<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1997
REGISTRATION STATEMENT NO. 333-25719
================================================================================
SECURITIES AND EXCHANGE COMMISSION
---------------------
PRE-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
CONTINENTAL NATURAL GAS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
OKLAHOMA 4923 73-1198957
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1412 SOUTH BOSTON, SUITE 500
TULSA, OKLAHOMA 74119
(918) 582-4700
(address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------------
GARRY D. SMITH
VICE PRESIDENT, CONTROLLER
CONTINENTAL NATURAL GAS, INC.
1412 SOUTH BOSTON, SUITE 500
TULSA, OKLAHOMA 74119
(918) 582-4700
(name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
Copies to:
<TABLE>
<C> <C> <C>
WILLIAM W. PRITCHARD, ESQ. KENNETH F. ALBRIGHT, ESQ. BYRON F. EGAN, ESQ.
DEL L. GUSTAFSON, ESQ. ALBRIGHT & RUSHER, JACKSON & WALKER, L.L.P.
HALL, ESTILL, HARDWICK, GABLE, A PROFESSIONAL CORPORATION 901 MAIN STREET, SUITE 6000
GOLDEN & NELSON, P.C. FIFTEEN WEST SIXTH STREET, SUITE 2600 DALLAS, TEXAS 75202-3797
320 SOUTH BOSTON AVENUE, SUITE 400 TULSA, OKLAHOMA 74119-5434 (214) 953-5727
TULSA, OKLAHOMA 74103-3708 (918) 583-5800
(918) 594-0400
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=============================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE PRICE REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value.......... 2,415,000 $14.00 $33,810,000 $10,245
=============================================================================================================================
</TABLE>
(1) Includes 315,000 shares which the Underwriters may purchase to cover
over-allotments, if any.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
CONTINENTAL NATURAL GAS, INC.
FORM S-1 REGISTRATION STATEMENT
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
REGISTRATION STATEMENT
ITEMS AND HEADING LOCATION IN PROSPECTUS
---------------------- ----------------------
<S> <C> <C> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front Cover Page; Outside Back Cover
Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Prospectus Summary; The Company; Risk Factors
4. Use of Proceeds.................................... Use of Proceeds
5. Determination of Offering Price.................... Risk Factors
6. Dilution........................................... Risk Factors; Dilution
7. Selling Security Holders........................... Principal and Selling Shareholders
8. Plan of Distribution............................... Outside Front Cover Page; Underwriting
9. Description of Securities to Be Registered......... Description of Capital Stock
10. Interests of Named Experts and Counsel............. Not Applicable
11. Information with Respect to the Registrant
a. Description of Business....................... Prospectus Summary; Risk Factors; Management's
Discussion and Analysis of Financial Condition
and Results of Operations; Business; Certain
Transactions
b. Description of Property....................... Business -- Facilities
c. Legal Proceedings............................. Business -- Legal Proceedings
d. Market Price and Dividends on Equity
Securities.................................... Outside Front Cover Page; Dividend Policy;
Description of Capital Stock; Certain
Transactions; Shares Eligible for Future Sale
e. Financial Statements.......................... Financial Statements
f. Selected Financial Data....................... Prospectus Summary; Selected Consolidated
Financial and Other Information
g. Supplementary Financial Data.................. Not Applicable
h. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... Management's Discussion and Analysis of
Financial Condition and Results of Operations
i. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........ Not Applicable
j. Qualitative and Quantitative Disclosure about
Market Risk................................... Not Applicable
k. Directors and Executive Officers.............. Management; Principal and Selling Shareholders
l. Executive Compensation........................ Management
m. Security Ownership of Certain Beneficial
Owners and Management......................... Principal and Selling Shareholders
n. Certain Relationships and Related
Transactions.................................. Certain Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities..... Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY STATE.
SUBJECT TO COMPLETION, DATED JULY 11, 1997
2,100,000 SHARES
[LOGO] CONTINENTAL NATURAL GAS, INC.
COMMON STOCK
---------------------
Of the 2,100,000 shares of Common Stock, par value $0.01 per share (the
"Common Stock") offered hereby (the "Offering"), 1,800,000 shares are being sold
by Continental Natural Gas, Inc. ("CNG" or the "Company") and 300,000 shares are
being sold by a shareholder of the Company (the "Selling Shareholder"). See
"Principal and Selling Shareholders." The Company will not receive any proceeds
from the sale of Common Stock by the Selling Shareholder. Prior to the Offering
there has been no public market for the Common Stock. It is currently estimated
that the initial public offering price will be between $12.00 and $14.00 per
share. See "Risk Factors -- No Prior Public Market" for the factors considered
in determining the initial public offering price. After the Offering, the
Company will remain under the control of affiliates of Gary C. Adams, Chairman
of the Board, President and Chief Executive Officer of the Company. Such
affiliates will be able to elect all of the Company's directors, control the
management and policies of the Company and determine the outcome of any matter
submitted to a vote of the Company's shareholders. See "Risk
Factors -- Continued Control by Majority Shareholders."
The Company has been approved for listing on the Nasdaq National Market
under the symbol "CNGL", subject to official notice of issuance.
FOR A DISCUSSION OF MATERIAL RISKS IN CONNECTION WITH THE PURCHASE OF COMMON
STOCK OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 8-12 OF THIS PROSPECTUS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================================
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT COMPANY(2) SHAREHOLDER
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
Total(3).......................... $ $ $ $
==================================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses payable by the Company estimated to be $700,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
315,000 additional shares of Common Stock at the Price to Public, less the
Underwriting Discount, for the purpose of covering over-allotments, if any.
If such option is exercised in full, the total Price to Public, Underwriting
Discount, Proceeds to Company and Proceeds to Selling Shareholder, will be
$ , $ , $ and $ , respectively. See
"Underwriting."
---------------------
The shares of Common Stock are offered severally by the Underwriters when,
as and if delivered to and accepted by them, subject to their right to withdraw,
cancel or reject orders in whole or in part and subject to certain other
conditions. It is expected that delivery of certificates representing the shares
of Common Stock will be made against payment on or about , 1997 at
the offices of Oppenheimer & Co., Inc., Oppenheimer Tower, World Financial
Center, New York, New York 10281.
---------------------
OPPENHEIMER & CO., INC. SOUTHWEST SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 4
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting requirements
of the Securities and Exchange Act of 1934, as amended (the "Exchange Act").
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 with respect to the shares of
Common Stock offered hereby, of which this Prospectus forms a part. In
accordance with the rules of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the securities offered hereby, reference is made
to the Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus concerning the provisions of such
documents are necessarily summaries of such documents and each such statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the Commission as an exhibit to the Registration Statement. The
Registration Statement and the exhibits and schedules thereto may be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission located at 500 West Madison Street, Chicago, Illinois 60661 and
Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained at prescribed rates from the Public Reference Room of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a World Wide Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants,
such as the Company, that file electronically with the Commission.
The Company will provide without charge to each person who receives a copy
of this Prospectus, upon written or oral request of such person, a copy of any
of the information that is incorporated by reference in this Prospectus (not
including exhibits to the information that is incorporated by reference unless
the exhibits are themselves specifically incorporated by reference). Such
request should be directed to: Continental Natural Gas, Inc., Attention: Garry
D. Smith, 1412 South Boston, Suite 500, Tulsa, Oklahoma 74119, (918) 582-4700.
The Company intends to distribute to its shareholders annual reports
containing audited financial statements certified by its independent auditors
and to make available to its shareholders quarterly reports for the first three
quarters of each fiscal year containing unaudited financial information.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. Certain terms, including several technical terms
commonly used in the oil and gas industry, are defined in the "Glossary." As
used in this Prospectus, the terms "Company" and "CNG" refer, unless the context
requires otherwise, to Continental Natural Gas, Inc., its subsidiaries
(including limited liability companies), joint venture entities managed by the
Company or its subsidiaries and their interests therein. Unless otherwise noted,
all references in this Prospectus to the number of shares of Common Stock
outstanding and to be offered in the Offering assume no exercise of the
over-allotment option granted to the Underwriters in connection with the
Offering and the conversion of all outstanding shares of Convertible Preferred
Stock of the Company ("Convertible Preferred Stock") into Common Stock prior to
the effectiveness of the Registration Statement of which this Prospectus is a
part. All information in this Prospectus has been adjusted to reflect an
approximate 136-for-1 stock split in July 1997. No information is given in this
Prospectus regarding the Company's recent acquisitions of the Spearman gas
processing plant and of the Laverne gas processing plant except in "-- Recent
Developments" and in "Business -- Recent Developments."
THE COMPANY
The Company is an independent mid-stream energy company engaged in the
purchasing, gathering, treating, processing and marketing of natural gas and
natural gas liquids ("NGLs"). The Company owns and operates approximately 1,100
miles of natural gas gathering pipelines located in the Texas and Oklahoma
panhandle region (the "Panhandle Area") with a total throughput capacity of 383
MMcf/d and two interconnected natural gas processing plants with a total NGL
production capacity of 490 Mgal/d. CNG provides essential services to natural
gas producers in the Panhandle Area by (i) connecting the producers' wells to
the Company's gathering systems, (ii) treating the producers' natural gas to
ensure that it meets pipeline specifications, (iii) transporting the natural gas
from the wellhead to CNG's processing plants where NGLs are extracted from the
natural gas stream and (iv) providing access for the natural gas and NGLs to
various markets in the Midwestern, Mid-Continent, Rocky Mountain and southern
Texas regions (the "CNG Market Area") of the United States. The April 1996 and
January 1997, editions of "Hart's Report on Gas Customer Satisfaction" published
by Hart Publications, Inc. reported that CNG was rated the most preferred
natural gas purchaser in surveys of natural gas sellers. The Company markets the
natural gas it gathers or processes ("on-system gas"), as well as natural gas it
neither gathers nor processes ("off-system gas"), to utilities, end-users, other
marketers and pipeline affiliates.
From 1985 through 1990, CNG's activities were primarily limited to
marketing off-system gas. Concurrent with the evolving deregulation of the
natural gas industry, the Company began to acquire natural gas gathering systems
and processing plants to complement its marketing business. Since 1990, the
Company has completed approximately $64 million of acquisitions and system
expansion projects. During March 1997, CNG's average gathering system throughput
was 108 MMcf/d and average processing plant throughput was 135 MMcf/d. The
Company's NGL production for March 1997, averaged 281 Mgal/d. Over the three
years ended December 31, 1996, the Company's daily natural gas throughput has
increased 92%. Primarily as a result of this growth, the Company's EBITDA (as
defined in the Glossary) has increased to $9.5 million in 1996 from $1.7 million
in 1994. For the three months ended March 31, 1997, the Company's EBITDA was
$3.7 million.
The Company's principal assets are located in the Panhandle Area, which is
a major natural gas producing area with significant long-lived natural gas
reserves. CNG's Beaver Plant and Beaver Gathering System were acquired in 1990
from El Paso Natural Gas Company and currently consist of approximately 300
miles of natural gas gathering pipelines, a 65 MMcf/d cryogenic processing plant
and a 40 MMcf/d propane refrigeration plant yielding NGL production of 215
Mgal/d. The Beaver Plant is interconnected with the Company's Mocane Plant,
which was acquired from affiliates of Conoco, Inc. and Chevron USA, Inc. in
1995. The Mocane Plant consists of two refrigerated lean oil absorption plants
with a combined demonstrated capacity of 200 MMcf/d of natural gas and 280
Mgal/d of NGLs, approximately 140,000 barrels of underground NGL storage and a
6,700 barrel per day NGL fractionator. During the first half of 1996, the
Company acquired approximately 800 miles of gas gathering assets located
throughout the Texas panhandle in three separate transactions. These gathering
assets (the "Texas Gathering Assets") were acquired for approximately $20.2
million from subsidiaries of Enron Corporation.
3
<PAGE> 6
BUSINESS STRATEGY
The Company's business strategy is to achieve sustainable growth in cash
flow and earnings by (i) acquiring and constructing natural gas gathering
systems and processing plants with excess capacity which complement CNG's
marketing operations, (ii) improving the profitability of the Company's existing
systems and plants by increasing their utilization and efficiency and (iii)
expanding its energy marketing services and sales volumes by offering natural
gas producers and purchasers flexible contract terms, value-added services and
other favorable arrangements.
Expansion of Facilities. The Company seeks to acquire or make investments
in projects that complement its existing systems or allow it to expand into new
strategic areas and provide enhanced marketing opportunities. These investments
typically include natural gas gathering, processing, treating or fractionation
assets.
Improving the Profitability of Existing Facilities. The Company seeks to
maximize the profitability of its operations by (i) increasing natural gas
throughput and processing levels, (ii) directing natural gas throughput to a
particular Company-owned gas processing plant that maximizes product yields
and/or margins, (iii) investing in assets that enhance product value and (iv)
controlling operating and overhead expenses.
Expanding Energy Marketing Services and Sales Volumes. CNG is a marketer of
natural gas and NGLs. The Company plans to expand its energy marketing
activities by continuing to offer creative, flexible contract terms that satisfy
the objectives of producers at the wellhead and purchasers in the marketing of
natural gas. The Company also seeks to increase its off-system marketing. In
addition, the Company intends to expand into the sale of electric power to
wholesale customers and industrial and commercial end-users. See
"Business -- Business Strategy."
RECENT DEVELOPMENTS
In July 1997 the Company completed the acquisition of the Spearman gas
processing plant (the "Spearman Plant") located in Ochitree County, Texas, for a
purchase price of approximately $1.0 million. The Spearman Plant was shut-down
in 1994 and has remained idle since that time. The current maximum throughput of
the Spearman Plant is estimated to be approximately 50 MMcf/d utilizing a
refrigerated lean-oil absorption process, producing approximately 86 Mgal/d of
NGLs. The Company believes that it will be able to utilize the Spearman Plant
for processing natural gas the Company gathers through its nearby Spearman
gathering system which is part of the Texas Gathering Assets.
In July 1997 the Company purchased from Conoco, Inc. ("Conoco") and its
affiliate a 36% interest in the Laverne gas processing plant (the "Laverne
Plant") located in Harper County, Oklahoma, for a purchase price of $2.9 million
(the "Laverne Plant Acquisition"). Prior to the Laverne Plant Acquisition, the
Company had acquired approximately 17% of the plant for $1.4 million and
presently owns approximately 53% of the Laverne Plant. Concurrent with the
Laverne Plant Acquisition, certain litigation between the Company and the Conoco
affiliate was settled. See "Business -- Legal Proceedings."
The Laverne Plant consists of a 200 MMcf/d cryogenic gas processing
facility, complete with NGL fractionation capability and above-ground storage.
The Laverne Plant straddles GPM Gas Corporation's Laverne natural gas gathering
system. Natural gas production feeding the Laverne Plant originates from the
Mocane-Laverne field. The plant is located approximately eight miles east of the
Beaver Plant. Current natural gas throughput at the Laverne Plant is
approximately 70 MMcf/d, yielding approximately 180 Mgal/d of NGLs. Due to the
Laverne Plant's proximity to CNG's other assets and its substantial
underutilized capacity, the Company believes that the Laverne Plant will enhance
the Company's existing operations in the Panhandle Area.
4
<PAGE> 7
THE OFFERING
Common Stock Offered by the Company....... 1,800,000 shares
Common Stock Offered by Selling
Shareholder............................... 300,000 shares
----------------
Total................................... 2,100,000 shares
================
Common Stock to be Outstanding after the
Offering(1)............................... 6,000,000 shares
Use of Proceeds........................... The net proceeds to the Company
from the Offering will be used to
repay outstanding bank borrowings,
pay accrued dividends on the
Convertible Preferred Stock and
for other general corporate
purposes. See "Use of Proceeds."
The Company will not receive any
of the proceeds from the sale of
shares by the Selling Shareholder.
Nasdaq National Market Symbol............. CNGL
- ---------------
(1) Excludes (i) 204,000 shares subject to outstanding options under the
Company's 1996 Incentive Stock Option Plan (the "1996 Stock Plan") and (ii)
600,000 shares reserved for future issuance and issuable upon grant of
options, stock appreciation rights and stock grants under the Company's 1997
Stock Plan (the "1997 Stock Plan").
5
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
The following table presents summary financial and operating information.
The financial data for the years ended December 31, 1994, 1995 and 1996 have
been derived from the Company's Consolidated Financial Statements included
herein which have been audited by Coopers & Lybrand L.L.P., independent
accountants. The data for and at the end of the three month periods ended March
31, 1996 and 1997, have been derived from the unaudited Consolidated Financial
Statements of the Company included elsewhere in this Prospectus and reflect, in
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary for fair presentation of the results for such periods.
Results of operations for the three months ended March 31, 1997, are not
necessarily indicative of the results to be achieved for the year ending
December 31, 1997. The summary financial data should be read in conjunction with
the Company's Financial Statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------------ -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Natural gas sales............................ $124,981 $126,583 $100,477 $ 95,631 $208,779 $ 32,670 $ 78,788
Natural gas liquids sales.................... 10,102 23,177 19,572 24,804 34,757 6,195 8,881
Gathering fees............................... -- -- -- -- 1,995 -- 843
Other........................................ 1,239 1,308 260 763 1,130 455 15
-------- -------- -------- -------- -------- -------- --------
Total operating revenue...................... 136,322 151,068 120,309 121,198 246,661 39,320 88,527
Operating costs and expenses
Cost of purchased natural gas................ 125,872 137,560 111,038 107,642 225,535 34,493 81,417
Operating expenses........................... 3,617 5,530 3,930 4,366 5,978 1,382 1,559
General and administrative................... 4,050 3,847 3,601 3,840 5,623 1,310 1,842
Depreciation, depletion and amortization..... 1,067 1,741 1,505 1,367 2,854 473 899
-------- -------- -------- -------- -------- -------- --------
Total operating costs and expenses........... 134,606 148,678 120,074 117,215 239,990 37,658 85,717
Operating income............................... 1,716 2,390 235 3,983 6,671 1,662 2,810
Other income (expense), net.................... (448) (1,028) 4,648 (1,047) (2,686) (264) (1,171)
-------- -------- -------- -------- -------- -------- --------
Income before income taxes, extraordinary item
and cumulative effect of accounting change..... 1,268 1,362 4,883 2,936 3,985 1,398 1,639
Income tax (expense) benefit..................... (47) (127) 2,174 3,635 (30) (652)
-------- -------- -------- -------- -------- -------- --------
Income before extraordinary item and cumulative
effect of accounting change.................... $ 1,268 $ 1,315 $ 4,756 $ 5,110 $ 7,620 $ 1,368 $ 987
======== ======== ======== ======== ======== ======== ========
Net income....................................... $ 1,268 $ 1,695 $ 4,756 $ 5,110 $ 7,193 $ 1,368 $ 987
======== ======== ======== ======== ======== ======== ========
Pro forma operating revenue...................... $246,058(1) $ 88,527(1)
Pro forma income before extraordinary item....... $ 786(2) 8,277(1) 1,235(1)
EARNINGS PER SHARE:
Primary:
Income before extraordinary item and cumulative
effect of accounting change.................. $ .41 $ .40 $ 1.46 $ 1.59 $ 1.99 $ .37 $ .24
Net income..................................... .41 .52 1.46 1.59 1.87 .37 .24
Fully Diluted:
Income before extraordinary item and cumulative
effect of accounting change.................. .40 .40 1.45 1.59 1.71 .33 .22
Net income..................................... .40 .52 1.45 1.59 1.61 .33 .22
Pro forma income before extraordinary item:
Primary........................................ .25(2) 1.47(1) .21(1)
Fully diluted.................................. .25(2) 1.34(1) .20(1)
Weighted average common shares outstanding:
Primary........................................ 3,131 3,217 3,215 3,185 3,536 3,305 3,613
Fully diluted.................................. 3,135 3,232 3,242 3,186 4,466 4,155 4,393
OTHER DATA:
Capital expenditures........................... $ 13,986 $ 2,267 $ 3,097 $ 12,311 $ 30,761 $ 10,418 $ 3,498
EBITDA(3)...................................... 2,782 4,132 1,739 5,350 9,525 2,135 3,709
Natural gas throughput gathered and/or
processed (MMcf/d)........................... 60 93 95 125 182 121 213
NGLs production (Mgal/d)....................... 105 251 249 265 264 245 269
Average NGL price (per gallon)................. $ .27 $ .26 $ .22 $ .26 $ .36 $ .28 $ .37
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ (2,773) $ (2,372)
Property, plant and equipment (net)....................... 62,751 62,751
Total assets.............................................. 117,064 117,465
Long-term debt, excluding current portion................. 38,071 18,071
Total liabilities......................................... 93,924 73,924
Shareholders' equity...................................... 23,140 43,541
</TABLE>
- ---------------
(1) Excludes the results of operations related to the Company's interests in oil
and gas properties which were sold to an affiliated company in 1996, and
includes the effect of debt to be extinguished with proceeds from the sale
of Common Stock pursuant to the Offering.
(2) Includes a pro forma income tax provision for 1992 when the Company was an
S-corporation and thus not subject to income taxes.
(3) See definition in the "Glossary" section of this Prospectus.
(4) Adjusted to give effect to the payment by the Company of $111,750 in
cumulative unpaid dividends on the Convertible Preferred Stock subsequent to
March 31, 1997, the sale by the Company of 1,800,000 shares of Common Stock
in the Offering and the application of the net proceeds to the Offering.
Estimated net proceeds of the Offering ($21.1 million) have been applied to
liquidate long term debt ($20.0 million) and to pay the remaining cumulative
unpaid dividend on the Convertible Preferred Stock ($587,250) with the
balance increasing cash.
6
<PAGE> 9
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating the Company and
its business before purchasing the Common Stock offered hereby.
COMMODITY PRICE FLUCTUATIONS
The Company's products, including NGLs, natural gas and related
by-products, are commodities. Because the Company's contracts generally do not
fix a long-term price for the products it purchases or sells, market changes in
the price of such products have a direct and immediate effect (whether favorable
or adverse) upon the revenues and profitability of the Company. In particular,
because the Company is a purchaser of natural gas at the wellhead and a seller
of NGLs extracted from natural gas, a contraction in the margin between the cost
of natural gas and the sales price of NGLs could adversely affect the Company.
Prices for the Company's products are subject to material change in
response to relatively minor changes in supply and demand, general economic
conditions and other market conditions over which the Company has no control.
Other conditions affecting the Company's business include the level of domestic
oil and gas production, the availability and prices of competing commodities and
of alternative energy sources, the availability of local, intrastate and
interstate transportation systems with adequate capacity, government regulation,
the seasons, the weather and the impact of energy conservation efforts.
AVAILABILITY OF NATURAL GAS SUPPLY
The Company must connect new wells to its gathering systems, contract for
new natural gas supplies with third party pipelines or acquire additional
gathering systems in order to maintain or increase throughput levels to offset
depletion of wells currently under contract. Historically, while certain
individual facilities have experienced decreases in dedicated reserves, the
Company has connected new wells and contracted for new supplies with third-party
pipelines which more than offset production depletion of existing wells. The
ability to connect new wells to existing facilities is dependent upon levels of
oil and gas development activity near existing facilities. Significant
competition for connections to newly drilled wells exists in every geographic
area served by the Company. Significant competition also exists for the
acquisition of existing gathering systems. There can be no assurance that the
Company will renew its existing supply contracts or that it will be able to
acquire new supplies of natural gas at a rate necessary to offset depletion of
wells currently under contract.
CONTINUED CONTROL BY MAJORITY SHAREHOLDERS
After giving effect to the Offering, Adams Affiliates, Inc. ("Adams
Affiliates") and Cottonwood Partnership (collectively, the "Majority
Shareholders"), will directly control approximately 57.3% of the outstanding
Common Stock (54.4% if the Underwriters' over-allotment option is exercised in
full). Gary C. Adams, the Chairman of the Board, President and Chief Executive
Officer of the Company, is Chief Executive Officer of Cottonwood Partnership
which, in turn, owns a majority interest in Adams Affiliates. See "Certain
Transactions." After the Offering, the Majority Shareholders will be able to
elect all of the Company's directors, control the management and policies of the
Company and determine the outcome of any matter submitted to a vote of the
Company's shareholders. This presents the potential for a conflict of interest
between the Company and its controlling officers, shareholders and directors.
Provisions of the Company's Certificate of Incorporation also strengthen the
control of the Majority Shareholders over the Company and may act to reduce the
likelihood of a successful attempt to take over the Company or any acquisition
of a substantial amount of Common Stock without the Majority Shareholders'
consent. See "Principal and Selling Shareholders" and "Description of Capital
Stock."
DEPENDENCE ON THIRD-PARTY PIPELINES
In 1996, approximately 60% of the Company's natural gas volume was
delivered to its processing plants through the interstate pipeline systems of
Northern Natural Gas Company ("NNG") and Transwestern Pipeline Company ("TW"),
and substantially all sales of natural gas by the Company were effected through
7
<PAGE> 10
deliveries on interstate pipelines. In addition, the Company has partially
relied on third-party gathering systems for access to and transportation of
contracted natural gas supplies. As a result, a curtailment of the Company's
supply of natural gas by pipelines or by third-party gathering systems, an
impairment of the Company's ability to transport natural gas on interstate
pipelines or a material increase in the rates charged to the Company for the
transportation of natural gas by reason of a change in federal regulations or
for any other reason, could have a material adverse effect upon the Company. In
such event, other transportation arrangements would have to be obtained or
alternative pipelines would need to be constructed by the Company. There can be
no assurance that economically alternative transportation would be available to
the Company or that alternative pipelines could be constructed economically.
Interstate pipelines are authorized under the FERC regulations to impose
penalties in the event the Company's deliveries and receipts from the pipeline
are not balanced on a daily or monthly basis. The Company attempts to balance
purchases and sales of natural gas on a daily and monthly basis so that the
Company's total purchases and sales on any given day (or in any given month) are
equal, thereby not incurring any significant pipeline imbalance penalties.
Nonetheless, in the event the Company is unable to balance its purchases and
sales within prescribed tolerances, the Company may incur severe pipeline
balancing penalties or may be compelled to purchase natural gas at unattractive
prices in order to alleviate these imbalances. In either instance, the Company
could incur substantial losses. See "Business -- Sales and
Marketing -- Transportation."
NET OPERATING LOSS CARRYFORWARDS
The Company has been able to utilize net operating loss carryforwards
("NOLs") to offset approximately $37 million of income in prior years and
thereby reduce or eliminate its tax liability. At December 31, 1996, the Company
had an available NOL of approximately $17.5 million, which it intends to utilize
to offset its taxable income for the current and future years. Due to the lack
of legal precedent with respect to the tax rules governing the Company's NOLs,
both the availability of the Company's NOLs and its prior utilization of NOLs
may be challenged. Management believes that the Company has been, and will
continue to be, legally entitled to use its NOLs. Should the Internal Revenue
Service audit and disallow prior or future use of the Company's NOLs and such
disallowance be upheld upon appeal, the Company would incur additional tax
liability, penalties and interest. Any such additional tax liability could have
a material adverse effect on the financial condition of the Company. The ability
of the Company to utilize its NOLs in the future will also depend upon the
generation of sufficient taxable income prior to the expiration of its NOLs.
Thus, there is no assurance that the Company will be able to utilize its NOLs
prior to expiration. See Note 8 of the Notes to the Consolidated Financial
Statements of the Company included herein.
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended,
in the event that a substantial change in the ownership of the Company were to
occur in the future (whether through the sale of stock by the Majority
Shareholders, new issuances of stock by the Company, conversions, a redemption,
recapitalization, reorganization, any combination of the foregoing or any other
method) so that ownership of more than 50% of the value of the Company's capital
stock changed during any three-year period, the Company's ability to utilize its
NOLs could be substantially limited. For each taxable year ending after such a
change in ownership, the Company would not be able to fully use its NOLs; it
would only be able to use an amount equal to the "sec. 382 limitation." The sec.
382 limitation is an amount equal to a designated percentage of the equity value
of the Company at the time of the change of ownership. The percentage used is
the federal long-term tax-exempt rate.
At present, neither the Company nor the Majority Shareholders intend to
sell stock, issue additional stock, make any acquisitions in exchange for stock
or take any other action which would constitute such a change in ownership and
cause the sec. 382 limitation to apply.
OPERATIONAL RISKS
The Company is subject to all of the risks generally associated with the
gathering, processing, marketing and storage of natural gas and NGLs, including
damage or loss to its own personnel and property, as well as
8
<PAGE> 11
the personnel and property of third-parties. Such loss or damage could result,
among other things, from acts of God, negligent acts of personnel, or systems
failures, resulting in fires and explosions, leakage of natural gas or spills of
NGLs. Any of these occurrences could result in the loss of natural gas and/or
NGLs, environmental pollution, personal injury claims or other damage to the
property of the Company and others. Losses resulting from the occurrence of such
events (notwithstanding insurance coverage for all or part of such losses) could
have a material adverse effect on the financial condition and results of
operation of the Company.
The Company's inability to negotiate natural gas purchase or sale
agreements or NGL sale agreements on favorable terms, or the failure of
contracting third-parties to perform agreements with the Company could have a
material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The success of the Company will depend in large part on the personal
efforts of its Chairman of the Board, President and Chief Executive Officer,
Gary C. Adams, its Vice President of Marketing, Scott C. Longmore, its Vice
President of Operations, Terry K. Spencer, and its Vice President and
Controller, Garry D. Smith. The loss of the services of any of these persons
could have a material adverse effect on the Company.
RISKS PERTAINING TO ACQUISITIONS
Part of the Company's business strategy is to expand through acquisitions.
The Company's future growth is partially dependent upon its ability to complete
suitable acquisitions and effectively integrate acquired assets into the
Company's operations. Suitable acquisitions, on terms acceptable to the Company,
may not be available in the future or may require the Company to assume certain
liabilities, including, without limitation, environmental liabilities, known or
unknown.
POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS
Demand for the Company's primary NGL product, propane, and the Company's
principal commodity, natural gas, will generally increase during the winter
because both products are used as heating fuels. The amount of such increased
demand will depend to some extent upon the severity of the winter. Accordingly,
Company revenues are likely to increase during winter months although the amount
of increase and its effect on profitability cannot be predicted because of
variations in weather and because the Company is also a purchaser of natural gas
and typically experiences an increase in product costs during the winter.
Because of the seasonality of the Company's business and fluctuations in the
prices of its products, the Company's operating results for any past quarterly
period may not necessarily be indicative of results for future periods and there
can be no assurance that the Company will be able to achieve or maintain
profitability on a quarterly or annual basis in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality."
DEPENDENCE ON ONE CUSTOMER
Sales of NGLs to a single customer, a subsidiary of Mapco, Inc., accounted
for 12% and 23% of the total revenue of the Company for fiscal years 1996 and
1995, respectively; however, the Company does not believe that the loss of such
customer would have a material adverse effect on the Company because of the
availability of other customers for the Company's products.
NO PRIOR PUBLIC MARKET
There has been no prior public market for the Company's Common Stock. Even
though the Common Stock has been approved for listing on the Nasdaq National
Market, there can be no assurance that an active trading market for the Common
Stock will develop or be sustained after the Offering or that purchasers of the
Common Stock will be able to resell their Common Stock at prices equal to or
greater than the initial public offering price. The initial public offering
price for the Common Stock will be determined by negotiation between the Company
and the representatives of the Underwriters based on several factors and may
bear no relationship to the market price of the Common Stock subsequent to the
Offering. Numerous factors,
9
<PAGE> 12
including the general economy, announcements by the Company, its suppliers or
competitors and fluctuations in the Company's quarterly and annual operating
results, changes in earnings estimates by analysts, governmental regulatory
action and general trends in the industry could significantly affect the future
market price of the Common Stock. In addition, the stock market has historically
experienced volatility which has affected the market price of securities of many
companies and which has sometimes been unrelated to the operating performance of
such companies.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company is subject to various local, state and federal laws and
regulations including environmental laws and regulations. The Company believes
that it is in substantial compliance with such laws and regulations; however,
there is no assurance that such laws and regulations will not be changed in the
future in a manner which will increase the burden and cost of compliance. In
addition, significant liability could be imposed on the Company for damages,
cleanup costs and penalties in the event of certain discharges into the
environment. See "Business -- Government Regulation" and
"Business -- Environmental Matters."
In March 1992, an environmental site assessment of the Laverne Plant
indicated the presence of hydrocarbon-contaminated groundwater underlying a
portion of the plant site. Under the direction of the Oklahoma Corporation
Commission and based on the results of a pilot remediation project, a plan has
been developed to remediate the site utilizing a biofiltration process to be
installed during the last half of 1997 at an estimated cost of $1 million. The
Company's share of this total cost is expected to be approximately $170,000. See
"Business -- Recent Developments."
The Company is currently involved in pending proceedings at the FERC in
which certain parties allege that the primary function of the Company's
processing plants is interstate transportation and thus that they are subject to
FERC rate and certificate regulation. While the Company believes that its
business is not subject to regulation by the FERC, it cannot predict the outcome
of these proceedings, nor can it predict the effect a ruling would have on the
Company's business. See "Business -- Government Regulation."
LITIGATION
The Company is involved in certain legal proceedings. Although the Company
believes that the final outcome of any legal proceedings will not have a
material adverse effect on the Company, the inherent uncertainty of litigation
makes it impossible to give assurance regarding the effect of such litigation on
the Company. See "Business -- Legal Proceedings."
ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation and Bylaws of the Company and Oklahoma law
include certain provisions that may be deemed to have anti-takeover effects and
may delay, defer or prevent a takeover attempt that a shareholder of the Company
might consider to be in the best interests of the Company or its shareholders.
See "Description of Capital Stock."
DILUTION
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in the amount of $5.74 in the net tangible book value per
share of Common Stock from the initial public offering price. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
The availability for sale of certain shares of Common Stock held by
existing shareholders of the Company after the Offering could adversely affect
the market price of the Common Stock. The Company currently has outstanding
4,200,000 shares of its Common Stock. In addition, the Company has 600,000
shares reserved for future issuance upon the exercise of options or other rights
granted under the 1997 Stock Plan and 204,000 shares subject to outstanding
options under the 1996 Stock Plan. Of the 6,000,000 shares of Common Stock to
10
<PAGE> 13
be outstanding following the Offering, the 2,100,000 shares being offered hereby
will be freely tradeable without restrictions or additional registration under
the Securities Act of 1933, as amended (the "Securities Act"). The remaining
3,900,000 shares were issued and sold by the Company in private transactions in
reliance upon exemptions from registration under the Securities Act. All of
these shares, except as limited by lock-up agreements, will be eligible for
resale pursuant to Rule 144 under the Securities Act ("Rule 144"). In connection
with the Offering, all shareholders of the Company have agreed not to offer,
sell or otherwise dispose of a total of 3,900,000 shares held by them for a
period of 180 days after the effective date of the Offering, without the prior
written consent of the representatives of the Underwriters. Substantially all of
the shares subject to this lock-up agreement would otherwise be available for
resale upon the effective date of the Offering under Rule 144. Sales of a
substantial amount of the currently outstanding shares of Common Stock in the
public market may adversely affect the market price of the Common Stock and the
ability of the Company to raise additional capital should such sales occur at a
time when it would be beneficial for the Company to sell securities. See
"Description of Capital Stock," "Shares Eligible for Future Sale" and
"Underwriting."
COMPETITION
The Company faces strong competition in every aspect of its business,
including the purchase and transportation of natural gas and the sale of natural
gas and NGLs. The Company's competitors include major integrated oil and gas
companies, affiliates of major interstate and intrastate pipeline companies,
natural gas gatherers and natural gas marketers of varying size, financial
resources and experience. Many of these competitors, particularly those
affiliated with major oil and gas and interstate and intrastate pipeline
companies, have capital resources and control supplies of natural gas
substantially greater than those of the Company. See "Business -- Competition."
11
<PAGE> 14
THE COMPANY
The Company is an independent mid-stream energy company engaged in the
purchasing, gathering, treating, processing and marketing of natural gas and
NGLs. From 1985 through 1990, CNG's activities were primarily limited to
marketing off-system gas. Concurrent with the evolving deregulation of the
natural gas industry, the Company began to acquire natural gas gathering systems
and processing plants to complement its marketing business. As a result of these
acquisitions, the Company now derives the majority of its operating income from
gathering, processing and marketing activities associated with these assets. The
Company does not own any natural gas reserves.
During 1996, CNG transferred substantially all of its operating assets to
three limited liability companies in order to limit the potential liability of
any single operating company to the assets and business of that company. The
Company owns 99% of each such limited liability company and the remaining 1% is
owned by Continental Holdings Company, a wholly-owned subsidiary of CNG.
Currently, approximately 90% of the outstanding Common Stock of the Company
is owned by the Majority Shareholders, which are affiliated entities. Gary C.
Adams, the Chairman of the Board, President and Chief Executive Officer of the
Company, is Chief Executive Officer of Cottonwood Partnership which, in turn,
owns a majority interest in Adams Affiliates. See "Principal and Selling
Shareholders." Following the Offering, those entities will own approximately
57.3% of the outstanding Common Stock of the Company.
The Company's principal offices are located at 1412 South Boston, Suite
500, Tulsa, Oklahoma 74119. Its telephone number is (918) 582-4700.
12
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,800,000 shares of
Common Stock offered by the Company hereby, at an assumed initial public
offering price of $13.00 per share, after deduction of the underwriting discount
and offering expenses payable by the Company, are estimated to be approximately
$21.1 million ($24.8 million if the Underwriters' over-allotment option is
exercised in full). The Company will receive none of the proceeds from the sale
of Common Stock by the Selling Shareholder.
Of such proceeds, the Company plans to use approximately $20 million to pay
a portion of the Company's existing indebtedness to ING Capital Corporation
under its term loan, approximately $587,000 to pay accumulated dividends on the
Convertible Preferred Stock and the balance for other general corporate
purposes. The interest rate under the Company's term loan varies at the
Company's election and may be either (i) up to 3/4% (depending upon the
Company's financial performance) above the greater of (x) the arithmetic average
of the prime rates announced by Chase Manhattan Bank, Citibank, N.A. and Morgan
Guaranty Trust Company of New York or (y) the federal funds rate as published by
the Federal Reserve Bank of New York plus 1/2%; or (ii) 1.375% to 2.50%
(depending upon the Company's financial performance) above the London Interbank
Offered Rate (LIBOR). The Company's term loan matures on July 31, 2001. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Pending such uses, the net proceeds of the Offering will be invested in
short-term, interest-bearing investment grade securities, including government
obligations and other money market instruments.
DIVIDEND POLICY
Although the Company paid a dividend of $24,217 in 1995, the Company does
not intend to pay any cash dividends on its Common Stock and anticipates that,
for the foreseeable future, it will retain any earnings for use in the operation
and expansion of its business. Payment of cash dividends in the future will
depend upon the Company's earnings, financial condition, any contractual
restrictions (including restrictions contained in agreements relating to the
Company's credit facility), restrictions imposed by applicable law, capital
requirements and other factors deemed relevant by the Company's Board of
Directors. The Company's current credit facility prohibits the payment of
dividends on its Common Stock until December 30, 1997, and thereafter prohibits
the payment of dividends in excess of 10% of the Company's annual consolidated
net income.
13
<PAGE> 16
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1997
was approximately $22.4 million or $5.34 per share of Common Stock. Net tangible
book value per share represents the amount of total tangible assets of the
Company less total liabilities, divided by the number of shares of Common Stock
issued and outstanding, adjusted for the conversion of the Convertible Preferred
Stock into 586,847 shares of Common Stock and the payment of cumulative unpaid
dividends of $699,000 as of March 31, 1997. After giving effect to the sale of
the 1,800,000 shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $13.00 per share and the application of the
estimated net proceeds therefrom as described under "Use of Proceeds," the pro
forma net tangible book value of the Company as of March 31, 1997 would have
been $43.5 million, or $7.26 per share. This represents an immediate increase in
net tangible book value of $1.92 per share to existing shareholders and an
immediate dilution of $5.74 per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $13.00
Pro forma net tangible book value before the Offering..... 5.34
Increase in pro forma net tangible book value attributable
to new investors....................................... 1.92
Pro forma net tangible book value after the Offering........ 7.26
------
Dilution to new investors................................... $ 5.74
======
</TABLE>
The computations in the table above exclude 204,000 shares of Common Stock
issuable upon the exercise of stock options granted under the 1996 Stock Plan
and 600,000 shares of Common Stock issuable pursuant to awards to be granted
under the 1997 Stock Plan. To the extent such awards under the 1997 Stock Plan
are made and vest or are exercised, there may be further dilution to new
investors. See "Management -- Executive Compensation."
The following table summarizes, on a pro forma basis as of March 31, 1997,
the differences in the total consideration paid and the average price per share
paid by the Company's existing shareholders during the past five years and by
purchasers of the shares offered hereby:
<TABLE>
<CAPTION>
TOTAL CONSIDERATION AVERAGE
NUMBER PERCENT ---------------------- PRICE
OF SHARES PURCHASED AMOUNT PERCENT PER SHARE
--------- --------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders........ 665,997 24% $ 153,040 1% $ .23
New investors................ 2,100,000 76 $27,300,000 99 13.00
--------- --- ----------- ---
Total.............. 2,765,997 100% $27,453,040 100%
========= === =========== ===
</TABLE>
The computation in the table above includes Common Stock acquired by
officers and directors during the past five years and shares issuable upon
exercise of outstanding options, which options are exercisable only if certain
performance criteria of the Company are met during the years of 1997 through
1999.
14
<PAGE> 17
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of March 31, 1997 (i) on an actual basis and (ii) as adjusted to give
effect to the issuance and sale by the Company of 1,800,000 shares of Common
Stock in the Offering at an assumed public offering price of $13.00 per share,
the application of the estimated net proceeds therefrom and the conversion of
the Convertible Preferred Stock into 586,847 shares of Common Stock. See "Use of
Proceeds" and the Company's Consolidated Financial Statements included herein.
This table should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
----------------------
AS
ACTUAL ADJUSTED(1)
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt and capital lease
obligations............................................... $ 3,217 $ 3,217
======= =========
Long-term debt and capital lease obligations(2):
Bank borrowings........................................... $38,071 $ 18,071
Capital lease obligations................................. 6,276 6,276
------- ---------
Total long-term debt and capital lease
obligations..................................... 44,347 24,347
Shareholders' equity(3):
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued................................ 0 0
Convertible preferred stock, $1 par value, $40,000
liquidation value, 200 shares authorized, 149 shares
issued and outstanding................................. 149 0
Common stock, $.01 par value, 60,000,000 shares
authorized, 3,919,156 shares issued, 6,000,000 as
adjusted............................................... 39 60
Additional paid-in capital................................ 12,376 33,455
Retained earnings......................................... 11,029 10,330
Treasury stock, at cost (306,003 shares).................. (204) (204)
Receivable from stock sale................................ (100) (100)
------- ---------
Total shareholders' equity........................ $23,140 $ 43,541
------- ---------
Total capitalization.............................. $67,487 $ 67,888
======= =========
</TABLE>
- ---------------
(1) Adjusted to give effect to (i) the sale by the Company of 1,800,000 shares
of Common Stock in the Offering and the application of the net proceeds
therefrom and (ii) the conversion of the Convertible Preferred Stock into
586,847 shares of Common Stock and the payment of unpaid dividends of
$699,000 attributable to the Convertible Preferred Stock. See "Use of
Proceeds."
(2) See Notes 5 and 6 of the Notes to the Company's Consolidated Financial
Statements included herein.
(3) See Note 11 of the Notes to the Company's Consolidated Financial Statements
included herein.
15
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA AND OTHER INFORMATION
The following table presents selected financial and operating information
for the Company as of the end of and for each of the five years in the period
ended December 31, 1996 and for the three month periods ended March 31, 1996 and
1997. The financial data for the years ended December 31, 1994, 1995 and 1996
have been derived from the Company's Consolidated Financial Statements included
herein which have been audited by Coopers & Lybrand L.L.P., independent
accountants. The data for and at the end of the three month periods ended March
31, 1996 and 1997, have been derived from the unaudited Consolidated Financial
Statements of the Company included elsewhere in this Prospectus and reflect, in
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary for fair presentation of the results for such periods.
