Holders will suffer damages if the Issuers fail to fulfill their obligations
under Section 2 or Section 3 hereof and that it would not be feasible to
ascertain the extent of such damages with precision. Accordingly, the Issuers
agree, jointly and severally, to pay, as liquidated damages, additional interest
on the Notes ("Liquidated Damages") under the circumstances and to the extent
set forth below (each of which shall be given independent effect):
10
(i) if (A) neither the Exchange Offer Registration Statement
nor the Initial Shelf Registration has been filed on or prior to the
applicable Filing Date or (B) notwithstanding that the Issuers have
consummated or will consummate the Exchange Offer, the Issuers are
required to file a Shelf Registration and such Shelf Registration is
not filed on or prior to the Filing Date applicable thereto, then,
commencing on the day after any such Filing Date, Liquidated Damages
shall accrue on the principal amount of the Notes at a rate of $.05 per
week per $1,000 principal amount of Notes held by such Holder for the
first 90 days immediately following each such Filing Date, and such
Liquidated Damages shall increase by an additional $.05 per week per
$1,000 principal amount at the beginning of each subsequent 90-day
period; or
(ii) if (A) neither the Exchange Offer Registration Statement
nor the Initial Shelf Registration is declared effective by the SEC on
or prior to the relevant Effectiveness Date or (B) notwithstanding that
the Issuers have consummated or will consummate the Exchange Offer, the
Issuers are required to file a Shelf Registration and such Shelf
Registration is not declared effective by the SEC on or prior to the
Effectiveness Date in respect of such Shelf Registration, then,
commencing on the day after such Effectiveness Date, Liquidated Damages
shall accrue on the principal amount of the Notes at a rate of $.05 per
week per $1,000 principal amount of Notes held by such Holder for the
first 90 days immediately following the day after such Effectiveness
Date, and such Liquidated Damages shall increase by an additional $.05
per week per $1,000 principal amount at the beginning of each
subsequent 90-day period; or
(iii) if (A) the Issuers have not exchanged Exchange Notes for
all Notes validly tendered in accordance with the terms of the Exchange
Offer on or prior to the 165th day after the Issue Date or (B) if
applicable, a Shelf Registration has been declared effective and such
Shelf Registration ceases to be effective at any time during the
Effectiveness Period, then Liquidated Damages shall accrue on the
principal amount of the Notes at a rate of $.05 per week per $1,000
principal amount of Notes held by such Holder for the first 90 days
commencing on the (x) 166th day after such Issue Date, in the case of
(A) above, or (y) the day such Shelf Registration ceases to be
effective in the case of (B) above, and such Liquidated Damages shall
increase by an additional $.05 per week per $1,000 principal amount at
the beginning of each such subsequent 90-day period (each such event
referred to in clauses (i) through (iii) above a "Registration
Default");
provided, however, that the Liquidated Damages on the Notes may not exceed at
any one time in the aggregate $.20 per week per $1,000 principal amount of Notes
11
held by such Holder; provided, further, however, that (1) upon the filing of the
applicable Exchange Offer Registration Statement or the applicable Shelf
Registration as required hereunder (in the case of clause (i) above of this
Section 4), (2) upon the effectiveness of the Exchange Offer Registration
Statement or the applicable Shelf Registration Statement as required hereunder
(in the case of clause (ii) of this Section 4), or (3) upon the exchange of the
applicable Exchange Notes for all Notes tendered (in the case of clause (iii)(A)
of this Section 4), or upon the effectiveness of the applicable Shelf
Registration Statement which had ceased to remain effective (in the case of
(iii)(B) of this Section 4), Liquidated Damages on the Notes in respect of which
such events relate as a result of such clause (or the relevant subclause
thereof), as the case may be, shall cease to accrue.
(b) The Issuers shall notify the Trustee within one business
day after each and every date on which an event occurs in respect of which
Liquidated Damages are required to be paid (an "Event Date"). Any amounts of
Liquidated Damages due pursuant to (a)(i), (a)(ii) or (a)(iii) of this Section 4
will be payable in cash semi-annually on each Damages Payment Date (to the
holders of record (the "Record Holders") on the regular record date therefor (as
specified in the Indenture) immediately preceding such dates), commencing with
the first such date occurring after any such Liquidated Damages commence to
accrue. The amount of Liquidated Damages will be determined by multiplying the
applicable Liquidated Damages by the principal amount of the Transfer Restricted
Securities, multiplied by a fraction, the numerator of which is the number of
days such Liquidated Damages were applicable during such period (determined on
the basis of a 360-day year comprised of twelve 30-day months and, in the case
of a partial month, the actual number of days elapsed), and the denominator of
which is 360. All accrued Liquidated Damages shall be paid to the Record Holders
by the Issuers by wire transfer of immediately available funds or by federal
funds check on each Damages Payment Date. Following the cure of all Registration
Defaults relating to any particular Transfer Restricted Securities, the accrual
of Liquidated Damages with respect to such Transfer Restricted Securities will
cease.
5. Registration Procedures
In connection with the filing of any Registration Statement
pursuant to Sections 2 or 3 hereof, the Issuers shall effect such registrations
to permit the sale of the securities covered thereby in accordance with the
intended method or methods of disposition thereof, and pursuant thereto and in
connection with any Registration Statement filed by the Issuers hereunder the
Issuers shall:
(a) Prepare and file with the SEC prior to the applicable
Filing Date, a Registration Statement or Registration Statements as
prescribed by Sections 2 or 3 hereof, and use their respective best
12
efforts to cause each such Registration Statement to become effective
and remain effective as provided herein; provided, however, that, if
(1) such filing is pursuant to Section 3 hereof, or (2) a Prospectus
contained in the Exchange Offer Registration Statement filed pursuant
to Section 2 hereof is required to be delivered under the Securities
Act by any Participating Broker-Dealer who seeks to sell Exchange Notes
during the Applicable Period relating thereto, before filing any
Registration Statement or Prospectus or any amendments or supplements
thereto, the Issuers shall furnish to and afford the Holders of the
Transfer Restricted Securities covered by such Registration Statement
or each such Participating Broker-Dealer, as the case may be, their
counsel and the managing underwriters, if any, a reasonable opportunity
to review copies of all such documents (including copies of any
documents to be incorporated by reference therein and all exhibits
thereto) proposed to be filed (in each case at least five days prior to
such filing, or such later date as is reasonable under the
circumstances). The Issuers shall not file any Registration Statement
or Prospectus or any amendments or supplements thereto if the Holders
of a majority in aggregate principal amount of the Transfer Restricted
Securities covered by such Registration Statement, or any such
Participating Broker-Dealer, as the case may be, their counsel, or the
managing underwriters, if any, shall reasonably object.
