-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PvlF9l3h3vGJjCSyJAcPzek30TdQy7dDylmmpj/2oVEERPWU3OrI/fZx449xEJZ7 Hd7po3w5CJetP/LDQe8NBQ== 0000867665-97-000002.txt : 19970128 0000867665-97-000002.hdr.sgml : 19970128 ACCESSION NUMBER: 0000867665-97-000002 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970127 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970127 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ABRAXAS PETROLEUM CORP CENTRAL INDEX KEY: 0000867665 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 742584033 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-19118 FILM NUMBER: 97511454 BUSINESS ADDRESS: STREET 1: 500 N LOOP 1604 EAST STE 100 CITY: SAN ANTONIO STATE: TX ZIP: 78209 BUSINESS PHONE: 2104904788 MAIL ADDRESS: STREET 1: 500 N LOOP 1604 EAST STE 100 CITY: SAN ANTONIO STATE: TX ZIP: 78232 8-K/A 1 FORM 8-K/A NUMBER 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A Number 1 Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report January 27, 1997 Abraxas Petroleum Corporation (Exact name of registrant as specified in its charter) Nevada (State or other jurisdiction of incorporation) 0-19118 74-2584033 (Commission File Number) (I.R.S. Employer Identification Number) 500 N. Loop 1604 East, Suite 100 San Antonio, Texas 78232 (Address of principal executive offices) Registrant's telephone number, including area code: (210) 490-4788 1 The undersigned registrant hereby amends the following items, financial statements, exhibits or other portions of its Current Report on Form 8-K dated November 27, 1996, as set forth in the pages attached hereto: Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of business acquired. See numbers 1,2,3 and 4 set forth on the attached index to Item 7., Financial Statements and Exhibits, for a listing of the Financial Statements of: 1. CGGS - Canadian Gas Gathering Systems Inc. 2. Canadian Abraxas Petroleum Limited 3. Certain Overriding Royalty Interests in the Portilla Field Acquired by Abraxas Petroleum Corporation 4. Portilla - 1996, L. P., (A Texas Limited Partnership) (b) Pro Forma financial information. See numbers 5 and 6 set forth on the attached index to Item 7., Financial Statements and Exhibits, for a listing of the unaudited pro forma information relating to the Registrant. 2 Item 7. Financial Statements and Exhibits (a) Financial Statements 1. CGGS - Canadian Gas Gathering Systems Inc. Auditors' report to the Directors Balance Sheets at October 31, 1994 and 1995 and October 31, 1996 (Unaudited) Statements and Earnings (Loss) and Deficit for the years ended October 31, 1993, 1994, and 1995 and for the year ended October 31, 1996 (Unaudited) Statements of Changes in Financial Position for the years ended October 31, 1993, 1994 and 1995 and for the year ended October 31, 1996 (Unaudited) Notes to Financial Statements 2. Canadian Abraxas Petroleum Limited Report of Independent Auditors Balance Sheet at September 30, 1996 Notes to Balance Sheet 3. Certain Overriding Royalty Interests in the Portilla Field Acquired by Abraxas Petroleum Corporation Report of Independent Auditors Statements of Combined Oil and Gas Revenues and Direct Operating Expenses for the years ended December 31, 1994 and 1995 and for the nine months ended September 30, 1995 and 1996 (Unaudited) Notes to Statements of Combined Oil and Gas Revenues and Direct Operating Expenses 4. Portilla - 1996, L. P., (A Texas Limited Partnership) Balance Sheet at September 30, 1996 (Unaudited) Statement of Income for the Period from March 20, 1996 (date of formation) through September 30, 1996 (Unaudited) Statement of Partners' Equity at September 30, 1996 (Unaudited) Statement of Cash Flows for the Period from March 20, 1996 (date of formation) through September 30, 1996 (Unaudited) Notes to Financial Statements (b) Unaudited Pro Forma Information 5. Pro Forma Condensed Balance Sheet at September 30, 1996 6. Pro Forma Statements of Operations for the year ended December 31, 1996 and the nine months ended September 30, 1996 3 AUDITORS' REPORT TO THE DIRECTORS To the Board of Directors of Canadian Gas Gathering Systems Inc. We have audited the balance sheets of CGGS Canadian Gas Gathering Systems Inc. as at October 31, 1995 and 1994 and the statements of earnings (loss) and deficit and changes in financial position for the years ended October 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 1995 and 1994 and the results of its operations and the changes in its financial position for the years ended October 31, 1995, 1994 and 1993 in accordance with generally accepted accounting principles. KPMG Chartered Accountants Calgary, Canada January 12, 1996 4
CGGS CANADIAN GAS GATHERING SYSTEMS INC. BALANCE SHEETS (In Canadian Dollars) ASSETS October 31 --------------------------- October 31 1994 1995 1996 ------------ ------------- ------------- (Unaudited) Current assets: Cash and short-term deposits ....... $ 8,326,000 $ 1,274,000 $ 10,050,000 Accounts receivable ................ 11,619,000 12,850,000 13,540,000 ------------ ------------ ------------ 19,945,000 14,124,000 23,590,000 Capital assets (note 3) .............. 129,432,000 128,095,000 123,857,000 Deferred financing costs (note 4)..... 1,628,000 1,482,000 1,336,000 Deferred foreign exchange loss ....... 9,775,000 7,882,000 6,858,000 ------------ ------------ ------------ Total assets ....................... $160,780,000 $151,583,000 $155,641,000 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY October 31 ----------------------------- October 31 1994 1995 1996 -------------- -------------- ------------ (Unaudited) Current liabilities: Debenture interest payable to shareholders ..................... $ 1,399,000 $ 1,344,000 $ 1,342,000 Accounts payable .................. 10,108,000 4,335,000 7,201,000 ------------- ------------- ------------- Total current liabilities ........ 11,507,000 5,679,000 8,543,000 Long-term shareholders' debt (note 5) 114,167,000 113,070,000 113,179,000 Provision for future site restoration ....................... 2,236,000 3,015,000 4,148,000 ------------- ------------- ------------- 127,910,000 121,764,000 125,870,000 Shareholders' equity: Share capital (note 6) ............ 34,213,000 34,213,000 34,213,000 Deficit ........................... (1,343,000) (4,394,000) (4,442,000) ------------- ------------- ------------- Total shareholders' equity ....... 32,870,000 29,819,000 29,771,000 Commitments (note 10) ------------- ------------- ------------- Total liabilities and shareholders' equity ........... $ 160,780,000 $ 151,583,000 $155,641,000 ============= ============= ============= See accompanying notes to financial statements.