Results of operations for the three months ended March 31, 1997, are not
necessarily indicative of the results to be achieved for the year ending
December 31, 1997. The selected financial data should be read in conjunction
with the Company's Financial Statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Natural gas sales.............................. $124,981 $126,583 $100,477 $ 95,631 $208,779 $ 32,670 $ 78,788
Natural gas liquids sales...................... 10,102 23,177 19,572 24,804 34,757 6,195 8,881
Gathering fees................................. -- -- -- -- 1,995 -- 843
Other.......................................... 1,239 1,308 260 763 1,130 455 15
-------- -------- -------- -------- -------- -------- --------
Total operating revenue.................... 136,322 151,068 120,309 121,198 246,661 39,320 88,527
Operating costs and expenses
Cost of purchased natural gas.................. 125,872 137,560 111,038 107,642 225,535 34,493 81,417
Operating expenses............................. 3,617 5,530 3,930 4,366 5,978 1,382 1,559
General and administrative..................... 4,050 3,847 3,601 3,840 5,623 1,310 1,842
Depreciation, depletion and amortization....... 1,067 1,741 1,505 1,367 2,854 473 899
-------- -------- -------- -------- -------- -------- --------
Total operating costs and expenses......... 134,606 148,678 120,074 117,215 239,990 37,658 85,717
Operating income................................. 1,716 2,390 235 3,983 6,671 1,662 2,810
Other income (expense), net...................... (448) (1,028) 4,648 (1,047) (2,686) (264) (1,171)
-------- -------- -------- -------- -------- -------- --------
Income before income taxes, extraordinary item and
cumulative effect of accounting change........... 1,268 1,362 4,883 2,936 3,985 1,398 1,639
Income tax (expense) benefit....................... (47) (127) 2,174 3,635 (30) (652)
-------- -------- -------- -------- -------- -------- --------
Income before extraordinary item and cumulative
effect of accounting change...................... $ 1,268 $ 1,315 $ 4,756 $ 5,110 $ 7,620 $ 1,368 $ 987
======== ======== ======== ======== ======== ======== ========
Net income......................................... $ 1,268 $ 1,695 $ 4,756 $ 5,110 $ 7,193 $ 1,368 $ 987
======== ======== ======== ======== ======== ======== ========
Pro forma operating revenue........................ 246,058(1) $ 88,527(1)
Pro forma income before extraordinary item......... $ 786(2) 8,277(1) $ 1,235(1)
EARNINGS PER SHARE:
Primary:
Income before extraordinary item and cumulative
effect of accounting change.................... $ .41 $ .40 $ 1.46 $ 1.59 $ 1.99 $ .37 $ .24
Net income....................................... .41 .52 1.46 1.59 1.87 .37 .24
Fully Diluted:
Income before extraordinary item and cumulative
effect of accounting change.................... .40 .40 1.45 1.59 1.71 .33 .22
Net income....................................... .40 .52 1.45 1.59 1.61 .33 .22
Pro forma income before extraordinary item:
Primary.......................................... .25(2) 1.47(1) .21(1)
Fully diluted.................................... .25(2) 1.34(1) .20(1)
Weighted average common shares outstanding:
Primary.......................................... 3,131 3,217 3,215 3,185 3,536 3,305 3,613
Fully diluted.................................... 3,135 3,232 3,242 3,186 4,466 4,155 4,393
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(in thousands, except where otherwise indicated)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF CASH FLOWS DATA:
Cash flows provided by (used in) operating
activities..................................... $ 174 $ 12,787 $ 1,785 $ 8,825 $ 23,535 $ (998) $ (8,804)
Cash flows provided by (used in) investing
activities..................................... (13,919) (1,444) 10,188 (12,286) (30,459) (10,418) (3,464)
Cash flows provided by (used in) financing
activities..................................... 14,036 (10,325) (7,800) 2,325 23,345 8,100 5,974
OTHER DATA:
Capital expenditures............................. $ 13,986 $ 2,267 $ 3,097 $ 12,311 $ 30,761 10,418 3,498
EBITDA(3)........................................ 2,782 4,132 1,739 5,350 9,525 2,135 3,709
Natural gas throughput gathered and/or
processed (MMcf/d)............................. 60 93 95 125 182 121 213
NGLs production (Mgal/d)......................... 105 251 249 265 264 245 269
Average NGL price (per gal)...................... $ .27 $ .26 $ .22 $ .26 $ .36 $ .28 $ .37
BALANCE SHEET DATA:
Property, plant and equipment (net).............. $ 19,899 $ 22,231 $ 13,554 $ 28,346 $ 61,045 $ 37,332 $ 62,751
Total assets..................................... 55,824 46,298 35,264 58,099 145,929 64,661 117,064
Long-term debt, excluding current portion........ 5,641 5,626 3,750 6,534 32,946 11,494 38,071
Capital lease obligations, excluding current
portion........................................ 1,565 2,554 954 2,745 6,583 2,601 6,276
Shareholders' equity............................. 5,379 7,397 12,153 16,754 22,153 18,368 23,140
</TABLE>
- ---------------
(1) Excludes the results of operations related to the Company's interests in oil
and gas properties which were sold to an affiliated company in 1996, and
includes the effect of debt to be extinguished with proceeds from the sale
of Common Stock pursuant to the Offering.
(2) Includes a pro forma income tax provision for 1992 when the Company was an
S-corporation, and thus not subject to income taxes.
(3) See definition in the "Glossary" section of this Prospectus.
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Since its formation, the Company has grown primarily as a result of
acquisitions, facilities expansions and connections of additional natural gas
reserves to its natural gas gathering systems. Additionally, the Company has
increased its natural gas and NGL marketing operations. All historical financial
information has been restated to reflect the Company's approximate 136-for-1
stock split effected in July 1997. This discussion and analysis should be read
in conjunction with the Consolidated Financial Statements of the Company and the
notes thereto included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
The Company's results of operations are determined primarily by the volume
of natural gas purchased, processed and resold in its natural gas gathering
systems and processing plants. The Company's off-system gas marketing activities
also contribute to its profitability. Acquisitions of the Texas Gathering Assets
in the second quarter of 1996 and the Mocane Plant in the first quarter of 1995
have had a significant impact on the Company's results of operations.
Fluctuations in the price levels of natural gas and NGLs also affect
results of operations since the Company generally receives a portion of the
natural gas and NGLs revenue from natural gas throughput. Most of the Company's
operating expenses do not vary materially with changes in natural gas throughput
volume on existing systems; thus, increases or decreases in volumes on existing
systems generally have a direct effect on the Company's profitability.
Conversely, operating expenses such as compression rental and compression
maintenance expenses vary with volume changes as compressor units are added or
removed accordingly.
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31,
1996
Revenues. Total operating revenue increased 125% to $88.5 million for the
three months ended March 31, 1997, compared to $39.3 million for the same period
in 1996. Total natural gas sales increased 141% to $78.8 million for the three
months ended March 31, 1997 from $32.7 million for the same period in 1996 as a
result of a $22.1 million price-related increase due to average sales prices of
$3.25 per Mcf in 1997 compared to $2.34 per Mcf in 1996 and a $24.0 million
volume-related increase due to sales of 66.3 MMcf/d in 1997 compared to 38.2
MMcf/d in 1996. This increase in volume resulted primarily from increases in
off-system gas marketing sales.
NGL sales increased 43% to $8.9 million for the three months ended March
31, 1997, compared to $6.2 million for the same period in 1996 primarily as a
result of a $2.1 million price-related increase due to average NGL sales prices
of $0.37 per gallon in 1997 compared to $0.28 per gallon in 1996.
The Company earned gathering fees of $0.8 million for the three months
ended March 31, 1997, as a result of the acquisition of the Texas Gathering
Assets. These assets are also utilized in the Company's processing activities by
purchasing natural gas from producers served by the Company's systems and
transporting it to the Beaver Plant for processing.
Costs and Expenses. Total operating costs and expenses increased 128% to
$85.7 million for the three months ended March 31, 1997, compared to $37.7
million for the same period in 1996. Total natural gas costs increased 136% to
$81.4 million in 1997 from $34.5 million in 1996 as a result of increases in
price and volume. The $24.4 million price-related increase (resulting from a
change in average purchase prices of $3.07 per Mcf in 1997 from $2.15 per Mcf in
1996) was mitigated by approximately $0.5 million of avoided gathering fees
caused by the integration of the Texas Gathering Assets into the Company's
processing business. A $22.6 million volume-related increase resulted from
purchases of 294.8 MMcf/d in 1997 compared to 178.2 MMcf/d in 1996. This
increase in volume resulted primarily from increases in off-system gas marketing
purchases.
Operating expenses increased 13% to $1.6 million for the three months ended
March 31, 1997 from $1.4 million for the same period in 1996. This was primarily
due to operating activities from the acquisition of the Texas Gathering Assets.
18
<PAGE> 21
General and administrative expenses increased 41% to $1.8 million for the
three months ended March 31, 1997 from $1.3 million in the same period in 1996.
This increase was due primarily to the addition of marketing personnel and
administrative support activities related to the Texas Gathering Assets.
Depreciation, depletion and amortization increased 90% to $0.9 million for
the three months ended March 31, 1997 from $0.5 million for the same period in
1996 primarily due to the acquisition of the Texas Gathering Assets and
expansions at the Beaver Plant.
Other Income (Expense). Interest income increased to $0.3 million for the
three months ended March 31, 1997 from $50,000 for the same period in 1996 due
to increased cash investments associated with contract advances received in the
fourth quarter of 1996. During these same time periods, interest expense
increased 350% to $1.5 million from $0.3 million primarily due to additional
debt incurred to finance the acquisition of the Texas Gathering Assets.
Income Taxes. Income tax expense increased to $0.7 million for the three
months ended March 31, 1997 from $30,000 for the same period in 1996. For the
three months ended March 31, 1997, the Company's effective income tax rate
approximates the sum of the federal and state statutory rates, while in 1996 the
Company's effective tax rate was significantly impacted by its net operating
loss carryforwards.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Total operating revenue increased 104% to $246.7 million for the
year ended December 31, 1996, compared to $121.2 million for the same period in
1995. Total natural gas sales increased 118% to $208.8 million in 1996 from
$95.6 million in 1995 as a result of a $79.1 million price-related increase due
to average sales prices of $2.56 per Mcf in 1996, compared to $1.59 per Mcf in
1995 and a $34.1 million volume-related increase due to sales of 224.1 MMcf/d in
1996, compared to 165.1 MMcf/d in 1995. This increase in volume resulted
primarily from increases in off-system gas marketing sales.
NGL sales increased 40% to $34.8 million for the year ended December 31,
1996, compared to $24.8 million in 1995, primarily as a result of a $10.0
million price-related increase due to average NGL sales prices of $0.36 per
gallon in 1996, compared to $0.26 per gallon in 1995.
The Company earned gathering fees of $2.0 million for the year ended
December 31, 1996, as a result of the acquisition of the Texas Gathering Assets
in the second quarter of 1996.
Other revenues including sales from oil and gas properties increased to
$1.1 million in 1996 from $0.8 million in 1995. All the Company's oil and gas
properties were sold to an affiliated entity in the third quarter of 1996 for
$0.3 million, which approximated book value. Oil and gas producing activities
contributed revenues of $0.6 million, $0.5 million and $0.2 million in 1996,
1995 and 1994, respectively.
Costs and Expenses. Total operating costs and expenses increased 105% to
$240.0 million for the year ended December 31, 1996, compared to $117.2 million
for the same period in 1995. Total natural gas costs increased 110% to $225.5
million in 1996 from $107.6 million in 1995 as a result of increases in price
and volume. The $85.2 million price-related increase (resulting from a change in
average purchase prices of $2.46 per Mcf in 1996 from $1.53 per Mcf in 1995) was
mitigated by approximately $0.5 million of avoided gathering fees caused by the
integration of the Texas Gathering Assets into the Company's processing
business. A $32.7 million volume-related increase resulted from purchases of
251.1 MMcf/d in 1996, compared to 192.6 MMcf/d in 1995. This increase in volume
resulted primarily from increases in off-system marketing purchases.
Operating expenses increased 37% to $6.0 million in 1996 from $4.4 million
in 1995. This was due mainly to the increased operating activities from
acquisition of the Texas Gathering Assets, expansions at the Beaver Plant and
inclusion of Mocane Plant operating expenses for the full year.
General and administrative expenses increased 46% to $5.6 million in 1996
from $3.8 million in 1995. This increase was due primarily to the addition of
marketing personnel, administrative support activities related to the Texas
Gathering Assets and ad valorem tax increases in connection with the acquisition
of the Texas Gathering Assets and Beaver Plant expansion projects.
19
<PAGE> 22
Depreciation, depletion and amortization increased 109% to $2.9 million in
1996 from $1.4 million in 1995 primarily due to the acquisition of the Texas
Gathering Assets, expansions at Beaver Plant and inclusion of the Mocane Plant
for the full year.
Other Income (Expense). Interest expense increased 196% to $2.7 million in
1996 from $0.9 million in 1995 due primarily to additional debt incurred to
finance the acquisition of the Texas Gathering Assets.
Income Taxes. The Company's effective income tax rate in 1996 and 1995 was
significantly impacted by its net operating loss carryforwards. For financial
statement purposes, recognition of the net operating loss carryforwards resulted
in a tax benefit of $3.6 million in 1996 and $2.2 million in 1995. The Company
anticipates that its effective tax rate in 1997 will approximate the sum of the
federal and state statutory rates. See Note 8 to the Company's financial
statements included elsewhere herein.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Total operating revenue increased to $121.2 million for the year
ended December 31, 1995, from $120.3 million for the same period in 1994. Total
natural gas sales decreased 5% to $95.6 million in 1995 from $100.5 million in
1994 as a result of a $20.8 million price-related decrease due to average sales
prices of $1.59 per Mcf in 1995 compared to $1.93 per Mcf in 1994 and a $15.9
million volume-related increase due to sales of 165.1 MMcf/d in 1995, compared
to 142.4 MMcf/d in 1994. This increase in volume resulted primarily from
increases in on-system gas marketing sales.
NGL sales increased 27% to $24.8 million for the year ended December 31,
1995, compared to $19.6 million in 1994, primarily as a result of a $4.1 million
price-related increase due to average NGL sales prices of $0.26 per gallon in
1995, compared to $0.22 per gallon in 1994 and a $1.1 million volume-related
increase due to sales of 265 Mgal/d in 1995, compared to 249 Mgal/d in 1994.
This volume-related increase included NGL sales volume from the Mocane Plant
acquisition of 104.0 Mgal/d, which was partially offset by decreased sales
volume of 83.4 Mgal/d due to the divestiture of a gathering and processing
system in Carlsbad, New Mexico (the "Carlsbad System") in 1994.
Costs and Expenses. Total operating costs and expenses decreased to $117.2
million for the year ended December 31, 1995 from $120.1 million for the same
period in 1994. Total natural gas costs decreased to $107.6 million in 1995 from
$111.0 million in 1994 as a result of a $20.3 million price-related decrease due
to average purchase prices of $1.53 per Mcf in 1995 compared to $1.82 per Mcf in
1994 offset by a $16.9 million volume-related increase due to purchases of 192.6
MMcf/d in 1995, compared to 167.2 MMcf/d in 1994. This increase in volume
resulted primarily from increases in on-system gas marketing purchases.
Operating expenses increased 11% to $4.4 million in 1995 from $3.9 million
in 1994, due primarily to increased operating activities from the acquisition of
the Mocane Plant.
General and administrative expenses increased 7% to $3.8 million in 1995
from $3.6 million in 1994.
Depreciation, depletion and amortization decreased 9% to $1.4 million in
1995 from $1.5 million in 1994, due primarily to the sale of the Carlsbad System
in 1994 offset partially by the acquisition of the Mocane Plant in 1995.
Other Income (Expense). Interest expense decreased 27% to $0.9 million in
1995 from $1.3 million in 1994. A gain of approximately $3.9 million (net of
$1.3 million attributable to minority ownership interests) on the sale of
certain gathering and processing assets was recognized by the Company during the
fourth quarter of 1994. Additionally, in 1994, the Company recognized other
income of $2.0 million from key-man life insurance policy proceeds due to the
death of an officer.
Income Taxes. The Company's effective income tax rate in 1995 and 1994 was
significantly impacted by its net operating loss carryforwards. For financial
statement recognition purposes, the net operating loss carryforwards resulted in
a tax benefit of $2.2 million in 1995 while tax expense was $0.1 million in
1994.
20
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
General. The Company's primary sources of liquidity and capital resources
historically have been net cash provided by operating activities and bank
borrowings. In addition, in 1994, the Company received $12.8 million from the
sale of the Carlsbad System. The Company's principal uses of cash have been to
fund operations and acquisitions.
The following summary table reflects comparative cash flows for the Company
for the years ended December 31, 1994, 1995 and 1996 and the three months ended
March 31, 1996 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- ------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities................ $ 1,785 $ 8,825 $ 23,535 $ (998) $(8,804)
Net cash provided by (used in)
investing activities................ 10,188 (12,286) (30,459) (10,418) (3,464)
Net cash provided by (used in)
financing activities................ (7,800) 2,325 23,345 8,100 5,974
</TABLE>
For the three months ended March 31, 1997, net cash used in operating
activities increased by approximately $7.8 million from the same period in 1996.
This was mainly attributable to changes in working capital including the
repayment of contract advances totaling $14.5 million. Excluding net changes in
working capital components, the Company's operating activities generated $2.5
million for this period in 1997 and $1.9 million in 1996. Net cash provided by
operating activities for the year ended 1996, increased by approximately $14.7
million from the same period in 1995. The increase resulted primarily from
changes in working capital, including contract advances of approximately $22.8
million received by the Company related to commitments to sell natural gas and
NGLs. It is anticipated that all such contract advances will be repaid in 1997,
which will result in a decrease in cash flows from operating activities.
Excluding net changes in working capital components, the Company's operating
activities generated $6.6 million during 1996 as compared to $4.7 million in
1995, an increase of $1.9 million. Net cash provided by operating activities for
1995 increased by $7.0 million from 1994. This increase was due to a $2.0
million increase in net earnings adjusted for depreciation and amortization and
other noncash items and a $5.0 million increase from working capital components.
Cash used in investing activities for the three months ended March 31, 1997
was primarily for expansion projects on the Texas Gathering Assets. Cash used in
investing activities for the same period in 1996 was mainly for the acquisition
of a portion of the Texas Gathering Assets on March 31, 1996. For the year ended
1996, cash used in investing activities was principally related to the
acquisition of the Texas Gathering Assets and various expansion projects on the
Texas Gathering Assets and the Beaver Gathering System. In 1995, cash used in
investing activities was related primarily to the acquisition of the Mocane
Plant and related expenditures for the expansion of the Mocane fractionation
facility and dual interconnecting pipelines from the Mocane Plant to the Beaver
Plant. Cash provided by investing activities in 1994 was related to the receipt
of $12.8 million from the sale of certain assets, which was offset by
approximately $3.1 million of various upgrade and expansion projects.
Cash provided by financing activities for the three months ended March 31,
1997 resulted from borrowing under the Company's revolving facility used for
working capital requirements and funding various capital projects. Cash provided
by financing activities for the same period in 1996 resulted mainly from
long-term borrowing for the acquisition of a portion of the Texas Gathering
Assets. For the year ended 1996, cash provided by financing activities resulted
principally from long-term borrowing for the acquisition of the Texas Gathering
Assets. In 1995, cash provided by financing activities resulted primarily from
increased borrowing levels for various capital expenditures. In 1994, cash used
in financing activities resulted primarily from the repayment of long-term debt.
In 1996, the Company issued preferred stock and canceled certain indebtedness to
acquire the minority interest ownership of a partnership holding one of the
Company's processing plants.
21
<PAGE> 24
Also in 1996, the Company redeemed 51 shares of Convertible Preferred Stock in
exchange for the cancellation of indebtedness due from an affiliated entity.
At December 31, 1996, the Company had NOLs totaling approximately $17.5
million for regular tax purposes and $18.0 million for alternative minimum tax
purposes. If not utilized, these NOLs will expire from 1999 to 2003. Due to the
lack of existing legal precedent with respect to the tax rules governing the
Company's NOLs, both the availability of the Company's NOLs and its prior
utilization of NOLs (totaling approximately $37 million) may be challenged.
Disallowance of the use of the NOLs would result in taxes associated with prior
utilization of the NOLs being currently payable.
The Company believes that the net proceeds from the Offering, together with
its current credit facilities and cash flows generated by its operations, will
be sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next twelve months. Thereafter, if cash generated
from operations is insufficient to satisfy the Company's liquidity requirements,
the Company may seek to obtain additional credit facilities, sell additional
equity or debt securities or adjust the level of its operating and capital
expenditures. The sale of additional equity securities could result in
additional dilution to the Company's shareholders.
Financing Facilities. The Company entered into a Credit Agreement with ING
Capital Corporation as of December 30, 1996. The Credit Agreement contains a
revolving facility and a term loan facility. The revolving facility has a
maximum borrowing base of $25.0 million which had outstanding borrowings of $6.5
million as of March 31, 1997. Under the term loan facility approximately $33.6
million was outstanding as of March 31, 1997, while an additional $4.8 million
was available for certain future acquisitions, including the acquisition of
interests in the Laverne Plant. Interest rates under both the revolving facility
and term facility are variable, at the Company's election, at: (i) up to 3/4%
(depending upon the Company's financial performance) above the greater of (x)
the arithmetic average of the prime rates announced by Chase Manhattan Bank,
Citibank, N.A. and Morgan Guaranty Trust Company of New York or (y) the federal
funds rate as published by the Federal Reserve Bank of New York plus 1/2%; or
(ii) 1.375% to 2.50% (depending upon the Company's financial performance) above
the London Interbank Offered Rate (LIBOR). Current interest payments on the
revolving facility and repayments under the term facility began on January 31,
1997. The revolving facility contains a sub-limit permitting the Company to
issue Letters of Credit amounting, in the aggregate, to $18.0 million. As of
March 31, 1997, the aggregate amount outstanding under these Letters of Credit
was $6.0 million.
The Company has also entered into a Letter of Credit and Reimbursement
Agreement with Christiania Bank, New York Branch. Under the Reimbursement
Agreement, Christiania Bank initially issued letters of credit in the aggregate
amount of approximately $21.0 million to secure the Company's obligation under
various contract advances. As of March 31, 1997, the aggregate amount
outstanding under these Letters of Credit was $11.1 million. The Company pays a
fee of 1 1/2% per annum for the amount of each Letter of Credit which is issued.
SEASONALITY
The Company's results of operations fluctuate from quarter to quarter, due
to variations in the prices and sales volumes of NGLs and natural gas. The
Company's primary NGL product is propane, which is used for agricultural and
home heating in the Company's market areas. Demand and prices of propane usually
increase during the winter season and decrease during the summer season. The
Company's principal commodity, natural gas, is used primarily for heating fuel
for homes and industry, and for electric power generation. Demand and prices for
natural gas usually increase during the winter season. While the Company's gross
revenues typically increase or decrease seasonally, profitability from natural
gas processing operations is affected by the margins between the cost of natural
gas purchased and the sales prices of the NGLs extracted, which may not follow
seasonal patterns.
22
<PAGE> 25
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("FAS 128"). FAS
128 will change the computation, presentation and disclosure requirements for
earnings per share. FAS 128 requires the presentation of "basic" and "diluted"
earnings per share, as defined, for all entities with complex capital
structures. FAS 128 is effective for financial statements issued for periods
ending after December 15, 1997, and requires restatement of all prior period
earnings per share amounts. The Company has not yet determined the impact that
FAS 128 will have on its earnings per share when adopted.
Statement of Position 96-1, "Environmental Remediation Liabilities," issued
by the American Institute of Certified Public Accountants, will become effective
for the Company in 1997. This statement establishes the timing and measurement
of accruals for environmental liabilities. The Company does not anticipate that
this standard will have a material effect on its financial condition or results
of operations.
UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial
information for each of the Company's last five quarters. The data has been
prepared on a basis consistent with the Company's audited consolidated financial
statements included elsewhere in the Prospectus and includes all necessary
adjustments, consisting only of normal recurring accruals that management
considers necessary for a fair presentation. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1996 1996 1996 1996 1997
--------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Operating revenues.................... $39,320 $42,098 $61,158 $104,085 $88,527
Operating income(1)................... 1,662 377 694 3,938 2,810
Income before extraordinary item...... 1,368 (157) (34) 6,443 987
Net income............................ 1,368 (157) (34) 6,016 987
EARNINGS PER SHARE(2):
Primary:
Income before extraordinary item...... .37 (.08) (.05) 1.75 .24
Net income............................ .37 (.08) (.05) 1.63 .24
Fully diluted:
Income before extraordinary item...... .33 (.08) (.05) 1.42 .22
Net income............................ .33 (.08) (.05) 1.33 .22
OTHER DATA:
General and administrative expense.... 1,310 1,101 1,247 1,965 1,842
Depreciation, depletion and
amortization....................... 473 732 890 759 899
EBITDA(3)............................. 2,135 1,108 1,585 4,697 3,709
Cash flows provided by (used in)
operating activities............... (998) 6,016 1,678 16,840 (8,804)
</TABLE>
- ---------------
(1) Operating revenues less operating costs and expenses.
(2) Earnings per share are calculated independently for each quarter, and
accordingly the sum of the four quarters may not equal the annual earnings
per share amounts.
(3) See definition in the "Glossary" section of this Prospectus.
23
<PAGE> 26
BUSINESS
GENERAL
The Company is an independent mid-stream energy company engaged in the
purchasing, gathering, treating, processing and marketing of natural gas and
NGLs. The Company owns and operates approximately 1,100 miles of natural gas
gathering pipelines located in the Panhandle Area with a total throughput
capacity of 383 MMcf/d and two interconnected natural gas processing plants with
a total NGL production capacity of 490 Mgal/d. CNG provides essential services
to natural gas producers in the Panhandle Area by (i) connecting the producers'
wells to the Company's gathering systems, (ii) treating the producers' natural
gas to ensure that it meets pipeline specifications, (iii) transporting the
natural gas from the wellhead to CNG's processing plants where NGLs are
extracted from the natural gas stream and (iv) providing access for the natural
gas and NGLs to various markets in the CNG Market Area of the United States. The
April 1996 and January 1997, editions of "Hart's Report on Gas Customer
Satisfaction" published by Hart Publications, Inc. reported that CNG was rated
the most preferred natural gas purchaser in surveys of natural gas sellers. The
Company markets on-system gas, as well as off-system gas, to utilities,
end-users, other marketers and pipeline affiliates.
From 1985 through 1990, CNG's activities were primarily limited to
marketing off-system gas. Concurrent with the evolving deregulation of the
natural gas industry, the Company began to acquire natural gas gathering systems
and processing plants to complement its marketing business. Since 1990, the
Company has completed approximately $64 million of acquisitions and system
expansion projects. During March 1997, CNG's average gathering system throughput
was 108 MMcf/d and average processing plant throughput was 135 MMcf/d. The
Company's NGL production for March 1997, averaged 281 Mgal/d. Over the three
years ended December 31, 1996, the Company's daily natural gas throughput has
increased 92%. Primarily as a result of this growth, the Company's EBITDA (as
defined in the Glossary) has increased to $9.5 million in 1996 from $1.7 million
in 1994. For the three months ended March 31, 1997, the Company's EBITDA was
$3.7 million.
The Company's principal assets are located in the Panhandle Area, which is
a major natural gas producing area with significant long-lived natural gas
reserves. CNG's Beaver Plant and Beaver Gathering System were acquired in 1990
from El Paso Natural Gas Company and currently consist of approximately 300
miles of natural gas gathering pipelines, a 65 MMcf/d cryogenic processing plant
and a 40 MMcf/d propane refrigeration plant yielding NGL production of 215
Mgal/d. The Beaver Plant is interconnected with the Company's Mocane Plant,
which was acquired from affiliates of Conoco, Inc. and Chevron USA, Inc. in
1995. The Mocane Plant consists of two refrigerated lean oil absorption plants
with a combined demonstrated capacity of 200 MMcf/d of natural gas and 280
Mgal/d of NGLs, approximately 140,000 barrels of underground NGL storage and a
6,700 barrel per day NGL fractionator. During the first half of 1996, the
Company acquired approximately 800 miles of gas gathering assets located
throughout the Texas panhandle in three separate transactions. These gathering
assets were acquired for approximately $20.2 million from subsidiaries of Enron
Corporation.
Although the Company's principal growth in recent years has been derived
from its gathering and processing operations, the Company's sale of off-system
gas, which does not enter its gathering or processing facilities, remains a
significant portion of its business. In 1996, revenue from the sale of
off-system gas accounted for approximately 53% of the Company's total operating
revenue. The Company marketed the off-system gas of over 70 producers via 15
interstate and intrastate pipelines during 1996. The Company's entry into and
continued participation in the off-system gas business has relied upon federal
regulations mandating the delivery of third-party natural gas by interstate
pipelines. A material change in such regulations could adversely affect the
Company's off-system gas operations. See "Risk Factors -- Dependence on
Third-Party Pipelines" and "Business -- Government Regulations."
24
<PAGE> 27
BUSINESS STRATEGY
The Company's business strategy is to achieve sustainable growth in cash
flow and earnings by (i) acquiring and constructing natural gas gathering
systems and processing plants with excess capacity which complement CNG's
marketing operations, (ii) improving the profitability of the Company's existing
systems and plants by increasing their utilization and efficiency and (iii)
expanding its energy marketing services and sales volumes by offering natural
gas producers and purchasers flexible contract terms, value-added services and
other favorable arrangements.
Expansion of Facilities. The Company seeks to acquire or make investments
in projects that complement its existing systems or allow it to expand into new
strategic areas and provide enhanced marketing opportunities. These investments
typically include natural gas gathering, processing, treating or fractionation
assets. By acquiring assets with unused capacity, the Company has established
significant operating leverage in the Panhandle Area. As a result, the Company
can gather and process additional natural gas through its existing systems at
incrementally higher rates of return. In addition to acquiring or constructing
new facilities in the Panhandle Area, CNG will continue to evaluate
opportunities in new operating areas where the Company believes it can establish
a competitive marketing advantage, allowing the Company to increase the wellhead
prices of natural gas paid to producers and provide value-added services.
In implementing this strategy, CNG has completed approximately $64 million
of acquisitions and system expansion projects since 1990. The Company believes
that its acquisition track record and demonstrated ability to complete
transactions with large pipeline companies and other sellers strengthen its
ability to compete for future acquisitions. In addition, the Company believes
that its seasoned management team allows it to assess and evaluate acquisition
opportunities and integrate acquired assets into its existing operations.
Set forth below is a summary of the Company's significant acquisitions and
construction projects:
<TABLE>
<CAPTION>
YEAR
ACQUIRED OR
PLACED INTO
NAME TYPE SERVICE COST
---- ---- ------------ -------------
(IN MILLIONS)
<S> <C> <C> <C>
Occidental Petroleum Well Connection......... Construction 1996 $ 1.8
Texas Gathering Assets(1).................... Acquisition 1996 20.2
Beaver-to-Mocane Gas Pipeline Construction
Interconnection............................ 1995 3.9
Mocane Fractionator.......................... Construction 1995 1.7
Mocane Processing Plant...................... Acquisition 1995 3.5
Beaver/ANR Pipeline Interconnection.......... Construction 1994 1.8
Carlsbad Cryogenic Plant(2).................. Construction 1992 5.8
Addition to Beaver System.................... Acquisition 1992 1.0
Beaver Cryogenic Plant....................... Construction 1992 4.9
Beaver Gathering System and Processing Acquisition
Plant...................................... 1990 1.2
</TABLE>
- ---------------
(1) This acquisition was accomplished in three separate transactions.
(2) The Company sold the Carlsbad System, which includes the Carlsbad Cryogenic
Plant, in 1994.
Improving the Profitability of Existing Facilities. The Company seeks to
maximize the profitability of its operations by (i) increasing natural gas
throughput and processing levels, (ii) directing natural gas throughput to a
particular Company-owned gas processing plant that maximizes product yields
and/or margins, (iii) investing in assets that enhance product value and (iv)
controlling operating and overhead expenses. In order to maintain or increase
natural gas throughput and processing volumes, the Company obtains additional
natural gas supplies for its facilities by connecting new wells to the Company's
gathering systems, purchasing and integrating gathering systems into the
Company's existing operations and entering into contractual natural gas supply
arrangements with producers or other gatherers.
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<PAGE> 28
The opportunity to connect new wells to the Company's gathering systems is
primarily affected by the level of drilling activity near such gathering
systems. The Panhandle Area is within one of the most prolific natural gas
producing regions in the continental United States and continues to attract
significant exploration activity. Although the Company owns no oil and gas
reserves, the independent engineering firm of Lee Keeling & Associates estimates
that the leases and wells currently under contract with the Company have
approximately 700 Bcf of proved, producing natural gas reserves. The Company
believes it has sufficient gathering and processing capacity to capitalize on
the Panhandle Area's development.
By maintaining geographically-focused operations, the Company believes it
is able to control operating and overhead expenses. Furthermore, the location
and strategic nature of CNG's natural gas gathering systems and processing
plants allow the Company to maximize NGL yields and product returns by directing
natural gas between its Beaver and Mocane Plants. For example, under current
market conditions, CNG seeks to maximize the flow of natural gas through the
Beaver cryogenic processing plant, thereby allowing the Company to realize
greater volumes of NGLs from the natural gas stream and enhance the total value
of its on-system gas throughput.
Expanding Energy Marketing Services and Sales Volumes. CNG is a marketer of
natural gas and NGLs. The Company plans to expand its energy marketing
activities by continuing to offer creative, flexible contract terms that satisfy
the objectives of producers at the wellhead and purchasers in the marketing of
natural gas. By offering flexible contract terms and using a portfolio approach
to marketing natural gas, CNG has been able to substantially increase its
on-system gas and NGL volumes. The Company also seeks to increase its off-system
marketing. In addition, the Company intends to expand into the sale of electric
power to wholesale customers and industrial and commercial end-users.
The Company markets and sells natural gas primarily in the CNG Market Area.
The Company's gathering systems and processing plants are located in an area
where many interstate pipelines converge, allowing it to take advantage of
locational differences in natural gas prices. CNG provides a full range of
services including risk management, storage, transportation, scheduling and
peaking requirements to purchasers of the Company's marketed natural gas. The
Company's natural gas marketing operations are substantially enhanced by its
ability to market natural gas gathered and processed by the Company.
Furthermore, CNG's portfolio approach to marketing allows it to offer producers
and purchasers optimum flexibility with respect to pricing, contract terms and
volumes. By aggregating large volumes of natural gas and maintaining the
flexibility to sell into different markets, CNG has been able to maximize sales
prices by selling to purchasers who are willing to pay a premium for large,
reliable quantities of natural gas.
The Company also markets NGLs produced at its plants to wholesalers and
end-users. The Company's NGL marketing strategy is to increase sales to
end-users and to expand its NGL marketing operations into the purchase and sale
of third-party NGLs.
The Company is currently creating the staffing and operating infrastructure
necessary to market electric power in the CNG Market Area to wholesale customers
and industrial and commercial end-users in accordance with anticipated
nationwide state-by-state deregulation. The Company believes that it may have a
market for electric power with its existing natural gas industrial and
commercial end-user customers. During 1996, the Company applied for and received
a power marketing certificate from the FERC, permitting it to sell wholesale
electric power at market-based rates pursuant to the Federal Power Act. The
Company believes its expertise in marketing natural gas in a deregulated
environment, its expanding customer base and its firm supplies of natural gas
and NGL products will allow it to compete effectively in this emerging market.
RECENT DEVELOPMENTS
In July 1997, the Company completed the acquisition of the Spearman Plant
located in Ochitree County, Texas, for a purchase price of approximately $1.0
million. The Spearman Plant was shut-down in 1994 and has remained idle since
that time. The current maximum throughput of the Spearman Plant is estimated to
be approximately 50 MMcf/d utilizing a refrigerated lean-oil absorption process,
producing approximately 86 Mgal/d of NGLs. The Company believes that it will be
able to utilize the Spearman Plant for processing natural gas the Company
gathers through its nearby Spearman gathering system which is part of the Texas
Gathering Assets.
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<PAGE> 29
In July 1997 the Company purchased from Conoco and its affiliate a 36%
interest in the Laverne Plant for a purchase price of $2.9 million. Prior to the
Laverne Plant Acquisition, the Company had acquired approximately 17% of the
plant for $1.4 million and presently owns approximately 53% of the Laverne
Plant. Concurrent with the Laverne Plant Acquisition, certain litigation between
the Company and the Conoco affiliate was settled. See "Business -- Legal
Proceedings." The Company's interest in the Laverne Plant is held by Continental
Laverne Gas Processing, L.L.C., an Oklahoma limited liability company which was
formed in May 1997, for the purpose of acquiring interests in the Laverne Plant.
The Laverne Plant consists of a 200 MMcf/d cryogenic gas processing
facility, complete with liquid fractionation capability and above-ground
storage. The Laverne Plant straddles GPM Gas Corporation's Laverne natural gas
gathering system. Natural gas production feeding the Laverne Plant originates
from the Mocane-Laverne field. The plant is located approximately eight miles
east of the Beaver Plant. Current throughput at the Laverne Plant is
approximately 70 MMcf/d, yielding approximately 180 Mgal/d of NGLs. Due to the
proximity of the Laverne Plant to CNG's other assets and its substantial
underutilized capacity, the Company believes that the Laverne Plant will enhance
the Company's existing operations in the Panhandle Area.
GATHERING AND PROCESSING
The Company's natural gas gathering and processing activities include
contracting to purchase natural gas supplies, operating and maintaining a system
of gathering pipelines that connect these natural gas supplies to transport
lines or natural gas processing plants and operating and maintaining processing
plants linked to its gathering systems.
Purchasing. In 1996, the Company purchased natural gas from over 75
suppliers, ranging from major producers to small independent companies primarily
in the Panhandle Area. The Company's natural gas throughput in its gathering
systems and processing plants is generally supplied by producers pursuant to
long-term contracts (i.e., contracts in excess of one year). In arranging new
purchase contracts, the Company submits to the producer an offer to purchase the
natural gas from the prospective acreage. The producer typically evaluates
various offers based upon the purchase price and other contract provisions, line
pressure, the time period required for well connection and the gathering
company's reputation for service and reliable marketing. The Company believes
that its flexibility in negotiating contract terms, prompt connection of wells,
reliable performance under its contracts and strong overall relationships with
producers provide it with an important competitive advantage in the acquisition
of new natural gas supplies.
The terms of the Company's natural gas purchase contracts are determined
based upon negotiations with producers, competition and the desire to maximize
the value to be realized from its gathering and processing systems. The Company
purchases a majority of its on-system gas supplies pursuant to long-term
contracts that require producers to dedicate all natural gas produced from
designated properties. The pricing of these producer contracts is generally not
fixed, however, and follows the market price.
The Company's on-system gas contracts with producers may be classified as
(i) processing contracts, (ii) purchase contracts or (iii) gathering contracts.
In March 1997, the Company contracted 14% of its natural gas volumes pursuant to
processing contracts, 47% pursuant to purchase contracts (sometimes with
processing included) and 39% under gathering contracts (sometimes with
processing included). Under processing contracts, the Company agrees to process
the raw natural gas from the wells on behalf of the producers and to allocate
the NGLs recovered and the residue natural gas to each well connected to its
gathering system. The Company retains a percentage of the value of the NGLs
extracted net of plant fuel and NGL shrinkage. The producer bears a share of the
cost of NGL extraction in return for a share of NGL revenue. These processing
contracts are typically on a "keep-whole" basis, where the Company must
reimburse the producer for the fuel and shrinkage.
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<PAGE> 30
Under a purchase contract, the Company generally pays for natural gas
received at the wellhead or at some other delivery point. The Company then
usually resells the natural gas after processing the natural gas for its own
account at its processing facilities. The Company derives a gross margin equal
to the difference between sale proceeds of both the NGLs and the residue natural
gas and the cost of the natural gas purchased at the wellhead.
In (i) gas purchase, (ii) gathering contracts with processing and (iii)
keep-whole processing contracts, operating margins are enhanced by maximizing
the value of the NGLs extracted from the natural gas stream and minimizing the
operating costs which the Company incurs during processing and gathering.
Margins under these contracts can be affected by decreases or increases in NGL
prices or increases or decreases in natural gas prices.
Gathering. Under gathering contracts, the Company typically gathers natural
gas on behalf of a producer from various wellheads for redelivery to specific
pipeline interconnection or redelivery points. The producer is charged a
gathering fee plus a fuel charge for such gathering services. Generally, the
producer will pay the Company a discounted gathering fee in exchange for the
Company retaining some or all of the extracted NGLs.
In the first half of 1996, the Company acquired certain assets in three
separate transactions from subsidiaries of Enron Corporation. As modified by the
Company and then integrated into the Company's business, these assets
collectively comprise the Texas Gathering Assets, which include 800 miles of
gathering pipeline and connect the Beaver and Mocane Plants to new gas supplies
via third-party interstate pipelines.
Natural gas from the Company's Texas Gathering Assets is transported to the
Company's processing plants through interstate pipelines, primarily NNG and TW.
Approximately 60% of the natural gas transported by NNG and TW for the Company
is subject to firm transportation agreements which obligate the pipelines to
give priority to the transportation of the Company's natural gas. The Beaver
Gathering System delivers on-system gas to the Company's processing plants. In
addition, natural gas may be transported to the Company's processing plants
through interruptible transportation agreements with pipelines and third-party
natural gas gatherers. Interruptible transportation agreements require the
pipelines to deliver natural gas on a "first-come, first-serve" basis after
satisfaction of commitments under firm transportation agreements.
Processing. The Company owns and operates two interconnected natural gas
processing plants, one of which is connected to the Beaver Gathering System.
These processing plants complement the Company's gathering operations by
enabling the Company to offer to its producers the option of wellhead purchase
or processing contracts. The sale of NGLs contributes materially to the overall
earnings of the Company because of the added value from NGL extraction. In
addition, natural gas processing complements and diversifies the earnings
derived from natural gas sales. The Company's processing plants at present have
excess capacity which, if increased natural gas supplies can be obtained, can be
utilized to increase Company revenues with a minimal increase in operating
costs. Management of the Company will attempt to obtain the natural gas supplies
necessary to utilize such excess capacity and benefit by the resultant
efficiency.
The Company's Beaver and Mocane Plants extract NGLs and remove water vapor,
solids and other contaminants contained in the natural gas stream. Each of these
plants is capable of recovering substantially all isobutane, normal butane and
natural gasoline components from the natural gas stream. Propane and ethane are
the Company's two primary NGL products. The Beaver Plant, due to its cryogenic
process, is able to extract a higher percentage of NGLs than the Mocane Plant.
The location of the Company's processing plants provide access to nearby
markets for the sale of NGLs, thus reducing transportation costs. The Company
believes its processing plants provide it with a competitive advantage in the
acquisition of natural gas supplies. Much of the Company's natural gas
processing capacity has ethane rejection capability, which allows the Company to
optimize margins if ethane prices decline significantly relative to natural gas
prices. The Company's two processing plants are interconnected.
Beaver Plant. The Beaver Plant was built in 1961. When acquired by CNG in
1990, the Beaver Plant consisted of a 40 MMcf/d design capacity refrigeration
plant, capable of extracting approximately 40% of the propane, nearly all of the
butane and gasoline, and virtually none of the ethane from the inlet natural gas
stream. Average throughput was less than 10 MMcf/d prior to the Company's
acquisition of the facility. In 1992, the Company purchased and relocated a 65
MMcf/d cryogenic processing plant to the Beaver Plant.
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<PAGE> 31
The added facility chills natural gas to -155 degrees Fahrenheit and separates
the natural gas from the NGLs condensed at the low temperatures. The Beaver
cryogenic processing plant currently recovers 95% of the propane, 70% of the
ethane and nearly 100% of the heavier butane and natural gasoline from the
natural gas stream.