(b) Prepare and file with the SEC such amendments and
post-effective amendments to each Shelf Registration Statement or
Exchange Offer Registration Statement, as the case may be, as may be
necessary to keep such Registration Statement continuously effective
for the Effectiveness Period or the Applicable Period, as the case may
be; cause the related Prospectus to be supplemented by any Prospectus
supplement required by applicable law, and as so supplemented to be
filed pursuant to Rule 424 (or any similar provisions then in force)
promulgated under the Securities Act; and comply with the provisions of
the Securities Act and the Exchange Act applicable to each of them with
respect to the disposition of all securities covered by such
Registration Statement as so amended or in such Prospectus as so
supplemented and with respect to the subsequent resale of any
securities being sold by a Participating Broker-Dealer covered by any
such Prospectus. The Issuers shall be deemed not to have used their
respective diligent best efforts to keep a Registration Statement
effective during the Effective Period or the Applicable Period, as the
case may be, relating thereto if any of the Issuers voluntarily takes
any action that would result in selling Holders of the Transfer
Restricted Securities covered thereby or Participating Broker-Dealers
seeking to sell Exchange Notes not being able to sell such Transfer
Restricted Securities or such Exchange Notes during that period unless
(i) such action is required by applicable law or (ii) such Issuers
13
comply with the provisions of the last sentence of Section 5(k) or the
last paragraph of this Section 5.
(c) If (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in the Exchange Offer
Registration Statement filed pursuant to Section 2 hereof is required
to be delivered under the Securities Act by any Participating
Broker-Dealer who seeks to sell Exchange Notes during the Applicable
Period relating thereto from whom the Company has received written
notice that it will be a Participating Broker-Dealer in the Exchange
Offer, notify the selling Holders of Transfer Restricted Securities, or
each such Participating Broker-Dealer, as the case may be, their
counsel and the managing underwriters, if any, promptly (but in any
event within one day), and confirm such notice in writing, (i) when a
Prospectus or any Prospectus supplement or post-effective amendment has
been filed, and, with respect to a Registration Statement or any
post-effective amendment, when the same has become effective under the
Securities Act (including in such notice a written statement that any
Holder may, upon request, obtain, at the sole expense of the Issuers,
one conformed copy of such Registration Statement or post-effective
amendment including financial statements and schedules, documents
incorporated or deemed to be incorporated by reference and exhibits),
(ii) of the issuance by the SEC of any stop order suspending the
effectiveness of a Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus or the initiation of
any proceedings for that purpose, (iii) if at any time when a
prospectus is required by the Securities Act to be delivered in
connection with sales of the Transfer Restricted Securities or resales
of Exchange Notes by Participating Broker-Dealers the representations
and warranties of any of the Issuers contained in any agreement
(including any underwriting agreement) contemplated by Section 5(m)
hereof cease to be true and correct in all material respects, (iv) of
the receipt by any of the Issuers of any notification with respect to
the suspension of the qualification or exemption from qualification of
a Registration Statement or any of the Transfer Restricted Securities
or the Exchange Notes to be sold by any Participating Broker-Dealer for
offer or sale in any jurisdiction, or the initiation or threatening of
any proceeding for such purpose, (v) of the happening of any event, the
existence of any condition or any information becoming known that makes
any statement made in such Registration Statement or related Prospectus
or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of
any changes in or amendments or supplements to such Registration
Statement, Prospectus or documents so that, in the case of the
Registration Statement, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and
14
that in the case of the Prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and (vi) of any of the Issuers' determination that a
post-effective amendment to a Registration Statement would be
appropriate.
(d) If (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in the Exchange Offer
Registration Statement filed pursuant to Section 2 hereof is required
to be delivered under the Securities Act by any Participating
Broker-Dealer who seeks to sell Exchange Notes during the Applicable
Period, use their respective best efforts to prevent the issuance of
any order suspending the effectiveness of a Registration Statement or
of any order preventing or suspending the use of a Prospectus or
suspending the qualification (or exemption from qualification) of any
of the Transfer Restricted Securities or the Exchange Notes to be sold
by any Participating Broker-Dealer, for sale in any jurisdiction, and,
if any such order is issued, to use their respective best efforts to
obtain the withdrawal of any such order at the earliest possible date.
(e) Subject to the provisions of the last sentence of Section
5(k), if a Shelf Registration is filed pursuant to Section 3 and if
requested by the managing underwriter or underwriters (if any), the
Holders of a majority in aggregate principal amount of the Transfer
Restricted Securities being sold in connection with an underwritten
offering or any Participating Broker-Dealer, (i) promptly as
practicable incorporate in a prospectus supplement or post-effective
amendment such information as the managing underwriter or underwriters
(if any), such Holders, any Participating Broker-Dealer or counsel for
any of them reasonably request to be included therein, (ii) make all
required filings of such prospectus supplement or such post-effective
amendment as soon as practicable after either Issuer has received
notification of the matters to be incorporated in such prospectus
supplement or post-effective amendment, and (iii) supplement or make
amendments to such Registration Statement; provided, however, that the
Issuers shall not be required to take any action pursuant to this
Section 5(e) that would violate applicable law.
(f) If (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in the Exchange Offer
Registration Statement filed pursuant to Section 2 hereof is required
to be delivered under the Securities Act by any Participating
Broker-Dealer who seeks to sell Exchange Notes during the Applicable
Period, furnish to each selling Holder of Transfer Restricted
15
Securities and to each such Participating Broker-Dealer who so requests
and to counsel and each managing underwriter, if any, at the sole
expense of the Issuers, one conformed copy of the Registration
Statement or Registration Statements and each post-effective amendment
thereto, including financial statements and schedules, and, if
requested, all documents incorporated or deemed to be incorporated
therein by reference and all exhibits.