5
CGGS CANADIAN GAS GATHERING SYSTEMS INC. STATEMENTS OF EARNINGS (LOSS) AND DEFICIT (In Canadian Dollars) Year Ended Year Ended October 31 October 31 ----------------------------------------- ------------- 1993 1994 1995 1996 ------------- ----------- ------------- ------------- (Unaudited) Revenues: Processing ............... $ 25,818,000 $ 30,408,000 $ 33,100,000 $ 36,954,000 Production ............... 28,620,000 35,855,000 22,408,000 26,791,000 Royalties, net ........... (5,321,000) (6,787,000) (3,366,000) (3,975,000) Other income ............. 264,000 1,028,000 996,000 690,000 ------------ ------------ ------------ ----------- 49,381,000 60,504,000 53,138,000 60,460,000 Expenses: Processing ............... 16,707,000 15,621,000 14,763,000 19,207,000 Production ............... 4,649,000 4,866,000 5,689,000 5,308,000 Administration (note 7) .. 3,685,000 3,960,000 4,507,000 4,117,000 Interest on acquisitions . 1,280,000 -- -- -- Interest on long-term .... 12,175,000 15,998,000 16,227,000 16,172,000 shareholders' debt Depletion and depreciation 13,408,000 14,361,000 13,754,000 14,092,000 Amortization of deferred . 146,000 146,000 146,000 146,000 financing costs Foreign exchange loss .... 760,000 772,000 795,000 1,134,000 ------------ ------------ ------------ ------------ 52,810,000 55,724,000 55,881,000 60,176,000 ------------ ------------ ------------ ------------ Earnings (loss) before taxes (3,429,000) 4,780,000 (2,743,000) 284,000 Large corporation tax ...... 262,000 274,000 308,000 332,000 ------------ ------------ ------------ ------------ Net earnings (loss) ........ (3,691,000) 4,506,000 (3,051,000) (48,000) Deficit - beginning of year (2,158,000) (5,849,000) (1,343,000) (4,394,000) ------------ ------------ ------------ ------------ Deficit - end of year ...... $ (5,849,000) $ (1,343,000) $ (4,394,000) $ (4,442,000) ============ ============ ============ ============
See accompanying notes to financial statements. 6
CGGS CANADIAN GAS GATHERING SYSTEMS INC. STATEMENTS OF CHANGES IN FINANCIAL POSITION (In Canadian Dollars) Year Ended Year Ended October 31 October 31 ----------------------------------------- ------------ 1993 1994 1995 1996 ------------- ------------- ------------- ------------ (Unaudited) Operating Activities: Net earnings (loss) ....... $ (3,691,000) $ 4,506,000 $ (3,051,000) $ (48,000) Depletion and depreciation 13,408,000 14,361,000 13,754,000 14,092,000 Amortization of deferred financing costs .......... 146,000 146,000 146,000 146,000 Foreign exchange loss ..... 760,000 772,000 795,000 1,134,000 Decrease (increase) in non-cash working capital items .................... 6,004,000 (5,443,000) (7,004,000) 2,176,000 ------------ ------------ ------------ ------------ 16,627,000 14,342,000 4,640,000 17,500,000 Financing Activities: Issuance of share capital . 17,692,000 583,000 -- -- Increase in long-term shareholders' debt ....... 53,057,000 1,726,000 -- -- ------------ ------------ ------------ ------------ 70,749,000 2,309,000 -- -- Investing Activities: Expenditures on capital assets ................... (49,010,000) (15,024,000) (11,638,000) (8,722,000) Decrease in deferred revenue .................. (1,473,000) -- -- -- (Increase) decrease in non-cash working capital . (35,281,000) (3,771,000) (54,000) (2,000) ------------ ------------ ------------ ------------ (85,764,000) (18,795,000) (11,692,000) (8,724,000) Increase (decrease) in cash and short-term deposits ... 1,612,000 (2,144,000) (7,052,000) 8,776,000 Cash and Short-Term Deposits: Beginning of year ......... 8,858,000 10,470,000 8,326,000 1,274,000 ------------ ------------ ------------ ------------ End of year ............... $ 10,470,000 $ 8,326,000 $ 1,274,000 $ 10,050,000 ============ ============ ============ ============
See accompanying notes to financial statements. 7 CGGS CANADIAN GAS GATHERING SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS (Information as to October 31, 1996 and for the Year Then Ended is Unaudited) The Company was incorporated on March 9, 1990 under the Canada Business Corporations Act. The Company was formed to invest in gas plants, gas gathering systems and related gas reserves in Canada. Morrison Petroleums Ltd., a shareholder, manages the Company. 1. Summary of Significant Accounting Policies The financial statements are prepared in accordance with generally accepted accounting principles in Canada. Foreign Currency Translation Monetary assets and monetary liabilities are translated at the exchange rate in effect at the balance sheet date. Gains and losses on translation are recorded in the statement of earnings, except that gains or losses on monetary liabilities with a fixed or ascertainable life are deferred and amortized over the repayment period. Joint Ventures The Company's exploration and production activities related to oil and gas are substantially conducted in joint participation with others and, accordingly, the accounts reflect only the Company's proportionate interest in such activities. Capital Assets The Company follows the full cost method of accounting for exploration and development expenditures wherein all costs related to the exploration for and the development of oil and gas reserves are capitalized. These costs include leasehold acquisition costs, carrying charges of non-producing properties, costs of drilling and completing wells, and oil and gas production equipment. Proceeds received from the disposal of properties are normally credited against accumulated costs unless this would result in a significant change in the depletion rate, in which case, a gain or loss is computed and reflected in the earnings statement. The Company carries its oil and gas properties at the lower of capitalized cost and net recoverable value. Net recoverable value is future net revenues from proven reserves plus unproven properties at cost less impairment, if any, net of the provision for future site restoration. Future net revenues are determined using unit prices and production costs in effect at year-end and include an allowance for future overhead costs, site restoration, financing charges and income taxes that will be incurred in earning these revenues. Petroleum and natural gas properties are depleted and tangible production equipment is depreciated using the unit-of-production method based upon the estimated proven oil and gas reserves after royalties. Reserves are converted to common units based on the approximate equivalent energy content of each unit of reserves, which results in a conversion ratio of six thousand cubic feet of gas to one barrel of oil equivalent. Processing facilities are depreciated on a straight-line basis over the estimated useful life of each facility. 8 CGGS CANADIAN GAS GATHERING SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Provision for Future Site Restoration Provision is made for future site restoration costs. This provision is charged to earnings over the estimated life of the proven oil and gas reserves and processing facilities using the unit of production and the straight-line methods respectively, and is included with depletion and depreciation. Royalties Crown, freehold and overriding royalties and mineral taxes are net of Alberta Royalty Tax Credits. Deferred Financing Costs The deferred financing costs are associated with obtaining the subscriptions for units (see Note 2). These costs were amortized evenly over fifteen years. 2. Formation and Unit Subscriptions Under the Unit Subscription Agreement, the investors have subscribed for units at U.S. $100,000 per unit consisting of U.S. $75,000 of debentures and U.S. $25,000 of Class A shares (2,500 Class A shares at a price of U.S. $10 per share) in a 3-to-1 ratio. The Company received commitments for unit subscriptions totaling U.S. $114,700,000 (U.S. $86,025,000 of debentures and 2,867,500 Class A shares at U.S. $10 per share). At October 31, 1996, 1995 and 1994 98.12% of the subscriptions were paid for and debentures and shares issued. On September 14, 1994, the Board of Directors approved a resolution to end any further acquisitions by the investors and to close out the investor obligations. At October 31, 1996, U.S. $84,411,829 of debentures and U.S. $28,137,367 Class A shares were issued and outstanding. Under Amendment No. 4 to the Unit Subscription Agreement dated May 15, 1995, in 1995 the Company is permitted to expend all of its funds from operations after debt servicing and all applicable corporate tax, on capital enhancements, repairs and maintenance. In 1996 and subsequent years, subject to approval by eighty percent of all shareholders, the Company is permitted to expend two-thirds of its funds from operations after debt servicing and all applicable corporate tax on, capital enhancements, repairs and maintenance. 9 CGGS CANADIAN GAS GATHERING SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. Capital Assets October 31 ------------------------------------------ 1994 1995 1996 -------------- ------------- ------------- (unaudited) Oil and Gas Properties: Cost $42,310,000 $43,361,000 $44,963,000 Accumulated depletion (20,267,000) (24,540,000) (28,197,000) ------------- ------------- ------------ 22,043,000 18,821,000 16,766,000 ------------- ------------- ------------ Tangible Production Equipment: Cost 7,889,000 9,402,000 10,239,000 Accumulated depreciation (3,523,000) (4,450,000) (5,283,000) ------------ ------------ ----------- 4,366,000 4,952,000 4,956,000 ------------ ------------ ----------- Processing Facilities: Cost 118,623,000 127,696,000 133,979,000 Accumulated depreciation (15,600,000) (23,374,000) (31,844,000) ------------ ----------- ----------- 103,023,000 104,322,000 102,135,000 ------------ ----------- ----------- $129,432,000 $128,095,000 $123,857,000 ============ ============ ============ During 1996 no acquisition fees (1995 - $0, 1994 - $27,000) were included in the cost of capital assets. A provision for future site restoration of $1,132,347 (1995 - $779,000, 1994 - $740,000, 1993 - $644,935) was expensed during 1996. 