The design of the Beaver Plant allows for relatively fuel-efficient,
low-pollution extraction of a high volume of NGLs from natural gas. The combined
cryogenic and refrigeration facilities have a processing capacity of 105 MMcf/d
of inlet natural gas and 215 Mgal/d of extracted NGLs. The Beaver Plant's
average throughput for March 1997 was 70 MMcf/d yielding 180 Mgal/d of NGLs. The
Beaver Plant and gathering system has over 28,000 horsepower of gathering and
processing compression capability. The cryogenic facilities typically run at
full capacity while the refrigeration unit is typically idle.
The NGLs produced consist of a mixture (commonly known as "Y-Grade") of
ethane, propane, isobutane, normal butane and natural gasoline. The Y-Grade
mixture is delivered into an NGL pipeline operated by an affiliate of Koch
Industries, Inc. which is connected to the Beaver Plant.
Mocane Plant. The Mocane Plant was built in 1959, was partially updated in
1985 and was acquired by CNG in early 1995. The Mocane Plant is located about 13
miles northwest of the Beaver Plant. The Mocane Plant has a demonstrated inlet
natural gas capacity of 200 MMcf/d and is designed to extract up to 280 Mgal/d
of NGLs. The Mocane Plant's average throughput for March 1997 was 65 MMcf/d,
yielding 101 Mgal/d of NGLs. Prior to the Company's acquisition of the Mocane
Plant in early 1995, recent historical throughput averaged less than 40 MMcf/d.
The Mocane Plant uses refrigeration and lean oil absorption processes to
extract NGLs. Propane recovery is approximately 85% and ethane recovery is
approximately 25% with nearly 100% of the heavier butane and natural gasoline
being recovered. The Mocane Plant has over 7,500 horsepower of compression used
in the NGL extraction process.
Y-Grade produced at the Mocane Plant may be sold and delivered to NGL
pipelines operated by affiliates of Koch Industries, Inc. and Mapco, Inc.
Alternatively, the Company may fractionate the NGLs into the various components
at its on-site fractionation facility and deliver these NGLs to purchasers via
truck racks. The Mocane Plant has fractionation capacity of 281 Mgal/d. The
Mocane facility can produce propane, isobutane, normal butane, natural gasoline
and a mixture of ethane and propane.
SALES AND MARKETING
Natural Gas Marketing. The Company markets natural gas to local
distribution companies ("LDCs"), marketing affiliates of pipeline companies,
electric utilities, various business and industrial end-users and other natural
gas marketers throughout the CNG Market Area. A portion of the natural gas which
the Company markets is produced in the Panhandle Area and is transported from
the Company's plants through pipeline interconnections with ANR Pipeline Company
("ANR"), Williams Natural Gas Company ("WNG"), NNG and Colorado Interstate Gas
Company ("CIG"). In addition, the Company purchases and resells off-system gas
on numerous pipeline systems located throughout the CNG Market Area.
The Company has multiple pipeline delivery connections, which it believes
allow it to negotiate favorable spot sales contracts and transportation rates
and to avoid curtailment of natural gas deliveries. Due to the flexibility
derived from multiple delivery points, the Company believes that the loss of any
of its markets on a particular pipeline would not have a material adverse effect
on the Company. The Company's facilities are located in an area where many
interstate pipelines converge, allowing it to take advantage of locational
differences in natural gas prices.
During the year ended December 31, 1996, the Company delivered natural gas
to approximately 125 customers located in 12 states. In 1996, the Company
delivered an average of approximately 224 MMcf/d (81.7 Bcf of natural gas for
the year) and had natural gas sales revenues of approximately $209 million. No
one customer accounted for more than 10% of total natural gas sales revenues
during 1996.
During 1994 and 1995, the Company experienced average daily natural gas
sales of 142 MMcf/d and 165 MMcf/d, respectively. In 1996, the Company's natural
gas sales averaged 224 MMcf/d and during the first quarter of 1997, this average
increased to 280 MMcf/d. Sales growth in 1996 and 1997 has resulted
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<PAGE> 32
largely from CNG's hiring of six additional marketing representatives during the
period from May 1, 1996 to the present. The Company plans to hire additional
representatives.
By aggregating large volumes of natural gas and maintaining the flexibility
to sell into different markets, CNG has been able to maximize sale prices by
selling to customers who are willing to pay a premium for large, reliable
quantities of natural gas. Accordingly, the Company expects to continue to
receive greater value than the commodity spot price for its delivered natural
gas.
The Company sells natural gas under sales agreements which may be
classified by (i) the duration of the contract, (ii) pricing terms and (iii) the
nature of the delivery obligations. "Term" contracts have a duration in excess
of one month, "spot" contracts have a duration of one month or less and
"peaking" contracts apply during short periods of high demand. The Company sells
natural gas at "fixed" prices or at "index" prices which vary on a
month-to-month basis with market conditions. Under "baseload" contracts the
Company is required (subject to extremely limited exceptions) to deliver a
specific volume of natural gas, while under "best efforts" contracts delivery
obligations may be suspended at the option of the Company or the purchaser. Due
to varying market conditions, the "mix" of the Company's sales agreements vary
substantially from time to time.
Transportation. The Company arranges for transportation of the natural gas
it markets from the supplier's point of receipt to the sales customer's delivery
point. To facilitate the transportation of its natural gas the Company must
schedule, nominate and monitor transportation availability on a continual basis.
The Company believes that its knowledge of the pipeline network within the CNG
Market Area is an important element in its success as a natural gas marketer.
This allows the Company to provide its suppliers with multiple outlets for their
natural gas and, in times of changes in demand or supply due to weather or other
factors, to route natural gas to areas where higher sales prices may be
achieved. In an effort to improve profit margins, the Company attempts to reduce
transportation charges by taking advantage of its broad array of transportation
arrangements and by negotiating Capacity Release, storage and competitive
transportation discounts.
The Company transports natural gas on interstate pipelines under
interruptible and firm transportation agreements. Under interruptible
transportation agreements, a pipeline is usually obligated to transport on a
non-discriminatory basis up to a specified maximum quantity of natural gas,
subject to available capacity. In return, the Company pays a transportation fee
based on the quantity of natural gas actually transported. An interruptible
transportation agreement may provide the customer with priority over other
interruptible shippers based on the rate paid and subject to the availability of
capacity not utilized by parties shipping under firm transportation agreements.
As of December 31, 1996, the Company had over 150 interruptible transportation
contracts. The majority of off-system gas purchased and sold by the Company is
transported under interruptible transportation arrangements.
Under firm transportation agreements, a pipeline is obligated to transport
up to a specified maximum quantity of natural gas without interruption, except
upon the occurrence of a force majeure event. Certain of the Company's
customers, including LDCs and electric utilities, and some of the Company's
long-term supply contracts require dependable transportation services provided
under firm transportation agreements. Some customers who purchase natural gas
from the Company transport such natural gas under their own transportation
arrangements, while other customers require or allow the Company to arrange for
such transportation services on their behalf.
Under contractual arrangements with pipelines, the Company is required to
balance its deliveries and receipts from each pipeline on a monthly or daily
basis. The pipelines are authorized to impose "imbalance penalties" in the event
that the Company's deliveries or receipts from any pipeline are not balanced on
a monthly or daily basis. These penalties are typically quite severe. In
addition, the Company may be required to purchase or sell natural gas at
unacceptable prices in the event it has not accurately balanced its deliveries
or receipts from the pipeline (i.e. it must purchase natural gas to make up
deficient volumes or sell natural gas to reduce excess volumes). Historically,
the Company has not incurred any significant "imbalance penalties" or sustained
other significant losses as a result of pipeline imbalances.
Due to regulatory changes resulting from Order 636 of the FERC, the
availability of firm transportation has increased, while the availability of
interruptible transportation on certain pipelines has decreased. In
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<PAGE> 33
particular, Order 636 permits current holders of pipeline firm transportation
rights, generally LDCs and large end-users, either to enter into Capacity
Releases of dedicated capacity with replacement shippers or to turn that
capacity back to the pipeline to be posted on an electronic bulletin board for
sale. Typically, LDCs sell Capacity Release during periods of low demand and
compete with released capacity by other LDCs or the pipeline's unsubscribed
capacity. As a result, the Company is often able to purchase Capacity Release at
a discount from posted rates.
NGL Marketing. The Company presently sells NGLs primarily to wholesale
markets with some sales in the local retail market. The Company has recently
hired an NGL marketer with the intent of realizing higher margins on NGLs
through increased sales to the retail market and increasing the marketing of
third-party NGLs. Generally, prices for NGLs tend not to vary directly with
natural gas prices, but more closely follow the prices of crude oil derivatives.
Processing margins increase when natural gas prices are lower in relation to NGL
prices. The Company had NGL sales of approximately $34.8 million in 1996 on NGL
average volumes of 276 Mgal/d.
NGLs are typically used as petrochemical feedstocks, petroleum refinery
blendstocks or fuel. Petrochemical plants use ethane, propane, butane and
natural gasoline in the production of ethylene, which is used in the manufacture
of plastics, building materials, automobile antifreeze and other products.
Refineries use normal butane and isobutane as motor fuel additives. Propane has
agricultural applications and is used as fuel for household consumption,
vehicles and industrial heaters and boilers.
As feedstock, demand for NGLs is influenced by the demand for the end
products in which they are used. Also, the demand for normal butane and
isobutane, which are important feedstocks for the production of the oxygenate,
methyl tertiary butyl ether ("MTBE"), is expected to increase as demand for MTBE
increases in gasoline production. The required use of oxygenates in motor
gasoline under the Clean Air Act Amendments of 1990 in many parts of the United
States is expected to increase demand for MTBE. Seasonal requirements of
purchasers using NGLs as a fuel source also affect demand. NGL production is
dependent upon the supply and NGL content of domestic natural gas. The market
price of NGLs relative to natural gas affects the volume of natural gas
processed and the NGLs extracted from the natural gas. Certain NGLs are produced
outside North America and imported by ship, which may from time to time affect
NGL prices.
Risk Management Activities. The Company uses risk management tools to
reduce commodity price risk for (i) purchases of natural gas to replace fuel and
shrinkage in connection with processing operations and (ii) its NGL and natural
gas sales. With respect to fuel and shrinkage for processing operations the
Company examines the prevailing price environment on an ongoing basis to
determine if opportunities exist to lock-in prices for replacement natural gas
at levels acceptable to the Company. The Company's management is responsible for
monitoring the price environment for replacement natural gas and makes any
decisions necessary to implement the Company's hedging strategies.
The Company employs several procedures to manage its risk with respect to
the purchases and sales of natural gas. The Company's principal strategy is to
balance purchases and sales of natural gas on a daily and monthly basis. This
means on any given day or in any given month the Company has commitments to
purchase and sell approximately the same volume of natural gas. This strategy is
accomplished through active management and monitoring of natural gas supply and
sales through the Company's natural gas marketing department.
A second strategy employed by the Company to manage risk is to enter into
contracts for the "back-to-back" purchase and sale of natural gas. Under this
strategy, the Company enters into natural gas purchase contracts and natural gas
sales contracts for a corresponding volume of natural gas. The Company thereby
locks in its profit and also locks in a supply of natural gas in order to assure
performance under the applicable sales contract.
Finally, the Company enters into other hedging transactions with respect to
its fixed price purchases and sales of natural gas, which constitute less than
10% of its total purchases and sales. These transactions include futures
contracts, swaps and basis agreements and other arrangements common in the
financial markets. The Company consistently has hedging positions to cover
substantially all of its purchases and sales under fixed price agreements.
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The Company does not use hedging transactions for speculative purposes. The
Company has, however, on certain occasions taken open positions on carefully
selected arbitrage opportunities. While these occasions have been relatively few
and are carefully reviewed by the Company's management, the Company believes
that the competitive information it obtains from its energy marketing activities
allows it to take advantage of certain opportunities in the market.
The Company's management oversees all hedging activity of the Company. A
daily book on all positions is maintained and daily and monthly reports are
given to management. See Note 12 to the Notes to Consolidated Financial
Statements of the Company included herein.
In addition to the risk associated with price movements, credit risk is
also inherent in the Company's risk management activities. Credit risk relates
to the risk of loss resulting from the nonperformance of a counterparty of its
contractual obligations. The Company maintains credit policies with regard to
counterparties that the Company believes significantly minimize overall credit
risk. These policies include the thorough review of potential counterparties'
financial condition, collateral requirements under certain circumstances,
monitoring of net exposure to each counterparty and the use of standardized
agreements which allow for the netting of positive and negative exposures
associated with each counterparty.
Electric Power Marketing. The Company formed Continental Energy Services,
L.L.C. ("CES") in 1996 to pursue electric power marketing opportunities that are
being created as the domestic electric power industry becomes increasingly
deregulated pursuant to the Energy Policy Act of 1992 (the "Energy Policy Act")
and certain actions taken by the FERC (including implementation of wholesale
open access under Order 888) and public utility commissions in various states.
Just as the Company provides aggregation and marketing services for natural gas
producers and consumers, CES intends to provide similar services in a
deregulating domestic electric industry.
CES received authorization from the FERC in December 1996 to purchase, sell
and market wholesale electric power and engage in other energy-related
transactions and to charge market-based rates for such services and
transactions. CES initially intends to market electric power to electric
utilities, municipalities and electric cooperatives on a wholesale basis.
In the future, if the power industry continues to deregulate and subject to
state and federal regulations, CES also intends to pursue the direct marketing
of power to existing industrial and commercial natural gas customers of the
Company in states which permit such activities. There is no guarantee that the
states or the federal government will adopt programs permitting such activities
or that such programs will be adopted on terms beneficial to CES. If adopted,
however, these programs are anticipated to allow CES to market electric power
directly to industrial and commercial end-users while using the utilities,
municipalities and electric cooperatives solely to generate and transmit power
to these end-users, much like the Company markets natural gas to LDCs and
end-users using the pipelines for transportation services only. CES also expects
to offer a variety of risk management products and services to generators and
consumers including futures, options, swaps and basis agreements and other
financial instruments.
CES has not, as yet, entered into any contracts or conducted any
substantive activities. The timing, manner and extent to which the power
industry will deregulate, with respect to both wholesale power marketing and
retail direct access, is extremely uncertain. Even if the power industry
continues to deregulate in a manner beneficial to CES, there can be no assurance
that the operations of CES, when and if commenced, will be profitable.
CAPITAL INVESTMENT PROGRAM
Capital spending by the Company is expected to reach $11.5 million in 1997.
Approximately $5.3 million is expected to be spent in connection with the
acquisitions of the Spearman Plant and the Laverne Plant. See
"Business -- Recent Developments." The remainder will be spent on various
expansions of the Company's gas gathering systems to accommodate new gas supply
development.
FACILITIES
Gathering Systems and Processing Plants. As of June 1, 1997, the Company
had approximately 1,100 miles of natural gas gathering pipelines, two natural
gas processing plants, each of which has extraction
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equipment and one of which has fractionation equipment and 49 compressor units
located at 18 field stations and the two plant sites.
The following table provides information concerning the Company's natural
gas processing plants and gathering systems:
<TABLE>
<CAPTION>
AVERAGE NATURAL AVERAGE NGL
YEAR CAPACITY GAS THROUGHPUT PRODUCTION
ACQUIRED OR AS OF ------------------- -------------------
PLACED INTO MARCH 31, MARCH MARCH
SERVICE 1997 1996 1997 1996 1997
----------- --------- -------- -------- -------- --------
(MMCF/D) (MMCF/D) (MMCF/D) (MGAL/D) (MGAL/D)
<S> <C> <C> <C> <C> <C> <C>
PROCESSING PLANTS
Beaver Plant.......................... 1990 105 65 70 158 180
Mocane Plant.......................... 1995 200 64 65 106 101
GATHERING SYSTEMS
Beaver-Mocane Gathering............... 1990 195 25 25 N/A N/A
Texas Gathering Assets................ 1996 188 54 83 N/A N/A
</TABLE>
The Company owns approximately 43 acres of land at its Beaver Plant site
and an additional 40 acres at its Mocane Plant site. While this real property is
necessary in order to operate its Beaver and Mocane Plants, it does not
contribute significantly to the value of the Company.
The Company's gas processing plants are fed directly by a network of low
and intermediate pressure steel and polypipe gas gathering pipelines. The Beaver
Gathering System consists of approximately 300 miles of pipelines connecting
over 100 wells for ultimate delivery to the Company's Beaver and Mocane Plants.
Approximately 22% of the Beaver and Mocane Plants' throughput originates from
the Beaver Gathering System. The Company's Texas Gathering Assets extend for
approximately 800 miles across the northern Texas Panhandle providing
substantial gathering exposure along the western edge of the Anadarko Basin,
south of its existing processing plants. Approximately 500 wells are connected
to the Texas Gathering Assets for redelivery to the interstate pipelines of
either NNG or TW. The Texas Gathering Assets, which are steel pipelines, operate
at low pressures.
The Company installed two pipelines connecting the Mocane Plant to the
Beaver Plant in 1995. These pipelines allow the Company to optimize processing
capacity utilization by shifting raw and processed natural gas between the
Beaver and Mocane Plants. In addition, the Company has constructed approximately
27 miles of residue interconnect line, connecting the Beaver Plant to the ANR,
WNG and CIG interstate pipelines, thus expanding the markets for the Company's
on-system gas.
The Company's operations in the Panhandle Area consist of the Beaver and
Mocane Plants, natural gas gathering systems, compression equipment, NGL
storage, fractionation and truck terminal facilities. The Company believes the
Panhandle Area has favorable production, supply and market access
characteristics. The Panhandle Area is one of the most prolific natural gas
producing regions in the continental United States. Production is obtained from
several geologic formations. Natural gas fields in the area have produced for
many years and currently produce at stabilized low rates of decline that
indicate substantial reserves. Estimates by an independent engineering firm, Lee
Keeling & Associates, attribute approximately 700 Bcf of natural gas to the
Company's contracted leases and/or wells as of January 1, 1997.
Compression and Storage Facilities. In connection with the operation of its
gathering systems, the Company operates 49 compressor units located at 18 field
stations and two plant sites with approximately 44,000 horsepower of natural gas
compression. Compressors are used to boost natural gas produced and gathered at
low field pressure to higher pipeline pressures. Approximately 30% of the
Company's compression capacity is leased under various capital lease agreements.
Under such capital lease agreements, the Company makes approximately $1.8
million per year in payments. The terms under such capital leases range from
1998 to 2003 at which time the Company has an option to purchase (generally at a
nominal price) the leased equipment. The Company continues to enter into capital
lease agreements for compression and other natural gas processing equipment.
Under its credit facility, the Company is permitted to incur capital lease
obligations which require incremental annual payments of up to $1 million per
year.
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<PAGE> 36
The Company has approximately 140,000 barrels of underground NGL storage
capacity at the Mocane Plant. Two of the five underground storage caverns
(amounting to approximately 20% of the total storage capacity located at the
Mocane Plant) are currently operational. The Company is currently evaluating the
economic feasibility of placing the remaining storage caverns in operation.
Corporate Offices. The Company leases its Tulsa, Oklahoma headquarters
under a commercial office lease covering approximately 20,000 square feet,
expiring in September 2002. The annual rental payments are approximately
$214,000.
OPERATIONAL RISKS AND INSURANCE
The Company's operations are subject to potential hazards incident to the
gathering, processing, separation and storage of natural gas and NGLs, such as
explosions, product spills, leaks, emissions and fires. These hazards can cause
personal injury and loss of life, severe damage to and destruction of property
and equipment, and pollution or other environmental damage, and may result in
curtailment or suspension of operations at the affected facility.
The Company maintains general public liability, property and business
interruption insurance in amounts that it considers to be adequate for such
risks. Such insurance is subject to deductibles that the Company considers
reasonable and not excessive. Consistent with the Company's proactive approach
to risk management, the Company's pollution liability policies not only provide
protection for sudden and accidental occurrences, but also, subject to the
policy terms and conditions, provide protection for gradual pollution incidents
occurring over time.
The occurrence of a significant event for which the Company is not fully
insured or indemnified, and/or the failure of a party to meet its
indemnification obligations, could materially and adversely affect the Company's
operations and financial condition. Moreover, no assurance can be given that the
Company will be able to maintain adequate insurance in the future at rates it
considers reasonable. To date, however, the Company has maintained adequate
coverage at reasonable rates and has experienced no material uninsured losses.
COMPETITION
The Company faces intense competition in obtaining natural gas supplies for
its gathering and processing operations and in marketing its products and
services. Principal competitors include marketing affiliates of interstate
pipeline companies, national and local natural gas gatherers and marketers of
varying sizes, financial resources and experience. Many of the Company's
competitors have capital resources and control supplies of natural gas
substantially greater than those of the Company.
The Company competes against other companies in the 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 price,
location of natural gas gathering facilities and gas processing plants, line
pressures, operating efficiency, reliability and quality producer relationships.
Competition for sales customers is based primarily on price, delivery
capabilities, reliability, price flexibility and maintenance of quality customer
relationships.
CNG's fractionation business competes against other fractionation
facilities that serve local markets. Competitive factors affecting its
fractionation business include proximity to customers, quality of NGL products,
price, efficiency and reliability of service.
In marketing its products and services, the Company has numerous
competitors, including marketing affiliates of major interstate pipelines, major
natural gas producers, and local and national gatherers and marketers of widely
varying sizes, financial resources and experience. Marketing competition is
primarily based upon reliability, transportation, flexibility and price.
GOVERNMENT REGULATION
Currently, federal, state and local regulations do not materially affect
the purchase and sale of natural gas and the fees received for gathering and
processing by the Company. Therefore, except as constrained by competitive
factors and contracts, the Company has considerable pricing flexibility.
However, federal, state
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<PAGE> 37
and local laws and regulations, directly or indirectly, govern some aspects of
the operations of the Company. These laws and regulations may in the future have
a significant impact upon the Company's overall operations.
In 1992, the FERC issued Order 636 which generally opens access to
interstate pipelines by requiring the operators of such pipelines to unbundle
their transportation services from sales services and allow customers to choose
and pay for only the services they require, regardless of whether the customer
purchases natural gas from such pipeline or from other suppliers. Order 636 also
requires upstream pipelines to permit downstream pipelines to assign upstream
capacity to their suppliers, and places analogous, unbundled requirements on the
downstream pipelines. This mandated access to interstate pipelines was and is of
vital importance to the Company's off-system gas business and to the delivery of
natural gas from CNG's Texas Gathering Assets to its processing plants in
Oklahoma. A change in such regulation could adversely affect these portions of
the Company's business.
The FERC retains jurisdiction over the interstate transportation of natural
gas and of liquid hydrocarbons, such as NGLs and product streams derived
therefrom. The gathering and processing of natural gas for the removal of
liquids currently is not viewed by the FERC as an activity subject to its
jurisdiction. If a processing plant's primary function is extraction of NGLs and
not natural gas transportation, the FERC has traditionally maintained that the
plant is not a facility for transportation or sale for resale of natural gas in
interstate commerce and, therefore, is not subject to jurisdiction under the
Natural Gas Act of 1938 (the "NGA").
The NGA exempts natural gas gathering facilities from the jurisdiction of
the FERC. Interstate transmission facilities, on the other hand, remain subject
to the FERC jurisdiction. The FERC has historically distinguished between these
two types of facilities on a fact-specific basis. The Company believes that its
gathering facilities and operations meet the current tests that the FERC uses to
determine a nonjurisdictional gathering facility status. While certain recent
cases have applied these tests in a manner supporting the Company's view that
the FERC lacks jurisdiction over its gathering facilities, these cases are,
however, still subject to rehearing and appeal. In addition, the FERC's
articulation and application of the tests used to distinguish between
jurisdictional pipelines and nonjurisdictional gathering facilities have varied
over time. While the Company believes the current definitions create
nonjurisdictional status for the Company's gathering facilities, no assurance
can be given that such facilities will remain classified as natural gas
gathering facilities and the possibility exists that the rates, terms, and
conditions of the services rendered by those facilities, and the construction
and operation of the facilities, will be subject to regulation by the FERC.
There are two pending proceedings at the FERC in which parties allege that
the FERC should regulate the rates and operations of certain aspects of the
Company's business. (GPM Gas Corporation v. Continental Natural Gas, Inc.,
Docket No. CP96-495-000; Plant Owners v. Continental Natural Gas, Inc., Docket
No. CP96-577-000.) The entities initiating these proceedings allege that the use
of the Company's facilities to receive natural gas from, and deliver natural gas
to, interstate pipelines renders those facilities subject to FERC's
jurisdiction. The Company is contesting these allegations. While the Company
believes that its business is not subject to regulation by the FERC, it cannot
predict the outcome of these proceedings, nor can it predict the effect a ruling
would have on the Company's business. If the FERC issues a decision in either of
these cases that subject some or all of the Company's facilities to the FERC's
jurisdiction, the decision may limit the rates that the Company charges for its
services, may have the effect of precluding the Company from engaging in certain
transactions, or may impose other obligations on the Company which may have a
material adverse effect on the Company. Knowing violations of the NGA may result
in the imposition of fines, forfeitures or other criminal penalties; however,
the imposition of such has been extremely rare.
Traditionally, the FERC has regulated the rates for gathering service
performed by interstate pipelines and their affiliates. In 1995, the FERC held
that interstate pipeline affiliates that performed gathering services could have
their rates and services deregulated. In addition, the FERC established a
two-year default (i.e., transition) period during which the new owners of
gathering facilities formerly owned by interstate pipelines would have to
provide service at the same rates and on the same terms and conditions as was
provided by the pipelines. As a result, many interstate pipelines have
transferred their facilities to gathering affiliates or sold them to
third-parties. On August 2, 1996, the United States Court of Appeals for the
District
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<PAGE> 38
of Columbia Circuit upheld the FERC's decision to deregulate gathering but
voided the two year default period. As a result, there could be numerous
additional unregulated gathering companies. Certain of those gathering companies
may compete with the Company. Notwithstanding the decision of the D.C. Circuit,
many owners of facilities acquired from interstate pipelines have committed to
continue providing service at the same rates and on the same terms and
conditions during the default period. At the expiration of these default
periods, it is possible that the cost of gathering service paid by the Company
could increase substantially. In addition, the Company (as a shipper on these
systems) could be placed at a competitive disadvantage vis-a-vis the owner of
the gathering facilities in acquiring natural gas and NGLs. It should be noted
that the Company's Texas Gathering Assets would also be free of the
FERC-mandated rate controls when their associated default period expires at the
end of 1997. Except with respect to the owners of gathering systems, the Company
does not believe that it will be affected by any action taken with respect to
the FERC's gathering policy materially differently than any other producers,
gatherers, processors or marketers with which it competes.
The Company purchased the Texas Gathering Assets from subsidiaries of Enron
Corporation that were regulated by the FERC prior to the purchase. In accordance
with federal regulations, the Company agreed that it would not charge rates that
exceed the rates that Enron was charging at the time of the sale until December
31, 1997, after which time the Company will be free to set rates in accordance
with market conditions at that time, subject, however, to future state or
federal laws or regulations.
Certain activities of the Company could be subject to regulation by the
Texas Railroad Commission ("RRC") pursuant to its jurisdiction over common
purchasers and natural gas utilities or its jurisdiction over the transportation
and gathering of natural gas. CNG is a "common purchaser" under Texas law. It is
not presently registered as a "gas utility" though no assurance can be given
that it will not at some future time be required to register as such.
Although the RRC does not regulate the activities of the Company at this
time, the RRC has authority to regulate the volumes of natural gas purchased by
common purchasers and the rates charged for the intrastate transportation,
gathering and sale of natural gas by gas utilities in Texas. Under the Gas
Utility Regulatory Act and other Texas statutes, the RRC has the duty to ensure
that rates for the transportation, gathering and sale of natural gas are just
and reasonable and gas utilities are prohibited from charging rates that are
unreasonably preferential, prejudicial or discriminatory. The Company believes
that its activities are in compliance with applicable laws and regulations.
All of the Company's pipeline operations are subject to federal safety
standards promulgated by the Department of Transportation under applicable
federal pipeline safety legislation, as supplemented by various state safety
statutes and regulations.
The Company's Oklahoma operations are subject to regulation by the State of
Oklahoma. The majority of these regulations are administered by the Oklahoma
Corporation Commission ("OCC"). Any entity engaged in the business of carrying
or transporting natural gas by pipeline is declared to be a common carrier under
Oklahoma law and is prohibited from any unjust or unlawful discrimination in the
carriage, transportation or delivery of natural gas. Although Oklahoma law may
be sufficiently broad to permit the OCC to set rates and terms of service for
the transportation and delivery of natural gas involving the Company's Oklahoma
assets, the OCC has not done so to date. There can be no assurance that the OCC
will not do so in the future. Recent Oklahoma legislation prohibits entities
which gather natural gas for hire from charging any fee which is unjustly or
unlawfully discriminatory. The Company does not expect this legislation to have
any significant impact on the Company's operations.
An entity carrying or transporting natural gas by pipeline which is engaged
in the business of purchasing natural gas is declared to be a common purchaser
under Oklahoma law and is required to purchase without discrimination in favor
of persons or price all natural gas in the vicinity of its lines. Ratable
purchase is required if a purchaser is unable to purchase all natural gas
offered. To date, such legislation has not had any significant effect on the
Company's Oklahoma operations.
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<PAGE> 39
The OCC and the RCC regulate the amount of natural gas which producers can
sell or deliver to the Company. Currently, substantially all natural gas
received by the Company in its Oklahoma and Texas operations is produced from
wells for which the OCC or RCC establish allowable rates. To date, the Company
has not experienced any material reductions in available supplies due to these
regulations. Nevertheless, future regulations could materially affect the
Company's ability to purchase natural gas supplies.
ENVIRONMENTAL MATTERS
The Company is subject to environmental risks normally incident to the
operation and construction of gathering lines, pipelines, plants and other
facilities for gathering, processing, treatment, storing and transporting
natural gas and other products. These environmental risks include uncontrollable
flows of natural gas, fluids and other substances into the environment,
explosions, fires, pollution and other environmental and safety risks. The
following is a discussion of certain environmental and safety concerns related
to the Company. It is not intended to constitute a complete discussion of the
various federal, state and local statutes, rules, regulations, or orders to
which the Company's operations may be subject. For example, the Company, without
regard to fault, could incur liability under the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended (also known as the
"Superfund" law), or state counterparts, in connection with the disposal or
other releases of hazardous substances and for damage to natural resources.
Further, the recent trend in environmental legislation and regulations is toward
stricter standards, and this will likely continue in the future.
The Company's activities in connection with the operation and construction
of gathering lines, pipelines, plants, storage caverns, and other facilities for
gathering, processing, treatment, storing and transporting natural gas and other
products are subject to environmental and safety regulation by federal and state
authorities, including, without limitation, the state environmental agencies and
the EPA, which can increase the costs of designing, installing and operating
such facilities. In most instances, the regulatory requirements relate to the
discharge of substances into the environment and include measures to control
water and air pollution.
Environmental laws and regulations may require the acquisition of a permit
or other authorization before certain activities may be conducted by the
Company. These laws also include fines and penalties for non-compliance.
Further, these laws and regulations may limit or prohibit activities on certain
lands lying within wilderness areas, wetlands, areas providing habitat for
certain species or other protected areas. The Company is also subject to other
federal, state, and local laws covering the handling, storage or discharge of
materials used by the Company, or otherwise relating to protection of the
environment, safety and health. The Company believes that it is in material
compliance with all applicable environmental laws and regulations. The Company
periodically conducts environmental assessments of its assets and is not aware
of any material environmental problems requiring remediation. Because the
requirements imposed by environmental laws and regulations frequently change,
the Company is unable to predict the ultimate costs of compliance with such
requirements or whether the incurrence of such costs would have a material
adverse effect on the operations of the Company.
In March 1992, an environmental site assessment of the Laverne Plant
indicated the presence of hydrocarbon contaminated groundwater underlying a
portion of the plant site. Under the direction of the Oklahoma Corporation
Commission and based on the results of a pilot remediation project, a plan has
been developed to remediate the site utilizing a biofiltration process to be
installed during the last half of 1997 at an estimated cost of $1 million. The
Company's share of this total cost is expected to be approximately $170,000. See
"Business -- Recent Developments."
EMPLOYEES
As of June 1, 1997, the Company had 95 employees. Of these, 53 employees
are located in the field and provide general operational and maintenance
activities on the Company's facilities located in the Panhandle Area while the
balance are located at CNG's executive offices in Tulsa, Oklahoma, and are
engaged in gas
37
<PAGE> 40
marketing activities, plant supervision or accounting and administration. The
Company considers its relations with employees to be excellent.
LEGAL PROCEEDINGS
The Company is currently a defendant in the case of Colorado Interstate Gas
Company v. Continental Hydrocarbons, Inc., et al., Case No. 93CV1894 (the
"Colorado Lawsuit"). The case as it pertains to the Company primarily involves
claims made by CIG that the Company and Continental Hydrocarbons, Inc. ("CHI"),
a former subsidiary of the Company, have improperly withheld from it proceeds
from the sale of NGLs processed by the Mocane Plant, have defamed CIG and
committed other wrongful acts, and are as a result liable to CIG for unspecified
actual and punitive damages. The Mocane Plant Sellers have also been sued by CIG
and have sought indemnity from CHI and the Company for some of the liability
they may have to CIG as well as other amounts allegedly owed them. The Company
and CHI have generally denied the allegations against them in the case and have
contended that they are owed certain amounts for the processing of natural gas.
Though impossible to estimate with any certainty, the Company believes that CIG
is seeking actual damages in excess of $3 million. The Company has reached a
settlement with the Mocane Plant Sellers which involves the Company's payment of
approximately $1.25 million plus accrued interest (on a portion of the
settlement) to the Mocane Plant Sellers. The Company had previously recorded an
accrued liability for a portion of the proceeds received from the processing of
gas through the Mocane Plant and accordingly no additional accrual is required.
The Company has also filed a lawsuit, Continental Natural Gas, Inc. v.
Colorado Interstate Gas Company, Case No. 96-CV-0041-BU (the "Oklahoma
Lawsuit"), in the United States District Court for the Northern District of
Oklahoma against CIG. The Company's complaint alleges constructive fraud in
connection with negotiations between the Company and CIG in the first part of
1995 for natural gas processing and gathering in the area surrounding the Mocane
Plant. In general, the Company alleges that CIG misled it and thereby precluded
the Company from offering a bid on certain compression services ultimately sold
by CIG to its subsidiary, CIG Resources Company.
The Company is at various times a party to additional claims and involved
in various other litigation and administrative proceedings arising in the normal
course of business. The Company believes it is unlikely that the final outcome
of any of the claims, litigation or proceedings discussed above to which the
Company is a party would have a material adverse effect on the Company's
financial position or results of operations; however, due to the inherent
uncertainty of litigation, the Company cannot give assurance regarding the
effect on the Company of an adverse resolution of any particular claim or
proceeding.
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<PAGE> 41
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth certain information concerning the directors and
executive officers of the Company as well as the two persons who have agreed to
become directors upon completion of the Offering.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Gary C. Adams............................. 46 Chairman, President, Chief Executive
Officer and Director(1)
Terry K. Spencer.......................... 37 Vice President of Operations and
Director
Scott C. Longmore......................... 37 Vice President of Marketing and
Director
Garry D. Smith............................ 40 Vice President, Controller and
Director(2)
William W. Pritchard...................... 46 (3)
William H. Bauch.......................... 35 (3)
</TABLE>
- ---------------
(1) The named person will be appointed to the Compensation Committee of the
Board of Directors upon completion of the Offering.
(2) The named person will be appointed to the Audit Committee of the Board of
Directors upon completion of the Offering.
(3) The named person has agreed to become a member of the Board of Directors and
the Compensation and Audit Committees of the Board upon completion of the
Offering.
Gary C. Adams has been the Company's Chairman of the Board since his
founding of the Company in 1983. In 1994 he assumed the role of Chief Executive
Officer, and in March 1997, was elected President. Mr. Adams is also Chairman of
Adams Affiliates, which is engaged in different segments of the oil and gas
industry. Most of Mr. Adams' 25-year career has been spent in the oil and gas
industry. Prior to his association with Adams Affiliates, Mr. Adams served as
Executive Vice President of OKC Corporation, then a New York Stock Exchange
listed company, where he was responsible for its oil and gas operations. Mr.
Adams graduated from the University of Kansas in 1973 with a Bachelor of Science
degree in Business Administration. Mr. Adams is the son of the late K.S. "Boots"
Adams, former Chairman of Phillips Petroleum Company.
Terry K. Spencer has been Vice President of Operations of the Company since
1991 and was elected to the Board of Directors of the Company in March 1997. He
is responsible for the management of pipeline and plant operations, engineering
design and construction, new project development, reservoir engineering and
economic evaluation. Prior to joining CNG in 1989, Mr. Spencer served as Manager
of Project Development for Stellar Gas Company and held various
engineering-related positions in Delhi Gas Pipeline Corporation. Mr. Spencer
earned his Bachelor of Science degree in Petroleum Engineering from the
University of Alabama in 1981.
Scott C. Longmore has been Vice President of Marketing of the Company since
1988 and was elected to the Board of Directors of the Company in March 1997. His
primary responsibilities are to supervise the acquisition of markets, supplies
and storage, the transportation of natural gas and risk management activities.
Prior to joining CNG in 1987, Mr. Longmore was employed with Cabot Energy
Marketing Corporation, where he served as a gas marketing and supply
representative. Mr. Longmore has 12 years of experience in the natural gas
marketing business. Prior to Cabot, he was an independent petroleum landman in
Oklahoma. Mr. Longmore graduated from the University of Oklahoma in 1982 with a
Bachelor of Business Administration degree in Petroleum Land Management.
Garry D. Smith has been Vice President and Controller of the Company since
1990 and was elected to the Board of Directors of the Company in March 1997. He
is responsible for managing the financial and accounting functions of the
Company. Prior to joining CNG in 1988, Mr. Smith served in various capacities at
Mustang Fuel Corporation, including managing the financial and oil and gas
revenue accounting functions. He
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<PAGE> 42
received his Bachelor of Science degree in Accounting from Central Oklahoma
State University in 1979, and his Masters of Business Administration from the
University of Oklahoma in 1987. Mr. Smith is a Certified Public Accountant and a
Certified Management Accountant.
William W. Pritchard has agreed to become a member of the Board of
Directors of the Company and the Compensation and Audit Committees of the Board
after completion of the Offering. Mr. Pritchard has more than 21 years of
experience in the domestic and international oil and gas industry. Beginning in
1976, Mr. Pritchard assumed various managerial positions with Parker Drilling
Company, a New York Stock Exchange company, serving its domestic and
international operations, and in 1984 he became Vice President and General
Counsel with Parker Drilling, positions he held until he concluded his tenure at
Parker in 1996. Mr. Pritchard became Of Counsel to the law firm of Hall, Estill,
Hardwick, Gable, Golden & Nelson, P.C. ("Hall, Estill") in 1996 and his
corporate practice focuses on acquisitions, contracts, securities laws and other
legal matters related to the oil and gas industry. Mr. Pritchard received a
Bachelor of Arts from the University of Kansas and a Juris Doctorate from the
University of Tulsa.
William H. Bauch has agreed to become a member of the Board of Directors of
the Company and the Compensation and Audit Committees of the Board after
completion of the Offering. Mr. Bauch has been a Senior Vice President in the
corporate finance department of Oppenheimer & Co., Inc. since 1996. Prior to
that, he was a Vice President in the investment banking department of Prudential
Securities Incorporated from 1994 to 1996, a Vice President with Jefferies &
Company, Inc. from 1993 to 1994 and a Vice President with Howard, Weil,
Labouisse & Friedrichs from 1991 to 1993. He holds Bachelors of Accountancy and
Juris Doctorate degrees from the University of Mississippi and a Masters of Laws
degree from the New York University School of Law.
BOARD OF DIRECTORS AND COMMITTEES
The Company's Certificate of Incorporation and Bylaws provide for a
classified board of directors. The two class I directors, Scott C. Longmore and
Terry K. Spencer, have been elected for an initial term expiring at the 1998
annual meeting. The two class II directors, Garry D. Smith and William H. Bauch
(effective upon his appointment as a director), have been elected for an initial
term expiring at the 1999 annual meeting. The two class III directors, Gary C.
Adams and William W. Pritchard (effective upon his appointment as a director),
have been elected for an initial term expiring at the 2000 annual meeting. All
subsequent elections will be for successive three-year terms. No director is
selected or serves pursuant to any special arrangement or contract.
Officers serve at the discretion of the Board and are elected annually.
There are no family relationships between the directors or executive officers of
the Company. Mr. William W. Pritchard, who has agreed to serve as a director of
the Company upon completion of the Offering, is Of Counsel to Hall, Estill. The
Hall, Estill firm is rendering legal services to the Company in connection with
the Offering and may render other legal services to the Company in the future.
Mr. William H. Bauch, who has agreed to serve as a director of the Company upon
completion of the Offering, is an officer in the firm of Oppenheimer & Co.,
Inc., one of the Representatives of the Underwriters in the Offering.
Upon completion of the Offering, the Board of Directors intends to
establish a Compensation Committee and an Audit Committee. The Compensation
Committee will make recommendations to the Board concerning salaries and
incentive compensation for the Company's officers and employees. The Audit
Committee will aid management in the establishment and supervision of the
Company's financial controls, evaluate the scope of the annual audit, review
audit results, consult with management and the Company's independent auditors
prior to the presentation of financial statements to shareholders and, as
appropriate, initiate inquiries into aspects of the Company's financial affairs.
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<PAGE> 43
EXECUTIVE COMPENSATION
The following table sets forth a summary of compensation for the fiscal
year ended December 31, 1996, for the chief executive officer and the three
other executive officers of the Company as of December 31, 1996, for services
rendered in all capacities.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
---------------------------------- -------------
# OF SHARES
UNDERLYING
NAME AND OTHER ANNUAL STOCK OPTIONS ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION GRANTED COMPENSATION
------------------ -------- -------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Gary C. Adams
Chief Executive Officer........ -- -- --(1) -- $150,000(2)
Scott C. Longmore Vice
President of Marketing......... $ 97,500 $152,842 $16,800(3) 68,000 --
Garry D. Smith
Vice President and
Controller.................. $104,195 $ 80,293 $12,600(3) 68,000 --
Terry K. Spencer
Vice President of Operations... $ 97,500 $ 80,293 $12,600(3) 68,000 --
</TABLE>
- ---------------
(1) The Company was charged a fee of $210,000 for management services in 1996 by
Adams Affiliates, an affiliate of the named person.
(2) The amounts shown represent the premiums paid by the Company under a split
dollar life insurance policy. Under this policy, the Company pays the
premiums for life insurance issued to the named person. Repayment of the
premiums is secured by the death benefit or the cash surrender value of the
policy, if any, if the named person cancels and surrenders the policy.
(3) Represents the difference between the fair market value of Common Stock
purchased by the named person in 1996 and the amount paid for such Common
Stock.
Employment and Consulting Agreements. The Company is a party to employment
agreements with Terry K. Spencer, Scott C. Longmore and Garry D. Smith which
will be amended effective upon the completion of the Offering. As then amended,
the employment agreements will continue in effect until December 31, 1999,
subject to customary termination provisions. The employment agreements will
provide for annual salary payments to each of such executive officers in the
amount of $150,000, subject to annual CPI adjustment, and for annual bonuses
based upon the Company exceeding designated annual income levels. In addition,
Mr. Longmore's employment agreement provides for the payment of annual
commissions based upon gross margins of natural gas sales.
The Company and Adams Affiliates are parties to a Consulting Agreement
dated as of April 1, 1997, under which Adams Affiliates has agreed to provide
consulting services to the Company in return for payments of $20,000 per month
($240,000 per year). It is anticipated that such consulting services will be
provided primarily by Gary C. Adams as an agent of Adams Affiliates. The
Consulting Agreement has a term extending until March 31, 1998, subject to
automatic one month renewals thereafter until terminated by one of the parties.
Mr. Adams is an affiliate of Adams Affiliates. See "Certain
Transactions -- General."