(g) If (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in the Exchange Offer
Registration Statement filed pursuant to Section 2 hereof is required
to be delivered under the Securities Act by any Participating
Broker-Dealer who seeks to sell Exchange Notes during the Applicable
Period, deliver to each selling Holder of Transfer Restricted
Securities, or each such Participating Broker-Dealer, as the case may
be, their respective counsel, and the underwriters, if any, at the sole
expense of the Issuers, as many copies of the Prospectus or
Prospectuses (including each form of preliminary prospectus) and each
amendment or supplement thereto and any documents incorporated by
reference therein as such Persons may reasonably request; and, subject
to the last paragraph of this Section 5, each of the Issuers hereby
consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders of Transfer Restricted
Securities or each such Participating Broker-Dealer, as the case may
be, and the underwriters or agents, if any, and dealers (if any), in
connection with the offering and sale of the Transfer Restricted
Securities covered by, or the sale by Participating Broker-Dealers of
the Exchange Notes pursuant to, such Prospectus and any amendment or
supplement thereto.
(h) Prior to any public offering of Transfer Restricted
Securities or any delivery of a Prospectus contained in the Exchange
Offer Registration Statement by any Participating Broker-Dealer who
seeks to sell Exchange Notes during the Applicable Period, to use their
respective best efforts to register or qualify, and to cooperate with
the selling Holders of Transfer Restricted Securities or each such
Participating Broker-Dealer, as the case may be, the managing
underwriter or underwriters, if any, and their respective counsel in
connection with the registration or qualification (or exemption from
such registration or qualification) of such Transfer Restricted
Securities for offer and sale under the securities or Blue Sky laws of
such jurisdictions within the United States as any selling Holder,
Participating Broker-Dealer, or the managing underwriter or
underwriters reasonably request in writing; provided, however, that
where Exchange Notes held by Participating Broker-Dealers or Transfer
Restricted Securities are offered other than through an underwritten
offering, the Issuers agree to cause their counsel to perform Blue Sky
16
investigations and file registrations and qualifications required to be
filed pursuant to this Section 5(h); keep each such registration or
qualification (or exemption therefrom) effective during the period such
Registration Statement is required to be kept effective and do any and
all other acts or things reasonably necessary or advisable to enable
the disposition in such jurisdictions of the Exchange Notes held by
Participating Broker-Dealers or the Transfer Restricted Securities
covered by the applicable Registration Statement; provided, however,
that none of the Issuers shall be required to (A) qualify generally to
do business in any jurisdiction where it is not then so qualified, (B)
take any action that would subject it to general service of process in
any such jurisdiction where it is not then so subject or (C) subject
itself to taxation in excess of a nominal dollar amount in any such
jurisdiction where it is not then so subject.
(i) If a Shelf Registration is filed pursuant to Section 3
hereof, cooperate with the selling Holders of Transfer Restricted
Securities and the managing underwriter or underwriters, if any, to
facilitate the timely preparation and delivery of certificates
representing Transfer Restricted Securities to be sold, which
certificates shall not bear any restrictive legends and shall be in a
form eligible for deposit with The Depository Trust Company; and enable
such Transfer Restricted Securities to be in such denominations and
registered in such names as the managing underwriter or underwriters,
if any, or Holders may request.
(j) Use their respective best efforts to cause the Transfer
Restricted Securities covered by the Registration Statement to be
registered with or approved by such other governmental agencies or
authorities as may be reasonably necessary to enable the seller or
sellers thereof or the underwriter or underwriters, if any, to
consummate the disposition of such Transfer Restricted Securities,
except as may be required solely as a consequence of the nature of such
selling Holder's business, in which case the Issuers will cooperate in
all reasonable respects with the filing of such Registration Statement
and the granting of such approvals.
(k) If (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in the Exchange Offer
Registration Statement filed pursuant to Section 2 hereof is required
to be delivered under the Securities Act by any Participating
Broker-Dealer who seeks to sell Exchange Notes during the Applicable
Period, upon the occurrence of any event contemplated by paragraph
5(c)(v) or 5(c)(vi) hereof, as promptly as practicable prepare and
(subject to Section 5(a) hereof) file with the SEC, at the sole expense
of the Issuers, a supplement or post-effective amendment to the
Registration Statement or a supplement to the related Prospectus or any
17
document incorporated or deemed to be incorporated therein by
reference, or file any other required document so that, as thereafter
delivered to the purchasers of the Transfer Restricted Securities being
sold thereunder or to the purchasers of the Exchange Notes to whom such
Prospectus will be delivered by a Participating Broker-Dealer, any such
Prospectus will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. Notwithstanding the
foregoing, the Issuers shall not be required to amend or supplement a
Registration Statement, any related prospectus or any document
incorporated therein by reference in the event that, and for a period
(a "Black Out Period") not to exceed, for so long as this Agreement is
in effect, an aggregate of 45 days if (x) an event occurs and is
continuing as a result of which a Registration Statement, any related
prospectus or any document incorporated therein by reference as then
amended or supplemented would, in the Issuers' good faith judgment,
contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading,
and (y) (1) the Issuers determine in good faith that the disclosure of
such event at such time would have a material adverse effect on the
business, operations or prospects of the Issuers or (2) the disclosure
otherwise relates to a material business transaction which has not yet
been publicly disclosed in any relevant jurisdiction.
(l) Prior to the effective date of the first Registration
Statement relating to the Transfer Restricted Securities, (i) provide
the Trustee with certificates for the Transfer Restricted Securities in
a form eligible for deposit with The Depository Trust Company and (ii)
provide a CUSIP number for the Transfer Restricted Securities.