4. Deferred Financing Costs October 31 -------------------------------------- 1994 1995 1996 ------------ ---------- ----------- (unaudited) Deferred financing costs $2,187,000 $2,187,000 $2,187,000 Accumulated amortization (559,000) (705,000) (851,000) ========== ========== ========== $1,628,000 $1,482,000 $1,336,000 ========== ========== ========== 5. Long-Term Shareholders' Debt The debentures are payable in U.S. dollars fifteen years from the date of issue which is in the period 2005 to 2008. The debentures bear interest at 14% per annum payable on a quarterly basis. The Company is entitled, if the after-tax cash flow is not sufficient to make interest payments, to satisfy interest payments by issuing additional debentures valued at an amount equal to 100% of the principal amount thereof, and Class A shares at $10.00 per share. The debentures are held by the Class A shareholders. 10 CGGS CANADIAN GAS GATHERING SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. Share Capital Authorized Unlimited Class A voting common shares. Unlimited Class B non-voting common shares. The Class B shares are not entitled to dividends. Upon payout, as defined in the Company's Articles, each Class B share may be converted to a Class A share and the Class B shareholders have a call option to purchase, in the aggregate, 25% of the then outstanding debentures at a price of U.S. $10 for each U.S. $75,000 principal amount of debentures. Class B shares are issued equal to 33% of the Class A shares issued pursuant to subscription calls. Class B shares are issued for U.S. $.01 per share. Issued for Cash Class A Class B --------------------------------------------------- Inception to October 31, 1993 2,770,599 $33,619,000 923,530 $11,000 Issued during 1994 43,139 582,000 14,380 - ------------- ------------ --------- ---------- Balance at October 31, 1994, 1995 and 1996 (unaudited) 2,813,738 $34,201,000 937,910 $11,000 =========== ============ ========= ========= 7. Administration Pursuant to the administration and management agreements, the following expenses have been recorded: Year Ended October 31 --------------------------------------------------- 1993 1994 1995 1996 ------------ ---------- ---------- ---------- (unaudited) Management fees $2,105,000 $2,384,000 $2,613,000 $2,531,000 Administration fees 1,394,000 1,959,000 1,628,000 1,632,000 ------------ ---------- ---------- ---------- 3,499,000 4,343,000 4,241,000 4,163,000 Directors' fees and expenses 38,000 63,000 311,000 113,000 General corporate expenses 148,000 550,000 400,000 299,000 ------------ ---------- ---------- ---------- 3,685,000 4,956,000 4,952,000 4,575,000 Recoveries - (996,000) (445,000) (458,000) ------------ ---------- ---------- ---------- $3,685,000 $3,960,000 $4,507,000 $4,117,000 ============ ========== ========== ========== 11 CGGS CANADIAN GAS GATHERING SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) General corporate expenses include third-party professional fees, insurance and other items of a general corporate nature. 8. Income Taxes At October 31, 1996, the Company has estimated deductions for income tax purposes which exceed the related book value by $3,400,000, the potential benefit of which have not been recognized in these financial statements. For income tax purposes, the Company has reported non-capital loss carryforwards of $50,350,000 at October 31, 1996, which expire as follows: 1997 - $415,000; 1998 - - $1,658,000; 1999 - $12,543,000; 2000 - $11,991,000; 2001 - $9,061,000; 2002 - $11,247,000; 2003 - $3,435,000. 9. Related Party Transactions At times, the Company enters into agreements and transactions related to gas plants and gas reserves with Morrison Petroleums Ltd. and Canadian Gas Gathering Systems II, Inc. These transactions are carried out in accordance with industry standard terms. During 1995, a consulting fee of $158,000 was paid to a founder and director. 10. Commitments The Company has a Management Agreement with Morrison Petroleums Ltd. to provide services with respect to evaluation, acquisition, development and construction of projects and Consulting Agreements with two other founders. The Agreements are for ten years and provide for annual management and consulting fees to be paid to the three parties totaling 1.5% of the original cost of all projects, subject to certain adjustments as provided in the Agreements. The Company has an Administration Agreement with Morrison Petroleums Ltd. to provide administrative functions to the Company. This Agreement is for ten years and provides for an annual administration fee of 5% of the net operating income as defined in the agreement. Under these agreements, fees were incurred and accrue to the founders as follows: Morrison Gas B. Petroleums Systems Feshbach Ltd. III & Sons ------------- ----------- ----------- Year ended October 31, 1993 $3,187,000 $496,000 $192,000 Year ended October 31, 1994 3,653,000 443,000 247,000 Year ended October 31, 1995 3,485,000 485,000 271,000 Year ended October 31, 1996 (unaudited) 3,363,000 513,000 287,000 12 CGGS CANADIAN GAS GATHERING SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Of the above fees which accrued to the founders, the following amounts were outstanding at the periods ended as follows: Morrison Gas B.Fesbach Petroleums Systems & Sons Ltd. III ------------ ----------- ----------- Year ended October 31, 1994 $854,000 $92,000 $53,000 Year ended October 31, 1995 850,000 88,000 40,000 Year ended October 31, 1996 616,000 131,000 1,000 In addition, under the Administration Agreement, where Morrison Petroleums Ltd. is the operator of a gas system, capital and operating overhead is recovered from the Company by Morrison Petroleums Ltd. following guidelines prescribed by the Petroleum Accountants Society of Canada, Accounting Procedure at negotiated rates. 11. Subsequent Events Subsequent to October 31, 1996 the Company became a wholly owned subsidiary of Abraxas Petroleum Corporation. Prior to the change in ownership, the Company sold its interest in the Nevis gas plant and related facilities to Morrison Petroleums Ltd. for a consideration of $120,000,000, converted its U.S. dollar denominated debt to Canadian dollars and repaid the debt. 12. Differences Between Canadian and United States Generally Accepted Accounting Principles These financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") which, in the case of the Company, conforms with United States generally accepted accounting principles ("US GAAP") in all material respects except as follows: (a)In accordance with U.S. GAAP, exchange gains and losses arising on translation of long-term monetary liabilities, unless designated as a hedge, are included in income currently instead of deferred and amortized over the lives of such long term liabilities. (b)The Company has applied Statement of Financial Accounting Standards Number 109 "Accounting for Income Taxes" ("SFAS 109") effective November 1, 1992. SFAS 109 requires the Company to account for income taxes using the liability method for US GAAP purposes. There was no cumulative effect or effect on current results as a consequence of adopting SFAS 109. 13 CGGS CANADIAN GAS GATHERING SYSTEMS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The impact of these changes on the Company's financial statements is as follows: Statement of Earnings Year Ended October 31 ------------------------------------------------------ 1993 1994 1995 1996 ------------- ------------- -------------------------- (unaudited) Net earnings (loss) as reported $(3,691,000) $4,506,000 $(3,051,000) $(1,384,000) Foreign currency translation (4,409,000) (1,829,000) 1,893,000 1,024,000 ------------- ---------- ----------- ----------- Net earnings (loss) in accordance with U.S. GAAP $(8,100,000) $2,677,000 $(1,158,000) $ (360,000) ========== ========== =========== =========== Increase As Reported (Decrease) U.S. GAAP ------------- ------------- ------------- October 31, 1994 Deferred foreign exchange loss $9,775,000 $(9,775,000) $ - Deficit (1,343,000) 9,776,000 (11,119,000) October 31, 1995 Deferred foreign exchange loss 7,882,000 (7,882,000) - Deficit (4,394,000) 7,883,000 (12,277,000) October 31, 1996 Deferred foreign exchange loss 6,858,000 (6,858,000) - Deficit (5,778,000) 6,859,000 (12,637,000) 13. Changes in non-cash working capital components Year Ended October 31 ------------------------------------------ ----------- 1993 1994 1995 1996 ------------- ------------- -------------- ----------- (unaudited) Decrease (increase) in non-cash working capital Operating: Accounts receivable $ (5,558,000) $ (562,000) $(1,231,000) $ (690,000) Accounts payable 11,562,000 (4,881,000) (5,773,000) 2,866,000 ------------ ---------- ----------- ---------- $ 6,004,000 $(5,443,000) $(7,004,000) $2,176,000 ============= =========== =========== ========== Investing: Accounts payable $(38,023,000) $ -- $ -- $ -- Debenture interest payable to shareholders 2,742,000 (3,771,000) (54,000) (2,000) ------------ ------------ ------------ ---------- $(35,281,000) (3,771,000) (54,000) $ (2,000) ============ ============ ============ =========== 14 Report of Independent Auditors The Board of Directors and Shareholders Canadian Abraxas Petroleum Limited (a Canadian corporation) We have audited the accompanying balance sheet of Canadian Abraxas Petroleum Limited as of September 30, 1996. This balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this balance sheet based on our audit. We conducted our audit 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 statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Canadian Abraxas Petroleum Limited at September 30, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Antonio, Texas October 7, 1996 15 CANADIAN ABRAXAS PETROLEUM LIMITED BALANCE SHEET September 30, 1996 ASSETS Subscription receivable $ 1 ========== Total assets $ 1 ========== LIABILITIES AND SHAREHOLDER'S EQUITY Shareholder's equity: Common stock, no par value; unlimited number of shares authorized, issued and outstanding -0- shares (Subscribed 1 share) $ 1 Preferred stock, no par value; unlimited number of shares authorized, issued and outstanding -0- shares ========== Total liabilities and shareholder's equity $ 1 ========== See accompanying notes. 