41
<PAGE> 44
The following table provides information regarding options granted to each
of the named executives during 1996:
<TABLE>
<CAPTION>
POTENTIAL
REALIZED VALUE
AT ASSUMED
ANNUAL RATES
# OF TOTAL OF STOCK PRICE
# OF SHARES OPTIONS APPRECIATION FOR
DATE OF UNDERLYING GRANTED EXERCISE EXPIRATION OPTION TERM
GRANT OPTIONS TO PRICE DATE -----------------
NAME (MO/DAY) GRANTED EMPLOYEES ($ SHARE) (MO/YR) 5%(2) 10%(3)
---- ----------- ----------- ---------- --------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott C. Longmore............. February 28 68,000 33.3% $0.26 March, 2000(1) $3,810 $8,205
Garry D. Smith................ February 28 68,000 33.3% $0.26 March, 2000(1) $3,810 $8,205
Terry K. Spencer.............. February 28 68,000 33.3% $0.26 March, 2000(1) $3,810 $8,205
<CAPTION>
POTENTIAL REALIZED
VALUE ASSUMING
MARKET PRICE
EQUAL TO
NAME $13.00/SHARE
---- ------------------
<S> <C>
Scott C. Longmore............. $866,320
Garry D. Smith................ $866,320
Terry K. Spencer.............. $866,320
</TABLE>
- ---------------
(1) Term expires upon earlier of 90 days after termination of the named person's
employment agreement or February 28, 2006.
(2) Assumes 5% annual increase in stock price over term of option which is
assumed to expire on March 31, 2000. Exercise of option is subject to the
Company achieving certain specified annual financial performance goals.
(3) Assumes 10% annual increase in stock price over term of option which is
assumed to expire on March 31, 2000. Exercise of option is subject to the
Company achieving certain specified annual financial performance goals.
1996 Incentive Stock Option Plan. Effective as of February 28, 1996, the
Company adopted the 1996 Incentive Stock Option Plan (the "1996 Stock Plan"),
and granted options under the plan to acquire a total of 204,000 shares of
Common Stock to Terry K. Spencer, Garry D. Smith and Scott C. Longmore. The 1996
Stock Plan is intended to comply with Section 422 of the Internal Revenue Code
of 1986, as amended. Each incentive stock option ("ISO") granted entitles the
optionee to purchase up to 68,000 shares of Common Stock at an exercise price of
$0.26 per share, which the Board of Directors determined to represent the fair
market value of the Common Stock on the grant date. The exercise of each ISO is
conditioned upon the Company achieving certain specified financial performance
goals for each of calendar years 1997, 1998 and 1999, and the optionee may not
in any event exercise ISOs to acquire Common Stock having a fair market value in
excess of $150,000 for any one calendar year. The ISOs shall remain in effect
for the term of the Optionee's employment agreement with the Company. No more
ISOs may be issued under the 1996 Stock Plan.
1997 Stock Plan. The purpose of the Continental Natural Gas, Inc. 1997
Stock Plan (the "1997 Stock Plan") is to promote the overall financial
objectives of the Company and its shareholders by motivating those persons
selected to participate in the 1997 Stock Plan to achieve long-term growth in
shareholder equity in the Company and by retaining the association of those
individuals who are instrumental in achieving this growth. Executive officers,
key employees and non-employee directors, as well as such other employees or
consultants as the Board of Directors selects, are eligible recipients of awards
under the 1997 Stock Plan. The maximum number of shares authorized to be issued
under the 1997 Stock Plan is 600,000 shares of Common Stock. No grants or awards
have been made under the 1997 Stock Plan.
The 1997 Stock Plan is administered by the Board of Directors of the
Company. The Board of Directors is authorized to determine plan participants,
the types and amounts of awards to be granted and the terms, conditions and
provisions of awards, prescribe forms of award agreements, interpret the 1997
Stock Plan, establish, amend and rescind rules and regulations relating to the
1997 Stock Plan and make all other determinations which may be necessary or
advisable for the administration of the 1997 Stock Plan. The Board of Directors
has not made a determination as to the number of employees currently eligible
for consideration as participants in the 1997 Stock Plan.
The 1997 Stock Plan permits the granting of any or all of the following
types of awards: (a) stock options, (b) stock appreciation rights ("SARs"), and
(c) restricted stock. Generally, awards under the 1997 Stock Plan are granted
for no consideration other than prior and future services. Awards granted under
the 1997
42
<PAGE> 45
Stock Plan may, in the discretion of the Board, be granted alone or in addition
to, in tandem with or in substitution for any other award under the 1997 Stock
Plan or other plan of the Company. Such grants could include grants of options
after a decline in the market price of the Common Stock in substitution for
previously granted options having a higher exercise price.
Stock options granted pursuant to the 1997 Stock Plan may, at the
discretion of the Board, be either ISOs within the meaning of Section 422 of the
Code, or non-qualified stock options. The exercise price of an ISO may not be
less than the fair market value of the Common Stock on the date of grant (or
110% of such fair market value in the case of ISOs granted to employees who
possess more than 10% of the combined voting power of all classes of stock of
the Company). In the case of non-qualified stock options, the exercise price
shall be as determined by the Board in its sole discretion, but in no event
shall be less than 50% of the fair market value of the Common Stock on the date
of grant. Options granted pursuant to the 1997 Stock Plan are exercisable in
whole or in part at such time or times as may be determined by the Board, except
that ISOs may not be exercised after the expiration of 10 years from the date
granted (or 5 years in the case of ISOs granted to employees who possess more
than 10% of the combined voting power of all classes of stock of the Company).
Generally, options may be exercised by the payment of cash, promissory notes,
stock or a combination thereof.
Any SARs granted under the 1997 Stock Plan will give the holder the right
to receive cash or stock in an amount equal to the difference between the fair
market value of a share of Common Stock on the date of exercise and the exercise
price of the options issued in conjunction with the SARs or such other amount as
the Board has established with respect to SARs issued on a stand-alone basis.
Methods of exercise and settlement and other terms of SARs are determined by the
Board.
The Board may award restricted stock, generally consisting of shares which
may not be disposed of by participants until certain restrictions established by
the Board lapse. Such restrictions may lapse in whole or in installments as the
Board determines. A participant receiving restricted stock will have all of the
rights of a shareholder of the Company, including the right to vote the shares
and the right to receive any dividends, unless the Board otherwise determines,
but shall not be permitted to sell, assign, or otherwise transfer the stock
during the restriction period established by the Board. Upon termination of
employment during the restriction period for any reason other than death or
disability, restricted stock will be forfeited, subject to such exceptions, if
any, as are authorized by the Board.
In the event of any change affecting the shares of Common Stock by reason
of any stock dividend or split, recapitalization, merger, consolidation,
spin-off, combination or exchange of shares, or other corporate change or any
distributions to shareholders, the Board may make such substitution or
adjustment in the aggregate number or kind of shares which may be distributed
under the 1997 Stock Plan and in the number, kind and exercise, grant or
purchase price of shares subject to the outstanding awards granted under the
1997 Stock Plan, or make provisions for a cash payment relating to any award, as
it deems to be appropriate in order to maintain the purpose of the original
grant.
The Board of Directors may amend, alter, suspend, discontinue or terminate
the 1997 Stock Plan without the consent of shareholders or participants, except
that shareholder approval of such action will be sought if such approval is
required by any federal or state law or regulation or by any agreement, or if
the Board of Directors in its discretion determines that obtaining such
shareholder approval is advisable. Unless earlier terminated by the Board of
Directors, the 1997 Stock Plan will terminate when no shares remain reserved and
available for issuance, and the Company has no further obligation with respect
to any award granted under the 1997 Stock Plan.
In the event of a change of control of the Company, as defined in the 1997
Stock Plan, all outstanding awards under the 1997 Stock Plan, regardless of any
limitations or restrictions, become fully exercisable and freed of all
restrictions.
Director Compensation. Directors receive no compensation from the Company
for serving on the Board of Directors but are eligible to receive grants under
the 1997 Stock Plan and will be reimbursed for out-of-pocket expenses incurred
while attending board and committee meetings.
43
<PAGE> 46
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the provisions of the Oklahoma General Corporation Act (the
"Oklahoma Corporate Act"), the Certificate of Incorporation of the Company
eliminates in certain circumstances the monetary liability of directors of the
Company for a breach of their fiduciary duty as directors. These provisions do
not eliminate the liability of a director for (i) a breach of the director's
duty of loyalty to the Company or its shareholders, (ii) acts or omissions by a
director not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) liability arising under Section 1053 of the Oklahoma
Corporate Act (relating to the declaration of dividends and purchase or
redemption of shares in violation of the Oklahoma Corporate Act) or (iv) any
transaction from which the director derived an improper personal benefit. In
addition, these provisions do not eliminate the liability of a director for
violations of Federal securities laws, nor do they limit the rights of the
Company or its shareholders, in appropriate circumstances, to seek equitable
remedies such as injunctive or other forms of non-monetary relief. Such remedies
may not be effective in all cases.
The Certificate of Incorporation and the Bylaws of the Company provide that
CNG shall indemnify all directors and officers of CNG to the full extent
permitted by the Oklahoma Corporate Act. Under such provisions, any director or
officer who in his capacity as such is made or threatened to be made, a party to
any suit or proceeding, may be indemnified by the Company if the Board of
Directors determines such director or officer acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interest of
CNG. The Certificate of Incorporation, Bylaws and the Oklahoma Corporate Act
further provide that such indemnification is not exclusive of any other rights
to which such individuals may be entitled under the Certificate of
Incorporation, the Bylaws, any agreement, vote of shareholders or disinterested
directors or otherwise.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification would
be required or permitted. The Company is not aware of any overtly threatened
litigation or proceeding that might result in a claim for indemnification.
44
<PAGE> 47
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 1, 1997, and adjusted to
reflect the sale of shares in the Offering, (i) by each person (or group of
affiliated persons) who is known by the Company to own beneficially more than 5%
of the Company's Common Stock, (ii) by each executive officer of the Company,
(iii) by each of the Company's directors, and the two persons who have agreed to
become members of the Board of Directors after completion of the Offering, (the
"Future Directors"), (iv) by all directors, including the two Future Directors,
and executive officers as a group and (v) by the Selling Shareholder. Unless
indicated otherwise, each person has sole voting and dispositive power with
respect to such shares.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
OWNED
NUMBER SHARES --------------------------
OF SHARES BEING BEFORE AFTER
BENEFICIAL OWNER (1) OFFERED(1) OFFERING(1) OFFERING(1)
---------------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Gary C. Adams(2)................................... 3,738,004 300,000 89.0% 57.3%
1412 South Boston, Suite 500 Tulsa, Oklahoma
74119
Garry D. Smith..................................... 126,005 -- 3.0% 2.1%
Scott C. Longmore.................................. 167,962 -- 4.0% 2.8%
Terry K. Spencer................................... 126,005 -- 3.0% 2.1%
William W. Pritchard............................... -- -- -- --
William H. Bauch................................... -- -- -- --
All directors and executive officers as a group of
(6 people)....................................... 4,157,976 300,000 99.0% 64.3%
SELLING SHAREHOLDER:
Adams Affiliates, Inc.............................. 597,864 300,000 14.2% 5.0%
</TABLE>
- ---------------
(1) Assumes the conversion of shares of Convertible Preferred Stock into Common
Stock prior to completion of the Offering.
(2) Gary C. Adams does not own of record any shares of Common Stock. Disclosed
here are shares held of record by Cottonwood Partnership (3,140,140 shares)
and Adams Affiliates (597,864 shares). See "Certain Transactions -- General"
for a description of Mr. Adams' relationship to such companies.
45
<PAGE> 48
CERTAIN TRANSACTIONS
GENERAL
Gary C. Adams, the Chairman of the Board, President and Chief Executive
Officer of the Company, is the chief executive officer of Cottonwood
Partnership. Cottonwood Partnership is owned by certain trusts, the
beneficiaries of which are members of the immediate family of Mr. Adams (the
"Family Trusts"). Cottonwood Partnership owns approximately 98% of the
outstanding common stock of Adams Affiliates and all of the outstanding common
stock of Bird Creek Resources, Inc. ("Bird Creek"). Mr. Adams is a director and
the chairman of Adams Affiliates and a director of Bird Creek. The Family Trusts
are also partners in Mountain Meadows Partnership, a general partnership.
Adams Affiliates owns, directly or indirectly, all of the outstanding
equity interests of Continental Natural Gas Marketing, L.L.C. ("CNGM"), Gary
Adams Ranch, Inc. ("G.A. Ranch"), CPA Ventures, Inc. ("CPA Ventures") and CPA
Aviation, Inc. ("CPA Aviation"). Mr. Adams is a director of G.A. Ranch, CPA
Ventures and CPA Aviation. Continental Gas Marketing, Inc. ("CGM") was a
subsidiary of Cottonwood Partnership until it was merged into Adams Affiliates
in 1997.
The Company believes that the transactions described below were made on
terms at least as fair to the Company as could have been obtained from
unaffiliated third parties except that sales of natural gas by the Company to
CNGM in 1996 were at cost and below market. The Company believes that its sales
to CNGM in 1997 and thereafter will be fair to the Company.
1996 TRANSACTIONS AMONG RELATED ENTITIES
The Beaver Plant was initially acquired by the Company and certain of its
affiliates. On January 1, 1996, the Company acquired the remaining 20% interest
in the Beaver Plant from Cottonwood Partnership, G.A. Ranch and CGM in exchange
for a total of 200 shares of Convertible Preferred Stock, and cancellation of an
account receivable from such affiliates in the amount of approximately $1.5
million. The terms of such exchange were not negotiated in an arms length
transaction. On December 1, 1996, the Company redeemed 51 shares of the
Convertible Preferred Stock for the liquidation value of $40,000 per share.
Prior to completion of the Offering, the remaining 149 shares of Convertible
Preferred Stock will be converted into 586,847 shares of Common Stock.
The Company sold approximately $12 million of natural gas to CNGM in 1996.
The natural gas was sold at cost to CNGM, which resold such volumes under
long-term sales contracts. At December 31, 1996 and July 15, 1997, CNGM owed the
Company approximately $5 million and $3.1 million, respectively, for such
purchases. For 1997 and thereafter, the Company will sell sufficient natural gas
to CNGM to satisfy the requirements of its existing sales agreements at a price
equal to the Company's cost plus $0.02 per Mcf.
In 1996, the Company purchased approximately $316,000 of natural gas
located in New Mexico and Oklahoma from Bird Creek under a month-to-month
contract. The Company's purchases from Bird Creek are made at a market index
price less gathering fees.
In 1996, the Company provided office space and general administrative
services to Bird Creek and billed it for rentals and fees in the aggregate
amount of $258,652. Additionally, the Company in 1996, was charged $14,766 by
Bird Creek for general and administrative expenses incurred on its behalf. In
1996, Adams Affiliates charged the Company $210,000 for management services.
Adams Affiliates and the Company are parties to a Consulting Agreement dated as
of April 1, 1997, under which Adams Affiliates provides consulting services to
the Company. See "Management -- Executive Compensation."
Bird Creek and Adams Affiliates are parties to Administrative Services
Agreements with the Company dated as of April 1, 1997, under which the Company
provides office space, accounting, clerical and other administrative services to
Bird Creek and Adams Affiliates in return for reimbursement to the Company of
the allocable cost to the Company of providing such services. These
Administrative Services Agreements expire on March 31, 1998, subject to
automatic renewal on a month-to-month basis thereafter until terminated by any
of the contracting parties. Bird Creek provides certain accounting, clerical and
administrative services to
46
<PAGE> 49
the Company (primarily accounting services) under the terms of an Administrative
Services Agreement dated as of April 1, 1997. The Company reimburses Bird Creek
for the allocable cost to Bird Creek of providing such services. This
Administrative Services Agreement expires on March 31, 1998, subject to
automatic renewal on a month-to-month basis thereafter until terminated by one
of the parties.
In 1996, the Company sold its oil and gas producing properties to Adams
Affiliates for $308,000, which approximated book value.
In 1996, the Company paid CPA Aviation and CPA Ventures a total of $175,600
for aviation services. Approximately $56,000 of the amount paid in 1996 was
related to services rendered in 1995. The Company and CPA Aviation are parties
to a charter services agreement dated as of April 1, 1997, under which CPA
Aviation agrees to provide aviation services to the Company on an "as needed"
basis (the "Charter Services Agreement"). The Company is required to pay CPA
Aviation for such services at the rates of $100 per hour for usage of a Cessna
Model Turbo 210 aircraft and $1,000 per hour for usage of a Learjet Model 24F
aircraft plus reimbursement of any taxes, fees, customs duties or other charges
which CPA Aviation may be required to pay by reason of the Company's usage. The
Charter Services Agreement expires on March 31, 1998, subject to automatic
renewal on a month-to-month basis thereafter until terminated by one of the
parties.
As of December 31, 1996 and July 15, 1997, Mountain Meadows Partnership was
indebted to the Company in the amount of approximately $800,000. Various other
affiliates of Cottonwood Partnership were indebted to the Company in the
aggregate amount of approximately $212,000 as of July 15, 1997.
OTHER RELATIONSHIPS
Oppenheimer & Co., Inc. is an Underwriter and a representative of the
Underwriters in the Offering. See "Underwriting." Mr. William H. Bauch is an
officer of Oppenheimer & Co., Inc. and is expected to become a director of the
Company following the Offering. The law firm of Hall, Estill, has advised the
Company on certain legal matters related to the Offering. Mr. William W.
Pritchard is Of Counsel to Hall, Estill and is expected to become a director of
the Company following the Offering.
BOARD POLICY ON AFFILIATED TRANSACTIONS
The Board of Directors has adopted a policy requiring that any transactions
to be entered into between the Company and an affiliate of the Company after
completion of the Offering be reviewed by CNG's independent directors.
47
<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the Offering, the authorized capital stock of the
Company will consist of 60,000,000 shares of Common Stock, $0.01 par value and
5,000,000 shares of Preferred Stock, $0.01 par value. The Convertible Preferred
Stock will be converted into 586,847 shares of Common Stock prior to completion
of the Offering. Accordingly, the terms of the Convertible Preferred Stock are
not discussed herein.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share on all
matters on which shareholders generally are entitled to vote, including
elections of directors, and, except as otherwise required by law or by the terms
of any series of Preferred Stock of the Company, the holders of Common Stock
exclusively possess all voting power. The Certificate of Incorporation of the
Company (the "Certificate") does not provide for cumulative voting for the
election of directors; therefore, the holders of a majority of the voting power
of the total number of outstanding shares of Common Stock are able to elect the
entire Board of Directors of the Company.
Subject to any preferential rights of any outstanding series of Preferred
Stock of the Company designated from time to time by the Board of Directors, the
holders of Common Stock are entitled to such dividends as may be declared from
time to time by the Board of Directors from funds legally available therefor
and, upon liquidation, dissolution or winding up, will be entitled to receive
pro rata all assets of the Company available for distribution to such holders.
No holder of Common Stock has any preemptive right to subscribe to any kind or
class of securities of the Company.
PREFERRED STOCK
The Board of Directors is empowered without shareholder approval to issue
up to 5,000,000 shares of Preferred Stock of the Company, from time to time, in
series and with respect to each series to determine (i) the number of shares
constituting such series, (ii) the dividend rate on the shares of each series,
whether such dividends shall be cumulative and the relation of such dividends
payable on any other class or series of stock, (iii) whether the shares of each
series shall be redeemable and the terms thereof, (iv) whether the shares shall
be convertible into Common Stock and the terms thereof, (v) the amount per share
payable on each series, or other rights of holders of such shares on liquidation
or dissolution of the Company, (vi) the voting rights, if any, of shares of each
series and (vii) generally, any other rights and privileges consistent with the
Certificate for each series and any qualifications, limitations or restrictions.
No shares of Preferred Stock are presently outstanding, and the Company has no
present intention to issue Preferred Stock.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Certificate and the Company's Bylaws may have the
effect of preventing, discouraging or delaying a change in the control of the
Company and may maintain the incumbency of the Board of Directors and
management. The Company's Bylaws limit the ability of shareholders of the
Company to raise matters at a meeting of shareholders without giving advance
notice. In addition, the Certificate and the Bylaws prohibit shareholders from
removing the Company's directors without cause. The Certificate of Incorporation
and Bylaws provide for a classified Board of Directors, which means that only
one-third of the members of the Board of Directors will be up for election in
any given year. The ability of the Board of Directors to issue Preferred Stock
as described above may also make it more difficult for, and may discourage,
other persons or companies from making a tender offer for, or attempting to
acquire substantial amounts of, the Company's Common Stock.
The Company is subject to the provisions of the Oklahoma Takeover
Disclosure Act of 1985 (the "Disclosure Act") regulating corporate takeovers.
The Disclosure Act requires certain notices to be given prior to making a
takeover offer. Such notices include filing a registration statement with the
Securities Administrator of Oklahoma and delivering a copy of such notice to the
Company. The Disclosure Act applies to offers to takeover an issuer of publicly
traded securities of which at least 20% are held by Oklahoma residents. A
"takeover" offer includes offers in which the offerer discloses its intention
that, as a result of the
48
<PAGE> 51
offer: (i) the offeror will own 10% or more of any class of equity securities or
(ii) ownership of any class of equity securities will be increased by 5% or
more.
The Company is subject to the provisions of Section 1090.3 of the Oklahoma
Corporate Act. That section provides, with certain exceptions, that an Oklahoma
corporation may not engage in any of a broad range of business combinations with
a person or an affiliate or associate of such person who is an "Interested
Shareholder" for a period of three years from the date that such person became
an Interested Shareholder unless: (a) the transaction, or business combination,
resulting in a person's becoming an Interested Shareholder is approved by the
board of directors of the corporation before the person becomes an Interested
Shareholder, (b) upon consummation of the transaction which resulted in the
person becoming an Interested Shareholder, the Interested Shareholder owned 85%
or more of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding shares owned by persons who are both officers
and directors of the corporation and shares held by certain employee stock
ownership plans) or (c) on or after the date the person became an Interested
Shareholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the Interested Shareholder. An "Interested Shareholder" is defined as any
person that is (a) the owner of 15% or more of the outstanding voting stock of
the corporation or (b) an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the three-year period immediately prior to the date on which it is
sought to be determined whether such person is an Interested Shareholder.
The Oklahoma Shares Control Act ("OSCA") (Section 1145 et seq. of the
Oklahoma Corporate Act) prohibits the voting of "control shares" without the
approval of a majority of shares held by non-interested shareholders. Under the
OSCA, "control shares" are shares acquired by a person which causes his
percentage ownership to exceed certain statutorily prescribed ranges of
ownership beginning at 20%. The OSCA was ruled unconstitutional shortly after
its adoption in 1987; however, it is believed that certain amendments to the
OSCA in 1990 and 1991 may have cured its constitutional infirmities.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is BankBoston, N.A.
LISTING
The Company has been approved for listing of the Common Stock on the Nasdaq
National Market under the symbol "CNGL", subject to official notice of issuance.
49
<PAGE> 52
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has not been any public market for the Common
Stock. Sale of a substantial number of shares of Common Stock into the public
market following the Offering could adversely affect prevailing market prices
for the Common Stock.
Following the Offering, the Company will have outstanding an aggregate of
6,000,000 shares of Common Stock, assuming no exercise of the underwriters'
over-allotment option. In addition to the 2,100,000 shares of Common Stock
offered hereby, as of the effective date of the Offering, there will be
3,900,000 shares of Common Stock outstanding, all of which are restricted
securities (the "Restricted Shares") under the Securities Act. All shareholders
of the Company have agreed they will not sell 3,900,000 shares of Common Stock
held by them without the prior consent of the representatives of the
Underwriters for a period of 180 days from the date of this Prospectus (the
"180-day Lockup Period"). Following the 180-day Lockup Period, up to 3,900,000
Restricted Shares will become eligible for sale in the public market pursuant to
Rule 144 subject to the volume and other restrictions pursuant to such Rule. The
Underwriters may, in their sole discretion and at any time prior to the
expiration of the 180-day Lockup Period without notice, release all or any
portion of the securities subject to lock-up agreements.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), who has beneficially owned shares for at least one
year (including the holding period of any prior owner except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period, a number of shares that does not exceed the greater of (i)
1% of the then outstanding shares of Common Stock or (ii) generally, the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding the sale. Sales under Rule 144 are also subject to the filing of a
Form 144 with respect to such sale and certain other limitations and
restrictions. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, would be entitled to sell such shares without having to comply with the
manner of sale, volume limitation or notice filing provisions described above.
The Company is unable to estimate the number of shares that will be sold
under Rule 144, as this will depend on the market price for the Common Stock of
the Company, the personal circumstances of the sellers and other factors. Prior
to the Offering, there has been no public market for the Common Stock, and there
can be no assurance that a significant public market for the Common Stock will
develop or be sustained after the Offering. Any future sale of substantial
amounts of the Common Stock in the open market may adversely affect the market
price of the Common Stock offered hereby.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register up to 600,000 shares of Common Stock reserved for
issuance under the 1997 Stock Plan, thus permitting the resale of such shares by
nonaffiliates in the public market without restriction under the Securities Act,
subject to vesting restrictions with the Company. The 204,000 shares subject to
purchase under the Company's 1996 Stock Option Plan are Restricted Shares.
50
<PAGE> 53
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
among the Company, the Selling Shareholder and the Underwriters named below, for
whom Oppenheimer & Co., Inc. and Southwest Securities, Inc. are acting as
representatives (the "Representatives"), the following Underwriters have
severally agreed to purchase from the Company and the Selling Shareholder, and
the Company and the Selling Shareholder have agreed to sell to the Underwriters,
the number of shares of Common Stock at the initial public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Oppenheimer & Co., Inc......................................
Southwest Securities, Inc...................................
---------
Total............................................. 2,100,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters thereunder are subject to approval of certain legal matters
(including, among other things, the legality of the issuance of shares of Common
Stock in the Offering) by counsel and to various other conditions. The nature of
the Underwriters' obligations is such that they are committed to purchase all of
the above shares of Common Stock if any are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the Offering price set forth on the cover page of this Prospectus
and at such price less a concession not in excess of $ per share of
Common Stock to certain securities dealers who are members of the National
Association of Securities Dealers, Inc. The Underwriters may allow and such
dealers may reallow concessions not in excess of $ per share to certain
other securities dealers. After the initial public offering, the offering price
and other selling terms may be changed by the Representatives.
The Underwriters have been granted a 30-day over-allotment option to
purchase from the Company up to an aggregate of 315,000 additional shares of
Common Stock at the public offering price less the underwriting discount and
commissions. If the Underwriters exercise such over-allotment option, the
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof as the number of shares of Common
Stock to be purchased by it as shown in the above table bears to the number of
shares of Common Stock offered hereby and the Company will be obligated,
pursuant to the over-allotment option, to sell such shares to the Underwriters.
The Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when the
Common Stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions, penalty bids and
passive market making may cause the price of the Common Stock to be higher than
it would otherwise be in
51
<PAGE> 54
the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
The Representatives have advised the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
The Company has agreed to pay the Representatives a financial advisory fee
equal to 3/4 of 1% of the total proceeds of the Offering. In addition, the
Company has agreed to indemnify the Underwriters against certain liabilities,
losses and expenses, including liabilities under the Securities Act or to
contribute to payments that the Underwriters may be required to make in respect
thereof.
All shareholders of the Company have agreed that for a period of 180 days
after the date of this Prospectus they will not sell, contract to sell or
otherwise dispose of, directly or indirectly, shares of Common Stock without the
prior written consent of the Representatives.
LEGAL MATTERS
The validity of the issuance of shares of Common Stock offered hereby will
be passed upon for the Company by Albright & Rusher, a Professional Corporation,
Tulsa, Oklahoma. Certain legal matters in connection with the Offering will be
passed upon for the Company by Hall, Estill, Hardwick, Gable, Golden & Nelson,
P.C., Tulsa, Oklahoma. Certain legal matters in connection with the Offering
will be passed upon for the Underwriters by Jackson Walker L.L.P., Dallas,
Texas.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated balance sheets as of December 31, 1995 and 1996 and the
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996 included in this
prospectus, have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing. With respect to the unaudited interim
financial information for the periods ended March 31, 1996 and 1997, included in
this Prospectus, the independent accountants have reported that they have
applied limited procedures in accordance with professional standards for a
review of such information. However, their separate report included in the
Prospectus states that they did not audit and they do not express an opinion on
that interim financial information. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature
of the review procedures applied. The accountants are not subject to the
liability provisions of Section 11 of the Securities Act for their report on the
unaudited interim financial information because that report is not a "report" or
a "part" of the registration statement prepared or certified by the accountants
within the meaning of Sections 7 and 11 of the Securities Act.
EXPERTS
The estimate of the proved, producing natural gas reserves which are
underlying leases and wells under contract to the Company was provided by Lee
Keeling and Associates, Inc., and are included herein in reliance in the
authority of said firm as experts in petroleum engineering.
52
<PAGE> 55
GLOSSARY
The definitions set forth below apply to the terms used in this Prospectus:
"Bcf" means billion cubic feet of natural gas.
"Beaver Gathering System" means the Company's natural gas gathering system
located in Beaver County, Oklahoma which gathers natural gas for delivery to the
Beaver Plant.
"Beaver Plant or Beaver" means the Company's natural gas processing plant
located in Beaver County, Oklahoma which is directly connected to the Beaver
Gathering System.
"Capacity Release" means firm transportation which the Company has acquired
by purchase or assignment from another party (typically a utility company) on a
particular pipeline.
"Convertible Preferred Stock" means the 149 shares of convertible preferred
stock of the Company, par value $1.00 per share, which will be converted into
shares of Common Stock prior to completion of the Offering.
"EBITDA" represents operating income plus, depreciation, depletion and
amortization. It should not be considered in isolation or as a substitute for
net income as a measure of the Company's operating results or to cash flows from
operating activities (determined in accordance with generally accepted
accounting principles) as a measure of liquidity. Not all companies calculate
EBITDA using the same methods; therefore, the EBITDA figures set forth herein
may not be comparable to EBITDA reported by other companies. The Company
believes that EBITDA is a measure commonly reported and widely used by analysts,
investors and other interested parties in the natural gas industry and
understands that it is used by such persons as one measure of a company's
historical ability to service its debt.
"EPA" means the Environmental Protection Agency.
"Extraction" means removing liquid and liquefiable hydrocarbons (NGLs) from
natural gas.
"FERC" means the Federal Energy Regulatory Commission.
"Firm transportation" means the obligation of a pipeline to transport
natural gas without curtailment or reduction up to the quantity which the
pipeline has committed to transport under the contract with its customer. Under
firm transportation, the pipeline reserves sufficient capacity on its pipelines
to satisfy the transportation requirements of all firm transportation customers
without curtailment (except for curtailment which may result due to acts of God
or similar occurrences).
"Fractionation" is the process by which the NGL stream is subjected to
controlled temperatures, causing the NGLs to separate, or fractionate, into the
separate NGL products of ethane, propane, butane, isobutane and natural
gasoline.
"Fuel and shrinkage" is the heating value of the natural gas extracted in
the form of NGLs or consumed as fuel during processing.
"Interruptible transportation" means the obligation of a pipeline to
transport natural gas on a "first come -- first serve" basis after the pipeline
has satisfied all of its firm transportation obligations.
"Mcf" means thousand cubic feet of natural gas.
"Mgal/d" means thousand gallons per day.
"MMcf" means million cubic feet of natural gas.
"MMcf/d" or "MMcf per day" means million cubic feet per day.
"Mocane Plant or Mocane" means the Company's natural gas processing plant
located in Beaver County, Oklahoma which is not directly connected to the Beaver
Gathering System.
"NGLs" means the liquids which are extracted from natural gas which include
ethane, propane, butane, isobutane and natural gasoline.
53
<PAGE> 56
"Off-system gas" means the natural gas, which the Company purchases from
time to time for resale to its customers which is neither gathered nor processed
by the Company.
"On-system gas" means the natural gas which is gathered or processed by the
Company.
"Panhandle Area" means the panhandle region of Oklahoma and Texas, where
the Company's gathering and processing assets are located.
"Processing" includes treatment, extraction and fractionation.
"Reserves" mean proven/producing natural gas reserves from wells whose
production is processed and/or gathered at the Company's plants and/or pipeline
systems.
"Texas Gathering Assets" means the natural gas gathering assets located in
various counties in the panhandle of Texas and Oklahoma which were acquired by
the Company from subsidiaries of Enron Corporation.
"Treatment" refers to the removal of water vapor, solids and other
contaminants, such as hydrogen sulfide or carbon dioxide, contained in the
natural gas stream that would interfere with pipeline transportation or
marketing of the natural gas to consumers.
54
<PAGE> 57
CONTINENTAL NATURAL GAS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Accountants.......................... F-1
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Shareholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
Unaudited Pro Forma Financial Data.......................... F-15
</TABLE>
55
<PAGE> 58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Continental Natural Gas, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Continental
Natural Gas, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years ended December 31, 1994, 1995 and 1996. 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 Continental
Natural Gas, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1994, 1995 and 1996 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
March 21, 1997
F-1
<PAGE> 59
REPORT OF INDEPENDENT ACCOUNTANTS
We have reviewed the accompanying consolidated balance sheet of Continental
Natural Gas, Inc. and Subsidiaries as of March 31, 1997, and the related
consolidated statements of operations and cash flows for the three-month periods
ended March 31, 1996 and 1997 and the consolidated statement of shareholders'
equity for the three-month period ended March 31, 1997. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquires of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
June 10, 1997
F-2
<PAGE> 60
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------- ------------
1995 1996 1997
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,655,867 $ 21,077,438 $ 14,784,031
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$252,979, $257,619 and $287,619....................... 18,028,283 44,930,884 21,374,532
Affiliates.............................................. 272,926 5,969,458 4,624,111
Other................................................... 531,683 1,150,334 2,026,856
Notes receivable -- affiliates............................ 795,711 17,801 17,801
Gas inventory............................................. 885,247 3,148,657 3,693,112
Prepaid expenses.......................................... 61,106 164,085 61,143
----------- ------------ ------------
Total current assets...................................... 25,230,823 76,458,657 46,581,586
Investments (Note 3)........................................ 786,424 655,589 588,220
Property and equipment, net (Note 4)........................ 28,345,593 61,045,047 62,750,946
Notes receivable -- affiliates.............................. 542,442 -- --
Deferred tax asset.......................................... 2,600,000 7,075,000 6,458,000
Other assets................................................ 593,376 694,305 685,634
----------- ------------ ------------
Total assets................................................ $58,098,658 $145,928,598 $117,064,386
=========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $24,508,073 $ 56,707,979 $ 35,528,539
Affiliate payables........................................ 294,185 463,884 351,309
Contract advances......................................... -- 24,787,831 10,257,651
Current portion of long-term debt......................... 2,715,669 867,000 2,025,000
Current portion of capital lease obligations.............. 543,052 1,165,361 1,191,962
----------- ------------ ------------
Total current liabilities................................. 28,060,979 83,992,055 49,354,461
Long-term debt.............................................. 6,534,331 32,945,500 38,070,753
Capital lease obligations................................... 2,745,371 6,583,478 6,275,577
Deferred gain on sale-leaseback............................. 376,149 254,154 223,656
Contract advances........................................... 1,956,055 -- --
----------- ------------ ------------
Total liabilities........................................... 39,672,885 123,775,187 93,924,447
Minority interest........................................... 1,671,456 -- --
Commitments and contingencies (Notes 4, 6, 8 and 9)
Shareholders' equity (Note 11):
Preferred stock, $.01 par value, 5,000,000 shares
authorized, non issued.................................. -- -- --
Convertible preferred stock, $1 par value, $40,000
liquidation value, 200 shares authorized and 149 shares
issued and outstanding in 1996.......................... -- 149 149
Common stock, $.01 par value, 60,000,000 shares authorized
and 3,457,159 shares issued in 1995 and 3,919,156 issued
in 1996 and 1997........................................ 34,571 39,191 39,191
Additional paid-in capital................................ 12,034,314 12,375,528 12,375,528
Retained earnings......................................... 4,889,652 10,042,763 11,029,291
Treasury stock, at cost................................... (204,220) (204,220) (204,220)
Receivable from stock sale................................ -- (100,000) (100,000)
----------- ------------ ------------
Total shareholders' equity................................ 16,754,317 22,153,411 23,139,939
----------- ------------ ------------
Total liabilities and shareholders' equity.................. $58,098,658 $145,928,598 $117,064,386
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 61
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- ---------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Natural gas sales......................... $100,476,775 $ 95,630,817 $196,729,349 $32,669,849 $ 72,955,874
Natural gas sales -- related party........ -- -- 12,049,421 -- 5,832,255
Natural gas liquids sales................. 19,572,332 24,803,858 34,757,184 6,194,619 8,881,135
Gathering fees............................ -- -- 1,994,711 -- 843,020
Other..................................... 259,837 762,770 1,130,751 455,202 14,725
------------ ------------ ------------ ----------- ------------
Total operating revenue................... 120,308,944 121,197,445 246,661,416 39,319,670 88,527,009
------------ ------------ ------------ ----------- ------------
Operating costs and expenses:
Cost of purchased gas................... 111,038,275 107,641,631 225,535,172 34,492,516 81,416,588
Operating expenses...................... 3,930,447 4,366,125 5,977,953 1,381,758 1,559,243
General and administrative.............. 3,600,982 3,840,084 5,622,871 1,310,413 1,842,202
Depreciation, depletion and
amortization.......................... 1,504,608 1,366,544 2,854,624 473,031 899,089
------------ ------------ ------------ ----------- ------------
Total operating costs and expenses...... 120,074,312 117,214,384 239,990,620 37,657,718 85,717,122
------------ ------------ ------------ ----------- ------------
Operating income.......................... 234,632 3,983,061 6,670,796 1,661,952 2,809,887
------------ ------------ ------------ ----------- ------------
Other income (expense):
Interest income......................... 224,418 309,832 131,947 46,944 279,592
Equity in loss of investee.............. (51,486) (82,769) (136,196) (27,973) (33,000)
Interest expense........................ (1,251,747) (914,331) (2,702,304) (326,019) (1,465,682)
Minority interest....................... (1,501,550) (403,872) -- -- --
Gain on sale of gathering system and
processing plant...................... 5,178,925 -- -- -- --
Other, net.............................. 2,049,920 43,726 20,827 42,707 47,731
------------ ------------ ------------ ----------- ------------
Total other income (expense)............ 4,648,480 (1,047,414) (2,685,726) (264,341) (1,171,359)
------------ ------------ ------------ ----------- ------------
Income before income taxes and
extraordinary item...................... 4,883,112 2,935,647 3,985,070 1,397,611 1,638,528
Income tax (expense) benefit.............. (127,000) 2,174,304 3,635,210 (30,000) (652,000)
------------ ------------ ------------ ----------- ------------
Income before extraordinary item.......... 4,756,112 5,109,951 7,620,280 1,367,611 986,528
Extraordinary loss on retirement of debt
(net of income taxes of $261,842)....... -- -- (427,220) -- --
------------ ------------ ------------ ----------- ------------
Net income................................ $ 4,756,112 $ 5,109,951 $ 7,193,060 $ 1,367,611 $ 986,528
============ ============ ============ =========== ============
Primary earnings per share:
Income before extraordinary item........ $ 1.46 $ 1.59 $ 1.99 $ 0.37 $ 0.24
============ ============ ============ =========== ============
Net income.............................. $ 1.46 $ 1.59 $ 1.87 $ 0.37 $ 0.24
============ ============ ============ =========== ============
Fully diluted earnings per share:
Income before extraordinary item........ $ 1.45 $ 1.59 $ 1.71 $ 0.33 $ 0.22
============ ============ ============ =========== ============
Net income.............................. $ 1.45 $ 1.59 $ 1.61 $ 0.33 $ 0.22
============ ============ ============ =========== ============
Weighted average common shares
outstanding:
Primary................................. 3,215,349 3,185,428 3,536,176 3,305,110 3,613,153
Fully diluted........................... 3,242,277 3,186,244 4,466,291 4,155,391 4,392,986
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 62
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF SHARES
-------------------------------- ADDITIONAL RETAINED
PREFERRED COMMON TREASURY PREFERRED COMMON PAID-IN EARNINGS TREASURY
STOCK STOCK STOCK STOCK STOCK CAPITAL (DEFICIT) STOCK
--------- --------- -------- --------- ------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993.................... 1,000 3,457,159 263,435 $ 315,000 $34,571 $12,034,314 $(4,830,132) $(156,470)
Net income................ 4,756,112
------ --------- ------- --------- ------- ----------- ----------- ---------
Balance at December 31,
1994.................... 1,000 3,457,159 263,435 315,000 34,571 12,034,314 (74,020) (156,470)
Acquisition of preferred
stock................... (1,000) (315,000)
Purchase of treasury
stock................. 42,568 (47,750)
Common stock dividends
($.01 per share)........ (24,217)
Preferred stock dividends
($122.06 per share)..... (122,062)
Net income................ 5,109,951
------ --------- ------- --------- ------- ----------- ----------- ---------
Balance at December 31,
1995.................... 3,457,159 306,003 34,571 12,034,314 4,889,652 (204,220)
Issuance of preferred
stock................... 200 200 199,834
Sale of common stock to
management (Note 11).... 461,997 4,620 141,380
Redemption of preferred
stock................... (51) (51) (2,039,949)
Net income................ 7,193,060
------ --------- ------- --------- ------- ----------- ----------- ---------
Balance at December 31,
1996.................... 149 3,919,156 306,003 149 39,191 12,375,528 10,042,763 (204,220)
Net income (unaudited).... 986,528
------ --------- ------- --------- ------- ----------- ----------- ---------
Balance at March 31, 1997
(unaudited)............. 149 3,919,156 306,003 $ 149 $39,191 $12,375,528 $11,029,291 $(204,220)
====== ========= ======= ========= ======= =========== =========== =========
<CAPTION>
RECEIVABLE
FROM
STOCK
SALE TOTAL
---------- -----------
<S> <C> <C>
Balance at December 31,
1993.................... $ $ 7,397,283
Net income................ 4,756,112
--------- -----------
Balance at December 31,
1994.................... 12,153,395
Acquisition of preferred
stock................... (315,000)
Purchase of treasury
stock................. (47,750)
Common stock dividends
($.01 per share)........ (24,217)
Preferred stock dividends
($122.06 per share)..... (122,062)
Net income................ 5,109,951
--------- -----------
Balance at December 31,
1995.................... 16,754,317
Issuance of preferred
stock................... 200,034
Sale of common stock to
management (Note 11).... (100,000) 46,000
Redemption of preferred
stock................... (2,040,000)
Net income................ 7,193,060
--------- -----------
Balance at December 31,
1996.................... (100,000) 22,153,411
Net income (unaudited).... 986,528
--------- -----------
Balance at March 31, 1997
(unaudited)............. $(100,000) $23,139,939
========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 63
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ---------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 4,756,112 $ 5,109,951 $ 7,193,060 $ 1,367,611 $ 986,528
------------ ------------ ------------ ------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization........ 1,504,608 1,366,544 2,854,624 473,031 899,089
Amortization of debt issuance costs............. 91,881 128,473 269,697 50,947 36,190
Gain on disposition of assets................... (5,196,221) (123,793) (133,945) (30,498) (30,498)
Minority interest............................... 1,501,550 403,872 -- -- --
Equity in loss of investee...................... 51,486 82,769 136,196 27,973 33,000
Deferred income tax benefit (expense)........... -- (2,220,000) (4,213,158) -- 617,000
Noncash compensation on stock issuance.......... -- -- 46,000 46,000 --
Extraordinary loss on retirement of debt........ -- -- 427,220 -- --
Changes in operating assets and liabilities:
Accounts receivable........................... 6,580,031 (6,716,615) (35,408,754) (1,670,585) 24,025,177
Gas inventory................................. (533,857) 85,070 (2,263,410) (701,849) (544,455)
Prepaid expenses.............................. 280,310 (42,424) (102,979) 30,967 102,942
Accounts payable.............................. (9,963,457) 11,508,016 31,899,220 (591,303) (20,398,859)
Contract advance.............................. 2,712,589 (756,534) 22,831,776 -- (14,530,180)
------------ ------------ ------------ ------------ ------------
Total adjustments........................... (2,971,080) 3,715,378 16,342,487 (2,365,317) (9,790,594)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities...................................... 1,785,032 8,825,329 23,535,547 (997,706) (8,804,066)
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures.............................. (3,096,999) (12,310,634) (30,761,492) (10,418,248) (3,498,143)
Proceeds from sale of property and equipment...... 12,784,452 7,000 308,000 -- --
(Increase) decrease in investments................ 68,392 54,852 (5,361) -- 34,369
(Increase) decrease in notes receivable --
affiliate....................................... (260,000) 98 -- -- --
(Increase) decrease in other assets............... 692,642 (37,500) -- -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities...................................... 10,188,487 (12,286,184) (30,458,853) (10,418,248) (3,463,774)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Dividends paid.................................... -- (146,279) -- -- --
Purchase of preferred and Treasury Stock.......... -- (362,750) -- -- --
Principal payments on long-term debt.............. (47,950,348) (11,125,868) (45,903,667) (312,500) (216,747)
Proceeds of long-term debt........................ 41,700,000 14,750,000 70,466,167 8,643,000 6,500,000
Purchase of warrants.............................. -- (315,000) -- -- --
Debt issuance costs............................... (15,000) (141,716) (523,688) (100,376) (27,521)
Principal payments under capital lease
obligations..................................... (814,574) (333,074) (693,935) (129,703) (281,299)
Minority interest distributions................... (720,000) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities...................................... (7,799,922) 2,325,313 23,344,877 8,100,421 5,974,433
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents..................................... 4,173,597 (1,135,542) 16,421,571 (3,315,533) (6,293,407)
Cash and cash equivalents at beginning of year.... 1,617,812 5,791,409 4,655,867 4,655,867 21,077,438
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of year.......... $ 5,791,409 $ 4,655,867 $ 21,077,438 $ 1,340,334 $ 14,784,031
============ ============ ============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid................................... $ 1,159,866 $ 745,967 $ 2,472,515 $ 238,661 $ 841,750
============ ============ ============ ============ ============
Income taxes paid............................... $ 120,000 $ 100,000 $ 100,000 $ 100,000 $ 460,000
============ ============ ============ ============ ============
</TABLE>
Supplemental disclosure of noncash investing and financing activities -- In
1994, 1995, and 1996, the Company incurred $1,997,249, $2,416,887 and
$5,154,349, respectively, relating to capital lease obligations for the
acquisition of equipment. In 1994, the Company retired $3,124,027 related to
capital lease obligations in the disposition of equipment. In 1996, the Company
issued preferred stock and cancelled certain indebtedness to acquire the
minority interest ownership of a partnership holding one of the Company's
processing plants. Also in 1996, the Company redeemed 51 shares of preferred
stock in exchange for the cancellation of indebtedness due from an affiliated
entity.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 64
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS -- Continental Natural Gas, Inc. and Subsidiaries (the
"Company") is an Oklahoma corporation involved principally in natural gas
gathering, processing and marketing with operations principally in the central
United States. The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries and its investments in majority-owned
partnerships.