(m) In connection with any underwritten offering of Transfer
Restricted Securities pursuant to a Shelf Registration, enter into an
underwriting agreement as is customary in underwritten offerings of
debt securities similar to the Notes in form and substance reasonably
satisfactory to the Issuers and take all such other actions as are
reasonably requested by the managing underwriter or underwriters in
order to expedite or facilitate the registration or the disposition of
such Transfer Restricted Securities and, in such connection, (i) make
such representations and warranties to, and covenants with, the
underwriters with respect to the business of the Issuers and their
respective subsidiaries (including any acquired business, properties or
entity, if applicable) and the Registration Statement, Prospectus and
documents, if any, incorporated or deemed to be incorporated by
reference therein, in each case, as are customarily made by issuers to
18
underwriters in underwritten offerings of debt securities similar to
the Notes, and confirm the same in writing if and when requested in
form and substance reasonably satisfactory to the Issuers; (ii) obtain
the written opinions of counsel to the Issuers and written updates
thereof in form, scope and substance reasonably satisfactory to the
managing underwriter or underwriters, addressed to the underwriters
covering the matters customarily covered in opinions reasonably
requested in underwritten offerings and such other matters as may be
reasonably requested by the managing underwriter or underwriters; (iii)
use their best efforts to obtain "cold comfort" letters and updates
thereof in form, scope and substance reasonably satisfactory to the
managing underwriter or underwriters from the independent certified
public accountants of the Issuers (and, if necessary, any other
independent certified public accountants of any subsidiary of any of
the Issuers or of any business acquired by any of the Issuers for which
financial statements and financial data are, or are required to be,
included or incorporated by reference in the Registration Statement),
addressed to each of the underwriters, such letters to be in customary
form and covering matters of the type customarily covered in "cold
comfort" letters in connection with underwritten offerings of debt
securities similar to the Notes and such other matters as reasonably
requested by the managing underwriter or underwriters as permitted by
the Statement on Auditing Standards No. 72; and (iv) if an underwriting
agreement is entered into, the same shall contain indemnification
provisions and procedures no less favorable to the sellers and
underwriters, if any, than those set forth in Section 7 hereof (or such
other provisions and procedures acceptable to Holders of a majority in
aggregate principal amount of Transfer Restricted Securities covered by
such Registration Statement and the managing underwriter or
underwriters or agents, if any). The above shall be done at each
closing under such underwriting agreement, or as and to the extent
required thereunder.
(n) If (1) a Shelf Registration is filed pursuant to Section 3
hereof, or (2) a Prospectus contained in the Exchange Offer
Registration Statement filed pursuant to Section 2 hereof is required
to be delivered under the Securities Act by any Participating
Broker-Dealer who seeks to sell Exchange Notes during the Applicable
Period, make available for inspection by any selling Holder of such
Transfer Restricted Securities being sold, or each such Participating
Broker-Dealer, as the case may be, any underwriter participating in any
such disposition of Transfer Restricted Securities, if any, and any
attorney, accountant or other agent retained by any such selling Holder
or each such Participating Broker-Dealer, as the case may be, or
underwriter (collectively, the "Inspectors"), at the offices where
normally kept, during reasonable business hours, all financial and
other records, pertinent corporate documents and instruments of the
19
Issuers and their respective subsidiaries (collectively, the "Records")
as shall be reasonably necessary to enable them to exercise any
applicable due diligence responsibilities, and cause the officers,
directors and employees of the Issuers and their respective
subsidiaries to supply all information reasonably requested by any such
Inspector in connection with such Registration Statement and
Prospectus. Each Inspector shall agree in writing that it will keep the
Records confidential and that it will not disclose any of the Records
unless (i) the disclosure of such Records is necessary to avoid or
correct a misstatement or omission in such Registration Statement or
Prospectus, (ii) the release of such Records is ordered pursuant to a
subpoena or other order from a court of competent jurisdiction, (iii)
disclosure of such information is necessary or advisable, in the
opinion of counsel for any Inspector, in connection with any action,
claim, suit or proceeding, directly or indirectly, involving or
potentially involving such Inspector and arising out of, based upon,
relating to, or involving this Agreement or the Purchase Agreement, or
any transactions contemplated hereby or thereby or arising hereunder or
thereunder, or (iv) the information in such Records has been made
generally available to the public; provided, however, that prior notice
shall be provided as soon as practicable to the Issuers of the
potential disclosure of any information by such Inspector pursuant to
clauses (ii) or (iii) of this sentence to permit the Issuers to obtain
a protective order (or waive the provisions of this paragraph (n)) and
that such Inspector shall take such actions as are reasonably necessary
to protect the confidentiality of such information (if practicable) to
the extent such action is otherwise not inconsistent with, an
impairment of or in derogation of the rights and interests of the
Holder or any Inspector. Each selling Holder of such Transfer
Restricted Securities and each such Participating Broker-Dealer will be
required to agree that information obtained by it as a result of such
inspections shall be deemed confidential and shall not be used by it as
the basis for any market transactions in the securities of the Issuers
unless and until such is made generally available to the public. Each
selling Holder of such Transfer Restricted Securities and each such
Participating Broker-Dealer will be required to further agree that it
will, upon learning that disclosure of such Records is sought in a
court of competent jurisdiction, give notice to the Issuers and allow
the Issuers to undertake appropriate action to prevent disclosure of
the Records deemed confidential at the Issuers' expense.
(o) Provide an indenture trustee for the Transfer Restricted
Securities or the Exchange Notes, as the case may be, and cause the
Indenture or the trust indenture provided for in Section 2(a) hereof,
as the case may be, to be qualified under the TIA not later than the
effective date of the first Registration Statement relating to the
Transfer Restricted Securities; and in connection therewith, cooperate
with the trustee under any such indenture and the Holders of the
20
Transfer Restricted Securities, to effect such changes to such
indenture as may be required for such indenture to be so qualified in
accordance with the terms of the TIA; and execute, and use their
respective best efforts to cause such trustee to execute, all documents
as may be required to effect such changes, and all other forms and
documents required to be filed with the SEC to enable such indenture to
be so qualified in a timely manner.
(p) Comply with all applicable rules and regulations of the
SEC and make generally available to their respective securityholders
earnings statements satisfying the provisions of Section 11(a) of the
Securities Act and Rule 158 thereunder (or any similar rule promulgated
under the Securities Act) no later than 45 days after the end of any
12-month period (or 90 days after the end of any 12-month period if
such period is a fiscal year) (i) commencing at the end of any fiscal
quarter in which Transfer Restricted Securities are sold to
underwriters in a firm commitment or best efforts underwritten offering
and (ii) if not sold to underwriters in such an offering, commencing on
the first day of the first fiscal quarter of the Issuers after the
effective date of a Registration Statement, which statements shall
cover said 12-month periods.
(q) Upon consummation of the Exchange Offer or a Private
Exchange, obtain an opinion of counsel to the Issuers, in a form
customary for underwritten transactions, addressed to the Trustee for
the benefit of all Holders of Transfer Restricted Securities
participating in the Exchange Offer or the Private Exchange, as the
case may be, that the Exchange Notes or Private Exchange Notes, as the
case may be, and the related indenture constitute legal, valid and
binding obligations of the Issuers, enforceable against the Issuers in
accordance with its respective terms, subject to customary exceptions
and qualifications.