16 CANADIAN ABRAXAS PETROLEUM LIMITED NOTES TO BALANCE SHEET September 30, 1996 1. Organization and Operations Canadian Abraxas Petroleum Limited, a Canadian Corporation (Canadian Abraxas), was capitalized by Abraxas Petroleum Corporation for the principal purpose of acquiring 100% of the outstanding capital stock of CGGS Canadian Gas Gathering Systems, Inc. (CGGS), after the consummation of the sale of the Nevis Plant. CGGS owns producing properties in western Canada, consisting primarily of natural gas reserves, natural gas gathering systems, and processing facilities. Canadian Abraxas has conducted no business and has no employees or operating history as of September 30, 1996. Due to the absence of business activity as of September 30, 1996, no statement of operations or cash flows is presented. 2. Subsequent Events (unaudited) On November 14, 1996, Abraxas Petroleum Corporation, through its wholly owned subsidiary, Canadian Abraxas, closed the acquisition of CGGS with a portion of the proceeds from the issuance of $215,000,000 of Senior Notes due 2004 (Notes). Abraxas Petroleum Corporation and Canadian Abraxas are jointly and severally liable for all obligations under the Notes. In connection with the close of the transaction, Canadian Abraxas incurred a liability of approximately $82,000,000 of the $215,000,000 liability. The notes are redeemable, in whole or in part, at the option of the Company and Abraxas Petroleum Corporation on or after November 1, 2000, and any time prior to November 1, 1999, the Company and Abraxas Petroleum Corporation may redeem up to 35% of the aggregate principal amount of the Notes with cash proceeds of equity offerings at a redemption price of 111.5% of the aggregate principal amount of the Notes to be redeemed. The terms of the Indenture related to the notes provide for certain financial covenants which may limit the ability of the Company to incur additional debt. Additionally, in connection with the close of the transaction, CGGS was immediately merged with and into Canadian Abraxas, and Canadian Abraxas, as the surviving entity, used the net proceeds from the sale of the Nevis gas processing plant to retire all of the outstanding debentures of CGGS. 17 Report of Independent Auditors Board of Directors Abraxas Petroleum Corporation We have audited the accompanying statements of combined oil and gas revenues and direct operating expenses of the Certain Overriding Royalty Interests in the Portilla Field Acquired by Abraxas Petroleum Corporation (Abraxas) for the years ended December 31, 1994 and 1995. These statements are the responsibility of Abraxas' management. Our responsibility is to express an opinion on the 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 statements of combined oil and gas revenues and direct operating expenses are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements of combined oil and gas revenues and direct operating expenses. An audit also includes assessing the basis of accounting used and significant estimates made by management, as well as evaluating the overall presentation of the statements. We believe that our audits provide a reasonable basis for our opinion. The accompanying statements of combined oil and gas revenues and direct operating expenses were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission as described in Note 1, are not intended to be a complete presentation of the combined oil and gas revenues and expenses of Certain Overriding Royalty Interests in the Portilla Field Acquired by Abraxas. In our opinion, the statements referred to above present fairly, in all material respects, the combined oil and gas revenues and direct operating expenses of Certain Overriding Royalty Interests in the Portilla Field Acquired by Abraxas for the years ended December 31, 1994 and 1995 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Antonio, Texas August 30, 1996 18 CERTAIN OVERRIDING ROYALTY INTERESTS IN THE PORTILLA FIELD ACQUIRED BY ABRAXAS PETROLEUM CORPORATION STATEMENTS OF COMBINED OIL AND GAS REVENUES AND DIRECT OPERATING EXPENSES Nine Months Ended Year Ended December 31 September 30 -------------------------- -------------------------- 1994 1995 1995 1996 -------------------------- -------------------------- (Unaudited) Oil and gas revenues $3,529,234 $3,675,596 $2,608,169 $2,821,855 Direct operating expenses: Production taxes 908,421 835,092 590,019 621,656 ----------- ----------- ---------- ---------- Oil and gas revenues in excess of direct operating expenses $2,620,813 $2,840,504 $2,018,150 $2,200,199 =========== ========== ========== ========== See accompanying notes. 19 CERTAIN OVERRIDING ROYALTY INTERESTS IN THE PORTILLA FIELD ACQUIRED BY ABRAXAS PETROLEUM CORPORATION NOTES TO STATEMENTS OF COMBINED OIL AND GAS REVENUES AND DIRECT OPERATING EXPENSES Years Ended December 31, 1994 and 1995 (Information as to the Nine Months Ended September 30, 1995 and 1996 is Unaudited) 1. Basis of Presentation The accompanying statement of combined oil and gas revenues and direct operating expenses represents the results from certain oil and gas producing properties located in the Portilla Field, San Patricio County, Texas -- (Properties) which were previously owned by the Commingled Pension Trust Fund (Petroleum II) (the Pension Fund) which were acquired in connection with the acquisition by Abraxas Petroleum Corporation (Abraxas). Abraxas acquired the remaining 75% partnership interest in Portilla-1996, L.P., the limited partner of which acquired the above interests from the Pension Fund on March 21, 1996 and contributed such interest to the Partnership. Full historical financial statements reflecting financial position, results of operations, and cash flows required by generally accepted accounting principles are not presented, as such information is not readily available on an individual property basis nor meaningful for the properties acquired because the entire acquisition cost is being assigned to oil and gas properties. Accordingly, these statements of combined oil and gas revenues and direct operating expenses are presented in lieu of the financial statements required under Rule 3-05 of Regulation S-X of the Securities and Exchange Commission. The accompanying statements of combined oil and gas revenues and direct operating expenses represent the net overriding royalty interests in the Properties to be acquired by Abraxas and are presented on the accrual basis of accounting. Depreciation, depletion and amortization, general and administrative expenses, interest expense, and federal and state income taxes have been excluded because the property interests acquired represent only a portion of a business and the expenses incurred are not necessarily indicative of the expenses to be incurred by Abraxas. The unaudited statements of combined oil and gas revenues and direct operating expenses for the nine months ended September 30, 1995 and 1996 include, in the opinion of management, all material adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation. The results of the nine months ended September 30, 1996, are not necessarily indicative of the results to be expected for the full year. 20 CERTAIN OVERRIDING ROYALTY INTERESTS IN THE PORTILLA FIELD ACQUIRED BY ABRAXAS PETROLEUM CORPORATION NOTES TO STATEMENTS OF COMBINED OIL AND GAS REVENUES AND DIRECT OPERATING EXPENSES (CONTINUED) 2. Supplemental Information Relating to Oil and Gas Producing Activities (Unaudited) The following table presents the estimate of the net proved crude oil and natural gas quantities related to the interests in the Properties acquired and have been prepared utilizing the estimates of reserve quantities prepared by independent petroleum reserve engineers. Liquid Natural Hydrocarbons Gas -------------- -------------- (Barrels) (Mcf) Proved developed and undeveloped reserves: Balance at December 31, 1993 2,060,000 7,309,000 Revisions of previous estimates 240,000 (1,374,000) Production (207,000) (256,000) -------------- -------------- Balance at December 31, 1994 2,093,000 5,679,000 Revisions of previous estimates (245,000) (2,290,000) Production (176,000) (497,000) Other changes, net 306,000 681,000 -------------- -------------- Balance at December 31, 1995 1,978,000 3,573,000 Revisions of previous estimates (417,000) (974,000) Production (81,000) (209,000) Other changes, net 208,000 10,000 -------------- -------------- Balance at June 30, 1996 1,688,000 2,400,000 ============== ============== Proved developed reserves: December 31, 1994 1,782,000 4,727,000 December 31, 1995 1,722,000 3,378,000 June 30, 1996 1,677,000 2,331,000 All of the above reserves are located in the United States. 21 CERTAIN OVERRIDING ROYALTY INTERESTS IN THE PORTILLA FIELD ACQUIRED BY ABRAXAS PETROLEUM CORPORATION NOTES TO STATEMENTS OF COMBINED OIL AND GAS REVENUES AND DIRECT OPERATING EXPENSES (CONTINUED) 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 Properties' 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 prices at December 31, 1995 and June 30, 1996 to the estimated future production of period-end proved reserves. Future cash inflows were reduced by estimated future production and development costs based on period-end costs to determine pre-tax cash inflows. The Properties are not, nor is the Owner, a separate tax paying entity. Accordingly, the standardized measure of discounted future net cash flows from proved reserves is presented before deduction of federal income taxes. Future net cash inflows were discounted using a 10% annual discount rate to arrive at the Standardized Measure. 