CASH EQUIVALENTS -- The Company considers all highly liquid investments
with maturities of three months or less at date of purchase to be cash
equivalents.
INVENTORY -- Gas inventory is stated at the lower of market or average
cost.
PROPERTY AND EQUIPMENT -- The Company's property and equipment is carried
at cost and depreciated on the straight-line basis over their estimated useful
lives ranging from 3 to 20 years. Gain or loss on disposal of such property and
equipment is reflected in operations. Maintenance and repairs are charged to
expense as incurred.
The carrying value of property and equipment is reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Assets determined to be impaired based on
estimated future net cash flows are reduced to estimated fair value. No such
reduction in the carrying value of assets has been reflected in the accompanying
financial statements.
OIL AND GAS PROPERTIES -- Costs incurred in the acquisition, exploration
and development of oil and gas properties owned in prior years were capitalized
utilizing the full cost method and depleted using the units-of-production method
based on proved reserves.
DEBT ISSUANCE COSTS -- Costs associated with obtaining financing are
capitalized and amortized using the straight-line method over the term of the
agreement.
REVENUE RECOGNITION -- Revenue is recognized when product is delivered or
when services are rendered.
INCOME TAXES -- The Company accounts for income taxes utilizing Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
EARNINGS PER SHARE -- Earnings per share is based on the weighted average
number of shares outstanding. Primary earnings per share assumes that
outstanding dilutive stock options and warrants are exercised and the proceeds
used to purchase common shares. Fully diluted earnings per share gives effect to
the conversion of convertible preferred stock and the exercise of dilutive stock
options.
ACCOUNTING 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.
RECLASSIFICATIONS -- Certain 1994 and 1995 amounts have been reclassified
to conform to the current year presentation.
2. RELATED PARTY TRANSACTIONS
In 1994, 1995 and 1996, the Company provided office space to an affiliated
entity and billed it for rentals of $47,759, $40,399 and $40,399, respectively.
The Company provided general and administrative services to
F-7
<PAGE> 65
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
affiliates and billed them $231,055, $265,351 and $218,253 in 1994, 1995 and
1996, respectively. Additionally, the Company in 1994, 1995 and 1996, was
charged by affiliates $11,212, $36,786 and $190,366, respectively, for general
and administrative expenses incurred on its behalf and $138,000 in 1994 and 1995
and $210,000 in 1996 for management services.
The Company purchased gas from Bird Creek Resources ("BCR"), an affiliated
entity, totaling $895,803, $125,284 and $316,466 in 1994, 1995 and 1996,
respectively. At December 31, 1995 and 1996, the Company had accounts payable to
BCR totaling $139,185 and $463,884, respectively.
In 1996, the Company sold its oil and gas producing properties to an
affiliated entity for approximately $308,000, which approximated book value.
Revenues from these properties are included in other revenues and totaled
$202,278, $461,984 and $602,656 for the years ended December 31, 1994, 1995 and
1996, respectively.
The Company had natural gas sales totaling $12,049,000 in 1996 to an
affiliated entity, which gas was sold at the Company's cost. Receivables at
December 31, 1996 related to these gas sales were $4,988,035. During 1996, the
Company entered into futures contracts on behalf of another affiliate, with
gains or losses or such contracts paid or billed to the affiliate. The Company
also had advances receivable from other affiliates totaling $981,423 at December
31, 1996.
At December 31, 1995 and 1996, notes receivable from affiliates related to
a sale of a gathering system in prior years were $17,801. This note bears
interest at 8% and is collateralized by the gathering system. Also, at December
31, 1995, the Company had notes receivable from affiliates totaling $1,320,352,
related to these parties' participation with the Company in the ownership of
certain gathering systems and processing plants. Accrued interest on these notes
totaling $153,206 at December 31, 1995, is included in accounts receivable-
affiliate. This receivable was collected in 1996 as part of the Company's
acquisition of the affiliate's interest in the plant.
3. INVESTMENTS
The Company, through two limited partnerships of which it is the general
partner, owns a 6.88% interest in a partnership which owns and operates a
natural gas gathering system in Texas. The Company's ownership interest is
accounted for using the equity method. Accordingly, during 1994, 1995 and 1996,
the Company has recognized losses of $51,486, $82,769 and $136,196,
respectively, from the investment.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1996, consisted of:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Gathering systems and processing plants................... $25,720,568 $55,722,149
Compressor equipment...................................... 4,779,303 10,162,571
Oil and gas properties, under the full-cost method........ 753,647 --
Furniture, fixtures and other............................. 919,255 1,342,984
Less accumulated depreciation, depletion and
amortization............................................ (3,827,180) (6,182,657)
----------- -----------
Net property and equipment................................ $28,345,593 $61,045,047
=========== ===========
</TABLE>
In March and May of 1996, the Company purchased gas gathering systems for
combined consideration of $20.2 million.
In December 1994, the Company sold a gathering system and processing plant
and recognized a $5.2 million gain on the sale, of which $1.3 million was
attributable to the minority ownership interests of related parties. The Company
utilized a portion of the proceeds from this sale to acquire a gas processing
plant and related assets in February 1995 for $3.5 million. The acquisition also
provides for contingent consideration
F-8
<PAGE> 66
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of up to $1.5 million ($500,000 per year for three years) plus associated
interest on any such amounts, based on the delivery of a certain supplier's gas
to the plant for processing. As the provisions of the agreement related to this
consideration were met in 1995, at December 31, 1995, the Company accrued
$500,000 plus interest related to this commitment. In 1996, the Company did not
receive gas for processing at this plant from the supplier, and accordingly,
does not believe that any additional consideration will be payable.
5. LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1996 consists of the following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Term loan payable in quarterly installments with a final
maturity in 2001, plus interest at either the bank's
base rate plus .50% or LIBOR plus 2.25% (7.94% at
December 31, 1996)...................................... $ -- $33,812,500
Term loan payable in quarterly installments, plus interest
at either the bank's base rate plus .5% or LIBOR plus
2.5% (8.25% at December 31, 1995)....................... 9,250,000 --
Less current portion...................................... (2,715,669) (867,000)
----------- -----------
Long-term debt............................................ $ 6,534,331 $32,945,500
=========== ===========
</TABLE>
In December 1996, the Company obtained a new credit facility including the
term loan above and a revolving credit facility of $25 million, of which up to
$18 million may be utilized to support letters of credit. Letters of credit
totalling $6,885,990 were outstanding related to this credit facility at
December 31, 1996. At December 31, 1996, no amount was outstanding on the
revolving credit facility which has a maturity of December 31, 1998 and also
accrues interest at either the bank's base rate plus .5% or LIBOR plus 2.25%.
The new agreement also provides borrowing availability of up to $4,800,000 for
approved capital projects. Associated with obtaining the new credit facility,
the Company retired its prior long-term debt and expensed the remaining
unamortized debt issuance costs of $689,062, which expense (net of income taxes
of $261,842) is classified as an extraordinary item in the statement of
operations.
The debt under the agreements is collateralized by inventory, accounts
receivable, property and equipment and other assets. The agreement includes
various restrictive covenants including the maintenance of specified levels of
working capital and net worth, limitations on the incurrence of additional
indebtedness and limitations on dividends to shareholders.
The Company's prior debt agreement included the issuance of stock purchase
warrants which entitled the holder of the warrants to purchase 127,840 shares of
common stock of the Company. During 1995, all such warrants were repurchased by
the Company for a total of $315,000.
At December 31, 1996, the aggregate amount of long-term debt is payable as
follows: $867,000 in 1997; $4,765,000 in 1998; $4,765,000 in 1999; $4,765,000 in
2000 and $18,650,500 in 2001. Beginning in 1998, certain additional principal
amounts may be due based on the Company's levels of operating cash flows as
defined by the agreement.
F-9
<PAGE> 67
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. CAPITAL LEASES
Property and equipment include the following property under capital leases
at December 31:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Compressor equipment........................................ $3,950,912 $9,105,261
Less accumulated amortization............................... (344,703) (616,643)
---------- ----------
$3,606,209 $8,488,618
========== ==========
</TABLE>
Future minimum lease payments as of December 31, 1996 under capital leases
are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 1,807,303
1998........................................................ 1,807,303
1999........................................................ 1,483,203
2000........................................................ 1,452,026
2001........................................................ 1,452,026
Thereafter.................................................. 2,056,827
-----------
Future minimum lease payments............................... 10,058,688
Less amount representing interest........................... (2,309,849)
-----------
Present value of future minimum lease payments.............. 7,748,839
Less current portion........................................ (1,165,361)
-----------
Long-term portion........................................... $ 6,583,478
===========
</TABLE>
7. CONTRACT ADVANCES
In December, 1996, the Company received contract advances totalling
approximately $22.8 million related to commitments to sell natural gas and
natural gas liquids. The advances do not bear interest and are payable in
product to be delivered over approximately nine months beginning in January
1997.
In June of 1994, the Company received a contract advance of approximately
$2.7 million related to a commitment to sell natural gas liquids. This advance
does not bear interest, is payable in cash or in product, and has a final
repayment date of June, 1997. The Company may terminate the contract and repay
this advance at its option with 30 days notice. During 1995, the Company elected
to reduce the contract advance by delivery of ethane volumes, reducing the
contract advance by approximately $756,000.
8. INCOME TAXES
Components of income tax expense (benefit) for the years ended December 31,
1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- ----------- -----------
<S> <C> <C> <C>
Current....................................... $127,000 $ 45,696 $ 577,948
Deferred...................................... -- (2,220,000) (4,213,158)
-------- ----------- -----------
$127,000 $(2,174,304) $(3,635,210)
======== =========== ===========
</TABLE>
F-10
<PAGE> 68
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the income tax expense computed by applying the federal
statutory rate to pre-tax income to the Company's effective income tax expense
(benefit) is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Income tax expense computed by applying
statutory rate............................. $1,660,258 $ 998,120 $ 1,354,924
State income taxes........................... 195,324 117,425 159,403
Nontaxable life insurance proceeds........... (760,000) -- --
Other........................................ 24,530 18,825 29,506
Benefit of net operating loss carryforward... (993,112) (1,088,674) (965,885)
Change in valuation allowance associated with
deferred tax assets........................ -- (2,220,000) (4,213,158)
---------- ----------- -----------
Income tax expense (benefit)................. $ 127,000 $(2,174,304) $(3,635,210)
========== =========== ===========
</TABLE>
Deferred tax assets and liabilities at December 31, 1995 and 1996 are
comprised of the following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for losses and other.......................... $ 127,900 $ 158,503
Deferred gain on sale leaseback......................... 142,936 96,579
Contract advances....................................... -- 9,419,375
Net operating loss carryforwards........................ 14,554,295 4,448,500
Deferred gain on futures contracts...................... -- 411,573
Alternative minimum tax credit carryforwards............ 195,700 773,851
----------- -----------
Total deferred tax assets............................... 15,020,831 15,308,381
----------- -----------
Deferred tax liabilities:
Depreciation, depletion and amortization of property and
equipment............................................ (617,700) (2,225,498)
Change from cash basis to accrual basis of accounting
for income tax purposes.............................. (441,800) --
----------- -----------
Total deferred tax liabilities............................ (1,059,500) (2,225,498)
----------- -----------
Valuation allowance....................................... (11,361,331) (6,007,883)
----------- -----------
Net deferred tax asset.................................... $ 2,600,000 $ 7,075,000
=========== ===========
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards
(NOLs) totaling approximately $17.5 million for regular tax purposes and $18.0
million for alternative minimum tax purposes. If not utilized, these
carryforwards will expire from 1999 to 2003. Due to the lack of existing legal
precedent with respect to the tax rules governing the Company's NOLs, both the
availability of the Company's NOLs and its prior utilization of NOLs (totaling
approximately $37 million) may be challenged. Disallowance of the use of the
NOLs would result in taxes associated with prior utilization of the NOLs being
currently payable.
Realization of the Company's deferred tax assets is dependent upon the
generation of sufficient taxable income prior to the expiration of the NOLs and,
for financial reporting purposes, the resolution of the matters noted above.
Although realization is not assured, management believes it is more likely than
not that the recorded net deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable could be increased or decreased by a
material amount in the near-term pending resolution of these matters.
9. COMMITMENTS AND CONTINGENCIES
The Company, in the ordinary course of business, enters into fixed price
sales contracts of natural gas. At December 31, 1995, the Company had fixed
price gas sales contracts for prices ranging between $1.43 and $2.30 for the
period January 1, 1996 and July 31, 1997. At December 31, 1996, the Company had
fixed price gas sales contracts for prices ranging between $1.83 and $2.46 for
the period January 1, 1997 to August 31, 1998.
F-11
<PAGE> 69
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1996, the Company has outstanding $27,519,090 of letters
of credit from commercial banks related to its purchases and sales of gas and
has pledged inventory, accounts receivable, property and equipment and other
assets as collateral.
The Company occupies office space and maintains certain compressor
equipment under operating leases and incurred rent expense of $1,461,300,
$1,839,000 and $1,931,708 in 1994, 1995 and 1996, respectively. Future minimum
rental payments under the terms of the leases are $191,473 in 1997.
The Company is currently a defendant in litigation which involves primarily
claims made by Colorado Interstate Gas ("CIG") that the Company and Continental
Hydrocarbons, Inc. ("CHI"), a former subsidiary of the Company, improperly
withheld proceeds from the sale of natural gas liquids processed at one of the
Company's plants, have (among other things) defamed CIG and are, as a result,
liable to CIG for unspecified actual and punitive damages. The companies from
which CHI purchased the plant have also been sued by CIG and have sought
indemnity from CHI and the Company for any liability they may have to CIG as
well as other amounts allegedly owed them. The Company and CHI have generally
denied the allegations against them in the case and have contended that they are
owed certain amounts for the processing of natural gas. Though impossible to
estimate with certainty, the Company believes that CIG is seeking actual damages
in excess of $3 million. Additionally, the Company is currently involved in
pending proceedings at the FERC in which certain parties allege that the primary
function of the Company's processing plants is interstate transportation and
thus that they are subject to FERC rate and certificate regulation. While the
Company believes that its business is not subject to regulation by the FERC, it
cannot predict the outcome of these proceedings. Various other lawsuits against
the Company have arisen in the ordinary course of the Company's business. In the
opinion of management, resolution of the CIG litigation, the FERC proceedings
and such other matters will not have a material adverse effect on results of
operations or financial position.
10. PROFIT SHARING AND THRIFT PLAN
The Company currently participates with certain affiliates in a defined
contribution plan (the "Plan") covering substantially all employees. Under the
Plan provisions, the Company contributes 2% of each participant's annual salary,
plus up to an additional 3% to match voluntary contributions by employees.
Employees may make voluntary contributions of up to 10% of their annual
compensation. The Company makes contributions to the Plan each pay period. Total
expense for 1994, 1995 and 1996 was approximately $120,000, $106,000 and
$141,500, respectively.
11. SHAREHOLDERS' EQUITY
Preferred stock of the Company is convertible at the option of the holders
into 586,847 shares of common stock of the Company. The preferred stock includes
a liquidation preference equal to $40,000 per share plus all unpaid dividends.
Dividends on the preferred stock are cumulative from the date of issuance at a
rate of 7 1/2% applied to the liquidation value. At December 31, 1996, unpaid
dividends totaling $587,250 had accumulated on the Preferred Stock.
On January 1, 1996, the Company issued 200 shares of preferred stock in
exchange for the minority interest ownership in the Beaver gas processing plant.
As the minority interest ownership was held by affiliates of the Company with
common ownership, the assets and liabilities associated with the acquired
interest have been reflected at their historical amounts. Subsequently, the
Company redeemed 51 shares of the preferred stock in exchange for cancellation
of indebtedness owed the Company.
As of December 31, 1994, stock options were outstanding on 68,000 shares of
common stock exercisable at $1.47 per share through December 31, 1997. During
1995, all such stock options were canceled. Also during 1995, the Company
granted certain employees phantom stock rights under which certain amounts would
be due upon the occurrence of specified events. On February 28, 1996, these
phantom stock rights were cancelled
F-12
<PAGE> 70
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and certain members of management were granted stock options for 204,000 shares
of common stock. These options become exercisable only if certain performance
criteria of the Company are met during the years of 1997 through 1999. The
options, if earned, are exercisable at $.26 per share and expire at March 31,
2000. The amount of the options exercisable may also be limited based on the
fair value of the Company's common stock at the date of exercise. The Company
applies APB 25 in accounting for such stock options. Under this standard,
compensation expense may be recognized associated with these options when
earned, based on the fair value of the Company's common stock at the dates they
are earned. Based on the provisions of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation," the grant date fair value of these
options is not material and, accordingly, disclosure of pro forma information as
required by this standard has not been presented.
Also on February 28, 1996, the Company sold 461,997 shares of common stock
of the Company to certain members of Company management for $100,000, payable in
the form of notes receivable due in April of 1997 with interest at 8%. Based on
the fair value of the Company's common stock at this date, compensation expense
and a contribution of capital of $46,000 has been recognized in 1996.
12. FINANCIAL INSTRUMENTS
DERIVATIVES -- The Company enters into futures contracts and options
related to its buying and selling of natural gas. Specifically, the Company
hedges its cost of future purchases of natural gas associated with its fixed
price sales commitments. At December 31, 1995, the Company had futures contracts
to purchase natural gas totaling approximately $1.8 million for the period from
January of 1996 to April of 1996. At December 31, 1996, the Company had futures
contracts to purchase natural gas totaling approximately $6.5 million for the
period from January of 1997 to April of 1998. Also, at December 31, 1995, the
Company had swap contracts on natural gas totaling approximately $1.3 million
for the period of January and February of 1996. At December 31, 1996, the
Company had swap contracts whereby the Company had fixed its price with respect
to future purchases of natural gas totaling approximately $7.2 million for the
period of January of 1997 to August of 1997. At December 31, 1995, the Company
had sold put options on approximately 500,000 mcf of natural gas at prices of
$2.00 to $2.25. At December 31, 1995 and 1996, the Company had deposits totaling
$458,873 and $962,553, respectively, related to these contracts which are
reflected as Accounts Receivable -- Other.
Gains or losses on futures contracts, swaps and options designated as
hedges are reflected in the Consolidated Statement of Operations in the same
period as the associated sale of gas occurs. Gains or losses on futures
contracts, swaps and options not designated as hedges are recognized as
fluctuations occur in the value of the contracts. At December 31, 1996, all
futures and swap contracts relating to the purchase of natural gas were
designated as hedges. Gains on futures contracts totalling approximately $1.1
million at December 31, 1996 have been deferred. At December 31, 1996, the fair
value of the swap contracts was approximately $2 million, which amount has also
been deferred.
At December 31, 1994 and 1995, no futures contracts or options were
designated as hedges. At December 31, 1994, losses of $1,027,519 on futures
contracts have been included in costs of purchased gas. At December 31, 1995,
gains of $278,020 related to open futures contracts have been recognized and
included in Marketing Fees and Other Revenues.
Additionally, the Company periodically enters into futures contracts on
behalf of its gas purchasers, with gains or losses on such contracts paid or
billed to these customers. At December 31, 1995 and 1996, such contracts were
not material.
FAIR VALUE -- Based on the interest rates currently available to the
Company for borrowings with similar terms and maturities, long-term debt and
capital leases at December 31, 1995 and 1996 approximate fair value.
F-13
<PAGE> 71
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair value of the contract advance liabilities at December
31, 1995 and 1996, assuming repayment under the scheduled terms of the
agreements, is approximately $1.7 and $24.3 million, respectively.
The fair value of the Company's futures and swaps at December 31, 1995 was
approximately $.3 million and $1.2 million, respectively. The fair value of the
Company's futures positions and swaps at December 31, 1996 was approximately
$1.1 million and $2 million, respectively.
13. CONCENTRATIONS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables with a
variety of companies located in the central United States. Such credit risk is
considered by management to be limited due to the large number of customers
comprising the Company's customer base. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral related
to its receivables. The Company's derivative activities also subject it to
credit risk. Such credit risk is considered by management to be limited based on
its assessment of the financial strength of the individual counterparties to its
derivative positions. Additionally, the Company had $5,039,000 and $32,197,000
of cash balances with banks at December 31, 1995 and 1996, respectively.
In fiscal years 1995 and 1996, one customer accounted for approximately 23%
and 12% of consolidated revenues, respectively. At December 31, 1995 and 1996,
accounts receivable from this customer were $3,538,932 and $2,429,622,
respectively.
14. SUBSEQUENT EVENTS
In February 1997, the Company began negotiations with certain underwriters
for a proposed public offering (the "Offering") of approximately $23 million of
common stock. In connection with the Offering, the Company intends to reduce the
par value of each share of common stock from $1.00 to $.01, increase the
authorized common stock to 60,000,000 shares and the authorized preferred stock
to 5,000,000 shares, and effect an approximate 136 to 1 common stock split. The
accompanying financial statements reflect these changes as if they had occurred
at December 31, 1993. The Company expects to use the net proceeds of the
Offering to retire a substantial portion of its outstanding long-term debt.
15. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The interim consolidated financial statements presented herein are
unaudited, but reflect, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary for fair presentation of
the results for such periods.
The Company has reached a settlement with one of the Mocane Plant Sellers
which involves the Company's payment of approximately $1.2 million plus accrued
interest (on a portion of the settlement) to such Mocane Plant Seller (See Note
9). The Company had previously recorded an accrued liability for a portion of
the proceeds received from the processing of gas through the Mocane system and
accordingly no additional provision is required. It is expected that this
settlement will be concluded in the third quarter of 1997 at the same time as
the Company purchases the interest of Conoco and its affiliate in the Laverne
Plant.
As a result of the utilization of the net operating loss carryforward for
financial reporting purposes in the fourth quarter of 1996, the income tax
provision for the first quarter of 1997 approximates the statutory rate for
federal and state income taxes.
F-14
<PAGE> 72
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED PRO FORMA FINANCIAL DATA
UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The unaudited condensed pro forma statement of operations gives effect to
(i) the disposition of the Company's oil and gas properties, assuming such
transactions occurred at the beginning of the respective periods and (ii) the
sale of common stock pursuant to this offering and the application of the
estimated proceeds therefrom.
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
<S> <C> <C> <C>
Operating revenues...................... $246,661 (603)(a) $246,058
Operating expenses:
Cost of purchased gas................. 225,535 225,535
Operating expenses.................... 5,978 (91)(a) 5,887
General and administrative............ 5,623 5,623
Depreciation, depletion and
amortization....................... 2,854 (96)(a) 2,758
-------- ----- --------
Total operating costs and
expenses.................... 239,990 (187) 239,803
-------- ----- --------
Operating income........................ 6,671 (416) 6,255
Other income (expense).................. (2,686) 1,475(b) (1,211)
-------- --------
Income before income taxes and
extraordinary item.................... 3,985 1,059 5,044
-------- --------
Income tax (expense) benefit............ 3,635 (402)(c) 3,233
-------- --------
Income before extraordinary item........ $ 7,620 $ 8,277
======== ========
Primary earnings per share:
Income before extraordinary item...... $ 1.99 $ 1.47
======== ========
Fully diluted earnings per share:
Income before extraordinary item...... $ 1.71 $ 1.34
======== ========
Weighted average shares:
Primary............................... 3,536 1,706(d) 5,242
======== ========
Fully diluted......................... 4,466 1,706(d) 6,172
======== ========
</TABLE>
- ---------------
(a) Adjustment to reflect the disposition of the Company's oil and gas
properties.
(b) Adjustment to reflect the decrease in interest expense related to debt to be
extinguished with proceeds from the sale of common stock.
(c) Adjustment to reflect income tax expenses on pro forma income before taxes
and extraordinary item.
(d) Adjustment to reflect the Company's sale of common stock to provide
sufficient proceeds to extinguish $20 million in debt.
F-15
<PAGE> 73
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED PRO FORMA FINANCIAL DATA
UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE THREE MONTHS ENDED MARCH 31,
1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The unaudited condensed pro forma statement of operations gives effect to
(i) the disposition of the Company's oil and gas properties, assuming such
transactions occurred at the beginning of the respective periods and (ii) the
sale of common stock pursuant to this offering and the application of the
estimated proceeds therefrom.
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
ACTUAL ADJUSTMENTS PRO FORMA
------- ----------- ---------
<S> <C> <C> <C>
Operating revenues...................... $88,527 $88,527
------- -------
Operating Expenses:
Cost of purchased gas................. 81,417 81,417
Operating expenses.................... 1,559 1,559
General and administrative............ 1,842 1,842
Depreciation, depletion and
amortization....................... 899 899
------- -------
Total operating costs and
expenses.................... 85,717 85,717
------- -------
Operating income........................ 2,810 2,810
------- -------
Other income (expense).................. (1,171) 400(b) (771)
------- -------
Income before income taxes and
extraordinary item.................... 1,639 2,039
------- -------
Income tax (expense) benefit............ (652) (152)(c) (804)
------- -------
Income before extraordinary item........ $ 987 $ 1,235
======= =======
Primary earnings per share:
Income before extraordinary item...... $ .24 .21
======= =======
Fully diluted earnings per share:
Income before extraordinary item...... $ .22 .20
======= =======
Weighted average shares:
Primary............................... 3,613 1,706(d) 5,319
======= =======
Fully diluted......................... 4,393 1,706(d) 6,099
======= =======
</TABLE>
- ---------------
(a) Adjustment to reflect the disposition of the Company's oil and gas
properties.
(b) Adjustment to reflect the decrease in interest expense related to debt to be
extinguished with proceeds from the sale of common stock.
(c) Adjustment to reflect income tax expenses on pro forma income before taxes
and extraordinary item.
(d) Adjustment to reflect the Company's sale of common stock to provide
sufficient proceeds to extinguish $20 million in debt.
F-16
<PAGE> 74
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 75
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 76
[Description of top of inside back of cover page]
<PAGE> 77
- --------------------------======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information................ 2
Prospectus Summary.................... 3
Risk Factors.......................... 7
The Company........................... 12
Use of Proceeds....................... 13
Dividend Policy....................... 13
Dilution.............................. 14
Capitalization........................ 15
Selected Consolidated Financial Data
and Other Information............... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 24
Management............................ 39
Principal and Selling Shareholders.... 45
Certain Transactions.................. 46
Description of Capital Stock.......... 48
Shares Eligible for Future Sale....... 50
Underwriting.......................... 51
Legal Matters......................... 52
Independent Public Accountants........ 52
Experts............................... 52
Glossary.............................. 53
Index to Consolidated Financial
Statements.......................... 55
</TABLE>
---------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
================================================================================
2,100,000 SHARES
[LOGO]
CONTINENTAL NATURAL GAS, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
OPPENHEIMER & CO., INC.
SOUTHWEST SECURITIES, INC.
, 1997
================================================================================
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale of
the Common Stock being registered hereby. The Company is paying all of such
costs and expenses. All amounts shown are estimates except for the SEC
registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
---- --------
<S> <C>
SEC registration fee........................................ $ 10,245
NASD filing fee............................................. 3,881
Nasdaq National Market Listing Fee.......................... 5,000
Financial Advisory Fee to Underwriters...................... 204,750
Blue Sky fees and expenses.................................. 20,000
Printing and engraving expenses............................. 110,000
Legal fees and expenses..................................... 200,000
Auditors' accounting fees and expenses...................... 100,000
Transfer Agent and Registrar fees........................... 2,500
Fee for Custodian for Selling Shareholder................... 5,000
Miscellaneous expenses...................................... 38,624
--------
Total............................................. $700,000
========
</TABLE>
- ---------------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by the Oklahoma General Corporation Act (the "Oklahoma
Corporate Act"), the Company's Certificate of Incorporation eliminates the
personal liability of a director to the Company for monetary damages for breach
of fiduciary duty of care as a director. Liability is not eliminated for (i) any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) unlawful payment of dividends or stock
purchases or redemptions pursuant to Section 1053 of the Oklahoma Corporate Act,
or (iv) any transaction from which the director derived an improper personal
benefit.
Section 1031 of the Oklahoma Corporate Act permits an Oklahoma corporation
to indemnify any persons who are, or are threatened to be made, parties to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of such corporation), by reason of the fact that such person is or was an
officer, director, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his conduct was unlawful. An Oklahoma corporation may indemnify
any persons who were or are parties, or are threatened to be made a party, to
any threatened, pending or completed action or suit by or in the right of the
corporation by reason of the fact that such person is or was a director,
officer, employees or agent of such corporation, or enterprise. The indemnity
may include expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection with the defense or settlement of such
action or suit, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interest
except that no indemnification is permitted without judicial approval if the
officer is adjudged to be liable to the corporation.
II-1
<PAGE> 79
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
against the expenses which such officer or director has actually and reasonably
incurred.
The Company's certificate of incorporation and bylaws provide for
indemnification of directors and officers of the Company and persons who serve
at the request of the Company as a director or officer of another corporation in
which the Company owns stock for all liabilities, expenses, (including
attorneys' fees) and costs incurred in a legal proceeding in which he is a party
by reason of his having been an officer or director. The Bylaws, however,
exclude indemnification for matters in which the officer or director is adjudged
to have been guilty of gross negligence or willful misconduct.
These indemnification provisions may be sufficiently broad to permit
indemnification of the Registrant's officers and directors for liabilities
(including reimbursement of expenses incurred) arising under the Securities Act
of 1933 as amended (the "Securities Act"). In the opinion of the Securities and
Exchange Commission, indemnification for liabilities arising under the
Securities Act is against public policy and, therefore, unenforceable.
Accordingly, these indemnification provisions may not limit the liability of
directors and executive officers under the Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act, or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In February, 1995, the Company re-issued to Christiana Bank two stock
purchase warrants for the purchase of a total of 127,907 shares of Common Stock.
These warrants were redeemed by the Company and canceled in August, 1995.
In 1996, the Company issued Incentive Stock Options to three of its
executives as described in the Prospectus in the section
"Management -- Executive Compensation."
In 1996, the Company sold 461,992 shares of Common Stock to certain of its
executive officers and one other employee for a total consideration of $100,000,
payable in the form of notes receivable due in April, 1997.
The issuance of 200 shares of Convertible Preferred Stock on January 1,
1996, and the issuance immediately prior to the effectiveness of this
Registration Statement, of 586,847 shares of Common Stock upon the conversion of
149 shares of such Convertible Preferred Stock, are described in the Prospectus
in the "Certain Transactions" section.
All of the above-described transactions were exempt from registration under
Section 4(2) of the Securities Act and Rule 506 promulgated thereunder as
transactions by an issuer not involving any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
a.) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. NAME OF EXHIBIT
----------- ---------------
<C> <S>
1.1 -- Form of Underwriting Agreement.
3.1 -- Amended and Restated Certificate of Incorporation of the
Registrant.*
3.2 -- Amended and Restated Bylaws of the Registrant.*
4.1 -- Specimen Common Stock Certificate of the Registrant.
5.1 -- Opinion of Albright and Rusher.
10.1 -- Second Restated Employment Agreement between the
Registrant and Garry D. Smith to be dated as of the
effective date of this Registration Statement.
</TABLE>
II-2
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT NO. NAME OF EXHIBIT
----------- ---------------
<C> <S>
10.2 -- Second Restated Employment Agreement between the
Registrant and Terry K. Spencer to be dated as of the
effective date of this Registration Statement.
10.3 -- Second Restated Employment Agreement between the
Registrant and Scott C. Longmore to be dated as of the
effective date of this Registration Statement.
10.4 -- 1997 Stock Plan.
10.5 -- Asset Purchase Agreement dated as of March 13, 1996, by
and among Transwestern Gathering Company ("TW Gathering")
as Seller and Registrant as Buyer.*
10.6 -- Asset Purchase Agreement dated as of March 22, 1996, by
and among TW Gathering and Enron Gathering Company
("Enron Gathering") as Sellers and Registrant as Buyer.*
10.7 -- Asset Purchase Agreement dated as of April 11, 1996, by
and among TW Gathering and Enron Gathering as Sellers and
Registrant as Buyer.*
10.8 -- Contribution Agreement dated as of January 1, 1996, by
and among Registrant, Cottonwood Partnership, Continental
Gas Marketing, Inc. and Gary Adams Ranch, Inc.*
10.9 -- Office Lease Agreement.
10.10 -- Credit Agreement between the Registrant and ING Capital
Corporation dated December 30, 1996.*
10.11 -- Letter of Credit and Reimbursement Agreement between the
Registrant and Christiana Bank dated as of December 27,
1996.*
10.12 -- 1996 Incentive Stock Option Plan.*
10.13 -- Agreement dated as of January 1, 1997, between the
Registrant and Continental Natural Gas Marketing, L.L.C.
for the sale of natural gas to L.L.C.*
10.14 -- Consulting Agreement dated as of April 1, 1997, between
the Registrant and Adams Affiliates, Inc. for the
provision of management services by Adams Affiliates to
the Registrant.*
10.15 -- Administrative Services Agreement dated as of April 1,
1997, between the Registrant and Adams Affiliates, Inc.
for the provision of administrative services by the
Registrant to Adams Affiliates.*
10.16 -- Administrative Services Agreement dated as of April 1,
1997, between the Registrant and Bird Creek Resources,
Inc. under which the Registrant will provide office space
and certain administrative services to Bird Creek
Resources, Inc.*
10.17 -- Administrative Services Agreement dated as of April 1,
1997, between Bird Creek and the Registrant under which
Bird Creek will provide certain administrative services
to the Registrant.*
10.18 -- Charter Services Agreement dated as of April 1, 1997,
between the Registrant and CPA Aviation, Inc. under which
CPA Aviation will provide the Registrant with certain air
transportation services.*
10.19 -- Agreement between the Registrant and Mapco Petroleum,
Inc. for the sale of NGLs dated as of July 14, 1994.*
10.20 -- Amendment dated February 16, 1996, to Firm Throughput
Service Agreement (CR# 101124) dated as of January 26,
1996, between the Registrant and Northern Natural Gas
Company ("NNG") together with the original agreement.*
10.21 -- Amendments dated November 13, 1996, March 15, 1996, and
March 14, 1996, to Transportation Service Agreement-Form
M (No: 24690) dated as of April 1, 1996, between
Registrant and Transwestern Pipeline Company ("TW"),
together with the original agreement.*
10.22 -- Amendment dated January 3, 1994, to Transportation
Service Agreement No: 20606 dated November 26, 1991,
between Registrant and TW, together with the original
agreement.*
10.23 -- Interconnect and Operating Agreement dated as of March 1,
1996, between Registrant and NNG.*
</TABLE>
II-3
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT NO. NAME OF EXHIBIT
- --------------------------- ------------------------------------------------------------------------------------------
<S> <C>
10.24 -- Amendment dated February 16, 1996, to Firm Throughput Service Agreement (CR# 101125) between
the Registrant and NNG dated January 26, 1996, together with the original agreement.*
10.25 -- Interruptible Transportation Service Agreement, Rate Schedule IT-1 between Registrant
and NNG dated August 1, 1992.*
10.26 -- Interruptible Throughput Service Agreement, Rate Schedule TI, Throughput Agreement No.
22224, between Registrant and NNG undated.*
11.1 -- Computation of per share earnings.*
15.1 -- Letter regarding unaudited interim financial information.
21.1 -- List of subsidiaries
23.1 -- Consent of Coopers & Lybrand.
23.2 -- Consent of Albright and Rusher (to be included as part of Exhibit 5.1).
23.3 -- Consent of Lee Keeling & Associates.*
23.4 -- Consent of William W. Pritchard.*
23.5 -- Consent of William H. Bauch.*
23.6 -- Consent of Hart Publications, Inc.*
24. -- Power of Attorney (included in Signature Page).*
27.1 -- Financial Data Schedules (Year ended December 31, 1996 and Quarter ended March 31,
1997)*
</TABLE>
b.) Financial statement schedules required by regulation S-X
<TABLE>
<CAPTION>
SCHEDULE NO. NAME OF SCHEDULE
------------ ----------------
<C> <S>
II -- Valuation and Qualifying Accounts and Reserves*
</TABLE>
- ---------------
* Previously filed as an exhibit to this Registration Statement on Form S-1,
SEC File No. 333-25719.
ITEM 17. UNDERTAKINGS.
The undersigned hereby undertakes to provide to the Underwriters, at the
Closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer of controlling person of the Registrant in the successful
defense of an action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the Registrant will treat the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the Registrant
under Rule 424(b)(1), or (4), or 497(h) under the Securities Act as part of
this Registration Statement as of the time the Commission declares it
effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the Offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Tulsa, State of Oklahoma, on the 28th day of July, 1997.
CONTINENTAL NATURAL GAS, INC.
By:
----------------------------------
Gary Clark Adams
Chairman, President, Chief
Executive Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement was signed by the following persons in the
capacities indicated below and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chairman, President and Chief July 28, 1997
- ----------------------------------------------------- Executive Officer (Principal
Gary C. Adams Executive Officer) and Director
Vice President and Controller July 28, 1997
- ----------------------------------------------------- (Principal Financial and Accounting
Garry D. Smith Officer) and Director
Vice President of Operations and July 28, 1997
- ----------------------------------------------------- Director
Terry K. Spencer
Vice President of Marketing and July 28, 1997
- ----------------------------------------------------- Director
Scott C. Longmore
</TABLE>
II-5
<PAGE> 83
REPORT OF INDEPENDENT ACCOUNTANTS
In connection with our audits of the consolidated financial statements of
Continental Natural Gas, Inc. and Subsidiaries as of December 31, 1995 and 1996,
and for each of the three years in the period ended December 31, 1996, which
financial statements are included in the Prospectus, we have also audited the
financial statement schedule listed in Item 16 herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
March 21, 1997
S-1
<PAGE> 84
SCHEDULE II
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
CHARGED
BALANCE AT CHARGED TO TO OTHER DEDUCTIONS BALANCE
BEGINNING COSTS AND ACCOUNTS AND NET AT END OF
DESCRIPTION OF PERIOD EXPENSES RECOVERIES WRITE-OFFS PERIOD
- ----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994................ $323 $ -- $ -- $ -- $323
Year ended December 31, 1995................ $323 $ -- $ -- $(70) $253
Year ended December 31, 1996................ $253 $ -- $ 5 $ -- $258
</TABLE>
S-2
<PAGE> 85
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. NAME OF EXHIBIT
----------- ---------------
<C> <S>
1.1 -- Form of Underwriting Agreement.
3.1 -- Amended and Restated Certificate of Incorporation of the
Registrant.*
3.2 -- Amended and Restated Bylaws of the Registrant.*
4.1 -- Specimen Common Stock Certificate of the Registrant.
5.1 -- Opinion of Albright and Rusher.
10.1 -- Second Restated Employment Agreement between the
Registrant and Garry D. Smith to be dated as of the
effective date of this Registration Statement.
10.2 -- Second Restated Employment Agreement between the
Registrant and Terry K. Spencer to be dated as of the
effective date of this Registration Statement.
10.3 -- Second Restated Employment Agreement between the
Registrant and Scott C. Longmore to be dated as of the
effective date of this Registration Statement.
10.4 -- 1997 Stock Plan.
10.5 -- Asset Purchase Agreement dated as of March 13, 1996, by
and among Transwestern Gathering Company ("TW Gathering")
as Seller and Registrant as Buyer.*
10.6 -- Asset Purchase Agreement dated as of March 22, 1996, by
and among TW Gathering and Enron Gathering Company
("Enron Gathering") as Sellers and Registrant as Buyer.*
10.7 -- Asset Purchase Agreement dated as of April 11, 1996, by
and among TW Gathering and Enron Gathering as Sellers and
Registrant as Buyer.*
10.8 -- Contribution Agreement dated as of January 1, 1996, by
and among Registrant, Cottonwood Partnership, Continental
Gas Marketing, Inc. and Gary Adams Ranch, Inc.*
10.9 -- Office Lease Agreement.