(r) If the Exchange Offer or a Private Exchange is to be
consummated, upon delivery of the Transfer Restricted Securities by
Holders to the Issuers (or to such other Person as directed by the
Issuers) in exchange for the Exchange Notes or the Private Exchange
Notes, as the case may be, the Issuers shall mark, or cause to be
marked, on such Transfer Restricted Securities that such Transfer
Restricted Securities are being cancelled in exchange for the Exchange
Notes or the Private Exchange Notes, as the case may be; in no event
shall such Transfer Restricted Securities be marked as paid or
otherwise satisfied.
(s) Cooperate with each seller of Transfer Restricted
Securities covered by any Registration Statement and each underwriter,
if any, participating in the disposition of such Transfer Restricted
Securities and their respective counsel in connection with any filings
required to be made with the National Association of Securities
Dealers, Inc. (the "NASD").
21
(t) Use their respective best efforts to take all other steps
reasonably necessary to effect the registration of the Exchange Notes
and/or Transfer Restricted Securities covered by a Registration
Statement contemplated hereby.
The Issuers may require each seller of Transfer Restricted
Securities as to which any registration is being effected to furnish to the
Issuers such information regarding such seller and the distribution of such
Transfer Restricted Securities as the Issuers may, from time to time, reasonably
request. The Issuers may exclude from such registration the Transfer Restricted
Securities of any seller so long as such seller fails to furnish such
information within a reasonable time after receiving such request. Each seller
as to which any Shelf Registration is being effected agrees to furnish promptly
to the Issuers all information required to be disclosed in order to make the
information previously furnished to the Issuers by such seller not materially
misleading.
If any such Registration Statement refers to any Holder by
name or otherwise as the holder of any securities of the Issuers, then such
Holder shall have the right to require (i) the insertion therein of language, in
form and substance reasonably satisfactory to such Holder, to the effect that
the holding by such Holder of such securities is not to be construed as a
recommendation by such Holder of the investment quality of the securities
covered thereby and that such holding does not imply that such Holder will
assist in meeting any future financial requirements of any of the Issuers, or
(ii) in the event that such reference to such Holder by name or otherwise is not
required by the Securities Act or any similar federal statute then in force, the
deletion of the reference to such Holder in any amendment or supplement to the
Registration Statement filed or prepared subsequent to the time that such
reference ceases to be required.
Each Holder of Transfer Restricted Securities and each
Participating Broker-Dealer agrees by its acquisition of such Transfer
Restricted Securities or Exchange Notes to be sold by such Participating
Broker-Dealer, as the case may be, that, upon actual receipt of any notice from
the Issuers of the happening of any event of the kind described in Section
5(c)(ii), 5(c)(iv), 5(c)(v), or 5(c)(vi) hereof, such Holder will forthwith
discontinue disposition of such Transfer Restricted Securities covered by such
Registration Statement or Prospectus or Exchange Notes to be sold by such Holder
or Participating Broker-Dealer, as the case may be, until such Holder's or
Participating Broker-Dealer's receipt of the copies of the supplemented or
amended Prospectus contemplated by Section 5(k) hereof, or until it is advised
in writing (the "Advice") by any of the Issuers that the use of the applicable
Prospectus may be resumed, and has received copies of any amendments or
supplements thereto. In the event that the Issuers shall give any such notice,
each of the Effectiveness Period and the Applicable Period shall be extended by
22
the number of days during such periods from and including the date of the giving
of such notice to and including the date when each seller of Transfer Restricted
Securities covered by such Registration Statement or Exchange Notes to be sold
by such Participating Broker-Dealer, as the case may be, shall have received (x)
the copies of the supplemented or amended Prospectus contemplated by Section
5(k) hereof or (y) the Advice.
6. Registration Expenses
All fees and expenses incident to the performance of or
compliance with this Agreement by the Issuers shall be borne by the Issuers,
jointly and severally, whether or not the Exchange Offer Registration Statement
or any Shelf Registration is filed or becomes effective or the Exchange Offer is
consummated, including, without limitation, (i) all registration and filing fees
(including, without limitation, (A) fees with respect to filings required to be
made with the NASD in connection with an underwritten offering and (B) fees and
expenses of compliance with state securities or Blue Sky laws (including,
without limitation, reasonable fees and disbursements of counsel in connection
with Blue Sky qualifications of the Transfer Restricted Securities or Exchange
Notes and determination of the eligibility of the Transfer Restricted Securities
or Exchange Notes for investment under the laws of such jurisdictions (x) where
the holders of Transfer Restricted Securities are located, in the case of the
Exchange Notes, or (y) as provided in Section 5(h) hereof, in the case of
Transfer Restricted Securities or Exchange Notes to be sold by a Participating
Broker-Dealer during the Applicable Period)), (ii) printing expenses, including,
without limitation, expenses of printing certificates for Transfer Restricted
Securities or Exchange Notes in a form eligible for deposit with The Depository
Trust Company and of printing prospectuses if the printing of prospectuses is
requested by the managing underwriter or underwriters, if any, by the Holders of
a majority in aggregate principal amount of the Transfer Restricted Securities
included in any Registration Statement or in respect of Transfer Restricted
Securities or Exchange Notes to be sold by any Participating Broker-Dealer
during the Applicable Period, as the case may be, (iii) messenger, telephone and
delivery expenses, (iv) fees and disbursements of counsel for the Issuers and
reasonable fees and disbursements of one special counsel for all of the sellers
of Transfer Restricted Securities (exclusive of any counsel retained pursuant to
Section 7 hereof), (v) fees and disbursements of all independent certified
public accountants referred to in Section 5(m)(iii) hereof (including, without
limitation, the expenses of any special audit and "cold comfort" letters
required by or incident to such performance), (vi) Securities Act liability
insurance, if the Issuers desire such insurance, (vii) fees and expenses of all
other Persons retained by any of the Issuers, (viii) internal expenses of the
Issuers (including, without limitation, all salaries and expenses of officers
and employees of all of the Issuers performing legal or accounting duties), (ix)
the expense of any annual audit, (x) the fees and expenses incurred in
23
connection with the listing of the securities to be registered on any securities
exchange, and the obtaining of a rating of the securities, in each case, if
applicable, and (xi) the expenses relating to printing, word processing and
distributing all Registration Statements, underwriting agreements, indentures
and any other documents necessary in order to comply with this Agreement.