22 CERTAIN OVERRIDING ROYALTY INTERESTS IN THE PORTILLA FIELD ACQUIRED BY ABRAXAS PETROLEUM CORPORATION NOTES TO STATEMENTS OF COMBINED OIL AND GAS REVENUES AND DIRECT OPERATING EXPENSES (CONTINUED) Set forth below is the Standardized Measure relating to proved oil and gas reserves for December 31, 1995 and June 30, 1996: December 31 --------------------------- June 30 1994 1995 1996 ------------ ------------- ------------- Standardized Measure: Future cash inflows $40,963,000 $43,052,000 $38,232,000 Future production and development costs 12,078,000 13,490,000 12,268,000 ----------- ----------- ----------- 28,885,000 29,562,000 25,964,000 Discount (11,498,000) (10,622,000) (11,703,000) ----------- ----------- ----------- Discounted future net cash flows before income taxes $17,387,000 $18,940,000 $14,261,000 =========== =========== =========== Change in Standardized Measure (in thousands): Standardized Measure, beginning of period $11,427,000 $17,387,000 $18,940,000 Sales and transfers of gas and oil produced, net of production costs (2,621,000) (2,841,000) (1,482,000) Changes in prices, net of production and future development costs 6,639,000 2,661,000 627,000 Revisions of previous quantity estimates 63,000 (3,168,000) (4,001,000) Accretion of discount 1,854,000 1,739,000 947,000 Additions, revisions, and other changes 25,000 3,162,000 (770,000) ----------- ----------- ----------- Standardized Measure, end of period $17,387,000 $18,940,000 $14,261,000 =========== =========== =========== 23 Portilla - 1996, L.P., (a Texas Limited Partnership) Financial Statements (Unaudited) Period From March 20, 1996 (Date of Formation) Through September 30, 1996 24 Portilla - 1996, L.P., (a Texas Limited Partnership) Balance Sheet (Unaudited) September 30 1996 -------------- (In Thousands) Assets Current assets: Accounts receivable: $ 380 --------- 380 Property and equipment: Oil and gas properties, including gas processing plant (full cost method), less accumulated depreciation, depletion, and amortization of $1,738,000 29,360 Deferred financing fees, net of accumulated amortization 223 Organization cost, net of accumulated amortization 166 --------- Total assets $ 30,129 ========= 25 Portilla - 1996, L.P., (a Texas Limited Partnership) Balance Sheet (Unaudited - continued) September 30 1996 -------------- (In Thousands) Liabilities and Partners' Equity Current liabilities: Accounts payable $ 380 Payable to Abraxas Petroleum Corporation 398 Payables to note holders 538 Current portion of long-term debt 6,285 ----- Total current liabilities 7,601 Long-term debt, net of current portions: Credit agreement 14,304 Notes payable 5,920 ------ 20,224 Commitments and contingencies Partners' equity: General partner 2,000 Limited partner 304 ------ Total partners' equity 2,304 ------ Total liabilities and partners' equity $ 30,129 ====== See accompanying notes. 26 Portilla - 1996, L.P. (a Texas Limited Partnership) Statement of Income (Unaudited) Period From March 20, 1996 (Date of Formation) Through September 30, 1996 (In Thousands) Oil and gas production sales $ 4,255 Operating costs and expenses: Lease operating and production taxes 871 Depreciation, depletion and amortization 1,738 Hedging loss 369 ------ 2,978 ------ 1,277 Other expense: Amortization of deferred financing fee and organization costs 70 Interest expense 916 Other 67 ------- 1,053 ------- Net income $ 224 ====== See accompanying notes. 27 Portilla - 1996, L.P. (a Texas Limited Partnership) Statement of Partners' Equity (Unaudited) Total General Limited Partners' Partner Partner Equity ----------------------------------- (In Thousands) Balance at March 20, 1996 (date of formation) Contribution to capital $ 2,000 $ 80 $ 2,080 Net income for the period March 20, 1996 (date of formation) through September 30, 1996 -- 224 224 ---------------------------------- Balance at September 30, 1996 $ 2,000 $ 304 $ 2,304 ================================== See accompanying notes. 28 Portilla - 1996, L.P. (a Texas Limited Partnership) Statement of Cash Flows (Unaudited) Period From March 20, 1996 (Date of Formation) Through September 30, 1996 (In Thousands) Operating Activities Net income $ 224 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion, and amortization 1,738 Amortization of deferred financing fees and organization costs 70 Changes in operating assets and liabilities: Accounts receivable (380) Current payables 1,316 --------- Net cash provided by operating activities 2,968 Investing Activities Capital expenditures (31,098) -------- Net cash used in investing activities (31,098) Financing Activities Capital contributions 2,080 Borrowings under credit agreement 21,750 Payments on credit agreement (1,161) Borrowings under notes payable 5,920 Financing fees (273) Organizational costs (186) --------- Increase in cash 28,130 Cash at beginning of period -- --------- Cash at end of period, including restricted cash $ -- ========= Supplemental Disclosures Supplemental disclosures of cash flow information: Interest paid $ 916 ========= See accompanying notes. 29 Portilla-1996, L.P. (a Texas Limited Partnership) Notes to Financial Statements (Unaudited) Period From March 20, 1996 (Date of Formation) Through September 30, 1996 1. Organization and Significant Accounting Policies Nature of Operations Portilla-1996, L.P., a Texas limited partnership (Partnership), was formed on March 20, 1996. The Partnership is an independent energy partnership engaged primarily in the production of crude oil and natural gas along the Texas Gulf Coast and in the Permian Basin of western Texas for sale into the U.S. energy market. The accompanying unaudited financial statements include all adjustments, consisting of normal recurring adjustments, that, in the opinion of management, are necessary for a fair presentation. In March, 1996, Abraxas Petroleum Corporation (Abraxas) sold its 50% working interest in its Portilla Field and its 12% working interest in its Happy Field to ACCO, LLC (Limited Partner). The Limited Partner also obtained the release of a 50% overriding royalty interest in the Portilla Field previously owned by the Commingled Pension Trust Fund (Pension Fund). In connection with the purchase of both Abraxas' interests in the Portilla and Happy Fields and the Pension Fund's interest in the Portilla Field (together, the Properties), the Limited Partner entered into a credit agreement with a bank, secured by the Properties, and contributed the Properties to the Partnership. A subsidiary of Abraxas, Portilla-Happy Corporation (Portilla-Happy), is the general partner of the Partnership. 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. 30 1. Organization and Significant Accounting Policies (continued) Oil and Gas Properties The Partnership follows the full cost method of accounting for crude oil and natural gas properties. Under this method, all costs associated with acquisition, exploration, and development are capitalized. The Partnership does not capitalize internal costs. Depreciation, depletion, and amortization (DD&A) of crude oil and natural gas properties are based on the unit-of-production method. If unamortized capitalized costs are in excess of the discounted present value of future cash flows relating to proved reserves (ceiling), a charge to operations is recorded. No gain or loss is recognized upon sale or disposition of crude oil and natural gas properties, except in unusual circumstances. Revenue Recognition The Partnership recognizes crude oil and natural gas revenue from its interest in producing wells as crude oil and natural gas is sold from those wells. Deferred Financing Fees Deferred financing fees are being amortized on a level yield basis over the term of the related debt. Organization Costs Organization costs are being amortized on a straight line basis over five years. Income Taxes The Partnership is not subject to federal income taxes; rather, its income (loss) from operations is passed directly through to its partners. 2. Partnership Formation and Agreement In connection with the formation of the Partnership, the General Partner contributed cash of $2,000,000 and the Limited Partner contributed the Properties and cash of $80,000. These Properties have been recorded in the Partnership's property and equipment at $27,500,000 representing the amount paid by the Limited Partner for the Properties. No partner is obligated to make additional contributions to the Partnership. The Partnership agreement provides for cash to be distributed to the partners as follows: * Until cumulative cash distributions have equaled the original contribution of $21,580,000 to the Limited Partner and $2,000,000 to the General Partner, cash in excess of amounts necessary to pay the Partnership's current obligations shall be distributed 91.5% to the Limited Partner and 8.3% to the General Partner, then 31 2. Partnership Formation and Agreement (continued) * from the time that cumulative cash distribution equals the original capital contribution until the operator of the Properties is entitled to cash distribution equal to a 25% net revenue interest in the Properties with the remainder to the Limited Partner, and thereafter * the operator is entitled to a percentage of 43.75% of the net revenue interest in the Partnership Properties with the remainder to the Limited Partner. 