10.10 -- Credit Agreement between the Registrant and ING Capital
Corporation dated December 30, 1996.*
10.11 -- Letter of Credit and Reimbursement Agreement between the
Registrant and Christiana Bank dated as of December 27,
1996.*
10.12 -- 1996 Incentive Stock Option Plan.*
10.13 -- Agreement dated as of January 1, 1997, between the
Registrant and Continental Natural Gas Marketing, L.L.C.
for the sale of natural gas to L.L.C.*
10.14 -- Consulting Agreement dated as of April 1, 1997, between
the Registrant and Adams Affiliates, Inc. for the
provision of management services by Adams Affiliates to
the Registrant.*
10.15 -- Administrative Services Agreement dated as of April 1,
1997, between the Registrant and Adams Affiliates, Inc.
for the provision of administrative services by the
Registrant to Adams Affiliates.*
10.16 -- Administrative Services Agreement dated as of April 1,
1997, between the Registrant and Bird Creek Resources,
Inc. under which the Registrant will provide office space
and certain administrative services to Bird Creek
Resources, Inc.*
10.17 -- Administrative Services Agreement dated as of April 1,
1997, between Bird Creek and the Registrant under which
Bird Creek will provide certain administrative services
to the Registrant.*
10.18 -- Charter Services Agreement dated as of April 1, 1997,
between the Registrant and CPA Aviation, Inc. under which
CPA Aviation will provide the Registrant with certain air
transportation services.*
10.19 -- Agreement between the Registrant and Mapco Petroleum,
Inc. for the sale of NGLs dated as of July 14, 1994.*
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT NO. NAME OF EXHIBIT
----------- ---------------
<C> <S>
10.20 -- Amendment dated February 16, 1996, to Firm Throughput
Service Agreement (CR# 101124) dated as of January 26,
1996, between the Registrant and Northern Natural Gas
Company ("NNG") together with the original agreement.*
10.21 -- Amendments dated November 13, 1996, March 15, 1996, and
March 14, 1996, to Transportation Service Agreement-Form
M (No: 24690) dated as of April 1, 1996, between
Registrant and Transwestern Pipeline Company ("TW"),
together with the original agreement.*
10.22 -- Amendment dated January 3, 1994, to Transportation
Service Agreement No: 20606 dated November 26, 1991,
between Registrant and TW, together with the original
agreement.*
10.23 -- Interconnect and Operating Agreement dated as of March 1,
1996, between Registrant and NNG.*
10.24 -- Amendment dated February 16, 1996, to Firm Throughput
Service Agreement (CR# 101125) between the Registrant and
NNG dated January 26, 1996, together with the original
agreement.*
10.25 -- Interruptible Transportation Service Agreement, Rate
Schedule IT-1 between Registrant and NNG dated August 1,
1992.*
10.26 -- Interruptible Throughput Service Agreement, Rate Schedule
TI, Throughput Agreement No. 22224, between Registrant
and NNG undated.*
11.1 -- Computation of per share earnings.*
15.1 -- Letter regarding unaudited interim financial information.
21.1 -- List of Subsidiaries
23.1 -- Consent of Coopers & Lybrand.
23.2 -- Consent of Albright and Rusher (to be included as part of
Exhibit 5.1).
23.3 -- Consent of Lee Keeling & Associates.*
23.4 -- Consent of William W. Pritchard.*
23.5 -- Consent of William H. Bauch.*
23.6 -- Consent of Hart Publications, Inc.*
24. -- Power of Attorney (included in Signature Page).*
27.1 -- Financial Data Schedules (Year ended December 31, 1996
and Quarter ended March 31, 1997)*
</TABLE>
- ---------------
* Previously filed as an exhibit to this Registration Statement on Form S-1,
SEC File No. 333-25719.
<PAGE> 1
EXHIBIT 1.1
Draft of 7/25/97
2,100,000 Shares
Continental Natural Gas, Inc.
Common Stock
UNDERWRITING AGREEMENT
_________________, 1997
Oppenheimer & Co., Inc.
c/o Oppenheimer & Co., Inc.
Oppenheimer Tower
World Financial Center
New York, New York 10281
Southwest Securities, Inc.
1201 Elm Street, Suite 3500
Dallas, Texas 75270
On behalf of the Several
Underwriters named on
Schedule I attached hereto.
Ladies and Gentlemen:
Continental Natural Gas, Inc., an Oklahoma corporation (the
"Company"), proposes to sell to you and the other underwriters named on
Schedule I to this Agreement (the "Underwriters"), for whom you are acting as
Representatives, an aggregate of 1,800,000 shares (the "Company Shares") of the
Company's Common Stock, $0.01 par value (the "Common Stock"). Adams
Affiliates, Inc., an Oklahoma corporation (the "Selling Shareholder"), proposes
to sell an aggregate of 300,000 shares (the "Selling Shareholder Shares") of
Common Stock to the Underwriters. The Company Shares and the Selling
Shareholder Shares are sometimes collectively called the "Firm Shares." In
addition, the Company proposes to grant to the Underwriters an option to
purchase up to an additional 315,000 shares (the "Option Shares") of Common
Stock from it for the purpose of covering over-allotments in connection with
the sale of the Firm Shares. The Firm Shares and the Option Shares are
together called the "Shares."
1. Sale and Purchase of the Shares. On the basis of
the representations,
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warranties and agreements contained in, and subject to the terms and conditions
of, this Agreement:
(a) The Company and the Selling Shareholder agree to
sell to each of the Underwriters, and each of the Underwriters
agrees, severally and not jointly, to purchase from the Company and
the Selling Shareholder, at $_____ per share (the "Initial Price"),
the number of Firm Shares set forth opposite the name of such
Underwriter on Schedule I to this Agreement.
(b) The Company grants to the several Underwriters an
option to purchase, severally and not jointly, all or any part of
the Option Shares at the Initial Price. The number of Option
Shares to be purchased by each Underwriter shall be the same
percentage (adjusted by the Representatives to eliminate fractions)
of the total number of Option Shares to be purchased by the
Underwriters as such Underwriter is purchasing of the Firm Shares.
Such option may be exercised only to cover over-allotments in the
sales of the Firm Shares by the Underwriters and may be exercised
in whole or in part at any time on or before 12:00 noon, New York
time, on the business day before the Firm Shares Closing Date (as
defined below), and only once thereafter within 30 days after the
date of this Agreement, in each case upon written or telegraphic
notice, or verbal or telephonic notice confirmed by written or
telegraphic notice, by the Representatives to the Company no later
than 12:00 noon, New York time on the business day before the Firm
Shares Closing Date or at least two business days before the Option
Shares Closing Date (as defined below), as the case may be, setting
forth the number of Option Shares to be purchased and the time and
date (if other than the Firm Shares Closing Date) of such purchase.
2. Delivery and Payment. Delivery by the Company and
the Selling Shareholder of the Firm Shares to the Representatives for the
respective accounts of the Underwriters, and payment of the purchase price by
certified or official bank check or checks payable in New York Clearing House
(next day) funds to the Company and the Selling Shareholder, shall take place
at the offices of_________________________________________________________, at
10:00 a.m., New York time, on the third business day following the date of this
Agreement, or at such time on such other date, not later than 10 business days
after the date of this Agreement, as shall be agreed upon by the Company, the
Selling Shareholder and the Representatives (such time and date of delivery and
payment are called the "Firm Shares Closing Date").
In the event the option with respect to the Option Shares
is exercised, delivery by the Company of the Option Shares to the
Representatives for the respective accounts of the Underwriters and payment of
the purchase price by certified or official bank check or checks payable in New
York Clearing House (next day) funds to the Company and the Selling Shareholder
shall take place at the offices of____________________________________________
specified above at the time and on the date (which may be the same date as, but
in no event shall be earlier than, the Firm Shares Closing Date) specified in
the notice referred to in Section 1(b) (such time and date of delivery and
payment are
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<PAGE> 3
called the "Option Shares Closing Date"). The Firm Shares Closing Date and the
Option Shares Closing Date are called, individually, a "Closing Date" and,
together, the "Closing Dates."
Certificates evidencing the Shares shall be registered in
such names and shall be in such denominations as the Representatives shall
request at least two full business days before the Firm Shares Closing Date or,
in the case of Option Shares, on the day of notice of exercise of the option as
described in Section l(b) and shall be made available to the Representatives
for checking and packaging, at such place as is designated by the
Representatives, on the full business day before the Firm Shares Closing Date
(or the Option Shares Closing Date in the case of the Option Shares).
Certificates in negotiable form for the total number of
Selling Shareholder Shares have been placed in custody with BankBoston, N.A. as
custodian (the "Custodian") pursuant to a Selling Shareholder Power of Attorney
and a Custody Agreement (collectively, the "Custodian Agreement") executed by
the Selling Shareholder for delivery of the Selling Shareholder Shares. The
Selling Shareholder specifically agrees that the Selling Shareholder Shares to
be sold hereunder by the Selling Shareholder, represented by the certificates
held in custody for the Selling Shareholder under the Custodian Agreement, are
subject to the interest of such Underwriters hereunder, that the arrangements
made by the Selling Shareholder for such custody are to that extent
irrevocable, and that the obligations of the Selling Shareholder hereunder
shall not be terminable by any act or deed of the Selling Shareholder, or by
any other person, firm or corporation, including the Company or the
Underwriters, or by the occurrence of any other event or events, except as set
forth in the Custodian Agreement. If any such event should occur prior to the
delivery to the Underwriters of the Selling Shareholder Shares to be sold
hereunder by the Selling Shareholder, certificates for such Selling Shareholder
Shares shall be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such event had not occurred. The Custodian
is authorized to receive and acknowledge receipt of the proceeds of sale of the
Selling Shareholder Shares against delivery of such Selling Shareholder Shares.
3. Registration Statement and Prospectus; Public
Offering. The Company has prepared in conformity with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the published
rules and regulations thereunder (the "Rules") adopted by the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-1
(No. 333-25719), including a preliminary prospectus relating to the Shares, and
has filed with the Commission the Registration Statement (as hereinafter
defined) and such amendments thereof as may have been required to the date of
this Agreement. Copies of such Registration Statement (including all
amendments thereof) and of the related preliminary prospectus have heretofore
been delivered by the Company to you. The term "preliminary prospectus" means
any preliminary prospectus (as described in Rule 430 of the Rules) included at
any time as a part of the Registration Statement. The Registration Statement
as amended at the time and on the date it becomes effective (the "Effective
Date"), including all exhibits and information, if any, deemed to be part of
the Registration Statement pursuant to Rule 424(b) and Rule 430A of the Rules,
is called the "Registration Statement." The term "Prospectus" means the
prospectus in the form first used to
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<PAGE> 4
confirm sales of the Shares (whether such prospectus was included in the
Registration Statement at the time of effectiveness or was subsequently filed
with the Commission pursuant to Rule 424(b) of the Rules).
The Company understands that the Underwriters propose to
make a public offering of the Shares, as set forth in and pursuant to the
Prospectus, as soon after the Effective Date and the date of this Agreement as
the Representatives deem advisable. The Company hereby confirms that the
Underwriters and dealers have been authorized to distribute or cause to be
distributed each preliminary prospectus and are authorized to distribute the
Prospectus (as from time to time amended or supplemented if the Company
furnishes amendments or supplements thereto to the Underwriters).
4. Representations and Warranties of the Company.
(a) The Company hereby represents and warrants to each
Underwriter as follows:
(i) On the Effective Date the Registration Statement
complied, and on the date of the Prospectus, on the date any
post-effective amendment to the Registration Statement shall become
effective, on the date any supplement or amendment to the
Prospectus is filed with the Commission and on each Closing Date,
the Registration Statement and the Prospectus (and any amendment
thereof or supplement thereto) will comply, in all material
respects, with the applicable provisions of the Securities Act and
the Rules and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission
thereunder; the Registration Statement did not, as of the Effective
Date, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary
in order to make the statements therein not misleading; and on the
other dates referred to above neither the Registration Statement
nor the Prospectus, nor any amendment thereof or supplement
thereto, will contain any untrue statement of a material fact or
will omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not
misleading. When any related preliminary prospectus was first
filed with the Commission (whether filed as part of the
Registration Statement or any amendment thereto or pursuant to Rule
424(a) of the Rules) and when any amendment thereof or supplement
thereto was first filed with the Commission, such preliminary
prospectus as amended or supplemented complied in all material
respects with the applicable provisions of the Securities Act and
the Rules and did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading. Notwithstanding the foregoing, the Company makes no
representation or warranty as to the paragraph with respect to
stabilization on the inside front cover page of the Prospectus and
the statements contained under the caption "Underwriting" in the
Prospectus. The Company acknowledges that the statements referred
to in the previous sentence constitute the only information
furnished in writing
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<PAGE> 5
by the Representatives on behalf of the several Underwriters
specifically for inclusion in the Registration Statement, any
preliminary prospectus or the Prospectus.
(ii) The financial statements of the Company (including
all notes and schedules thereto) included in the Registration
Statement and Prospectus present fairly the financial position, the
results of operations and cash flows and the shareholders' equity
and the other information purported to be shown therein of the
Company at the respective dates and for the respective periods to
which they apply; and such financial statements have been prepared
in conformity with generally accepted accounting principles,
consistently applied throughout the periods involved, and all
adjustments necessary for a fair presentation of the results for
such periods have been made.
(iii) Coopers & Lybrand L.L.P., whose reports are filed
with the Commission as a part of the Registration Statement, are
and, during the periods covered by their reports, were independent
public accountants as required by the Securities Act and the Rules.
(iv) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws
of the State of Oklahoma. The Company has no subsidiary or
subsidiaries and does not control, directly or indirectly, any
corporation, partnership, joint venture, limited liability company,
association or other business organization, except as disclosed in
Exhibit 21 to the Registration Statement (and for purposes of this
Section 4, the term "the Company" shall, where appropriate, include
such entities). Except as disclosed in Exhibit 21 to the
Registration Statement, all of the issued and outstanding equity
interests of each of such entities are owned directly by the
Company; all such interests have been duly authorized and validly
issued and are fully paid and nonassessable and are owned free and
clear of any pledge, lien, encumbrance, security interest or other
claim (other than the pledge of the same to ING Capital Corporation
under the Company's principal loan facility); there are no
outstanding rights, subscriptions, warrants, calls, preemptive
rights, options or other agreements of any kind with respect to the
equity interests of such entities. The Company is duly qualified
and in good standing as a foreign corporation in each jurisdiction
in which the character or location of its assets or properties
(owned, leased or licensed) or the nature of its business makes
such qualification necessary except for such jurisdictions where
the failure to so qualify would not have a material adverse effect
on the assets or properties, business, results of operations or
financial condition of the Company. Except as disclosed in the
Registration Statement and the Prospectus, the Company does not
own, lease or license any asset or property or conduct any business
outside the United States of America. The Company has all
requisite corporate power and authority, and all necessary
authorizations, approvals, consents, orders, licenses, certificates
and permits of and from all governmental or regulatory bodies or
any other person or entity, to own, lease and license its assets
and properties and conduct its businesses as now being conducted
and
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<PAGE> 6
as described in the Registration Statement and the Prospectus
except for such authorizations, approvals, consents, orders,
material licenses, certificates and permits the failure to so
obtain would not have a material adverse effect upon the assets or
properties, business, results of operations, prospects or condition
(financial or otherwise) of the Company; no such authorization,
approval, consent, order, license, certificate or permit contains a
materially burdensome restriction other than as disclosed in the
Registration Statement and the Prospectus; and the Company has all
such corporate power and authority, and such authorizations,
approvals, consents, orders, licenses, certificates and permits to
enter into, deliver and perform this Agreement and to issue and
sell the Shares (except as may be required under the Securities Act
and state and foreign Blue Sky laws).
(v) The Company owns or possesses adequate and
enforceable rights to use all trademarks, trademark applications,
trade names, service marks, copyrights, copyright applications,
licenses, know-how and other similar rights and proprietary
knowledge (collectively, "Intangibles") necessary for the conduct
of its business as described in the Registration Statement and the
Prospectus. The Company has not received any notice of, or to its
best knowledge is not aware of, any infringement of or conflict
with asserted rights of others with respect to any Intangibles
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect
upon the assets or properties, business, results of operations,
prospects or condition (financial or otherwise) of the Company.
(vi) The Company has good title to each of the items of
personal property which are reflected in the financial statements
referred to in Section 4(a)(iii) or are referred to in the
Registration Statement and the Prospectus as being owned by it and
valid and enforceable leasehold interests in each of the items of
real and personal property which are referred to in the
Registration Statement and the Prospectus as being leased by it, in
each case free and clear of all liens, encumbrances, claims,
security interests and defects, other than those described in the
Registration Statement and the Prospectus and those which do not
and will not have a material adverse effect upon the assets or
properties, business, results of operations or financial condition
of the Company.
(vii) Except as described in the Registration Statement
and the Prospectus, there is no litigation or governmental or other
proceeding or investigation before any court or before or by any
public body or board pending or, to the Company's best knowledge,
threatened (and the Company does not know of any basis therefor)
against, or involving the assets, properties or business of, the
Company which would materially adversely affect the value or the
operation of any such assets or properties or the business, results
of operations, prospects or condition (financial or otherwise) of
the Company.
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<PAGE> 7
(viii) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, except as described therein, (i) there has not been
any material adverse change in the assets or properties, business,
results of operations, prospects or condition (financial or
otherwise), of the Company, whether or not arising from
transactions in the ordinary course of business; (ii) the Company
has not sustained any material loss or interference with its
assets, businesses or properties (whether owned or leased) from
fire, explosion, earthquake, flood or other calamity, whether or
not covered by insurance, or from any labor dispute or any court or
legislative or other governmental action, order or decree; and
(iii) and since the date of the latest balance sheet included in
the Registration Statement and the Prospectus, except as reflected
therein, the Company has not (a) issued any securities or incurred
any liability or obligation, direct or contingent, for borrowed
money, except such liabilities or obligations incurred in the
ordinary course of business, (b) entered into any transaction not
in the ordinary course of business or (c) declared or paid any
dividend or made any distribution on any shares of its stock or
redeemed, purchased or otherwise acquired or agreed to redeem,
purchase or otherwise acquire any shares of its stock.
(ix) All contracts and other documents required to be
filed as exhibits to the Registration Statement have been filed
with the Commission as exhibits to the Registration Statement.
There is no document or contract of a character required to be
described in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement which is not
described or filed as required. Each agreement listed in the
Exhibits to the Registration Statement is in full force and effect
and is valid and enforceable by and against the Company in
accordance with its terms, assuming the due authorization,
execution and delivery thereof by each of the other parties
thereto. Neither the Company, nor to the best of the Company's
knowledge, any other party is in default in the observance or
performance of any term or obligation to be performed by it under
any such agreement, and no event has occurred which with notice or
lapse of time or both would constitute such a default, in any such
case which default or event would have a material adverse effect on
the assets or properties, business, results of operations,
prospects or condition (financial or otherwise) of the Company. No
default exists, and no event has occurred which with notice or
lapse of time or both would constitute a default, in the due
performance and observance of any term, covenant or condition, by
the Company of any other agreement or instrument to which the
Company is a party or by which it or its properties or business may
be bound or affected which default or event would have a material
adverse effect on the assets or properties, business, results of
operations, prospects or condition (financial or otherwise) of the
Company.
(x) The Company is not in violation of any term or
provision of its charter or bylaws or of any franchise, license,
permit, judgment, decree, order, statute, rule or regulation, where
the consequences of such violation would have a material adverse
effect on the assets or properties, business, results of
operations, prospects or condition
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<PAGE> 8
(financial or otherwise) of the Company.
(xi) Neither the execution, delivery and performance of
this Agreement by the Company nor the consummation of any of the
transactions contemplated hereby (including, without limitation,
the issuance and sale by the Company of the Shares) will give rise
to a right to terminate or accelerate the due date of any payment
due under, or conflict with or result in the breach of any term or
provision of, or constitute a default (or an event which with
notice or lapse of time or both would constitute a default) under,
or require any consent or waiver under, or result in the execution
or imposition of any lien, charge or encumbrance upon any
properties or assets of the Company pursuant to the terms of, any
indenture, mortgage, deed of trust or other agreement or instrument
to which the Company is a party or by which it or any of its
properties or businesses is bound, or any franchise, license,
permit, judgment, decree, order, statute, rule or regulation
applicable to the Company or violate any provision of the charter
or bylaws of the Company, except for such consents or waivers which
have already been obtained and are in full force and effect.
(xii) The Company has an authorized and outstanding
capital stock as set forth under the caption "Capitalization" in
the Prospectus. All of the outstanding shares of Common Stock have
been duly and validly issued and are fully paid and nonassessable
and none of them was issued in violation of any preemptive or other
similar right. The Shares, when issued and sold pursuant to this
Agreement, will be duly and validly issued, fully paid and
nonassessable and none of them will be issued in violation of any
preemptive or other similar right. Except as disclosed in the
Registration Statement and the Prospectus, there is no outstanding
option, warrant or other right calling for the issuance of, and
there is no commitment, plan or arrangement to issue, any share of
stock of the Company or any security convertible into, or
exercisable or exchangeable for, such stock. The Common Stock and
the Shares conform in all material respects to all statements in
relation thereto contained in the Registration Statement and the
Prospectus.
(xiii) No holder of any security of the Company has the
right to have any security owned by such holder included in the
Registration Statement or to demand registration of any security
owned by such holder during the period ending 180 days after the
date of this Agreement. Each shareholder, director and executive
officer of the Company has delivered to the Representatives his
enforceable written agreement that he will not, for a period of 180
days after the date of this Agreement, offer for sale, sell,
distribute, grant any option for the sale of, or otherwise dispose
of, directly or indirectly, or exercise any registration rights
with respect to, any shares of Common Stock (or any securities
convertible into, exercisable for, or exchangeable for any shares
of Common Stock) owned by him, without the prior written consent of
the Representatives; provided, that, such shareholder, director or
executive officer shall be permitted under such agreement to make
gifts of shares of Common Stock so long as the donee of the shares
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<PAGE> 9
acquires and holds them subject to the restrictions of such
agreement.
(xiv) All necessary corporate action has been duly and
validly taken by the Company to authorize the execution, delivery
and performance of this Agreement and the issuance and sale of the
Shares by the Company. This Agreement has been duly and validly
authorized, executed and delivered by the Company and constitutes
legal, valid and binding obligations of the Company enforceable
against the Company in accordance with their respective terms,
except (A) as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights generally and
by general equitable principles and (B) to the extent that rights
to indemnity or contribution under this Agreement may be limited by
Federal and state securities laws or the public policy underlying
such laws.
(xv) The Company has not violated any foreign, federal,
state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental
Laws"). The Company reasonably has concluded that the costs and
liabilities associated with compliance by the Company with
Environmental Laws are not likely to have, singly or in the
aggregate, a material adverse effect on the properties, assets,
operations, business, business prospects or financial condition of
the Company.
(xvi) The Company is not involved in any labor dispute
nor, to the knowledge of the Company, is any such dispute
threatened, which dispute would have a material adverse effect on
the assets or properties, business, results of operations,
prospects or condition (financial or otherwise) of the Company.
(xvii) No transaction has occurred between or among the
Company and any of its officers or directors or any affiliate or
affiliates of any such officer or director that is required to be
described in and is not described in the Registration Statement and
the Prospectus.
(xviii) The Company has not taken, nor will it take,
directly or indirectly, any action designed to or which might
reasonably be expected to cause or result in, or which has
constituted or which might reasonably be expected to constitute,
the stabilization or manipulation of the price of the Common Stock
to facilitate the sale or resale of any of the Shares.
(xix) The Company has filed all Federal, state, local
and foreign tax returns which are required to be filed through the
date hereof, or has received extensions thereof, and has paid all
taxes shown on such returns and all assessments received by it to
the extent that the same are material and have become due.
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<PAGE> 10
(xx) The Shares have been duly authorized for quotation
on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") National Market.
(xxi) The Company has complied with all of the
requirements and filed the required forms as specified in Florida
Statutes Section 517.075.
(b) The Selling Shareholder hereby represents and warrants to
each Underwriter as follows:
(i) To the best knowledge of the Selling Shareholder,
the representations and warranties of the Company contained in
Section 4(a) hereof are true and correct; the Selling Shareholder
has reviewed and is familiar with the Registration Statement as
originally filed with the Commission and the Prospectus and has no
knowledge of any material fact, condition or information not
disclosed in such Prospectus that has adversely affected or could
adversely affect the condition (financial or otherwise), earnings,
business affairs or business prospects of the Company; to the best
knowledge of the Selling Shareholder, the Prospectus does not
include 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 the Selling Shareholder is not prompted to sell the
Selling Shareholder Shares to be sold hereunder by the Selling
Shareholder by any information concerning the Company that is not
set forth in the Prospectus.
(ii) When the Registration Statement shall become
effective, and at all times subsequent thereto up to the Closing
Date (and if any Option Shares are purchased, on the Second Closing
Date), such parts of the Registration Statement and any amendments
and supplements thereto and the Prospectus as specifically refer to
the Selling Shareholder 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 not
misleading.
(iii) Each of this Agreement and the Custodian Agreement
is a legal, valid and binding agreement of the Selling Shareholder,
enforceable against the Selling Shareholder in accordance with
their respective terms except as such enforceability may be limited
by bankruptcy, reorganization, insolvency, moratorium and other
similar laws affecting creditors' rights generally or by the
application of equitable principles.
(iv) Neither the execution, delivery and performance of
this Agreement and the Custodian Agreement, the consummation of the
transactions contemplated herein and therein, including the
issuance, sale and delivery of the Selling Shareholder Shares nor
compliance with the terms and provisions hereof, will (i) conflict
with or result in a breach of any of the terms and provisions of,
or constitute a default (or an event which
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<PAGE> 11
with notice or lapse of time, or both, would constitute a default)
or require consent under, or result in the creation or imposition
of, any lien, encumbrance, security interest, claim or other
restriction of any nature whatsoever upon any property or assets of
the Selling Shareholder, pursuant to the terms of any agreement,
instrument or permit to which the Selling Shareholder is a party or
by which any of the Selling Shareholder's properties or assets may
be bound; (ii) violate or conflict with any provisions of any
permit, judgment, decree, order, statute, rule or regulation of any
court or any public, governmental or regulatory agency or body
having jurisdiction over the Selling Shareholder or any of the
Selling Shareholder's properties or assets. No permit of or with
any court or any public, governmental or regulatory agency or body
having jurisdiction over the Selling Shareholder or any of the
Selling Shareholder's properties or assets is required for the
execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated herein, including the
sale and delivery of the Selling Shareholder Shares, except the
registration under the Securities Act of the Selling Shareholder
Shares and such permits as may be required under state or foreign
securities or "Blue Sky" laws in connection with the purchase and
distribution of the Selling Shareholder Shares by the Underwriters.
(v) The Selling Shareholder now has, and at the
Closing Date will have good and marketable title to the Selling
Shareholder Shares to be sold hereunder by the Selling Shareholder,
free and clear of any pledge, lien, security interest, charge,
claim, equity or encumbrance of any kind, other than pursuant to
this Agreement; the Selling Shareholder has full right, power and
authority to sell, transfer and deliver such Selling Shareholder
Shares; the Selling Shareholder Shares have been duly and validly
authorized and issued, are fully paid and non-assessable, conform
to the description thereof in the Prospectus, and have not been
issued in violation of or subject to any preemptive right or other
right to subscribe for or purchase such securities; and, upon
delivery of such Selling Shareholder Shares to be sold hereunder by
the Selling Shareholder and payment of the purchase price therefor
as contemplated in this Agreement, each of the Underwriters will
receive good and marketable title to the Selling Shareholder
Shares, free and clear of any pledge, lien, security interest,
charge, claim, equity or encumbrance of any kind.
(vi) No person has any right to acquire from the
Selling Shareholder any Shares to be sold hereunder and the Selling
Shareholder is under no obligation, whether absolute or contingent,
to sell any such Shares to any person, except as disclosed in the
Prospectus.
(vii) The Selling Shareholder has not taken and will not
take, directly or indirectly, any action designed to, or which
might be reasonably expected to, cause or result in stabilization
or manipulation of the price of the Common Stock, or any other
securities convertible into or exchangeable or exercisable for
shares of Common Stock.
5. Conditions of the Underwriters' Obligations. The
obligations of the
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<PAGE> 12
Underwriters under this Agreement are several and not joint. The
respective obligations of the Underwriters to purchase the Shares
are subject to each of the following terms and conditions:
(a) The Prospectus shall have been timely filed with
the Commission in accordance with Section 6(A)(i) of this
Agreement.
(b) No order preventing or suspending the use of any
preliminary prospectus or the Prospectus shall have been or shall
be in effect and no order suspending the effectiveness of the
Registration Statement shall be in effect and no proceedings for
such purpose shall be pending before or threatened by the
Commission, and any requests for additional information on the part
of the Commission (to be included in the Registration Statement or
the Prospectus or otherwise) shall have been complied with to the
satisfaction of the Representatives.
(c) The representations and warranties of the Company
contained in this Agreement and in the certificates delivered
pursuant to Section 5(d) shall be true and correct when made and on
and as of each Closing Date as if made on such date and the Company
shall have performed all covenants and agreements and satisfied all
the conditions contained in this Agreement required to be performed
or satisfied by it at or before such Closing Date.
(d) The Representatives shall have received on each
Closing Date a certificate, addressed to the Representatives and
dated such Closing Date, of the chief executive or chief operating
officer and the chief financial officer or chief accounting officer
of the Company to the effect that the signers of such certificate
have carefully examined the Registration Statement, the Prospectus
and this Agreement and that the representations and warranties of
the Company in this Agreement are true and correct on and as of
such Closing Date with the same effect as if made on such Closing
Date and the Company has performed all covenants and agreements and
satisfied all conditions contained in this Agreement required to be
performed or satisfied by it at or prior to such Closing Date.
(e) The Representatives shall have received on the
Effective Date, at the time this Agreement is executed and on each
Closing Date a signed letter from Coopers & Lybrand L.L.P.,
addressed to the Representatives and dated, respectively, the
Effective Date, the date of this Agreement and each such Closing
Date, in form and substance reasonably satisfactory to the
Representatives, confirming that they are independent accountants
within the meaning of the Securities Act and the Rules, that the
response to Item 10 of the Registration Statement is correct
insofar as it relates to them and stating in effect that:
(i) in their opinion the audited financial
statements and financial statement schedules included in
the Registration Statement and the Prospectus and reported
on by them comply as to form in all material respects with
the applicable
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<PAGE> 13
accounting requirements of the Securities Act and the
Rules;
(ii) on the basis of a reading of the amounts
included in the Registration Statement and the Prospectus
under the headings "Summary Financial Information" and
"Selected Financial Data," carrying out certain procedures
(but not an examination in accordance with generally
accepted auditing standards) which would not necessarily
reveal matters of significance with respect to the comments
set forth in such letter, a reading of the minutes of the
meetings of the shareholders and directors of the Company,
and inquiries of certain officials of the Company who have
responsibility for financial and accounting matters of the
Company as to transactions and events subsequent to the
date of the latest audited financial statements, except as
disclosed in the Registration Statement and the Prospectus,
nothing came to their attention which caused them to
believe that:
(A) the amounts in "Summary Financial
Information," and "Selected Financial Data"
included in the Registration Statement and the
Prospectus do not agree with the corresponding
amounts in the audited and unaudited financial
statements from which such amounts were derived;
or
(B) with respect to the Company, there
were, at a specified date not more than five
business days prior to the date of the letter, any
increases in the current liabilities and long-term
liabilities of the Company or any decreases in net
income or in working capital or the shareholders'
equity in the Company, as compared with the
amounts shown on the Company's audited balance
sheet for the fiscal year ended December 31, 1996
and the three months ended March 31, 1997 included
in the Registration Statement; and
(iii) they have performed certain other
procedures as a result of which they determined that
certain information of an accounting, financial or
statistical nature (which is limited to accounting,
financial or statistical information derived from the
general accounting records of the Company) set forth in the
Registration Statement and the Prospectus and reasonably
specified by the Representatives agrees with the accounting
records of the Company.
References to the Registration Statement and the Prospectus
in this paragraph (e) are to such documents as amended and
supplemented at the date of the letter.
(f) The Representatives shall have received on each
Closing Date from Albright & Rusher, a Professional Corporation,
counsel for the Company and the Selling Shareholder, an opinion,
addressed to the Representatives and dated such Closing Date,
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<PAGE> 14
and stating in effect that:
(i) The Company has been duly organized and is
validly existing as a corporation in good standing under
the laws of the State of Oklahoma. To the best of such
counsel's knowledge, except as provided in Exhibit 21 to
the Registration Statement, the Company has no subsidiaries
and does not control, directly or indirectly, any
corporation, partnership, joint venture, association or
other business organization. Each of the entities listed
on Exhibit 21 to the Registration Statement (the
"Subsidiaries") has been duly organized and is validly
existing in good standing under the laws of its state of
organization. The Company and each Subsidiary is duly
qualified and in good standing as a foreign corporation in
each jurisdiction in which the character or location of its
assets or properties (owned, leased or licensed) or the
nature of its businesses makes such qualification
necessary, except for such jurisdictions where the failure
to so qualify would not have a material adverse effect on
the assets or properties, business, results of operations,
prospects or condition (financial or otherwise) of the
Company and the Subsidiaries, taken as a whole.
(ii) The Company and each Subsidiary has all
requisite corporate power and authority to own, lease and
license its assets and properties and conduct its business
as now being conducted and as described in the Registration
Statement and the Prospectus; and the Company has all
requisite corporate power and authority and all necessary
authorizations, approvals, consents, orders, licenses,
certificates and permits to enter into, deliver and perform
this Agreement and to issue and sell the Shares other than
those required under the Securities Act and state and
foreign Blue Sky laws.
(iii) The Company has authorized and issued
capital stock as set forth in the Registration Statement
and the Prospectus; the certificates evidencing the Shares
are in due and proper legal form and have been duly
authorized for issuance by the Company; all of the
outstanding shares of Common Stock of the Company have been
duly and validly authorized and have been duly and validly
issued and are fully paid and nonassessable and none of
them was issued in violation of any preemptive or other
similar right. The Shares when issued and sold pursuant to
this Agreement will be duly and validly issued,
outstanding, fully paid and nonassessable and none of them
will have been issued in violation of any preemptive or
other similar right. To the best of such counsel's
knowledge, except as disclosed in the Registration
Statement and the Prospectus, there is no outstanding
option, warrant or other right calling for the issuance of,
and no commitment, plan or arrangement to issue, any share
of stock of the Company or any security convertible into,
exercisable for, or exchangeable for stock of the Company.
The Common Stock and the Shares conform in all material
respects
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<PAGE> 15
to the descriptions thereof contained in the Registration
Statement and the Prospectus.
(iv) The agreement of the Company's
shareholders, directors and officers stating that for a
period of 180 days from the date of this Agreement they
will not, without the Representatives' prior written
consent, sell, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, any shares of
Common Stock (or any securities convertible into,
exercisable for, or exchangeable for any shares of Common
Stock) owned by them has been duly and validly delivered by
such persons and constitutes the legal, valid and binding
obligation of each such person enforceable against each
such person in accordance with its terms, except as the
enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights
generally and by general equitable principles.
(v) All necessary corporate action has been duly
and validly taken by the Company to authorize the
execution, delivery and performance of this Agreement and
the issuance and sale of the Shares. This Agreement has
been duly and validly authorized, executed and delivered by
the Company and this Agreement constitutes the legal, valid
and binding obligation of the Company enforceable against
the Company in accordance with its terms except (A) as such
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights
generally and by general equitable principles and (B) to
the extent that rights to indemnity or contribution under
this Agreement may be limited by Federal or state
securities laws or the public policy underlying such laws.
(vi) Neither the execution, delivery and
performance of this Agreement by the Company nor the
consummation of any of the transactions contemplated hereby
(including, without limitation, the issuance and sale by
the Company of the Shares) will give rise to a right to
terminate or accelerate the due date of any payment due
under, or conflict with or result in the breach of any term
or provision of, or constitute a default (or any event
which with notice or lapse of time, or both, would
constitute a default) under, or require consent or waiver
under, or result in the execution or imposition of any
lien, charge or encumbrance upon any properties or assets
of the Company or any Subsidiary pursuant to the terms of
any indenture, mortgage, deed trust, note or other
agreement or instrument of which such counsel is aware and
to which the Company or any Subsidiary is a party or by
which it or any of its properties or businesses is bound,
or any franchise, license, permit, judgment, decree, order,
statute, rule or regulation of which such counsel is aware
or violate any provision of the charter or bylaws of the
Company or any Subsidiary.
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<PAGE> 16
(vii) To the best of such counsel's knowledge, no
default exists, and no event has occurred which with notice
or lapse of time, or both, would constitute a default, in
the due performance and observance of any term, covenant or
condition by the Company or any Subsidiary of any
indenture, mortgage, deed of trust, note or any other
agreement or instrument to which the Company or any
Subsidiary is a party or by which it or any of its assets
or properties or businesses may be bound or affected, where
the consequences of such default would have a material and
adverse effect on the assets, properties, business, results
of operations, prospects or condition (financial or
otherwise) of the Company and the Subsidiaries, taken as a
whole.
(viii) To the best of such counsel's knowledge,
neither the Company nor any Subsidiary is in violation of
any term or provision of its charter or bylaws or any
franchise, license, permit, judgment, decree, order,
statute, rule or regulation, where the consequences of such
violation would have a material and adverse effect on the
assets or properties, businesses, results of operations,
prospects or condition (financial or otherwise) of the
Company and the Subsidiaries, taken as a whole.
(ix) No consent, approval, authorization or order
of any court or governmental agency or body is required for
the performance of this Agreement by the Company or the
consummation of the transactions contemplated hereby or
thereby, except such as have been obtained under the
Securities Act and such as may be required under state
securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the several Underwriters.
(x) To the best of such counsel's knowledge,
except as disclosed in the Registration Statement and
Prospectus, there is no litigation or governmental or other
proceeding or investigation, before any court or before or
by any public body or board pending or threatened against,
or involving the assets, properties or businesses of, the
Company or any Subsidiary which would have a material
adverse effect upon the assets or properties, business,
results of operations, prospects or condition (financial or
otherwise) of the Company and the Subsidiaries, taken as a
whole.
(xi) The statements in the Prospectus under the
captions "Description of Capital Stock," "Management's
Discussion & Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources," "Business,"
"Shares Eligible for Future Sale,", "Management," and
"Certain Transactions," insofar as such statements
constitute a summary of documents referred to therein or
matters of law, are fair summaries in all material respects
and accurately present the information called for with
respect to such documents and matters. To the best
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<PAGE> 17
knowledge of such counsel, all contracts and other
documents required to be filed as exhibits to, or described
in, the Registration Statement have been so filed with the
Commission or are fairly described in the Registration
Statement, as the case may be.
(xii) The Agreement has been duly executed and
delivered by or on behalf of the Selling Shareholder.
(xiii) To the best knowledge of such counsel, the
Selling Shareholder has good and valid title to the Selling
Shareholder Shares, free and clear of any pledge, lien,
security interest, charge, claim, equity or encumbrance of
any kind and has full right, power and authority to sell,
transfer and deliver the Selling Shareholder Shares. By
delivery of a certificate or certificates therefor, the
Selling Shareholder will transfer good and valid title to
such Selling Shareholder Shares free and clear of any
pledge, lien, security interest, charge, claim, equity or
encumbrance of any kind.
(xiv) The Custody Agreement executed and
delivered by the Selling Shareholder is a valid,
irrevocable instrument, and except as rights to indemnity
thereunder may be limited under applicable law, is binding
and enforceable against the Selling Shareholder in
accordance with its terms, subject to bankruptcy,
insolvency, and similar laws governing the rights of
creditors generally and to the discretion of courts in
granting equitable remedies. The attorneys-in-fact
appointed under the Selling Shareholder's Power of Attorney
have the power and authority to sell, on behalf of the
Selling Shareholder, such of the Shares as are to be sold
by the Selling Shareholder on the terms set forth in the
Underwriting Agreement.
To the extent deemed advisable by such counsel, they may
rely as to matters of fact on certificates of responsible officers of the
Company and public officials and on the opinions of other counsel satisfactory
to the Representatives as to matters which are governed by laws other than the
laws of the State of Oklahoma and the Federal laws of the United States;
provided that such counsel shall state that in their opinion the Underwriters
and they are justified in relying on such other opinions. Copies of such
certificates and other opinions shall be furnished to the Representatives and
counsel for the Underwriters.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the Representatives and representatives of the
independent certified public accountants of the Company, at which conferences
the contents of the Registration Statement and the Prospectus and related
matters were discussed and, although such counsel is not passing upon and does
not assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the
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<PAGE> 18
Registration Statement and the Prospectus (except as specified in the foregoing
opinion), on the basis of the foregoing, no facts have come to the attention of
such counsel which lead such counsel to believe that the Registration Statement
at the time it became effective (except with respect to the financial
statements and notes and schedules thereto and other financial data, as to
which such counsel need express no belief) contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, or that the
Prospectus as amended or supplemented (except with respect to the financial
statements and notes schedules thereto and other financial data, as to which
such counsel need make no statement) on the date thereof contained any untrue
statement of a material fact or omitted 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.
(g) The Representatives shall have received on each
Closing Date from Hall, Estill, Hardwick, Gable, Golden & Nelson,
P.C., counsel for the Company, an opinion, addressed to the
Representatives and dated such Closing Date, and stating in effect
that:
(i) The Registration Statement, all preliminary
prospectuses and the Prospectus and each amendment or
supplement thereto (except for the financial statements and
schedules and other financial and statistical data included
therein, as to which such counsel expresses no opinion)
comply as to form in all material respects with the
requirements of the Securities Act and the Rules.
(ii) The Registration Statement has become
effective under the Securities Act, and no stop order
suspending the effectiveness of the Registration Statement
has been issued and no proceedings for that purpose have
been instituted or are threatened, pending or contemplated.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the Representatives and representatives of the
independent certified public accountants of the Company, at which conferences
the contents of the Registration Statement and the Prospectus and related
matters were discussed and, although such counsel is not passing upon and does
not assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement and the Prospectus (except
as specified in the foregoing opinion), on the basis of the foregoing, no facts
have come to the attention of such counsel which lead such counsel to believe
that the Registration Statement at the time it became effective (except with
respect to the financial statements and notes and schedules thereto and other
financial data, as to which such counsel need express no belief) contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or that the Prospectus as amended or supplemented (except with
respect to the financial statements and notes schedules thereto and other
financial data, as to which such counsel need make no statement) on the date
thereof contained any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the light
of the circumstances
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<PAGE> 19
under which they were made, not misleading.
(h) All proceedings taken in connection with the sale
of the Firm Shares and the Option Shares as herein contemplated
shall be reasonably satisfactory in form and substance to the
Representatives and their counsel and the Underwriters shall have
received from Jackson Walker L.L.P., a favorable opinion, addressed
to the Representatives and dated such Closing Date, with respect to
the Shares, the Registration Statement and the Prospectus, and such
other related matters, as the Representatives may reasonably
request, and the Company shall have furnished to Jackson Walker
L.L.P. such documents as they may reasonably request for the
purpose of enabling them to pass upon such matters.
(i) The Representatives shall have received on each
Closing Date a certificate, addressed to the Representatives, and
dated such Closing Date, of an executive officer of the Company to
the effect that the signer of such certificate has reviewed and
understands the provisions of Section 517.075 of the Florida
Statutes, and represents that the Company has complied, and at all
times will comply, with all provisions of Section 517.075 and
further, that as of such Closing Date, neither the Company nor any
of its affiliates does business with the government of Cuba or with
any person or affiliate located in Cuba.
(j) The Representatives shall have received the
certificate of each Selling Shareholder dated the Firm Shares
Closing Date that the representations and warranties of such
Selling Shareholder made in this Agreement are the true and correct
on and as of such Firm Shares Closing Date as if made on such Firm
Shares Closing Date, and that to the best of such Selling
Shareholder's knowledge the representations and warranties of the
Company made in this Agreement are true and correct and as of such
Firm Shares Closing Date as if made on such Firm Shares Closing
Date.
6. Covenants.
(A) The Company covenants and agrees as follows:
(i) The Company shall prepare the Prospectus
in a form approved by the Representatives and file such
Prospectus pursuant to Rule 424(b) under the Securities Act
not later than the Commission's close of business on the
second business day following the execution and delivery of
this Agreement, or, if applicable, such earlier time as may
be required by Rule 430A(a)(3) under the Securities Act,
and shall promptly advise the Representatives (i) when any
amendment to the Registration Statement shall have become
effective, (ii) of any request by the Commission for any
amendment of the Registration Statement or the Prospectus
or for any additional information, (iii) of the prevention
or suspension of the use of any preliminary prospectus or
the Prospectus or of the
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<PAGE> 20
issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that
purpose and (iv) of the receipt by the Company of any
notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or
the initiation or threatening of any proceeding for such
purpose. The Company shall not file any amendment of the
Registration Statement or supplement to the Prospectus
unless the Company has furnished the Representatives a copy
for its review prior to filing and shall not file any such
proposed amendment or supplement to which the
Representatives reasonably object. The Company shall use
its best efforts to prevent the issuance of any such stop
order and, if issued, to obtain as soon as possible the
withdrawal thereof.