7. Indemnification
(a) The Issuers and any Subsidiary Guarantors agree, jointly
and severally, to indemnify and hold harmless each Holder of Transfer Restricted
Securities and each Participating Broker-Dealer selling Exchange Notes during
the Applicable Period, the officers, directors, employees and agents of each
such Person, and each Person, if any, who controls any such Person within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act (each, a "Participant"), from and against any and all losses, claims,
damages, judgments, liabilities and expenses (including, without limitation, the
reasonable legal fees and other expenses actually incurred in connection with
any suit, action or proceeding or any claim asserted) caused by, arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement (or any amendment thereto) or
Prospectus (as amended or supplemented if any of the Issuers shall have
furnished any amendments or supplements thereto) or any preliminary prospectus,
or caused by, arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in the case of the Prospectus in light of the
circumstances under which they were made, not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any untrue statement or
omission or alleged untrue statement or omission made in reliance upon and in
conformity with information relating to any Participant furnished to the Issuers
in writing by such Participant expressly for use therein; provided, however,
that the Issuers will not be liable if such untrue statement or omission or
alleged untrue statement or omission was contained or made in any preliminary
prospectus and corrected in the final Prospectus or any amendment or supplement
thereto and any such loss, liability, claim, or damage or expense suffered or
incurred by the Participants resulted from any action, claim or suit by any
Person who purchased Transfer Restricted Securities or Exchange Notes which are
the subject thereof from such Participant and it is established in the related
proceeding that such Participant failed to deliver or provide a copy of the
final Prospectus (as amended or supplemented) to such Person with or prior to
the confirmation of the sale of such Transfer Restricted Securities or Exchange
Notes sold to such Person if required by applicable law.
(b) Each Participant agrees, severally and not jointly, to
indemnify and hold harmless each of the Issuers, their respective directors,
their respective officers who sign the Registration Statement and each Person
24
who controls each Issuer within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act to the same extent (but on a several, and not
joint, basis) as the foregoing indemnity from the Issuers to each Participant,
but only with reference to information relating to such Participant furnished to
the Issuers in writing by such Participant expressly for use in any Registration
Statement or Prospectus, any amendment or supplement thereto, or any preliminary
prospectus. The liability of any Participant under this paragraph shall in no
event exceed the proceeds received by such Participant from sales of Transfer
Restricted Securities or Exchange Notes giving rise to such obligations.
(c) If any suit, action, proceeding (including any
governmental or regulatory investigation), claim or demand shall be brought or
asserted against any Person in respect of which indemnity may be sought pursuant
to either of the two preceding paragraphs, such Person (the "Indemnified
Person") shall promptly notify the Persons against whom such indemnity may be
sought (the "Indemnifying Persons") in writing, and the Indemnifying Persons,
upon request of the Indemnified Person, shall retain counsel reasonably
satisfactory to the Indemnified Person to represent the Indemnified Person and
any others the Indemnifying Persons may reasonably designate in such proceeding
and shall pay the fees and expenses actually incurred by such counsel related to
such proceeding; provided, however, that the failure to so notify the
Indemnifying Persons shall not relieve any of them of any obligation or
liability which any of them may have hereunder or otherwise. In any such
proceeding, any Indemnified Person shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Person unless (i) the Indemnifying Persons and the Indemnified
Person shall have mutually agreed to the contrary, (ii) the Indemnifying Persons
shall have failed within a reasonable period of time to retain counsel
reasonably satisfactory to the Indemnified Person or (iii) the named parties in
any such proceeding (including any impleaded parties) include both any
Indemnifying Person and the Indemnified Person or any affiliate thereof and
representation of both parties by the same counsel would be inappropriate due to
actual or potential differing interests between them. It is understood that,
unless there exists a conflict among Indemnified Persons, the Indemnifying
Persons shall not, in connection with such proceeding or separate but
substantially similar related proceeding in the same jurisdiction arising out of
the same general allegations, be liable for the fees and expenses of more than
one separate firm (in addition to any local counsel) for all Indemnified
Persons, and that all such fees and expenses shall be reimbursed promptly as
they are incurred. Any such separate firm for the Participants and such control
Persons of Participants shall be designated in writing by Participants who sold
a majority in interest of Transfer Restricted Securities and Exchange Notes sold
by all such Participants and shall be reasonably acceptable to the Issuers and
any such separate firm for the Issuers, their respective directors, their
25
respective officers and such control Persons of the Issuers shall be designated
in writing by the Issuers and shall be reasonably acceptable to the Holders.
The Indemnifying Persons shall not be liable for any
settlement of any proceeding effected without its prior written consent (which
consent shall not be unreasonably withheld or delayed), but if settled with such
consent or if there be a final non-appealable judgment for the plaintiff for
which the Indemnified Person is entitled to indemnification pursuant to this
Agreement, each of the Indemnifying Persons agrees to indemnify and hold
harmless each Indemnified Person from and against any loss or liability by
reason of such settlement or judgment. No Indemnifying Person shall, without the
prior written consent of the Indemnified Persons (which consent shall not be
unreasonably withheld or delayed), effect any settlement or compromise of any
pending or threatened proceeding in respect of which any Indemnified Person is
or could have been a party, or indemnity could have been sought hereunder by
such Indemnified Person, unless such settlement (A) includes an unconditional
written release of such Indemnified Person, in form and substance reasonably
satisfactory to such Indemnified Person, from all liability on claims that are
the subject matter of such proceeding and (B) does not include any statement as
to an admission of fault, culpability or failure to act by or on behalf of such
Indemnified Person.