3. Long-Term Debt In connection with the Limited Partner's purchase of the interest in the Portilla and Happy Fields, it entered into a credit agreement with a bank providing financing in the amount of $21,750,000. The borrowings under the credit agreement are collateralized by the Partnership's interest in the Portilla and Happy Fields, the Limited Partner's ownership interest in the Partnership, the Partnership bank accounts and a guaranty agreement. Although the bank credit agreement is between the Limited Partner and the bank, the Partnership has recorded the debt in its financial statements because the Partnership Properties have been pledged as collateral for the debt. The borrowings bear interest generally at LIBOR or the bank's prime rate. Under an interest rate swap agreement, the interest rate has been fixed at 6.12% on approximately 80% of the outstanding borrowings through October 31, 2001. Principal is due in monthly installments of 2.70% of the original principal balance through April 1997, 2.00% through April 1998; 1.46% through April 1999, 1.29% through April 2009, .67% through April 2001 and .42% through October 2001. The Partnership incurred financing fees of $273,000. Notes payable consist of three promissory notes payable to private investment funds totaling $5,920,000. Each note bears interest at 10%, is due on March 30, 2004 and can be prepaid without penalty after four years. The notes are recourse to the Partners only to the extent of distribution made by the Partnership to such Partners. The Partnership has granted each noteholder an option to purchase an overriding royalty interest in the Partnership's oil and gas properties, which will entitle the noteholders, on a combined basis, to 74% of the net revenue for the oil and gas properties through the time that such aggregate royalty payments have equaled the sum of 10% of the option price per annum compounded annually and 150% of the option price; then at 56.25% of net revenue until the termination of the royalty interest. The noteholder may apply to the payment of the purchase price all or any part of the principal amount of the promissory notes from the Partnership and any accrued and unpaid interest thereon on a dollar-for-dollar basis. The portion of the purchase price not so applied shall be paid in cash. The option can be exercised at any time until April 30, 2004. As of September 30, 1996, the private investment funds had advanced to the Partnership $538,000 for working capital purposes. 4. Advisory and Operating Agreements The Partnership has entered into an advisory agreement with an entity related to the Limited Partner to provide various advisory services relating to the 32 identification and acquisition of oil and gas properties, the marketing of production, the monitoring of costs by the operator and preparation of reports and all material financial matters related to the Partnership or its oil and gas properties. Such advisor is entitled to quarterly compensation equal to the lesser of 1/4 of 1% of the debt payable to the investment funds or 1% of the partnership gross proceeds plus reimbursement of reasonable out-of-pocket expenses incurred in rendering its services. For the period ended September 30, 1996, the Partnership accrued $42,000 related to the advisory agreement, the payable of which is included in accounts payable. The parent Company of the General Partner, Abraxas, is the operator of the oil and gas properties of the Partnership and also provides certain executive, administrative, legal, and accounting support to the Partnership for which it is not reimbursed. During the period ended September 30, 1996, as operator, Abraxas has collected net revenues from the sale of oil and gas production on behalf of the Partnership. Abraxas has also advanced funds on behalf of the Partnership for development drilling and working capital purposes. As of September 30, 1996, the Partnership has recorded a net payable to Abraxas of $398,000 for such activity. The Partnership agreement provides that the General Partner shall have all the rights and powers of a General Partner except the Limited Partner must approve in writing any transfer of the oil and gas properties, any acquisition of any other mineral property, the lending of money or the guarantee of obligations, and any material amendment of an operating agreement. The Limited Partner may remove the General Partner upon 60 days written notice. 5. Commodity Swap Agreement In April 1996, the Partnership entered into a commodity swap agreement with its bank lender to reduce its exposure to price risk in the spot market. Under the commodity swap agreement, the Partnership receives or makes payments to the bank based on the differential between a fixed and variable price for natural gas. At September 30, 1996, the Partnership had agreed to exchange payments monthly on volumes ranging from 8,160 to 20,000 barrels of crude oil per month and 14,850 to 87,406 MMBTU of natural gas per month extending through November 2001. Under the swap agreement, the Partnership receives fixed prices ranging from $17.20 to $18.55 per barrel of crude oil and $1.793 to $1.925 per MMBTU of natural gas and makes payments 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 0) price for natural gas. 6. Subsequent Event In November, 1996, Abraxas acquired the Limited Partner's 75% interest in the Partnership and repaid the bank debt as well as the notes payable to the private investment funds resulting in Abraxas effectively owning all of the equity interests in the Partnership. Upon the acquisition of the Limited Partner's interest, Abraxas had title to the Properties transferred to its name. 33 PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma financial data are derived from the historical financial statements of Abraxas Petroleum Corporation (Company) and are adjusted to reflect the consummation of the acquisitions of CGGS Canadian Gas Gathering Systems, Inc. (CGGS) by Canadian Abraxas Petroleum Limited (a wholly owned subsidiary of Abraxas Petroleum Corporation) (Canadian Abraxas) and of Certain Overriding Royalty Interests in the Portilla Field acquired by Abraxas Petroleum Corporation which were previously owned by the Commingled Pension Trust Fund (Pension Fund) (the Acquisitions) and also reflects the sale of $215,000,000, 11.5% Senior Notes due 2004 (Notes) and the repayment of all amounts outstanding under the Credit Agreement dated September 30, 1996 with Bankers Trust Company and other lenders in the amount of $85,000,000 (Credit Agreement). The pro forma statements of operations also reflects the acquisition of the oil and gas producing properties acquired from Enserch Exploration, Inc. on September 30, 1996 (Wyoming Properties). The historical balance sheet of the Company at September 30, 1996 includes the acquisition cost of the Wyoming Properties. The Unaudited Pro Forma Condensed Balance Sheet of the Company as of September 30, 1996 has been prepared assuming the Acquisitions, sale of Notes and repayment of the Credit Agreement were consummated on September 30, 1996, and the Unaudited Pro Forma Statements of Operations of the Company for the year ended December 31, 1995 and the nine months ended September 30, 1996 have been prepared assuming the Acquisitions, sale of Notes and repayment of the Credit Agreement were consummated on January 1, 1995 and January 1, 1996, respectively. The historical revenues and expenses of CGGS and Portilla and Happy represent amounts recorded by or with respect to such businesses or properties for the periods indicated. The historical financial statements of CGGS were prepared in Canadian dollars in accordance with Canadian generally accepted accounting principles. This information has been adjusted to present the historical financial statements in accordance with United States generally accepted accounting principles. The statements of operations have been translated into U.S. dollars at the average exchange rates of $0.7321 and $0.7273 to one Canadian dollar for the nine months ended October 31, 1996 and the fiscal year ended October 31, 1995, respectively. The monetary amounts on the unaudited balance sheet as of October 31, 1996 have been translated at the period-end exchange rate of $0.7458 to one Canadian dollar. Non-monetary amounts have been translated at a historical November 1, 1994 rate with changes in the amounts since that date translated at the average rate over the twenty five-month period. The historical financial statements of CGGS include the results of the Hoole Area. In January, 1997, Canadian Abraxas entered into a letter of intent to sell its interest in the Hoole Area for approximately $9.3 million. For the nine months ended September 30, 1996, the Hoole Area properties and natural gas processing plants contributed $2.4 million of revenues to CGGS. The Company previously owned a 50% working interest in the Portilla Field and a 12% working interest in the Happy Field. In March 1996, the Company sold its interests in the Portilla and Happy Fields to Acco LLC (Acco) for net consideration of $15.6 million. Acco separately obtained the release of the 50% overriding royalty interest in the Portilla previously owned by the Pension Fund and contributed its interests in the Portilla and Happy Fields , acquired from Abraxas and the Pension Fund (Portilla and Happy) to the Portilla - 1996 LP (the Partnership). The pro forma adjustments assume that the Company acquired the Pension Fund's interest in the Portilla Field at the beginning of the periods indicated and that the Company owned the Portilla and Happy Fields during the period from March 21, 1996 to September 30, 1996. 