(ii) If, at any time when a prospectus relating
to the Shares is required to be delivered under the
Securities Act and the Rules, any event occurs as a result
of which the Prospectus as then amended or supplemented
would include any untrue statement of a material fact or
omit to state any material fact necessary to make the
statements therein in the light of the circumstances under
which they were made not misleading, or if it shall be
necessary to amend or supplement the Prospectus to comply
with the Securities Act or the Rules, the Company promptly
shall prepare and file with the Commission, subject to the
second sentence of paragraph (a) of this Section 6(A), an
amendment or supplement which shall correct such statement
or omission or an amendment which shall effect such
compliance.
(iii) The Company shall make generally available
to its security holders and to the Representatives as soon
as practicable, but not later than 45 days after the end of
the 12-month period beginning at the end of the fiscal
quarter of the Company during which the Effective Date
occurs (or 90 days if such 12-month period coincides with
the Company's fiscal year), an earning statement (which
need not be audited) of the Company, covering such 12-month
period, which shall satisfy the provisions of Section 11(a)
of the Securities Act or Rule 158 of the Rules.
(iv) The Company shall furnish to the
Representatives and counsel for the Underwriters, without
charge, signed copies of the Registration Statement
(including all exhibits thereto and amendments thereof) and
to each other Underwriter a copy of the Registration
Statement (without exhibits thereto) and all amendments
thereof and, so long as delivery of a prospectus by an
Underwriter or dealer may be required by the Securities Act
or the Rules, as many copies of any preliminary prospectus
and the Prospectus and any amendments thereof and
supplements thereto as the Representatives may reasonably
request.
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<PAGE> 21
(v) The Company shall cooperate with the
Representatives and their counsel in endeavoring to qualify
the Shares for offer and sale under the laws of such
jurisdictions as the Representatives may designate and
shall maintain such qualifications in effect so long as
required for the distribution of the Shares; provided,
however, that the Company shall not be required in
connection therewith, as a condition thereof, to qualify as
a foreign corporation or to execute a general consent to
service of process in any jurisdiction or subject itself to
taxation as doing business in any jurisdiction.
(vi) For a period of five years after the date
of this Agreement, the Company shall supply to the
Representatives, and to each other Underwriter who may so
request in writing, copies of such financial statements and
other periodic and special reports as the Company may from
time to time distribute generally to the holders of any
class of its capital stock and to furnish to the
Representatives a copy of each annual or other report it
shall be required to file with the Commission (including
the Report on Form SR required by Rule 463 of the Rules).
(vii) Without the prior written consent of the
Representatives, for a period of 180 days after the date of
this Agreement, the Company shall not issue, sell or
register with the Commission (other than on Form S-8 or on
any successor form), or otherwise dispose of, directly or
indirectly, any equity securities of the Company (or any
securities convertible into or exercisable or exchangeable
for equity securities of the Company), except for the
issuance of the Shares pursuant to the Registration
Statement and the issuance of shares pursuant to the
Company's existing stock option plans or bonus plans. In
the event that during this period, (i) any shares are
issued pursuant to the Company's existing stock option
plans or bonus plans or (ii) any registration is effected
on Form S-8 or on any successor form, the Company shall
obtain the written agreement of such grantee or purchaser
or holder of such registered securities that, for a period
of 180 days after the date of this Agreement, such person
will not, without the prior written consent of the
Representatives, offer for sale, sell, distribute, grant
any option for the sale of, or otherwise dispose of,
directly or indirectly, or exercise any registration rights
with respect to, any shares of Common Stock (or any
securities convertible into, exercisable for, or
exchangeable for any shares of Common Stock) owned by such
person.
(viii) On or before completion of this offering,
the Company shall make all filings required under
applicable securities laws and by the NASDAQ National
Market (including any required registration under the
Exchange Act).
(B) The Selling Shareholder covenants and agrees with
each of the Underwriters that:
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<PAGE> 22
(i) without the prior written consent of the
Representatives, the Selling Shareholder will not sell or
offer or contract to sell, except to the Underwriters
pursuant to this Agreement, any securities of the Company
before the close of business on the 180th day after the
commencement of the public offering of the Shares by the
Underwriters.
(ii) the Selling Shareholder will cooperate with
the Representatives in endeavoring to qualify the Shares
for sale under the securities laws of such jurisdictions as
the Representatives may reasonably designate in writing and
will make such applications, file such documents, and
furnish such information as may be reasonably required for
that purpose.
(C) The Company agrees to pay, or reimburse if paid by
the Representatives, whether or not the transactions contemplated hereby are
consummated or this Agreement is terminated, all costs and expenses incident to
the public offering of the Shares and the performance of the obligations of the
Company under this Agreement including those relating to: (i) the preparation,
printing, filing and distribution of the Registration Statement including all
exhibits thereto, each preliminary prospectus, the Prospectus, all amendments
and supplements to the Registration Statement and the Prospectus, and the
printing, filing and distribution of this Agreement; (ii) the preparation and
delivery of certificates for the Shares to the Underwriters; (iii) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the various jurisdictions referred to in Section
6(A)(e), including the reasonable fees and disbursements of counsel for the
Underwriters in connection with such registration and qualification and the
preparation, printing, distribution and shipment of preliminary and
supplementary Blue Sky memoranda; (iv) the furnishing (including costs of
shipping and mailing) to the Representatives and to the Underwriters of copies
of each preliminary prospectus, the Prospectus and all amendments or
supplements to the Prospectus, and of the several documents required by this
Section to be so furnished, as may be reasonably requested for use in
connection with the offering and sale of the Shares by the Underwriters or by
dealers to whom Shares may be sold; (v) the filing fees of the National
Association of Securities Dealers, Inc. in connection with its review of the
terms of the public offering; (vi) the furnishing (including costs of shipping
and mailing) to the Representatives and to the Underwriters of copies of all
reports and information required by Section 6(A)(f); (vii) inclusion of the
Shares for quotation on the NASDAQ National Market; and (viii) all transfer
taxes, if any, with respect to the sale and delivery of the Shares by the
Company to the Underwriters. The Selling Shareholder agrees to reimburse the
Company for 14.29% of such costs promptly after request therefor by the
Company. Subject to the provisions of Section 9, the Underwriters agree to
pay, whether or not the transactions contemplated hereby are consummated or
this Agreement is terminated, all costs and expenses incident to the
performance of the obligations of the Underwriters under this Agreement not
payable by the Company pursuant to the preceding sentence, including, without
limitation, the fees and disbursements of counsel for the Underwriters.
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<PAGE> 23
7. Indemnification.
(a) The Company and the Selling Shareholder, jointly
and severally, agree to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act against any and all losses, claims, damages
and liabilities, joint or several (including any reasonable
investigation, legal and other expenses incurred in connection
with, and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted) (collectively, "Losses"), to
which they, or any of them, may become subject under the Securities
Act, the Exchange Act or other Federal or state law or regulation
(a "Statute"), at common law or otherwise, insofar as such losses,
claims, damages or liabilities arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus, the Registration Statement
or the Prospectus or any amendment thereof or supplement thereto,
or arise out of or are 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 not misleading; provided,
however, that such indemnity shall not inure to the benefit of any
Underwriter (or any person controlling such Underwriter) on account
of any losses, claims, damages or liabilities arising from the sale
of the Shares to any person by such Underwriter if such untrue
statement or omission or alleged untrue statement or omission was
made in such preliminary prospectus, the Registration Statement or
the Prospectus, or such amendment or supplement, in reliance upon
and in conformity with information furnished in writing to the
Company by the Representatives on behalf of any Underwriter
specifically for use therein; and provided further that the
foregoing indemnity agreement with respect to any preliminary
prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such Losses purchased Shares, or any
person controlling such Underwriter, if a copy of the Prospectus
(as then amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) was not sent or
given by or on behalf of such Underwriter to such person, if
required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Shares to such person, and
if the Prospectus (as so amended or supplemented) would have cured
the defect giving rise to such Loss; and provided further that the
Selling Shareholder will not be liable in any case for any amount
in excess of the aggregate proceeds received by the Selling
Shareholder. THE COMPANY AND THE SELLING SHAREHOLDER WILL BE
RESPONSIBLE UNDER THIS AGREEMENT FOR ANY AND ALL LOSSES WHETHER OR
NOT IT IS ALLEGED OR PROVEN THAT THE LOSSES AROSE OUT OF OR
RESULTED FROM THE SOLE OR CONCURRENT NEGLIGENCE OR GROSS NEGLIGENCE
OF ANY UNDERWRITER, OR THE SOLE OR CONCURRENT STRICT LIABILITY
IMPOSED ON ANY UNDERWRITER, OR THE SOLE OR CONCURRENT LIABILITY
IMPOSED VICARIOUSLY ON ANY UNDERWRITER, UNDER A STATUTE, AT COMMON
LAW OR OTHERWISE. This indemnity agreement will be in addition to
any liability which the Company and the Selling Shareholder may
otherwise have.
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<PAGE> 24
(b) Each Underwriter agrees, severally and not
jointly, to indemnify and hold harmless the Company, the Selling
Shareholder, each person, if any, who controls the Company and the
Selling Shareholder within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, each director of
the Company, and each officer of the Company who signs the
Registration Statement, to the same extent as the foregoing
indemnity from the Company to each Underwriter, but only insofar as
such losses, claims, damages or liabilities arise out of or are
based upon any untrue statement or omission or alleged untrue
statement or omission which was made in any preliminary prospectus,
the Registration Statement or the Prospectus, or any amendment
thereof or supplement thereto, contained in the last paragraph of
the cover page, in the paragraph relating to stabilization on the
inside front cover page of the Prospectus and the statements
contained under the caption "Underwriting" in the Prospectus;
provided, however, that the obligation of each Underwriter to
indemnify the Company, the Selling Shareholder, as the case may be,
(including any controlling person, director or officer thereof)
shall be limited to the net proceeds received by the Company or the
Selling Shareholder, as the case may be, from such Underwriter.
(c) Any party that proposes to assert the right to be
indemnified under this Section will, promptly after receipt of
notice of commencement of any action, suit or proceeding against
such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section, notify each such
indemnifying party of the commencement of such action, suit or
proceeding, enclosing a copy of all papers served. No
indemnification provided for in Section 7(a) or 7(b) shall be
available to any party who shall fail to give notice as provided in
this Section 7(c) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related
and was prejudiced by the failure to give such notice but the
omission so to notify such indemnifying party of any such action,
suit or proceeding shall not relieve it from any liability that it
may have to any indemnified party for contribution or otherwise
than under this Section. In case any such action, suit or
proceeding shall be brought against any indemnified party and it
shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate in, and, to
the extent that it shall wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof and the approval
by the indemnified party of such counsel, the indemnifying party
shall not be liable to such indemnified party for any legal or
other expenses, except as provided below and except for the
reasonable costs of investigation subsequently incurred by such
indemnified party in connection with the defense thereof. The
indemnified party shall have the right to employ its counsel in any
such action, but the fees and expenses of such counsel shall be at
the expense of such indemnified party unless (i) the employment of
counsel by such indemnified party has been authorized in
-24-
<PAGE> 25
writing by the indemnifying parties, (ii) the indemnified party
shall have reasonably concluded that there may be a conflict of
interest between the indemnifying parties and the indemnified party
in the conduct of the defense of such action (in which case the
indemnifying parties shall not have the right to direct the defense
of such action on behalf of the indemnified party) or (iii) the
indemnifying parties shall not have employed counsel to assume the
defense of such action within a reasonable time after notice of the
commencement thereof, in each of which cases the fees and expenses
of counsel shall be at the expense of the indemnifying parties. An
indemnifying party shall not be liable for any settlement of any
action, suit, proceeding or claim effected without its written
consent.
8. Contribution. In order to provide for just and
equitable contribution in circumstances in which the indemnification provided
for in Section 7(a) is due in accordance with its terms but for any reason is
held to be unavailable from the Company or the Selling Shareholder, the
Company, the Selling Shareholder and the Underwriters shall contribute to the
aggregate losses, claims, damages and liabilities (including any investigation,
legal and other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claims asserted,
but after deducting any contribution received by the Company or the Selling
Shareholder, from persons other than the Underwriters, such as persons who
control the Company within the meaning of the Securities Act, officers of the
Company who signed the Registration Statement and directors of the Company, who
may also be liable for contribution) to which the Company or the Selling
Shareholder and one or more of the Underwriters may be subject in such
proportion as is appropriate to reflect the relative benefits received by the
Company or the Selling Shareholder, on the one hand and the Underwriters on the
other from the offering of the Shares or, if such allocation is not permitted
by applicable law or indemnification is not available as a result of the
indemnifying party not having received notice as provided in Section 7 hereof,
in such proportion as is appropriate to reflect not only the relative benefits
referred to above but also the relative fault of the Company or the Selling
Shareholder, on the one hand and the Underwriters on the other in connection
with the statements or omissions which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company, the Selling
Shareholder and the Underwriters shall be deemed to be in the same proportion
as (x) the total proceeds from the offering (net of underwriting discounts but
before deducting expenses) received by the Company and the Selling Shareholder,
as set forth in the table on the cover page of the Prospectus, bear to (y) the
underwriting discounts received by the Underwriters, as set forth in the table
on the cover page of the Prospectus. The relative fault of the Company, the
Selling Shareholder or the Underwriters shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact related to information supplied by the Company, the Selling
Shareholder or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company, the Selling Shareholder and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 8
were determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other
-25-
<PAGE> 26
method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
Section 8, (i) in no case shall any Underwriter (except as may be provided in
the Agreement Among Underwriters) be liable or responsible for any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Underwriter hereunder, and (ii) the Company shall be liable and responsible for
any amount in excess of such underwriting discount; provided, however, that 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. For purposes of this
Section 8, each person, if any, who controls an Underwriter within the meaning
of Section 15 of the Securities Act or Section 20(a) of the Exchange Act shall
have the same rights to contribution as such Underwriter, and each person, if
any, who controls the Company within the meaning of the Section 15 of the
Securities Act or Section 20(a) of the Exchange Act, each officer of the
Company who shall have signed the Registration Statement and each director of
the Company shall have the same rights to contribution as the Company, subject
in each case to clauses (i) and (ii) in the immediately preceding sentence of
this Section 8. Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against
such party in respect of which a claim for contribution may be made against
another party or parties under this Section, notify such party or parties from
whom contribution may be sought, but the omission so to notify such party or
parties from whom contribution may be sought shall not relieve the party or
parties from whom contribution may be sought from any other obligation it or
they may have hereunder or otherwise than under this Section. No party shall
be liable for contribution with respect to any action, suit, proceeding or
claim settled without its written consent. The Underwriter's obligations to
contribute pursuant to this Section 8 are several in proportion to their
respective underwriting commitments and not joint.
9. Termination. This Agreement may be terminated
with respect to the Shares to be purchased on a Closing Date by the
Representatives by notifying the Company and the Selling Shareholder at any
time
(a) in the absolute discretion of the Representatives
at or before any Closing Date: (i) if on or prior to such date, any
domestic or international event or act or occurrence has materially
disrupted, or in the opinion of the Representatives will in the
future materially disrupt, the securities markets; (ii) if there
has occurred any new outbreak or material escalation of hostilities
or other calamity or crisis the effect of which on the financial
markets of the United States is such as to make it, in the judgment
of the Representatives, inadvisable to proceed with the offering;
(iii) if there shall be such a material adverse change in general
financial, political or economic conditions or the effect of
international conditions on the financial markets in the United
States is such as to make it, in the judgment of the
Representatives, inadvisable or impracticable to market the Shares;
(iv) if trading in the Shares has been suspended by the Commission
or trading generally on the New York Stock Exchange, Inc. or on the
American Stock Exchange, Inc. has been suspended or limited, or
minimum or maximum ranges for prices for securities shall have been
fixed, or maximum ranges for prices for securities have been
-26-
<PAGE> 27
required, by said exchanges or by order of the Commission, the
National Association of Securities Dealers, Inc., or any other
governmental or regulatory authority; or (v) if a banking
moratorium has been declared by any state or Federal authority, or
(b) at or before any Closing Date, that any of the
conditions specified in Section 5 shall not have been fulfilled
when and as required by this Agreement.
If this Agreement is terminated pursuant to any of its
provisions, the Company shall not be under any liability to any Underwriter,
and no Underwriter shall be under any liability to the Company, except that (y)
if this Agreement is terminated by the Representatives or the Underwriters
because of any failure, refusal or inability on the part of the Company to
comply with the terms or to fulfill any of the conditions of this Agreement,
the Company will reimburse the Underwriters for all out-of-pocket expenses
(including the reasonable fees and disbursements of their counsel) incurred by
them in connection with the proposed purchase and sale of the Shares or in
contemplation of performing their obligations hereunder and (z) no Underwriter
who shall have failed or refused to purchase the Shares agreed to be purchased
by it under this Agreement, without some reason sufficient hereunder to justify
cancellation or termination of its obligations under this Agreement, shall be
relieved of liability to the Company or to the other Underwriters for damages
occasioned by its failure or refusal.
10. Substitution of Underwriters. If one or more of
the Underwriters shall fail (other than for a reason sufficient to justify the
cancellation or termination of this Agreement under Section 9) to purchase on
any Closing Date the Shares agreed to be purchased on such Closing Date by such
Underwriter or Underwriters, the Representatives may find one or more
substitute underwriters to purchase such Shares or make such other arrangements
as the Representatives may deem advisable or one or more of the remaining
Underwriters may agree to purchase such Shares in such proportions as may be
approved by the Representatives, in each case upon the terms set forth in this
Agreement. If no such arrangements have been made by the close of business on
the business day following such Closing Date,
(a) if the number of Shares to be purchased by the
defaulting Underwriters on such Closing Date shall not exceed 10%
of the Shares that all the Underwriters are obligated to purchase
on such Closing Date, then each of the nondefaulting Underwriters
shall be obligated to purchase such Shares on the terms herein set
forth in proportion to their respective obligations hereunder;
provided, that in no event shall the maximum number of Shares that
any Underwriter has agreed to purchase pursuant to Section 1 be
increased pursuant to this Section 10 by more than one-ninth of
such number of Shares without the written consent of such
Underwriter, or
(b) if the number of Shares to be purchased by the
defaulting Underwriters on such Closing Date shall exceed 10% of
the Shares that all the Underwriters are obligated
-27-
<PAGE> 28
to purchase on such Closing Date, then the Company shall be
entitled to an additional business day within which it may, but is
not obligated to, find one or more substitute underwriters
reasonably satisfactory to the Representatives to purchase such
Shares upon the terms set forth in this Agreement.
In any such case, either the Representatives or the Company
shall have the right to postpone the applicable Closing Date for a period of
not more than five business days in order that necessary changes and
arrangements (including any necessary amendments or supplements to the
Registration Statement or Prospectus) may be effected by the Representatives
and the Company. If the number of Shares to be purchased on such Closing Date
by such defaulting Underwriter or Underwriters shall exceed 10% of the Shares
that all the Underwriters are obligated to purchase on such Closing Date, and
none of the nondefaulting Underwriters or the Company shall make arrangements
pursuant to this Section within the period stated for the purchase of the
Shares that the defaulting Underwriters agreed to purchase, this Agreement
shall terminate with respect to the Shares to be purchased on such Closing Date
without liability on the part of any nondefaulting Underwriter to the Company
and without liability on the part of the Company, except in both cases as
provided in Sections 6(B), 7, 8 and 9. The provisions of this Section shall
not in any way affect the liability of any defaulting Underwriter to the
Company or the nondefaulting Underwriters arising out of such default. A
substitute underwriter hereunder shall become an Underwriter for all purposes
of this Agreement.
11. Miscellaneous. The respective agreements,
representations, warranties, indemnities and other statements of the Company or
its officers and of the Underwriters set forth in or made pursuant to this
Agreement shall remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
the officers, directors or controlling persons referred to in Sections 7 and 8
hereof, and shall survive delivery of and payment for the Shares. The
provisions of Sections 6(B), 7, 8 and 9 shall survive the termination or
cancellation of this Agreement.
This Agreement has been and is made for the benefit of the
Underwriters and the Company and their respective successors and assigns, and,
to the extent expressed herein, for the benefit of persons controlling any of
the Underwriters, or the Company, and directors and officers of the Company,
and their respective successors and assigns, and no other person shall acquire
or have any right under or by virtue of this Agreement. The term "successors
and assigns" shall not include any purchaser of Shares from any Underwriter
merely because of such purchase.
All notices and communications hereunder shall be in
writing and mailed or delivered or by telephone or telegraph if subsequently
confirmed in writing, (a) if to the Representatives, c/o Oppenheimer & Co.,
Inc. at the address set forth above, (b) if to the Company, to its agent for
service as such agent's address appears on the cover page of the Registration
Statement, and (c) if to the Selling Shareholder in care of the Company.
-28-
<PAGE> 29
This Agreement shall be governed by and construed in
accordance with the laws of the State of _____________________ without regard
to principles of conflict of laws.
This Agreement may be signed in any number of counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
Please confirm that the foregoing correctly sets forth the agreement among us.
Very truly yours,
CONTINENTAL NATURAL GAS, INC.
By
------------------------------------
Title:
Selling Shareholder:
ADAMS AFFILIATES, INC.
By
------------------------------------
Title:
-29-
<PAGE> 30
Confirmed:
OPPENHEIMER & CO., INC.
SOUTHWEST SECURITIES, INC.
Acting severally on behalf of itself
and as representatives of the several
Underwriters named in Schedule I annexed
hereto.
By OPPENHEIMER & CO., INC.
By
---------------------------------------
Title:
-30-
<PAGE> 31
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Firm Shares to
Name Be Purchased
---- ---------------
<S> <C>
Oppenheimer & Co., Inc.
Southwest Securities, Inc.
---------------
Total
==========
</TABLE>
-31-
<PAGE> 32
SCHEDULE II
<TABLE>
<CAPTION>
Number of
Selling Shareholder Shares
Selling Shareholder To Be Sold
------------------- --------------------------
<S> <C>
Adams Affiliates, Inc.
</TABLE>
-32-
<PAGE> 1
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
NUMBER SHARES
C-
CONTINENTAL NATURAL GAS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF OKLAHOMA
CUSIP 211789 10 2
SEE REVERSE FOR CERTAIN DEFINITIONS
This certifies that
Is the record holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.01 PER
SHARE, OF
- -------------------------CONTINENTAL NATURAL GAS, INC---------------------------
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed.
This certificate is not valid unless countersigned by the Transfer Agent
and registered by the Registrar.
WITNESS the facsimilie seal of the Corporation and the facsimilie
signatures of its duly authorized officers.
DATED:
[SEAL]
/s/ [ILLEGIBLE] /s/ [ILLEGIBLE]
SECRETARY PRESIDENT
BANKNOTE CORP. OF AMERICA WALL ST. 1-707030-942. PROOF #1-CONTINENTAL NATURAL
GAS, INC. 7/22/97 ALW
COUNTERSIGNED AND REGISTERED:
BANKBOSTON, N.A.
BY: /s/ [ILLEGIBLE] TRANSFER AGENT
AND REGISTRAR
AUTHORIZED SIGNATURE
<PAGE> 2
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- Custodian
-----------------------------
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right Act
of survivorship and not as -----------------------------
tenants in common (State)
</TABLE>
FOR VALUE RECEIVED, ________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
_____________________________________________________________________ Shares of
the Stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint _________________________________________________________
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated
---------------------
------------------------------------------------
NOTE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE
WHATEVER.
<PAGE> 1
EXHIBIT 5.1
July 31, 1997
Continental Natural Gas, Inc.
1412 South Boston
Suite 550
Tulsa, Oklahoma 74119
Re: Registration Statement on Form S-1, as amended
(No. 333-25719)
Ladies and Gentlemen:
We have acted as counsel for Continental Natural Gas, Inc., an Oklahoma
corporation (the "Company"), in connection with the various legal matters
relating to the filing of a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act of 1933, as amended,
relating to 2,415,000 shares of the common stock of the Company, $0.01 par
value per share (the "Common Stock") consisting of up to 2,115,000 shares to be
sold by the Company and up to 300,000 shares to be sold by certain of the
shareholders of the Company (the "Selling Shareholders"), including, in each
case, those shares subject to an option to purchase granted to the several
underwriters to cover over-allotments.
We have examined such corporate records of the Company, such laws and such
other information as we have deemed relevant, including the Company's
Certificate of Incorporation, as amended, Amended and Restated Bylaws,
resolutions adopted by the Board of Directors of the Company relating to such
offering and certificates received from state officials and from officers of
the Company. In delivering this opinion, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
conformity to the originals of all documents submitted to us as certified,
photostatic or conformed copies, and the correctness of all statements
submitted to us by officers of the Company.
<PAGE> 2
Continental Natural Gas, Inc.
July 31, 1997
Page 2
Based solely on the foregoing, the undersigned is of the opinion that:
1. The Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Oklahoma.
2. The Common Stock being offered by the Company and each of the Selling
Shareholders, if sold and issued in the manner described in the
Registration Statement, will be validly issued and outstanding and
will be fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of our name in the Registration Statement. We also
consent to you filing copies of this opinion as an exhibit to the Registration
Statement with agencies of such states as you deem necessary in the course of
complying with the laws of such states regarding the issuance of the Common
Stock sold.
Very truly yours,
Albright & Rusher,
A Professional Corporation
<PAGE> 1
EXHIBIT 10.1
EXHIBIT A
SECOND RESTATED
EMPLOYMENT AGREEMENT
This Agreement is entered into as of the ___ day of ________, 199_, by
and between Continental Natural Gas, Inc., an Oklahoma corporation
("Employer"), and Garry D. Smith ("Employee").
RECITALS
A. As of January 1, 1992, Employer and Employee entered into an
Employment Agreement pursuant to which Employee agreed to employment with
Employer;
B. The Employment Agreement (the "Employment Agreement") was
subsequently amended January 1, 1995 and February 28, 1996;
C. Employer desires to continue to employ Employee and Employee
desires to continue to be employed by Employer to serve and perform such duties
at such times and places and upon such terms and conditions as hereinafter
provided;
D. Employer desires to receive from Employee a covenant not to
disclose certain information relating to Employer's business and a covenant not
to compete with Employer;
E. Employer and Employee desire to set forth in writing the terms
and conditions of their agreement and understandings.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration this day paid by
each party to the other, the receipt and sufficiency of which are hereby
acknowledged, Employer and Employee agree as follows:
1. Employment. Employer hereby agrees to continue the employment of
Employee and Employee hereby agrees to continue to provide Employee's services
to Employer upon the terms and conditions herein stated.
2. Term. Subject to the provisions for termination as hereinafter
provided, the term of this Agreement shall begin as of the date hereof, and
shall terminate on December 31, 1999.
3. Compensation.
(a) Salary. For services rendered by Employee under this
Agreement, Employer shall pay Employee a salary of One Hundred Fifty
Thousand Dollars ($150,000.00) per annum, payable in twenty-six (26)
equal bi-weekly installments. On January 1 of each calendar year during
the term hereof, the
<PAGE> 2
annual salary payable to Employee pursuant to this paragraph 3(a) shall
be increased by a percentage equal to the percentage increase as of such
date, if any, in the Official Consumers Price Index published by the
Bureau of Labor Statistics of the U. S. Department of Labor, applicable
to the smallest geographic region which includes Tulsa, Oklahoma, with
reference to the Official Consumers Price Index for January 1 of the
previous year.
(b) Bonus. For the calendar year 1997 and for all subsequent
calendar years during the term of this Agreement, Employer shall pay
Employee a yearly bonus equal as follows:
(i) If the Adjusted Income for such calendar year is
equal to or greater than the Initial Threshold, but less than the
Second Threshold, the yearly bonus payable to Employee shall
equal the product obtained by multipying (A) $50,000 by (B) a
fraction (I) the numerator of which is the amount by which the
Adjusted Income for such calendar year exceeds the Initial
Threshold and (II) the denominator of which is the difference
between the Second Threshold and the Initial Threshold;
(ii) If the Adjusted Income is equal to or greater than
the Second Threshold, but less than the Third Threshold, the
yearly bonus payable to Employee shall equal $50,000;
(iii) If the Adjusted Income is equal to or greater than
the Third Threshold, but less than the Fourth Threshold, the
yearly bonus payable to Employee shall equal $100,000; or
(iv) If the Adjusted Income is equal to or greater than
the Fourth Threshold, the yearly bonus payable to Employee shall
equal $150,000.
The Thresholds for the 1997 calendar year shall be as follows:
Initial Threshold = $4,400,000
Second Threshold = $5,500,000
Third Threshold = $6,600,000
Fourth Threshold = $7,700,000
For any calendar year subsequent to 1997, the Initial Threshold shall be
an amount equal to 20% of Average Daily Adjusted Equity for the previous
calendar year, the Second Threshold will be 25% of such Average Daily
Adjusted Equity, the Third Threshold will be 30% of such Average Daily
Adjusted Equity and the Fourth Threshold will be 35% of such Average
Daily Adjusted Equity . As used herein, the term "Adjusted
2
<PAGE> 3
Income" shall mean, for the calendar year in question, the income of
Employer before income taxes plus depreciation, depletion and
amortization and any other noncash items. As used herein, the term
"Average Daily Adjusted Equity" shall mean, for the calendar year in
question, the average of the Adjusted Equity for the year in question;
such Adjusted Equity being an amount, determined each day, equal to (A)
the stockholders' equity of Employer as of the last day of the previous
calendar year less (B) the then Unutilized IPO Proceeds. As of any day,
the then Unutilized IPO Proceeds shall be an amount equal to (I) the net
proceeds, after all expenses, to Employer raised pursuant to the initial
public offering ("IPO") consummated by Employer as of the effective date
of this Agreement less (II) the amount of Employer's long-term debt as
of such day which has been incurred by Employer since the date of the
IPO (plus any long-term debt incurred by Employer prior to the IPO if
incurred in contemplation of the IPO, as determined by Employer, in
Employer's sole discretion, exercised in good faith).
Notwithstanding any of the foregoing, for any calendar year
during which occurs an event which would have been a "Buyout Event"
under the Employment Agreement (prior to its amendment hereby), the
bonus payable with respect to the gain realized by Employer as a result
of such event shall be 1.5%.
Within thirty (30) days after the end of each calendar month,
Employer shall make a good faith estimate of the Adjusted Income for
such calendar month and pay Employee the estimated bonus attributable
thereto). Within ninety (90) days after the end of each calendar year
during the term hereof, an accounting of the actual amounts owed to
Employee pursuant to this paragraph 3(b) shall be conducted by Employer
and, to the extent of the difference between the aggregate of the
estimated monthly payments to Employee and the actual amounts owed by
Employer to Employee, the party owing such amounts shall make payment to
the other. Such payment shall be made within five (5) days after
delivery of the accounting to Employee. Any payment not paid on or
before the due date therefor shall bear interest at a varying rate of
interest per annum equal to the prime lending rate of Bank of Oklahoma,
N.A., plus one and one-half percent (1-1/2%).
If this Agreement becomes effective on any day other than January
1, the bonus payable to Employee for the first calendar year during
which this Agreement is effective shall be prorated. The bonus payable
to Employee for the portion of such calendar year from January 1 through
the day prior to the effective date of this Agreement shall be paid
based upon the terms of the Employment Agreement prior to its amendment
and restatement hereunder. The bonus which would have been paid under
such Employment Agreement prior to its amendment and
3
<PAGE> 4
restatement hereunder shall be computed for the entire calendar year and
then multiplied by a fraction, the numerator of which is the number of
days of such calendar year prior to the effective date of this Agreement
and the denominator of which is the number of days in such entire
calendar year. The bonus payable to Employee for the remaining portion
of such calendar year shall be paid based upon the terms described in
this paragraph 3(b), prorated in the same manner as described in the
preceding sentence (using the number of remaining days in such calendar
year as the numerator).
(c) Determination of Adjusted Income and Average Daily Adjusted
Equity. The Adjusted Income and Average Daily Adjusted Equity shall be
determined by the certified public accountant or accounting firm (the
"CPA") which normally audits the books of Employer. Such determinations
shall be made using generally accepted accounting principles,
consistently applied and consistent with past practices of Employer.
Such determinations shall be binding on all parties and conclusive in
all respects; provided, however, Employee shall have the right to audit
the determinations. If Employee's audit reveals inconsistencies in the
determination by the CPA resulting in an error in the amount payable
hereunder for any twelve-month period in excess of five percent (5%),
Employer shall bear the cost of Employee's audit. Otherwise, Employee's
audit shall be Employee's expense. After any such audit, once the
correct amount owed is determined, the party owing the other shall pay
the amount owed upon demand.
(d) Automobile Allowance. Employer shall also pay Employee at
the same times Employee is paid salary pursuant to paragraph 3(a) above,
Four Hundred Dollars ($400.00) per month during the term of this
Agreement as an automobile allowance. In consideration thereof and as a
result of the nature of the services to be performed by Employee,
Employee shall keep an automobile available and in working condition so
that Employee can adequately perform the services required to be
performed by Employee hereunder.
(e) Additional Compensation. The compensation agreed to be
paid to Employee by Employer in this paragraph 3 shall not operate in
any manner as a limitation of any type upon or as a direction, express
or implied, against the exercise by the Board (the "Board") of Directors
of Employer of its power, authority and discretion to grant additional
bonuses and/or fees or other additional direct or indirect benefits or
compensation to or on behalf of Employee if, in the business judgment of
the Board, such action is merited and in the best interest of Employer.
4
<PAGE> 5
(f) Withholding. The salary and any other compensation paid
to Employee shall be subject to any and all such payroll and withholding
deductions as are required by the laws of any jurisdiction, federal,
state or local, with taxing authority with respect to such salary and
other compensation.
(g) Payments after Termination. Notwithstanding any other
provision of this Agreement to the contrary, except as provided in
paragraph 13 hereof, any payment required pursuant to this paragraph 3
attributable to any period of time occurring during the term of this
Agreement shall be made when due despite the fact that such payment is
due after termination of this Agreement.
4. Duties. To the best of Employee's ability, using reasonable and
prudent judgment and care, Employee shall render such services and perform such
duties as are customary for a Vice-President and Controller in the industry and
as may be requested by Employer from time to time.
5. Extent of Services. Employee shall devote such time and energy
to the furtherance of Employer's business as shall be determined by the Board.
During the term of this Agreement, Employee shall not, directly or indirectly,
alone or as a member of any business entity, or as an officer, director or
stockholder of any corporation, be engaged in or concerned with any other
commercial or business duties or pursuits which would require such substantial
services on the part of Employee that Employee, in Employer's sole opinion,
would be unable to perform the services required to be performed by Employee
hereby.
6. Working Facilities and Staff. Employee shall be furnished with
such facilities, staff and services as are suitable to Employee's position and
adequate for the performance of Employee's duties.
7. Expenses. Employer will reimburse Employee for all such expenses
which Employer, in Employer's sole discretion, deems are reasonably incurred
for promoting the business of Employer, upon the presentation by Employee, from
time to time, of an itemized account of such expenditures.
8. Vacations. During the term of this Agreement, Employee shall be
entitled, during each year of employment with Employer, to a vacation in
accordance with the established company policy of Employer, during which time
Employee's compensation hereunder shall be paid in full.
9. Insurance. During the term of this Agreement, Employer shall
provide to Employee, and pay all premiums for, major medical insurance with
coverage for Employee and Employee's immediate family on terms no less
favorable than is currently provided.
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<PAGE> 6
10. Pension and Profit-sharing Plan. During the term of this
Agreement, to the extent it is financially reasonable as determined by the
Board, Employer shall maintain in effect any pension and profit-sharing plans
maintained by Employer as of the date hereof and Employee shall be entitled to
participate in such plans on a non-discriminatory basis.
11. Memberships. During the term of this Agreement, Employer shall
maintain its membership at Cedar Ridge Country Club and Employee shall be
designated as the exclusive user thereof, entitled to enjoy all of the rights
and privileges pertaining thereto. In addition, Employer agrees to pay, on
behalf of Employee, up to Three Thousand Dollars ($3,000.00) per year for dues
and/or fees for club memberships, dinner clubs and/or professional
organizations.
12. Disability and Death. If Employee is unable to perform
Employee's services by reason of illness or incapacity for a period of more
than ninety (90) consecutive days, the compensation otherwise payable to
Employee during the continued period of such illness or incapacity shall be
reduced by fifty percent (50%). Employee's full compensation shall be
reinstated upon Employee's return to employment and the discharge of Employee's
full duties hereunder. Notwithstanding anything herein to the contrary,
Employer may terminate this Agreement at any time after Employee shall be
absent from Employee's employment, for whatever cause, for a continuous period
of more than sixty (60) consecutive days, in which event, subject to paragraph
3(g) hereof, all obligations of the Employer hereunder, including Employer's
obligations to pay Employee the compensation provided in paragraph 3 hereof,
shall immediately cease upon any such termination. In no event, however, shall
any provision of this paragraph 12 be interpreted to limit or restrict
Employee's rights to participate in and receive benefits under the existing
Employer disability plan(s). Subject to paragraph 3(g) hereof, all of
Employer's obligations hereunder, including Employer's obligations to pay
Employee the compensation provided in paragraph 3 hereof, shall cease
immediately upon Employee's death. The determination of all periods of time
under this paragraph 12 shall be calculated by including (and counting)
weekends which occur within the applicable period but excluding days of sick
leave, vacation, holidays and other days off, if any, allowed pursuant to
established company policy of Employer.
13. Termination for Cause. Employer may terminate Employee's
employment under this Agreement upon (10) days' notice to Employee after the
occurrence of any of the following events ("Cause Events") unless such events
were caused at the direction of Employer:
(a) Any failure by Employee to faithfully perform the
covenants and agreements of Employee herein stated;
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<PAGE> 7
(b) Willful, gross misconduct by Employee in connection with
the performance of the covenants and agreements of Employee herein
stated;
(c) If Employee violates any law, rule or regulation which
violation materially adversely affects Employer or any of Employer's
subsidiaries or other affiliates (collectively hereinafter referred to
as the "Employer Companies");
(d) If Employee violates any of the provisions of paragraphs
16 or 17;
(e) If Employee converts any property of Employer Companies;
(f) If Employee is convicted of any felony which materially
adversely affects Employer Companies or the ability of Employee to
perform Employee's duties hereunder; or
(g) If Employee is convicted of any lesser crime or offense
involving property or business of Employer Companies.
In the event of a dispute as to whether a Cause Event has occurred, upon the
request of Employer or Employee, such dispute shall be resolved pursuant to the
expedited procedures of the commercial arbitration rules of the American
Arbitration Association regardless of the amount in controversy, with each
party to bear its own arbitration costs and expenses. The parties stipulate
that the hearing locale for any such arbitration proceeding will be Tulsa,
Oklahoma. Judgment upon the award rendered as a result of such arbitration may
be entered in any court having jurisdiction thereof. The parties further
stipulate that the provisions hereof shall be a complete defense to any suit,
action or proceeding instituted in any federal, state or local court or before
any administrative tribunal with respect to any controversy or dispute arising
out of or relating to whether a Cause Event has occurred. Upon termination of
Employee's employment under this Agreement as a result of a Cause Event, all of
Employer's obligations hereunder, including Employer's obligations to pay
Employee the compensation provided in paragraph 3 hereof (whether or not then
accrued), shall immediately cease. Nothing contained herein shall be construed
as limiting in any manner any of the rights or remedies available to Employer
pursuant to this agreement or otherwise with respect to such Cause Event.
14. Expiration of Term. In the event this Agreement is terminated
due to expiration of the term of this Agreement as set forth in paragraph 2
hereof, subject to paragraph 3(g) hereof, all of Employer's obligations
hereunder, including Employer's obligations to pay Employee the compensation
provided in paragraph 3 hereof, shall immediately cease.
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<PAGE> 8
15. Other Termination by Employer. In the event Employer terminates
Employee's employment hereunder for any reason other than as provided in
paragraphs 12, 13 or 14, (a) all of Employer's obligations hereunder, including
Employer's obligations to pay Employee the compensation provided in paragraph 3
hereof, shall continue until terminated under paragraph 14 above, and (b)
notwithstanding anything to the contrary contained herein, the provisions of
paragraph 17 hereof shall not apply.
16. Disclosure of Information. Employee acknowledges that, in and as
a result of Employee's employment with Employer, Employee has and will be
making use of, acquiring, developing and/or adding to confidential information
of special and unique value relating to such matters as Employer Companies'
products, trade secrets, systems, procedures, manuals, confidential reports,
customer and supplier lists, and other information, data and displays, whether
or not patented or copyrighted, as well as the nature and type of product sold
by Employer Companies, the identity of Employer Companies' suppliers and
customers, the products and methods used and preferred by Employer Companies'
customers, and the prices paid by such customers (collectively hereinafter
referred to as the "Confidential Information"). As a material inducement to
Employer to enter into this Agreement and to pay to Employee the compensation
referred to in paragraph 3 hereof (as well as any additional benefits referred
to herein), Employee covenants and agrees that Employee and Employee's
partners, agents, representatives, servants, employers, employees and any and
all other persons acting, directly or indirectly, for or with Employee shall
not, at any time during or following the term of Employee's employment
hereunder, directly or indirectly, for any purpose whatsoever, divulge or
disclose any of the Confidential Information which has been obtained by or
disclosed to Employee and shall not at any time during or following the term of
Employee's employment hereunder, directly or indirectly, use, for any purpose
whatsoever, any of the Confidential Information for Employee's benefit or for
any purpose, whether or not beneficial to Employee, except for the purpose of
permitting Employee to perform the services for Employer contemplated by this
Agreement. Employee further covenants and agrees that all such Confidential
Information shall be the exclusive property of Employer and, upon the
expiration of this Agreement, Employee shall deliver to Employer all
Confidential Information then in the possession, custody or control of Employee
and without regard to the form in which such Confidential Information is stored
or the media for storage for such Confidential Information.
17. Covenants Against Competition. Employee acknowledges that
Employee's services to be rendered hereunder are of a special and unusual
character which have a unique value to Employer, the loss of which cannot
adequately be compensated by damages in an action at law. In view of the
unique value to Employer of the services of Employee for which Employer has
contracted hereunder,
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<PAGE> 9
and because of the Confidential Information to be obtained by or disclosed to
Employee, as hereinabove set forth, and as a material inducement to Employer to
enter into this Agreement, and to pay to Employee the compensation referred to
in paragraph 3 hereof, (as well as any additional benefits referred to herein),
Employee covenants and agrees that Employee and Employee's partners, agents,
representatives, servants, employers, employees and any and all other persons
acting, directly or indirectly, for or with Employee shall not, during the
term of this Agreement and for a period of two (2) years thereafter, within the
continental United States:
(a) Solicit in any manner the termination of any of the
Agreements (the "CNG Agreements") between any of the Employer Companies
and any end-user customer ("CNG End-User") or supplier ("CNG Supplier");
(b) Prior to or immediately upon termination of any CNG
Agreement, compete with or bid competitively against any of the Employer
Companies in order to sell product to any CNG End-User or obtain supply
or product from the same source of supply provided by any CNG Supplier
to any of the Employer Companies; or
(c) Solicit for employment or employ any person who is then or
was at any time during the term of this Agreement an employee of
Employer Companies.
18. Reasonableness of Restrictions. Employee has carefully read and
considered the provisions of paragraphs 16 and 17 hereof and having done so,
agrees that the restrictions set forth in such paragraphs (including, but not
limited to, the time period restriction and the geographical areas of
restriction set forth in paragraphs 16 and 17) are fair and reasonable and are
reasonably required for the protection of the interests of Employer, its
officers, directors and other employees. Notwithstanding the foregoing, in the
event that any of the provisions of paragraphs 16 or 17 shall be held to be
invalid or unenforceable, the remaining provisions thereof shall nevertheless
continue to be valid and enforceable as though the invalid or unenforceable
parts had not been included therein. In the event that any provision of
paragraph 16 or 17 relating to time period and/or areas of restriction shall be
declared by a court of competent jurisdiction to exceed the maximum time period
or areas such court deems reasonable and enforceable, such time period and/or
areas of restriction shall be deemed to become and thereafter be the maximum
time period and/or areas which such court deems reasonable and enforceable.