(d) If the indemnification provided for in the first and
second paragraphs of this Section 7 is for any reason unavailable to, or
insufficient to hold harmless, an Indemnified Person in respect of any losses,
claims, damages or liabilities referred to therein, then each Indemnifying
Person under such paragraphs, in lieu of indemnifying such Indemnified Person
thereunder and in order to provide for just and equitable contribution, shall
contribute to the amount paid or payable by such Indemnified Person as a result
of such losses, claims, damages or liabilities in such proportion as is
appropriate to reflect (i) the relative benefits received by the Indemnifying
Person or Persons on the one hand and the Indemnified Person or Persons on the
other from the offering of the Notes or (ii) if the allocation provided by the
foregoing clause (i) is not permitted by applicable law, not only such relative
benefits but also the relative fault of the Indemnifying Person or Persons on
the one hand and the Indemnified Person or Persons on the other in connection
with the statements or omissions or alleged statements or omissions that
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof) as well as any other relevant equitable considerations. The relative
benefits received by the Issuers on the one hand and the Participants on the
other shall be deemed to be in the same proportion as the total proceeds from
the offering (net of discounts and commissions but before deducting expenses) of
the Notes received by the Issuers bears to the total proceeds received by such
Participant from the sale of Transfer Restricted Securities or Exchange Notes,
as the case may be, in each case as set forth in the table on the cover page of
the Offering Memorandum in respect of the sale of the Notes. The relative fault
of the parties shall be determined by reference to, among other things, whether
26
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Issuers on the one hand or such Participant or such other Indemified Person, as
the case may be, on the other, the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission,
and any other equitable considerations appropriate in the circumstances.
(e) The parties agree that it would not be just and equitable
if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Participants were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an Indemnified Person as a result of the losses,
claims, damages, judgments, liabilities and expenses referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any reasonable legal or other expenses actually
incurred by such Indemnified Person in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
Section 7, in no event shall a Participant be required to contribute any amount
in excess of the amount by which proceeds received by such Participant from
sales of Transfer Restricted Securities or Exchange Notes, as the case may be,
exceeds the amount of any damages that such Participant has otherwise been
required to pay or has paid by reason of such untrue or alleged untrue statement
or omission or alleged omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
(f) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 7 shall be paid by the Indemnifying Party to the Indemnified Party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Issuers set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Holder or any person who controls a
Holder, any Issuer, their respective directors, officers, employees or agents or
any person controlling any Issuer, and (ii) any termination of this Agreement.
(g) The indemnity and contribution agreements contained in
this Section 7 will be in addition to any liability which the Indemnifying
Persons may otherwise have to the Indemnified Persons referred to above.
8. Rules 144 and 144A
27
The Issuers covenant and agree that each of them will file the
reports required to be filed by each of them under the Securities Act and the
Exchange Act and the rules and regulations adopted by the SEC thereunder in a
timely manner in accordance with the requirements of the Securities Act and the
Exchange Act and, if at any time any of the Issuers is not required to file such
reports, such Issuer will, upon the request of any Holder or beneficial owner of
Transfer Restricted Securities, make available such information necessary to
permit sales pursuant to Rule 144A under the Securities Act. The Issuers further
covenant and agree, for so long as any Transfer Restricted Securities remain
outstanding that each of them will take such further action as any Holder of
Transfer Restricted Securities may reasonably request, all to the extent
required from time to time to enable such holder to sell Transfer Restricted
Securities without registration under the Securities Act within the limitation
of the exemptions provided by (a) Rule 144(k) and Rule 144A under the Securities
Act, as such Rules may be amended from time to time, or (b) any similar rule or
regulation hereafter adopted by the SEC. 9. Underwritten Registrations
If any of the Transfer Restricted Securities covered by any
Shelf Registration are to be sold in an underwritten offering, the investment
banker or investment bankers and manager or managers that will manage the
offering will be selected by the Holders of a majority in aggregate principal
amount of such Transfer Restricted Securities included in such offering and
shall be reasonably acceptable to the Issuers.
No Holder of Transfer Restricted Securities may participate in
any underwritten registration hereunder unless such Holder (a) agrees to sell
such Holder's Transfer Restricted Securities on the basis provided in any
underwriting arrangements approved by the Persons entitled hereunder to approve
such arrangements and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such underwriting arrangements.
10. Miscellaneous
(a) No Inconsistent Agreements. None of the Issuers has, as of
the date hereof, and none of the Issuers shall, after the date of this
Agreement, enter into any agreement with respect to any of its securities that
is inconsistent with the rights granted to the Holders of Transfer Restricted
Securities in this Agreement or otherwise conflicts with the provisions hereof.
The rights granted to the Holders hereunder do not in any way conflict with and
are not inconsistent with the rights granted to the holders of any of the
Issuers' other issued and outstanding securities under any such agreements.
Except as otherwise disclosed to the Initial Purchaser, none of the Issuers has
28
entered and none will enter into any agreement with respect to any of its
securities which will grant to any Person piggy-back registration rights with
respect to any Registration Statement.
(b) Adjustments Affecting Transfer Restricted Securities. None
of the Issuers shall, directly or indirectly, take any action with respect to
the Transfer Restricted Securities as a class that would adversely affect the
ability of the Holders of Transfer Restricted Securities to include such
Transfer Restricted Securities in a registration undertaken pursuant to this
Agreement.
(c) Amendments and Waivers. The provisions of this Agreement
may not be amended, modified or supplemented, and waivers or consents to
departures from the provisions hereof may not be given, otherwise than with the
prior written consent of (I) the Issuers and the Subsidiary Guarantors, if any,
and (II)(A) the Holders of not less than a majority in aggregate principal
amount of the then outstanding Transfer Restricted Securities and (B) in
circumstances that would adversely affect the Participating Broker-Dealers, the
Participating Broker-Dealers holding not less than a majority in aggregate
principal amount of the Exchange Notes held by all Participating Broker-Dealers;
provided, however, that Section 7 and this Section 10(c) may not be amended,
modified or supplemented without the prior written consent of each Holder and
each Participating Broker-Dealer (including any person who was a Holder or
Participating Broker-Dealer of Transfer Restricted Securities or Exchange Notes,
as the case may be, disposed of pursuant to any Registration Statement) affected
by any such amendment, modification or supplement. Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with respect
to a matter that relates exclusively to the rights of Holders of Transfer
Restricted Securities whose securities are being sold pursuant to a Registration
Statement and that does not directly or indirectly affect, impair, limit or
compromise the rights of other Holders of Transfer Restricted Securities may be
given by Holders of at least a majority in aggregate principal amount of the
Transfer Restricted Securities being sold pursuant to such Registration
Statement.
(d) Notices. All notices and other communications (including,
without limitation, any notices or other communications to the Trustee) provided
for or permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, next-day air courier or facsimile:
(i) if to a Holder of the Transfer Restricted Securities or
any Participating Broker-Dealer, at the most current address of such
Holder or Participating Broker-Dealer, as the case may be, set forth on
the records of the registrar under the Indenture.