34 The unaudited pro forma Condensed Balance Sheet reflects the preliminary allocations of the purchase prices for the Acquisitions to the assets and liabilities of the Company. The final allocation of the purchase prices, and the resulting effect on DD&A expense in the accompanying unaudited Pro Forma Statements of Operations, will differ from the preliminary estimates because the final allocation will be based on purchase prices allocated to assets and liabilities on the basis if the estimated fair values of the assets and liabilities determined at the end of the allocation period as allowed by accounting Principles Board Opinion Number 38. The unaudited pro forma financial data should be read in conjunction with the notes thereto, the Consolidated Financial Statements of the Company and the notes thereto and the historical financial information and the notes relating to CGGS and the Certain Overriding Royalty Interests in the Portilla Field acquired by Abraxas Petroleum Corporation included herein.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS For the Year Ended December 31, 1995 Historical Acquisitions --------- ------------------------------------------------- Adjusments Acquisition Abraxas to Reflect and Petroleum Wyoming Sale of Offering Corporation CGGS Properties Portilla(1) Nevis(a) Adjustments Pro Forma ------------ ------- ---------- ------------ ----------- ----------- ----------- (dollars in thousands) Operating revenue: Oil and gas $ 13,660 $ 13,849 $ 7,542 $ 3,676 $ -- $ -- $ 38,727 production sales Processing -- 24,072 -- -- (20,012) -- 4,060 Rig revenue 108 -- -- -- -- -- 108 Other 49 690 -- -- -- -- 739 -------- -------- -------- -------- -------- -------- -------- Total operating revenue 13,817 38,611 7,542 3,676 (20,012) -- 43,634 revenue Operating costs and expenses: LOE 4,333 4,137 2,142 835 -- -- 11,447 Processing -- 10,737 -- -- (9,501) -- 1,236 DD&A 5,434 10,003 -- -- (3,672) 8,666 (b) 20,431 Rig operations 125 -- -- -- -- -- 125 G&A 1,042 3,257 -- -- (1,173) (534)(c) 2,592 -------- -------- -------- -------- -------- ------ ------- Total operating expenses 10,934 28,134 2,142 835 (14,346) 8,132 35,831 -------- -------- -------- -------- -------- -------- ------- Operating Income 2,883 10,477 5,400 2,841 (5,666) (8,132) 7,803 Other (income) expense: Interest income (34) (82) -- -- -- -- (116) Amortization of deferred financing fee 214 106 -- -- -- 705 (d) 1,025 Interest expense 3,911 11,822 -- -- (5,782) 14,030 (e) 23,981 Unrealized foreign exchange gain -- (795) -- -- -- 795 (f) -- Realized foreign exchange loss -- 44 -- -- -- -- 44 --------- ------- ------ ------- -------- ------- ---------- Income (loss) (1,208) (618) 5,400 2,841 116 (23,662) (17,131) before tax Income tax (benefit): Current -- 224 -- -- (128) -- 96 Deferred -- -- -- -- -- (670)(g) (670) -------- ------- ------- ------- -------- ------- -------- Net income loss) $ (1,208) $ (842) $ 5,400 $ 2,841 $ 244 $(22,992) $(16,557) Less dividend requirement on cumulative preferred stock (366) -- -- -- -- -- (366) -------- -------- ------- -------- -------- -------- ------- Net income (loss) available to common stockholders $ (1,574) $ (842) $ 5,400 $ 2,841 $ 244 $(22,992) $(16,923) ======== ======= ======= ======== ======== ======== ======= Earnings (loss) per share: $ (0.34) $ (3.65) ======== ========
(1) The data for Portilla reflects that portion of Portilla previously owned by the Pension Fund. See notes to unaudited pro forma financial statements. 35
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS For the Nine Months Ended September 30, 1996 Historical Acquisitions ----------- -------------------------------------------------- Adjustment Abraxas to Reflect Acquisition Petroleum Wyoming Portilla & Sale of and Offering Corporation CGGS Properties Happy (h) Nevis (a) Adjustments Pro Forma ----------- ---------- ----------- ----------- ----------- ------------- --------- (dollars in thousands) Operating revenue: Oil and gas production $ 11,786 $ 12,246 $ 7,280 $ 5,232 $ -- $ -- $ 36,544 Processing -- 20,279 -- -- (17,214) -- 3,065 Rig revenue 106 -- -- -- -- -- 106 Other 17 160 -- -- -- -- 177 ----------- ---------- ----------- ----------- ----------- ----------- -------- Total operating revenue 11,909 32,685 7,280 5,232 (17,214) -- 39,892 Operating costs and expenses: LOE 3,296 2,920 1,844 1,086 -- -- 9,146 Processing -- 11,289 -- -- (10,097) -- 1,192 DD&A 4,145 7,722 -- -- (3,098) 8,229 (b) 16,998 Rig operations 113 -- -- -- -- -- 113 G&A 1,250 2,156 -- -- (481) (380)(c) 2,545 Hedging loss 511 -- -- 370 -- -- 881 ----------- ---------- ----------- ----------- ----------- ----------- -------- Total operating expense 9,315 24,087 1,844 1,456 (13,676) 7,849 30,875 ----------- ---------- ----------- ----------- ----------- ----------- -------- Operating income 2,594 8,598 5,436 3,776 (3,538) (7,849) 9,017 Other (income) expense: Interest income (156) (226) -- -- -- -- (382) Amortization of deferred financing fee 192 80 -- -- -- 497(d) 769 Interest expense 2,142 8,870 -- -- (4,255) 11,195(e) 17,952 Minority interest 58 -- -- -- -- -- 58 Unrealized foreign exchange gain -- (2,070) -- -- -- 2,070(f) -- Realized foreign exchange gain -- (51) -- -- -- -- (51) Loss on Securities 235 -- -- -- -- -- 235 ----------- ---------- ----------- ----------- ----------- ------------ -------- Income (loss) before tax 123 1,995 5,436 3,776 717 (21,611) (9,564) Income Tax (benefit): Current -- 190 -- -- (89) -- 101 Deferred -- -- -- -- -- (541)(g) (541) ----------- ---------- ----------- ----------- ----------- ------------ -------- Net income (loss) excluding extraordinary items 123 1,805 5,436 3,776 806 (21,070) (9,124) Less dividend requirement on cumulative preferred stock (274) -- -- -- -- -- (274) ----------- ---------- ----------- ----------- ----------- ------------ -------- Net income (loss) available to common stockholders $ (151) $ 1,805 $ 5,436 $ 3,776 $ 806 $ (21,070) $(9,398) =========== ========== =========== =========== =========== =========== ======== Earnings (loss) per share $ (0.03) $ (1.62) =========== ========
See notes to unaudited pro forma financial statements. 36
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET As of September 30, 1996 Historical Acquisitions ------------ -------------------- Adjustments Abraxas to Reflect Acquisition Petroleum Sale of Adjustments Offering Corporation CGGS Nevis(a) including Portilla Adjustments ProForma ------------ -------- ----------- ------------------ ------------ ---------- (dollars in thousands) Assets: Cash $ 9,993 $ 7,495 $ 87,000 $ (84,412) (b) $ 181 $ 20,257 Accounts receivable 3,965 10,099 (5,769) -- -- 8,295 Other 280 -- -- -- -- 280 -------- -------- ----------- ----------- --------- --------- Total current assets 14,238 17,594 81,231 (84,412) 181 28,832 Property and equipment: Oil and gas properties 111,104 12,769 -- 49,336 (b) -- 29,022 (d) -- 202,231 Processing facilities -- 78,860 (50,790) 18,190 (b) -- 46,260 Other property and equipment 872 -- -- 3,600 (b) -- 4,472 Investment and advances to partnership 2,397 -- -- (2,397) (d) -- -- Deferred financing fees 971 992 -- 223 (d) 8,200 (f) (992) (b) (223)(b) 9,171 Other assets 858 -- -- -- 858 -------- -------- ----------- ----------- --------- --------- Total assets $130,440 $110,215 $ 30,441 $ 12,570 $ 8,158 $ 291,824 ======== ======== =========== =========== ========= ========= Liabilities and stockholders' equity: Total current liabilities $ 6,556 $ 5,586 $ (2,050) $ (2,135) (b) $ -- $ 7,957 Long-term debt: Financing agreement 85,000 -- -- -- (85,000)(f) -- CGGS debentures -- 84,412 -- (84,412) (b) -- -- Acquisition debt: CGGS shareholders -- -- -- 94,771 (b) (94,771)(f) -- Portilla -- -- -- 26,848 (d) (26,848)(f) -- Notes -- -- -- -- 215,000 (f) 215,000 Other liabilities 124 3,834 (1,664) -- -- 2,294 Deferred income taxes 187 -- -- 28,036 (b) -- 28,223 Minority interest 2,153 -- -- -- -- 2,153 Shareholders' equity: Preferred stock -- -- -- -- -- -- Common stock 58 25,296 -- (25,296) (c) -- 58 Additional paid in capital 50,920 -- -- -- -- 50,920 Retained earnings (deficit) (14,184) (8,672) 34,155 (25,483) (c) (223)(g) (14,407) Cumulative foreign exchange adjustment -- (241) -- 241 (c) -- -- exchange Treasury stock (374) -- -- -- -- (374) --------- --------- --------- ----------- --------- --------- Total stockholders' equity 36,420 16,383 34,155 (50,538) (223) 36,197 --------- --------- --------- ----------- --------- --------- Total liabilities and Stockholders' equity $130,440 $110,215 $30,441 $ 12,570 $ 8,158 $291,824 ========= ========= ========= ========== ========= =========
- ------------- See notes to unaudited pro forma financial statements. 37 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS Note 1. The pro forma unaudited Statements of Operations for the periods ended December 31, 1995 and September 30, 1996 reflect the Acquisitions, the sale of Notes and repayment of the Credit Agreement as if consummated on January 1, 1995 and January 1, 1996, respectively. The statements also reflect the operations relating to the acquisition of the oil and gas properties acquired from Enserch Exploration, Inc. on September 30, 1996 (Wyoming Properties). a. To adjust for the sale of the Nevis Plant prior to the Company's acquisition of CGGS. The reduction in G&A expense represents the contractual management and administrative fee paid to the operator related to the results of the Nevis Plant, net of overhead recoveries charged to third parties for processing of natural gas. The reduction in interest expense relates to the repayment of a portion of the debentures issued by CGGS in connection with its acquisition of the Nevis Plant. b. To adjust DD&A expense for the year ended December 31, 1995 to reflect the acquisition of CGGS, the 50% overriding royalty interest in Portilla previously owned by the Pension Fund and the Wyoming Properties for the twelve months ended December 31, 1995 and to adjust DD&A expense for the nine months ended September 30, 1996 to reflect the acquisitions of CGGS, the reacquisition of Portilla and Happy for the period March 21, 1996 to September 30, 1996, the acquisition of the 50% overriding royalty interest in the Portilla Field previously owned by the Pension Fund and the Wyoming Properties for the nine months ended September 30, 1996. DD&A expense of crude oil and natural gas properties is computed using the units of production method. Depreciation of natural gas processing facilities is computed using the straight line method over the estimated useful life of 18 years. c. To adjust G&A expense of CGGS to reflect the following: Nine Months Ended Fiscal September 30, 1995 1996 ------- - ------------ (dollars in thousands) Reversal of management and administrative fees paid to third party $(1,649) $(1,340) Additional expenses relating to salaries and benefits, office rent and other G&A expenses 1,115 960 ------ ----- $ (534) $(380) ------ ----- d. To adjust the amortization of the deferred financing fee for the credit facility oweed to First Union National Bank of North Carolina and the repayment of the CGGS debentures and the fees and expenses related to the issuance of the Notes. e. To adjust interest expense using a rate of 11.5% for the issuance of the Notes and to reflect the repayment of the Credit Agreement and the retirement of the CGGS debentures. f. To adjust the foreign exchange gain realized by CGGS with respect to certain U.S.dollar-denominated debentures. g. To reflect the deferred tax benefit. Nine Months Ended Year Ended September 30, December 31, 1995 1996 ------------------ ----------------- (dollars in thousands) Deferred tax benefit $679 $541 ==== ==== 38 h. The following reflects the results of operations of the 50% overriding royalty interest in Portilla Field previously owned by the Pension Fund for the nine months ended September 30, 1996 and the results from Portilla and Happy previously owned by the Partnership for the period March 21, 1996 to September 30, 1996:
Certain Overriding Royalty Interests in the Portilla Field Acquired by Abraxas Portilla and Happy Petroleum previously owned Corporation by the Company for the Nine for the period Portilla Months Ended March 21, 1996 to and September 30, 1996 September 30, 1996 Happy ------------------ ------------------ ---------- (dollars in thousands) Oil and gas production sales $ 2,822 $ 2,410 $ 5,232 LOE (622) (464) (1,086) Hedging loss -- (370) (370) ================== ================== ========== $ 2,200 $ 1,576 $ 3,776 ================== ================== ==========
Note 2. The pro forma unaudited Condensed Balance Sheet as of September 30, 1996, reflects the Acquisitions, the sale of Notes and repayment of the Credit Agreement as if they had occurred as of September 30, 1996. a. Canadian Abraxas purchased all of the outstanding shares of capital stock of CGGS and immediately thereafter merged CGGS with and into Canadian Abraxas. Prior to the Canadian Abraxas' acquisition of CGGS, the Nevis Plant was sold and Canadian Abraxas, as the surviving entity of the CGGS acquisition, used the net proceeds from the sale of the Nevis Plant to retire the outstanding debentures of CGGS. The CGGS balance sheet included in the accompanying Unaudited Pro Forma Condensed Balance Sheet dated as of September 30, 1996 represents the historical unaudited balance sheet of CGGS as of October 31, 1996, converted into United States generally accepted accounting principles and into U.S. dollars. The balances included in the "Adjustments to Reflect Sale of Nevis" column on the accompanying Unaudited Pro Forma Condensed Balance Sheet represent the sale of the Nevis Plant and related accounts receivable and payable at a sales price of approximately CDN$116.1 million, net of estimated selling costs and related closing adjustments, or approximately U.S.$87.0 million, and the removal of the historical net book value of the Nevis Plant and the working capital and other liabilities associated with the operations of the Nevis Plant as of October 31, 1996. Retained earnings represent the approximate gain from the sale of the Nevis Plant. b. The acquisition of CGGS was accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16 "Business Combinations." The purchase price was allocated to the crude oil and natural gas properties, the natural gas processing plants and other assets based upon estimated fair values. A deferred income tax liability has been established representing the tax effect of the difference in the fair value of the assets acquired and their historical tax basis and has been allocated as additional basis of the crude oil and natural gas properties, the natural gas processing plants and other assets. 39 - -------------------------------------------------------------------------------- (dollars in thousands) - ------------------------------------------------------------------------------- The total purchase price has been allocated as follows: Purchase price for the outstanding capital stock of CGGS $ 94,771 Book value of net assets acquired 49,546 -------- Increase in basis $ 45,225 Allocation of increase in basis: Increase in crude oil and natural gas properties $ 49,336 Increase in natural gas processing facilities 18,190 Increase in other property and equipment 3,600 Deferred financing fee (992) Change in accounts payable 3,127 Change in deferred tax liabilities (28,036) ------- $ 45,225 ======= Retirement of CGGS debentures: Cash $(84,412) CGGS debentures 84,412 c. To reflect the elimination of CGGS equity balance: Common stock $ 25,296 Retained earnings 25,483 Cumulative foreign exchange adjustment (241) d. To reflect the purchase of Portilla and Happy: Purchase price of Portilla and Happy $ 27,600 Estimated adjustments to purchase price for accrual of net crude oil and natural gas revenues to November 14, 1996 (752) ------ Net amount due to seller 26,848 Elimination of the Company's equity investment in and advances to the Partnership 2,397 Deferred financing fee related to debt repaid (223) ------ Net purchase price allocated to oil and gas properties $ 29,022 ====== 40 Acco entered into a commodity price hedge with Christiania which was assumed by the Company in connection with the consummation of the Transactions. Under the terms of this commodity price hedge, the Company is required to receive or make payment to Christiania based on a differential between a fixed and variable price for crude oil and natural gas through the last business day of November 2001 on volumes ranging from 8,160 barrels of crude oil to 20,000 barrels of crude oil per month and 14,850 MMBTU of natural gas to 87,406 MMBTU of natural gas per month. Under this agreement, the Company receives fixed prices ranging from $17.20 per barrel of crude oil to $18.55 per barrel of crude oil and $1.793 per MMBTU of natural gas to $1.925 per MMBTU of natural gas and makes payments 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 0) price for natural gas. Currently there is a net unrealized loss of approximately $1.8 million under the commodity price hedge. e. To reflect the issuance of Notes and application of the proceeds therefrom: Issuance of Notes $215,000 Expense for issuance of Notes (8,200) Repayment of the Credit Agreement (85,000) Payment of amount due to CGGS (94,771) Payment of amounts due to seller of Portilla and Happy (26,848) -------- Increase in existing cash 181 ======== f. To reflect the write-off of deferred financing fees upon retirement of certain related debt $ 223 ======== In January, 1997, Canadian Abraxas entered into a letter of intent to sell its interest in the Hoole Area for approximately $9.3 million. The Hoole Area consists of 9,728 gross acres (3,311 net acres) and 6.4 gross wells (3.2 net wells), of which are operated by Canadian Abraxas. As of September 1, 1996, the Hoole Area natural gas properties had total proved reserves of 1,477.0 MBOE with an aggregate PV-10 of $6.3 million, 89.3% of which was attributable to proved developed reserves. The Hoole Area natural gas processing plant had aggregate net natural gas processing capacity of 32.0 Mmcf per day at September 1, 1996. For the nine months ended September 30, 1996, the Hoole Area natural gas processing plant processed an average of 18.9 gross MMcf (9.5 net MMcf ) of natural gas per day, of which 4.4% (2.2% net) was custom processed for third parties. For the nine months ended September 30, 1996, the Hoole Area properties and natural gas processing plants contributed $2.4 million of revenue to CGGS. 41 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. ABRAXAS PETROLEUM CORPORATION By: /s/Chris Williford --------------------- Chris Williford Executive Vice President/ Chief Financial Officer Dated: January 27, 1997 42 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the RegistrationStatement (Form S-3 No. 33-3398 of Abraxas Petroleum Corporation and in the related Prospectus of our report dated August 30, 1996 with respect to the statements of combined oil and gas revenues and direct operating expenses of Certain Overriding Royalty Interests in the Portilla Field acquired by Abraxas Petroleum Corporation for the years ended December 31, 1994 and 1995 and our report dated October 7, 1996 with respect to the balance sheet of Canadian Abraxas Petroleum Limited as of September 30, 1996, included in this Current Report (Form 8-K/A Number 1) dated January 27, 1997. Ernst & Young LLP San Antonio, Texas January 27, 1997 43 Consent of Independent Chartered Accountants To the Board of Directors of CGGS Canadian Gas Gathering Systems Inc. We consent to the incorporation by reference in the registration statement (No. 33-3398) on Form S-3 of Abraxas Petroleum Corporation of our report dated January 12, 1996 with respect to the balance sheets of CGGS Canadian Gas Gathering Systems Inc. as at October 31, 1995 and 1994, and the related statements of earnings (loss) and deficit and changes in financial position for the years ended October 31, 1995, 1994 and 1993, which report appears in the Form 8-K/A Number 1 of Abraxas Petroleum Corporation dated January 27, 1997. Calgary, Canada KPMG January 24, 1997 Chartered Accountants -----END PRIVACY-ENHANCED MESSAGE-----