29
(ii) if to either of the Issuers or any of the Subsidiary
Guarantors, at the address as follows:
c/o Abraxas Petroleum Corporation
500 N. Loop 1604 East
Suite 100
San Antonio, Texas
Facsimile No.: (210) 490-8816
Attention: Chief Executive Officer
All such notices and communications shall be deemed to have
been duly given: when delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; one business
day after being timely delivered to a next-day air courier; and when receipt is
acknowledged by the addressee, if sent by facsimile.
Copies of all such notices, demands or other communications
shall be concurrently delivered by the Person giving the same to the Trustee at
the address and in the manner specified in such Indenture.
(e) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the parties
hereto, the Holders and the Participating Broker-Dealers.
(f) Release of Subsidiary Guarantors. If any Subsidiary
Guarantor becomes a party to this Agreement and is subsequently released from
its obligations under the Indenture in accordance with the terms thereof then
such Subsidiary Guarantor shall be released from its obligations hereunder.
(g) Counterparts. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO
CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
30
(j) Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
(k) Securities Held by the Issuers or Their Affiliates.
Whenever the consent or approval of Holders of a specified percentage of
Transfer Restricted Securities is required hereunder, Transfer Restricted
Securities held by any of the Issuers or any of their their respective
affiliates (as such term is defined in Rule 405 under the Securities Act) shall
not be counted in determining whether such consent or approval was given by the
Holders of such required percentage.
(l) Third Party Beneficiaries. Holders of Transfer Restricted
Securities and Participating Broker-Dealers are intended third party
beneficiaries of this Agreement, and this Agreement may be enforced by such
Persons.
(m) Entire Agreement. This Agreement, together with the
Purchase Agreement and the Indenture, is intended by the parties as a final and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein and therein and any and all prior
oral or written agreements, representations, or warranties, contracts,
understandings, correspondence, conversations and memoranda between the Holders
on the one hand and the Issuers on the other, or between or among any agents,
representatives, parents, subsidiaries, affiliates, predecessors in interest or
successors in interest with respect to the subject matter hereof and thereof are
merged herein and replaced hereby.
n. Information Supplied by the Participant. The statements set
forth in the last paragraph on the front cover page, the paragraph regarding
stabilization on page ii, the second sentence on page 4 opposite the caption
"Exchange Offer; Registration Rights" and in the third and fourth paragraphs and
the fourth, fifth, sixth and seventh sentences of the fifth paragraph under the
heading "Plan of Distribution" in the Final Memorandum (to the extent such
statements relate to the Participant) constitute the only information furnished
by the Participant to the Issuers for the purposes of Section 7 hereof.
31
(o) Subsidiary Guarantor a Party. Immediately upon the
designation of any Subsidiary of either Issuer as a Restricted Subsidiary (as
defined in the Indenture), the Issuers shall cause such Subsidiary to become a
party hereto as a Subsidiary Guarantor by executing and delivering to the
Initial Purchaser a counterpart hereof.
32
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
ABRAXAS PETROLEUM CORPORATION
By:______________________________
Name: Chris E. Williford
Title: Executive Vice President,
Chief Financial Officer and Treasurer
CANADIAN ABRAXAS PETROLEUM LIMITED
By:_______________________________
Name: Chris E. Williford
Title: Vice President
NEW CACHE PETROLEUMS LTD.
By:________________________________
Name: Chris E. Williford
Title: Assistant Secretary
SANDIA OIL AND GAS CORPORATION
By:________________________________
Name: Chris E. Williford
Title: Vice President
JEFFERIES & COMPANY, INC.,
as Initial Purchaser
By:________________________________
Name:______________________________
Title:_____________________________
33
Each of the undersigned by its execution hereof agrees to
become a party to this Agreement as a Subsidiary Guarantor as of the date first
above written:
By:________________________________
Name:______________________________
Title:_____________________________
34
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-48932) pertaining to Abraxas Petroleum Corporation 1984
Non-Qualified Stock Option Plan; (Form S-8 No. 33-48934) pertaining to Abraxas
Petroleum Corporation 1984 Incentive Stock Option Plan; (Form S-8 No. 33-72268)
pertaining to the Abraxas Petroleum Corporation 1993 Key Contribution Stock
Option Plan; (Form S-8 No. 33-81416) pertaining to the Abraxas Petroleum
Corporation Restricted Share Plan for Directors; (Form S-8 No. 33-81418)
pertaining to Abraxas Petroleum Corporation 1994 Long Term Incentive Plan; (Form
S-8 No. 333-17375) pertaining to the Abraxas Petroleum Corporation Director
Stock Option Plan; and (Form S-8 No. 333-17377) pertaining to the Abraxas
Petroleum Corporation 401 (K) Profit Sharing Plan of our report dated March 17,
1999,except for Note 2, as to which the date is March 27, 1999 with respect to
the consolidated financial statements of Abraxas Petroleum Corporation included
in this Annual Report (Form 10-K) for the year ended December 31, 1998.
Ernst & Young LLP
San Antonio, Texas
April 9, 1999
Exhibit 23.2
Consent of DeGolyer & MacNaughton
We hereby consent to the incorporation in your Annual Report on Form 10-K of
the references to DeGolyer and MacNaughton in the "Reserves Information" section
on page 19 and to the use by reference of information contained in our Appraisal
Report as of December 31, 1998 on Certain Interests owned by Abraxas Petroleum
Corporation provided, however, that since the crude oil, condensate, natural gas
reserves estimates, as of December 31, 1998, set forth in this Report have been
combined with reserve estimates of other petroleum consultants, we are
necessarily unable to verify the accuracy of the reserves values contained in
the aforementioned Annual Report.
DeGolyer and MacNaughton
Dallas, Texas
April 13, 1999
Exhibit 23.3
Consent of McDaniel & Associates Consultants LTD.
We consent to the incorporation in your Annual Report on Form 10-K of the
references to McDaniel & Associates Consultants Ltd. in the "Reserves
Information" section and to the use by reference of information contained in our
Evaluation Report "Canadian Abraxas Petroleum Ltd., Evaluation of Oil & Gas
Reserves, As of December 31, 1998", dated February 10, 1999
McDaniel & Associates Consultants LTD
Calgary, Alberta
April 13, 1999