19. Equitable Relief; Accounting for Profits. In the event of a
breach or threatened breach of any of the provisions of paragraphs 16 or 17,
Employer, in addition to and not in limitation of any other rights or remedies
available to Employer at law or in equity, shall be entitled to a permanent
injunction in order to
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<PAGE> 10
prevent or to restrain any such breach by Employee or by Employee's partners,
agents, representatives, servants, employers, employees and/or any and all
persons, directly or indirectly, acting for or with Employee. Employee further
covenants and agrees that if Employee shall violate any of Employee's covenants
and agreements pursuant to paragraphs 16 and 17 above, Employer shall be
entitled to an accounting and repayment of all profits, compensations,
commissions, remunerations and/or other benefits which Employee, directly or
indirectly, may realize as a result of, growing out of or in connection with,
any such violation. Such remedy shall be in addition to and not in limitation
of any injunctive relief or other rights or remedies which Employer is or may
be entitled to at law or in equity or under this Agreement. In any action
brought by Employer against Employee for the breach of paragraph 16 or 17,
Employer shall be entitled to recover Employer's costs and expenses, including
reasonable attorneys' fees.
20. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing, and shall be deemed to have been
given if personally delivered or if deposited in the United States mail, by
certified mail, with proper postage prepaid thereon, addressed as follows:
If to Employer: Continental Natural Gas, Inc.
1412 South Boston, Suite 500
Tulsa, Oklahoma 74119
Att'n: Mr. Gary C. Adams
If to Employee: Mr. Garry D. Smith
11938 South Canton Avenue
Tulsa, Oklahoma 74137
or to such other address as either party may hereafter advise the other by
notice given in accordance with the provisions hereof.
21. Waiver of Breach. The waiver by Employer of a breach of any
provision of this Agreement by Employee shall not operate or be construed as a
waiver of any subsequent breach by Employee.
22. Assignment. Employer may assign this Agreement to any successor
in interest of Employer's business. The rights and obligations of the parties
under this Agreement shall inure to the benefit of and shall be binding upon
the successors and assigns of Employer and Employee; provided, however, that
Employee may not assign this Agreement without the prior written consent of
Employer.
23. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
together constitute one and the same Agreement.
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<PAGE> 11
24. Governing Law. This Agreement shall be construed in accordance
with, and the rights and duties of the parties hereto shall be governed by, the
internal laws of the State of Oklahoma. The parties hereto irrevocably and
unconditionally consent to and submit themselves to the exclusive jurisdiction
of the courts of the State of Oklahoma located in Tulsa County, Oklahoma and
the courts of the United States of America located in the Northern District of
Oklahoma (collectively, the "Agreed Courts") with respect to any actions, suits
or proceedings arising out of or in connection with this Agreement and the
transactions contemplated hereby and the parties hereto agree not to commence
any action, suit or proceeding relating thereto except in such Agreed Courts.
The parties hereto further agree that service of any process, summons, notice,
or documents in accordance with paragraph 20 hereof shall be effective service
of process for any action, suit or proceeding brought. The parties hereto
irrevocably and unconditionally waive any objection to the laying of venue of
any action, suit or proceeding arising out of this Agreement or the
transactions contemplated hereby in the Agreed Courts and hereby further
irrevocably and unconditionally waive and agree not to plead or claim that any
such action, suit or proceeding brought in any of the Agreed Courts has been
brought in an inconvenient forum.
25. Entire Agreement. This instrument contains the entire Agreement
of the parties pertaining to Employee's employment by Employer, superseding all
other agreements (including, without limitation, the January 1, 1992 Employment
Agreement between Employer and Employee, and all amendments, modifications and
supplements thereto) (collectively hereinafter referred to as the "Prior
Employment Agreements") whether oral or written, express or implied. It may
not be changed orally but only by an agreement in writing signed by the party
against whom enforcement of any waiver, change, modification, extension or
discharge is sought. Further, except as specifically set forth herein,
Employer and Employee do hereby release each other from any and all claims,
known or unknown, fixed or contingent, that either may have against the other
pursuant to the Prior Employment Agreements or otherwise.
26. Severability. The provisions of this Agreement shall be deemed
severable, and the invalidity or unenforceability of any one or more of the
provisions hereof shall not affect the validity and enforceability of the other
provisions hereof.
27. Construction. Every covenant, term and provision of this
Agreement shall be construed simply according to its fair meaning and not
strictly for or against any party.
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<PAGE> 12
IN WITNESS WHEREOF, the parties have executed this Agreement the day and
year first above set forth.
Continental Natural Gas, Inc.
By /s/ GARY C. ADAMS
------------------------------
Gary C. Adams, Chairman
"Employer"
/s/ GARRY D. SMITH
------------------------------
Garry D. Smith
"Employee"
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<PAGE> 1
EXHIBIT 10.2
EXHIBIT A
SECOND RESTATED
EMPLOYMENT AGREEMENT
This Agreement is entered into as of the ___ day of ________, 199_, by
and between Continental Natural Gas, Inc., an Oklahoma corporation
("Employer"), and Terry K. Spencer ("Employee").
RECITALS
A. As of March 27, 1989, Employer and Employee entered into an
Employment Agreement pursuant to which Employee agreed to employment with
Employer;
B. The Employment Agreement (the "Employment Agreement") was
subsequently amended August 8, 1990, November 15, 1992, January 1, 1995 and
February 28, 1996;
C. Employer desires to continue to employ Employee and Employee
desires to continue to be employed by Employer to serve and perform such duties
at such times and places and upon such terms and conditions as hereinafter
provided;
D. Employer desires to receive from Employee a covenant not to
disclose certain information relating to Employer's business and a covenant not
to compete with Employer;
E. Employer and Employee desire to set forth in writing the terms
and conditions of their agreement and understandings.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained and other good and valuable consideration this day
paid by each party to the other, the receipt and sufficiency of which are
hereby acknowledged, Employer and Employee agree as follows:
1. Employment. Employer hereby agrees to continue the employment
of Employee and Employee hereby agrees to continue to provide Employee's
services to Employer upon the terms and conditions herein stated.
2. Term. Subject to the provisions for termination as
hereinafter provided, the term of this Agreement shall begin as of the date
hereof, and shall terminate on December 31, 1999.
3. Compensation.
(a) Salary. For services rendered by Employee under this
Agreement, Employer shall pay Employee a salary of One Hundred Fifty
Thousand Dollars ($150,000.00) per annum, payable in twenty-six (26)
equal bi-weekly installments. On
<PAGE> 2
January 1 of each calendar year during the term hereof, the annual
salary payable to Employee pursuant to this paragraph 3(a) shall be
increased by a percentage equal to the percentage increase as of such
date, if any, in the Official Consumers Price Index published by the
Bureau of Labor Statistics of the U. S. Department of Labor,
applicable to the smallest geographic region which includes Tulsa,
Oklahoma, with reference to the Official Consumers Price Index for
January 1 of the previous year.
(b) Bonus. For the calendar year 1997 and for all
subsequent calendar years during the term of this Agreement, Employer
shall pay Employee a yearly bonus equal as follows:
(i) If the Adjusted Income for such calendar year is
equal to or greater than the Initial Threshold, but less than
the Second Threshold, the yearly bonus payable to Employee
shall equal the product obtained by multipying (A) $50,000 by
(B) a fraction (I) the numerator of which is the amount by
which the Adjusted Income for such calendar year exceeds the
Initial Threshold and (II) the denominator of which is the
difference between the Second Threshold and the Initial
Threshold;
(ii) If the Adjusted Income is equal to or greater
than the Second Threshold, but less than the Third Threshold,
the yearly bonus payable to Employee shall equal $50,000;
(iii) If the Adjusted Income is equal to or greater
than the Third Threshold, but less than the Fourth Threshold,
the yearly bonus payable to Employee shall equal $100,000; or
(iv) If the Adjusted Income is equal to or greater
than the Fourth Threshold, the yearly bonus payable to
Employee shall equal $150,000.
The Thresholds for the 1997 calendar year shall be as follows:
Initial Threshold = $4,400,000
Second Threshold = $5,500,000
Third Threshold = $6,600,000
Fourth Threshold = $7,700,000
For any calendar year subsequent to 1997, the Initial Threshold shall
be an amount equal to 20% of Average Daily Adjusted Equity for the
previous calendar year, the Second Threshold will be 25% of such
Average Daily Adjusted Equity, the Third Threshold will be 30% of such
Average Daily Adjusted Equity and the Fourth Threshold will be 35% of
such Average
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Daily Adjusted Equity . As used herein, the term "Adjusted Income"
shall mean, for the calendar year in question, the income of Employer
before income taxes plus depreciation, depletion and amortization and
any other noncash items. As used herein, the term "Average Daily
Adjusted Equity" shall mean, for the calendar year in question, the
average of the Adjusted Equity for the year in question; such Adjusted
Equity being an amount, determined each day, equal to (A) the
stockholders' equity of Employer as of the last day of the previous
calendar year less (B) the then Unutilized IPO Proceeds. As of any
day, the then Unutilized IPO Proceeds shall be an amount equal to (I)
the net proceeds, after all expenses, to Employer raised pursuant to
the initial public offering ("IPO") consummated by Employer as of the
effective date of this Agreement less (II) the amount of Employer's
long-term debt as of such day which has been incurred by Employer
since the date of the IPO (plus any long-term debt incurred by
Employer prior to the IPO if incurred in contemplation of the IPO, as
determined by Employer, in Employer's sole discretion, exercised in
good faith).
Within thirty (30) days after the end of each calendar month,
Employer shall make a good faith estimate of the Adjusted Income for
such calendar month and pay Employee the estimated bonus attributable
thereto). Within ninety (90) days after the end of each calendar year
during the term hereof, an accounting of the actual amounts owed to
Employee pursuant to this paragraph 3(b) shall be conducted by
Employer and, to the extent of the difference between the aggregate of
the estimated monthly payments to Employee and the actual amounts owed
by Employer to Employee, the party owing such amounts shall make
payment to the other. Such payment shall be made within five (5) days
after delivery of the accounting to Employee. Any payment not paid on
or before the due date therefor shall bear interest at a varying rate
of interest per annum equal to the prime lending rate of Bank of
Oklahoma, N.A., plus one and one-half percent (1-1/2%).
If this Agreement becomes effective on any day other than
January 1, the bonus payable to Employee for the first calendar year
during which this Agreement is effective shall be prorated. The bonus
payable to Employee for the portion of such calendar year from January
1 through the day prior to the effective date of this Agreement shall
be paid based upon the terms of the Employment Agreement prior to its
amendment and restatement hereunder. The bonus which would have been
paid under such Employment Agreement prior to its amendment and
restatement hereunder shall be computed for the entire calendar year
and then multiplied by a fraction, the numerator of which is the
number of days of such calendar year prior to the effective date of
this Agreement and the denominator of which is the number of days in
such entire calendar year. The
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<PAGE> 4
bonus payable to Employee for the remaining portion of such calendar
year shall be paid based upon the terms described in this paragraph
3(b), prorated in the same manner as described in the preceding
sentence (using the number of remaining days in such calendar year as
the numerator).
(c) Determination of Adjusted Income and Average Daily
Adjusted Equity. The Adjusted Income and Average Daily Adjusted
Equity shall be determined by the certified public accountant or
accounting firm (the "CPA") which normally audits the books of
Employer. Such determinations shall be made using generally accepted
accounting principles, consistently applied and consistent with past
practices of Employer. Such determinations shall be binding on all
parties and conclusive in all respects; provided, however, Employee
shall have the right to audit the determinations. If Employee's audit
reveals inconsistencies in the determination by the CPA resulting in
an error in the amount payable hereunder for any twelve-month period
in excess of five percent (5%), Employer shall bear the cost of
Employee's audit. Otherwise, Employee's audit shall be Employee's
expense. After any such audit, once the correct amount owed is
determined, the party owing the other shall pay the amount owed upon
demand.
(d) Automobile Allowance. Employer shall also pay
Employee at the same times Employee is paid salary pursuant to
paragraph 3(a) above, Four Hundred Dollars ($400.00) per month during
the term of this Agreement as an automobile allowance. In
consideration thereof and as a result of the nature of the services to
be performed by Employee, Employee shall keep an automobile available
and in working condition so that Employee can adequately perform the
services required to be performed by Employee hereunder.
(e) Additional Compensation. The compensation agreed to
be paid to Employee by Employer in this paragraph 3 shall not operate
in any manner as a limitation of any type upon or as a direction,
express or implied, against the exercise by the Board (the "Board") of
Directors of Employer of its power, authority and discretion to grant
additional bonuses and/or fees or other additional direct or indirect
benefits or compensation to or on behalf of Employee if, in the
business judgment of the Board, such action is merited and in the best
interest of Employer.
(f) Withholding. The salary and any other compensation
paid to Employee shall be subject to any and all such payroll and
withholding deductions as are required by the laws of any
jurisdiction, federal, state or local, with taxing authority with
respect to such salary and other compensation.
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<PAGE> 5
(g) Payments after Termination. Notwithstanding any
other provision of this Agreement to the contrary, except as provided
in paragraph 13 hereof, any payment required pursuant to this
paragraph 3 attributable to any period of time occurring during the
term of this Agreement shall be made when due despite the fact that
such payment is due after termination of this Agreement.
4. Duties. To the best of Employee's ability, using reasonable
and prudent judgment and care, Employee shall render such services and perform
such duties as are customary for a Vice-President of Operations in the industry
and as may be requested by Employer from time to time.
5. Extent of Services. Employee shall devote such time and
energy to the furtherance of Employer's business as shall be determined by the
Board. During the term of this Agreement, Employee shall not, directly or
indirectly, alone or as a member of any business entity, or as an officer,
director or stockholder of any corporation, be engaged in or concerned with any
other commercial or business duties or pursuits which would require such
substantial services on the part of Employee that Employee, in Employer's sole
opinion, would be unable to perform the services required to be performed by
Employee hereby.
6. Working Facilities and Staff. Employee shall be furnished
with such facilities, staff and services as are suitable to Employee's position
and adequate for the performance of Employee's duties.
7. Expenses. Employer will reimburse Employee for all such
expenses which Employer, in Employer's sole discretion, deems are reasonably
incurred for promoting the business of Employer, upon the presentation by
Employee, from time to time, of an itemized account of such expenditures.
8. Vacations. During the term of this Agreement, Employee shall
be entitled, during each year of employment with Employer, to a vacation in
accordance with the established company policy of Employer, during which time
Employee's compensation hereunder shall be paid in full.
9. Insurance. During the term of this Agreement, Employer shall
provide to Employee, and pay all premiums for, major medical insurance with
coverage for Employee and Employee's immediate family on terms no less
favorable than is currently provided.
10. Pension and Profit-sharing Plan. During the term of this
Agreement, to the extent it is financially reasonable as determined by the
Board, Employer shall maintain in effect any pension and profit-sharing plans
maintained by Employer as of the date hereof
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<PAGE> 6
and Employee shall be entitled to participate in such plans on a
non-discriminatory basis.
11. Memberships. During the term of this Agreement, Employer
agrees to pay, on behalf of Employee, up to Three Thousand Dollars ($3,000.00)
per year for dues and/or fees for club memberships, dinner clubs and/or
professional organizations.
12. Disability and Death. If Employee is unable to perform
Employee's services by reason of illness or incapacity for a period of more
than ninety (90) consecutive days, the compensation otherwise payable to
Employee during the continued period of such illness or incapacity shall be
reduced by fifty percent (50%). Employee's full compensation shall be
reinstated upon Employee's return to employment and the discharge of Employee's
full duties hereunder. Notwithstanding anything herein to the contrary,
Employer may terminate this Agreement at any time after Employee shall be
absent from Employee's employment, for whatever cause, for a continuous period
of more than sixty (60) consecutive days, in which event, subject to paragraph
3(g) hereof, all obligations of the Employer hereunder, including Employer's
obligations to pay Employee the compensation provided in paragraph 3 hereof,
shall immediately cease upon any such termination. In no event, however, shall
any provision of this paragraph 12 be interpreted to limit or restrict
Employee's rights to participate in and receive benefits under the existing
Employer disability plan(s). Subject to paragraph 3(g) hereof, all of
Employer's obligations hereunder, including Employer's obligations to pay
Employee the compensation provided in paragraph 3 hereof, shall cease
immediately upon Employee's death. The determination of all periods of time
under this paragraph 12 shall be calculated by including (and counting)
weekends which occur within the applicable period but excluding days of sick
leave, vacation, holidays and other days off, if any, allowed pursuant to
established company policy of Employer.
13. Termination for Cause. Employer may terminate Employee's
employment under this Agreement upon (10) days' notice to Employee after the
occurrence of any of the following events ("Cause Events") unless such events
were caused at the direction of Employer:
(a) Any failure by Employee to faithfully perform the
covenants and agreements of Employee herein stated;
(b) Willful, gross misconduct by Employee in connection
with the performance of the covenants and agreements of Employee
herein stated;
(c) If Employee violates any law, rule or regulation
which violation materially adversely affects Employer or any of
Employer's subsidiaries or other affiliates (collectively hereinafter
referred to as the "Employer Companies");
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<PAGE> 7
(d) If Employee violates any of the provisions of
paragraphs 16 or 17;
(e) If Employee converts any property of Employer
Companies;
(f) If Employee is convicted of any felony which
materially adversely affects Employer Companies or the ability of
Employee to perform Employee's duties hereunder; or
(g) If Employee is convicted of any lesser crime or
offense involving property or business of Employer Companies.
In the event of a dispute as to whether a Cause Event has occurred, upon the
request of Employer or Employee, such dispute shall be resolved pursuant to the
expedited procedures of the commercial arbitration rules of the American
Arbitration Association regardless of the amount in controversy, with each
party to bear its own arbitration costs and expenses. The parties stipulate
that the hearing locale for any such arbitration proceeding will be Tulsa,
Oklahoma. Judgment upon the award rendered as a result of such arbitration may
be entered in any court having jurisdiction thereof. The parties further
stipulate that the provisions hereof shall be a complete defense to any suit,
action or proceeding instituted in any federal, state or local court or before
any administrative tribunal with respect to any controversy or dispute arising
out of or relating to whether a Cause Event has occurred. Upon termination of
Employee's employment under this Agreement as a result of a Cause Event, all of
Employer's obligations hereunder, including Employer's obligations to pay
Employee the compensation provided in paragraph 3 hereof (whether or not then
accrued), shall immediately cease. Nothing contained herein shall be construed
as limiting in any manner any of the rights or remedies available to Employer
pursuant to this agreement or otherwise with respect to such Cause Event.
14. Expiration of Term. In the event this Agreement is terminated
due to expiration of the term of this Agreement as set forth in paragraph 2
hereof, subject to paragraph 3(g) hereof, all of Employer's obligations
hereunder, including Employer's obligations to pay Employee the compensation
provided in paragraph 3 hereof, shall immediately cease.
15. Other Termination by Employer. In the event Employer
terminates Employee's employment hereunder for any reason other than as
provided in paragraphs 12, 13 or 14, (a) all of Employer's obligations
hereunder, including Employer's obligations to pay Employee the compensation
provided in paragraph 3 hereof, shall continue until terminated under paragraph
14 above, and (b) notwithstanding anything to the contrary contained herein,
the provisions of paragraph 17 hereof shall not apply.
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<PAGE> 8
16. Disclosure of Information. Employee acknowledges that, in and
as a result of Employee's employment with Employer, Employee has and will be
making use of, acquiring, developing and/or adding to confidential information
of special and unique value relating to such matters as Employer Companies'
products, trade secrets, systems, procedures, manuals, confidential reports,
customer and supplier lists, and other information, data and displays, whether
or not patented or copyrighted, as well as the nature and type of product sold
by Employer Companies, the identity of Employer Companies' suppliers and
customers, the products and methods used and preferred by Employer Companies'
customers, and the prices paid by such customers (collectively hereinafter
referred to as the "Confidential Information"). As a material inducement to
Employer to enter into this Agreement and to pay to Employee the compensation
referred to in paragraph 3 hereof (as well as any additional benefits referred
to herein), Employee covenants and agrees that Employee and Employee's
partners, agents, representatives, servants, employers, employees and any and
all other persons acting, directly or indirectly, for or with Employee shall
not, at any time during or following the term of Employee's employment
hereunder, directly or indirectly, for any purpose whatsoever, divulge or
disclose any of the Confidential Information which has been obtained by or
disclosed to Employee and shall not at any time during or following the term of
Employee's employment hereunder, directly or indirectly, use, for any purpose
whatsoever, any of the Confidential Information for Employee's benefit or for
any purpose, whether or not beneficial to Employee, except for the purpose of
permitting Employee to perform the services for Employer contemplated by this
Agreement. Employee further covenants and agrees that all such Confidential
Information shall be the exclusive property of Employer and, upon the
expiration of this Agreement, Employee shall deliver to Employer all
Confidential Information then in the possession, custody or control of Employee
and without regard to the form in which such Confidential Information is stored
or the media for storage for such Confidential Information.
17. Covenants Against Competition. Employee acknowledges that
Employee's services to be rendered hereunder are of a special and unusual
character which have a unique value to Employer, the loss of which cannot
adequately be compensated by damages in an action at law. In view of the
unique value to Employer of the services of Employee for which Employer has
contracted hereunder, and because of the Confidential Information to be
obtained by or disclosed to Employee, as hereinabove set forth, and as a
material inducement to Employer to enter into this Agreement, and to pay to
Employee the compensation referred to in paragraph 3 hereof, (as well as any
additional benefits referred to herein), Employee covenants and agrees that
Employee and Employee's partners, agents, representatives, servants, employers,
employees and any and all other persons acting, directly or indirectly, for or
with Employee
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<PAGE> 9
shall not, during the term of this Agreement and for a period of two (2) years
thereafter, within the continental United States:
(a) Solicit in any manner the termination of any of the
Agreements (the "CNG Agreements") between any of the Employer
Companies and any end-user customer ("CNG End-User") or supplier ("CNG
Supplier");
(b) Prior to or immediately upon termination of any CNG
Agreement, compete with or bid competitively against any of the
Employer Companies in order to sell product to any CNG End-User or
obtain supply or product from the same source of supply provided by
any CNG Supplier to any of the Employer Companies; or
(c) Solicit for employment or employ any person who is
then or was at any time during the term of this Agreement an employee
of Employer Companies.
18. Reasonableness of Restrictions. Employee has carefully read
and considered the provisions of paragraphs 16 and 17 hereof and having done
so, agrees that the restrictions set forth in such paragraphs (including, but
not limited to, the time period restriction and the geographical areas of
restriction set forth in paragraphs 16 and 17) are fair and reasonable and are
reasonably required for the protection of the interests of Employer, its
officers, directors and other employees. Notwithstanding the foregoing, in the
event that any of the provisions of paragraphs 16 or 17 shall be held to be
invalid or unenforceable, the remaining provisions thereof shall nevertheless
continue to be valid and enforceable as though the invalid or unenforceable
parts had not been included therein. In the event that any provision of
paragraph 16 or 17 relating to time period and/or areas of restriction shall be
declared by a court of competent jurisdiction to exceed the maximum time period
or areas such court deems reasonable and enforceable, such time period and/or
areas of restriction shall be deemed to become and thereafter be the maximum
time period and/or areas which such court deems reasonable and enforceable.
19. Equitable Relief; Accounting for Profits. In the event of a
breach or threatened breach of any of the provisions of paragraphs 16 or 17,
Employer, in addition to and not in limitation of any other rights or remedies
available to Employer at law or in equity, shall be entitled to a permanent
injunction in order to prevent or to restrain any such breach by Employee or by
Employee's partners, agents, representatives, servants, employers, employees
and/or any and all persons, directly or indirectly, acting for or with
Employee. Employee further covenants and agrees that if Employee shall violate
any of Employee's covenants and agreements pursuant to paragraphs 16 and 17
above, Employer shall be entitled to an accounting and repayment of all
profits, compensations, commissions, remunerations and/or other benefits which
Employee,
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directly or indirectly, may realize as a result of, growing out of or in
connection with, any such violation. Such remedy shall be in addition to and
not in limitation of any injunctive relief or other rights or remedies which
Employer is or may be entitled to at law or in equity or under this Agreement.
In any action brought by Employer against Employee for the breach of paragraph
16 or 17, Employer shall be entitled to recover Employer's costs and expenses,
including reasonable attorneys' fees.
20. Notices. Any notice required or permitted to be given under
this Agreement shall be sufficient if in writing, and shall be deemed to have
been given if personally delivered or if deposited in the United States mail,
by certified mail, with proper postage prepaid thereon, addressed as follows:
If to Employer: Continental Natural Gas, Inc.
1412 South Boston, Suite 500
Tulsa, Oklahoma 74119
Att'n: Mr. Gary C. Adams
If to Employee: Mr. Terry K. Spencer
5831 East 63rd Street
Tulsa, Oklahoma 74136
or to such other address as either party may hereafter advise the other by
notice given in accordance with the provisions hereof.
21. Waiver of Breach. The waiver by Employer of a breach of any
provision of this Agreement by Employee shall not operate or be construed as a
waiver of any subsequent breach by Employee.
22. Assignment. Employer may assign this Agreement to any
successor in interest of Employer's business. The rights and obligations of
the parties under this Agreement shall inure to the benefit of and shall be
binding upon the successors and assigns of Employer and Employee; provided,
however, that Employee may not assign this Agreement without the prior written
consent of Employer.
23. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
together constitute one and the same Agreement.
24. Governing Law. This Agreement shall be construed in
accordance with, and the rights and duties of the parties hereto shall be
governed by, the internal laws of the State of Oklahoma. The parties hereto
irrevocably and unconditionally consent to and submit themselves to the
exclusive jurisdiction of the courts of the State of Oklahoma located in Tulsa
County, Oklahoma and the courts of the United States of America located in the
Northern District of Oklahoma (collectively, the "Agreed Courts") with respect
to any actions, suits or proceedings arising out of or in
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<PAGE> 11
connection with this Agreement and the transactions contemplated hereby and the
parties hereto agree not to commence any action, suit or proceeding relating
thereto except in such Agreed Courts. The parties hereto further agree that
service of any process, summons, notice, or documents in accordance with
paragraph 20 hereof shall be effective service of process for any action, suit
or proceeding brought. The parties hereto irrevocably and unconditionally
waive any objection to the laying of venue of any action, suit or proceeding
arising out of this Agreement or the transactions contemplated hereby in the
Agreed Courts and hereby further irrevocably and unconditionally waive and
agree not to plead or claim that any such action, suit or proceeding brought in
any of the Agreed Courts has been brought in an inconvenient forum.
25. Entire Agreement. This instrument contains the entire
Agreement of the parties pertaining to Employee's employment by Employer,
superseding all other agreements (including, without limitation, the March 27,
1989 Employment Agreement between Employer and Employee, and all amendments,
modifications and supplements thereto) (collectively hereinafter referred to as
the "Prior Employment Agreements") whether oral or written, express or implied.
It may not be changed orally but only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension
or discharge is sought. Further, except as specifically set forth herein,
Employer and Employee do hereby release each other from any and all claims,
known or unknown, fixed or contingent, that either may have against the other
pursuant to the Prior Employment Agreements or otherwise.
26. Severability. The provisions of this Agreement shall be
deemed severable, and the invalidity or unenforceability of any one or more of
the provisions hereof shall not affect the validity and enforceability of the
other provisions hereof.
27. Construction. Every covenant, term and provision of this
Agreement shall be construed simply according to its fair meaning and not
strictly for or against any party.
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<PAGE> 12
IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year first above set forth.
Continental Natural Gas, Inc.
By /s/ GARY C. ADAMS
-------------------------------------
Gary C. Adams, Chairman
"Employer"
/s/ TERRY K. SPENCER
-------------------------------------
Terry K. Spencer
"Employee"
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<PAGE> 1
EXHIBIT 10.3
EXHIBIT A
SECOND RESTATED
EMPLOYMENT AGREEMENT
This Agreement is entered into as of the ___ day of ________, 199_, by
and between Continental Natural Gas, Inc., an Oklahoma corporation
("Employer"), and Scott C. Longmore ("Employee").
RECITALS
A. As of January 1, 1990, Employer and Employee entered into an
Employment Agreement pursuant to which Employee agreed to employment with
Employer;
B. The Employment Agreement (the "Employment Agreement") was
subsequently amended January 1, 1993, January 1, 1995 and February 28, 1996;
C. Employer desires to continue to employ Employee and Employee
desires to continue to be employed by Employer to serve and perform such duties
at such times and places and upon such terms and conditions as hereinafter
provided;
D. Employer desires to receive from Employee a covenant not to
disclose certain information relating to Employer's business and a covenant not
to compete with Employer;
E. Employer and Employee desire to set forth in writing the terms
and conditions of their agreement and understandings.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained and other good and valuable consideration this day
paid by each party to the other, the receipt and sufficiency of which are
hereby acknowledged, Employer and Employee agree as follows:
1. Employment. Employer hereby agrees to continue the employment
of Employee and Employee hereby agrees to continue to provide Employee's
services to Employer upon the terms and conditions herein stated.
2. Term. Subject to the provisions for termination as
hereinafter provided, the term of this Agreement shall begin as of the date
hereof, and shall terminate on December 31, 1999.
3. Compensation.
(a) Salary. For services rendered by Employee under this
Agreement, Employer shall pay Employee a salary of One Hundred Fifty
Thousand Dollars ($150,000.00) per annum, payable in twenty-six (26)
equal bi- weekly installments. On
<PAGE> 2
January 1 of each calendar year during the term hereof, the annual
salary payable to Employee pursuant to this paragraph 3(a) shall be
increased by a percentage equal to the percentage increase as of such
date, if any, in the Official Consumers Price Index published by the
Bureau of Labor Statistics of the U. S. Department of Labor,
applicable to the smallest geographic region which includes Tulsa,
Oklahoma, with reference to the Official Consumers Price Index for
January 1 of the previous year.
(b) Commissions. Employer shall pay Employee a
commission equal to the sum of one and one-half percent (1.5%) of the
"Commission Base," as hereinafter defined, for each twelve-month
period during the term of this Agreement. As used herein, the term
"Commission Base" shall mean the total dollar amount of sales of
energy related products by the Employer for the applicable
twelve-month period, less the cost of the product, transportation,
wet/dry conversions, fuel usage, line loss and commissions paid to
parties not employed by Employer.
(i) Notwithstanding the foregoing provisions of
this paragraph 3(b), in the event there is no "Adjusted
Income," as hereinafter defined, of Employer for any
twelve-month period, no commission shall be payable to
Employee for such period or any subsequent period until such
Adjusted Income is positive after restoration in full of any
deficit in the computation of Net Income for all previous
twelve-month periods.
(ii) Payments to Employee pursuant to this
paragraph 3(b) shall be based on the estimated Commission Base
for each calendar month. Payment to Employee for any
particular calendar month shall be made to Employee, in cash,
on or before the thirty-sixth (36th) day after the end of such
calendar month. Within one hundred twenty (120) days after
the end of each calendar month, an accounting of the actual
amounts owed to Employee pursuant to this paragraph 3(b) shall
be conducted by Employer and, to the extent of the difference
between the estimated payments to Employee and the actual
amounts owed by Employer to Employee, Employer shall make
additional payments to Employee or Employee shall reimburse
Employer, as the case may be. Such additional payments or
reimbursements shall be made within five (5) days after
delivery of the accounting to Employee. Any payment not paid
on or before the due date therefor shall bear interest at a
varying rate of interest per annum equal to the prime lending
rate of Bank of Oklahoma, N.A., plus one and one-half percent
(1.5%).
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<PAGE> 3
(c) Bonus. For the calendar year 1997 and for all
subsequent calendar years during the term of this Agreement, Employer
shall pay Employee a yearly bonus equal as follows:
(i) If the Adjusted Income for such calendar year is
equal to or greater than the Initial Threshold, but less than
the Second Threshold, the yearly bonus payable to Employee
shall equal the product obtained by multipying (A) $50,000 by
(B) a fraction (I) the numerator of which is the amount by
which the Adjusted Income for such calendar year exceeds the
Initial Threshold and (II) the denominator of which is the
difference between the Second Threshold and the Initial
Threshold;
(ii) If the Adjusted Income is equal to or greater
than the Second Threshold, but less than the Third Threshold,
the yearly bonus payable to Employee shall equal $50,000;
(iii) If the Adjusted Income is equal to or greater
than the Third Threshold, but less than the Fourth Threshold,
the yearly bonus payable to Employee shall equal $100,000; or
(iv) If the Adjusted Income is equal to or greater
than the Fourth Threshold, the yearly bonus payable to
Employee shall equal $150,000.
The Thresholds for the 1997 calendar year shall be as follows:
Initial Threshold = $4,400,000
Second Threshold = $5,500,000
Third Threshold = $6,600,000
Fourth Threshold = $7,700,000
For any calendar year subsequent to 1997, the Initial Threshold shall
be an amount equal to 20% of Average Daily Adjusted Equity for the
previous calendar year, the Second Threshold will be 25% of such
Average Daily Adjusted Equity, the Third Threshold will be 30% of such
Average Daily Adjusted Equity and the Fourth Threshold will be 35% of
such Average Daily Adjusted Equity . As used herein, the term
"Adjusted Income" shall mean, for the calendar year in question, the
income of Employer before income taxes plus depreciation, depletion
and amortization and any other noncash items. As used herein, the
term "Average Daily Adjusted Equity" shall mean, for the calendar year
in question, the average of the Adjusted Equity for the year in
question; such Adjusted Equity being an amount, determined each day,
equal to (A) the stockholders' equity of Employer as of the last day
of the previous calendar year less (B) the then Unutilized IPO
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<PAGE> 4
Proceeds. As of any day, the then Unutilized IPO Proceeds shall be an
amount equal to (I) the net proceeds, after all expenses, to Employer
raised pursuant to the initial public offering ("IPO") consummated by
Employer as of the effective date of this Agreement less (II) the
amount of Employer's long-term debt as of such day which has been
incurred by Employer since the date of the IPO (plus any long-term
debt incurred by Employer prior to the IPO if incurred in
contemplation of the IPO, as determined by Employer, in Employer's
sole discretion, exercised in good faith).
Within thirty (30) days after the end of each calendar month,
Employer shall make a good faith estimate of the Adjusted Income for
such calendar month and pay Employee the estimated bonus attributable
thereto). Within ninety (90) days after the end of each calendar year
during the term hereof, an accounting of the actual amounts owed to
Employee pursuant to this paragraph 3(c) shall be conducted by
Employer and, to the extent of the difference between the aggregate of
the estimated monthly payments to Employee and the actual amounts owed
by Employer to Employee, the party owing such amounts shall make
payment to the other. Such payment shall be made within five (5) days
after delivery of the accounting to Employee. Any payment not paid on
or before the due date therefor shall bear interest at a varying rate
of interest per annum equal to the prime lending rate of Bank of
Oklahoma, N.A., plus one and one-half percent (1-1/2%).
If this Agreement becomes effective on any day other than
January 1, the bonus payable to Employee for the first calendar year
during which this Agreement is effective shall be prorated. The bonus
payable to Employee for the portion of such calendar year from January
1 through the day prior to the effective date of this Agreement shall
be paid based upon the terms of the Employment Agreement prior to its
amendment and restatement hereunder. The bonus which would have been
paid under such Employment Agreement prior to its amendment and
restatement hereunder shall be computed for the entire calendar year
and then multiplied by a fraction, the numerator of which is the
number of days of such calendar year prior to the effective date of
this Agreement and the denominator of which is the number of days in
such entire calendar year. The bonus payable to Employee for the
remaining portion of such calendar year shall be paid based upon the
terms described in this paragraph 3(c), prorated in the same manner as
described in the preceding sentence (using the number of remaining
days in such calendar year as the numerator).
(d) Determination of Adjusted Income and Average Daily
Adjusted Equity. The Adjusted Income and Average Daily Adjusted
Equity shall be determined by the certified public accountant or
accounting firm (the "CPA") which normally
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<PAGE> 5
audits the books of Employer. Such determinations shall be made using
generally accepted accounting principles, consistently applied and
consistent with past practices of Employer. Such determinations shall
be binding on all parties and conclusive in all respects; provided,
however, Employee shall have the right to audit the determinations.
If Employee's audit reveals inconsistencies in the determination by
the CPA resulting in an error in the amount payable hereunder for any
twelve-month period in excess of five percent (5%), Employer shall
bear the cost of Employee's audit. Otherwise, Employee's audit shall
be Employee's expense. After any such audit, once the correct amount
owed is determined, the party owing the other shall pay the amount
owed upon demand.
(e) Automobile Allowance. Employer shall also pay
Employee at the same times Employee is paid salary pursuant to
paragraph 3(a) above, Four Hundred Dollars ($400.00) per month during
the term of this Agreement as an automobile allowance. In
consideration thereof and as a result of the nature of the services to
be performed by Employee, Employee shall keep an automobile available
and in working condition so that Employee can adequately perform the
services required to be performed by Employee hereunder.
(f) Additional Compensation. The compensation agreed to
be paid to Employee by Employer in this paragraph 3 shall not operate
in any manner as a limitation of any type upon or as a direction,
express or implied, against the exercise by the Board (the "Board") of
Directors of Employer of its power, authority and discretion to grant
additional bonuses and/or fees or other additional direct or indirect
benefits or compensation to or on behalf of Employee if, in the
business judgment of the Board, such action is merited and in the best
interest of Employer.
(g) Withholding. The salary and any other compensation
paid to Employee shall be subject to any and all such payroll and
withholding deductions as are required by the laws of any
jurisdiction, federal, state or local, with taxing authority with
respect to such salary and other compensation.
(h) Payments after Termination. Notwithstanding any
other provision of this Agreement to the contrary, except as provided
in paragraph 13 hereof, any payment required pursuant to this
paragraph 3 attributable to any period of time occurring during the
term of this Agreement shall be made when due despite the fact that
such payment is due after termination of this Agreement.
4. Duties. To the best of Employee's ability, using reasonable
and prudent judgment and care, Employee shall render
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<PAGE> 6
such services and perform such duties as are customary for a Vice-President of
Marketing in the industry and as may be requested by Employer from time to
time.
5. Extent of Services. Employee shall devote such time and
energy to the furtherance of Employer's business as shall be determined by the
Board. During the term of this Agreement, Employee shall not, directly or
indirectly, alone or as a member of any business entity, or as an officer,
director or stockholder of any corporation, be engaged in or concerned with any
other commercial or business duties or pursuits which would require such
substantial services on the part of Employee that Employee, in Employer's sole
opinion, would be unable to perform the services required to be performed by
Employee hereby.
6. Working Facilities and Staff. Employee shall be furnished
with such facilities, staff and services as are suitable to Employee's position
and adequate for the performance of Employee's duties.
7. Expenses. Employer will reimburse Employee for all such
expenses which Employer, in Employer's sole discretion, deems are reasonably
incurred for promoting the business of Employer, upon the presentation by
Employee, from time to time, of an itemized account of such expenditures.
8. Vacations. During the term of this Agreement, Employee shall
be entitled, during each year of employment with Employer, to a vacation in
accordance with the established company policy of Employer, during which time
Employee's compensation hereunder shall be paid in full.
9. Insurance. During the term of this Agreement, Employer shall
provide to Employee, and pay all premiums for, major medical insurance with
coverage for Employee and Employee's immediate family on terms no less
favorable than is currently provided.
10. Pension and Profit-sharing Plan. During the term of this
Agreement, to the extent it is financially reasonable as determined by the
Board, Employer shall maintain in effect any pension and profit-sharing plans
maintained by Employer as of the date hereof and Employee shall be entitled to
participate in such plans on a non-discriminatory basis.
11. Memberships. During the term of this Agreement, Employer
shall maintain its membership at The Golf Club of Oklahoma and Employee shall
be designated as the exclusive user thereof, entitled to enjoy all of the
rights and privileges pertaining thereto. In addition, Employer agrees to pay,
on behalf of Employee, up to Three Thousand Dollars ($3,000.00) per year for
dues and/or fees for club memberships, dinner clubs and/or professional
organizations.
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<PAGE> 7
12. Disability and Death. If Employee is unable to perform
Employee's services by reason of illness or incapacity for a period of more
than ninety (90) consecutive days, the compensation otherwise payable to
Employee during the continued period of such illness or incapacity shall be
reduced by fifty percent (50%). Employee's full compensation shall be
reinstated upon Employee's return to employment and the discharge of Employee's
full duties hereunder. Notwithstanding anything herein to the contrary,
Employer may terminate this Agreement at any time after Employee shall be
absent from Employee's employment, for whatever cause, for a continuous period
of more than sixty (60) consecutive days, in which event, subject to paragraph
3(h) hereof, all obligations of the Employer hereunder, including Employer's
obligations to pay Employee the compensation provided in paragraph 3 hereof,
shall immediately cease upon any such termination. In no event, however, shall
any provision of this paragraph 12 be interpreted to limit or restrict
Employee's rights to participate in and receive benefits under the existing
Employer disability plan(s). Subject to paragraph 3(h) hereof, all of
Employer's obligations hereunder, including Employer's obligations to pay
Employee the compensation provided in paragraph 3 hereof, shall cease
immediately upon Employee's death. The determination of all periods of time
under this paragraph 12 shall be calculated by including (and counting)
weekends which occur within the applicable period but excluding days of sick
leave, vacation, holidays and other days off, if any, allowed pursuant to
established company policy of Employer.
13. Termination for Cause. Employer may terminate Employee's
employment under this Agreement upon (10) days' notice to Employee after the
occurrence of any of the following events ("Cause Events") unless such events
were caused at the direction of Employer:
(a) Any failure by Employee to faithfully perform the
covenants and agreements of Employee herein stated;
(b) Willful, gross misconduct by Employee in connection
with the performance of the covenants and agreements of Employee
herein stated;
(c) If Employee violates any law, rule or regulation
which violation materially adversely affects Employer or any of
Employer's subsidiaries or other affiliates (collectively hereinafter
referred to as the "Employer Companies");
(d) If Employee violates any of the provisions of
paragraphs 16 or 17;
(e) If Employee converts any property of Employer Companies;
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<PAGE> 8
(f) If Employee is convicted of any felony which
materially adversely affects Employer Companies or the ability of
Employee to perform Employee's duties hereunder; or
(g) If Employee is convicted of any lesser crime or
offense involving property or business of Employer Companies.
In the event of a dispute as to whether a Cause Event has occurred, upon the
request of Employer or Employee, such dispute shall be resolved pursuant to the
expedited procedures of the commercial arbitration rules of the American
Arbitration Association regardless of the amount in controversy, with each
party to bear its own arbitration costs and expenses. The parties stipulate
that the hearing locale for any such arbitration proceeding will be Tulsa,
Oklahoma. Judgment upon the award rendered as a result of such arbitration may
be entered in any court having jurisdiction thereof. The parties further
stipulate that the provisions hereof shall be a complete defense to any suit,
action or proceeding instituted in any federal, state or local court or before
any administrative tribunal with respect to any controversy or dispute arising
out of or relating to whether a Cause Event has occurred. Upon termination of
Employee's employment under this Agreement as a result of a Cause Event, all of
Employer's obligations hereunder, including Employer's obligations to pay
Employee the compensation provided in paragraph 3 hereof (whether or not then
accrued), shall immediately cease. Nothing contained herein shall be construed
as limiting in any manner any of the rights or remedies available to Employer
pursuant to this agreement or otherwise with respect to such Cause Event.
14. Expiration of Term. In the event this Agreement is terminated
due to expiration of the term of this Agreement as set forth in paragraph 2
hereof, subject to paragraph 3(h) hereof, all of Employer's obligations
hereunder, including Employer's obligations to pay Employee the compensation
provided in paragraph 3 hereof, shall immediately cease.
15. Other Termination by Employer. In the event Employer
terminates Employee's employment hereunder for any reason other than as
provided in paragraphs 12, 13 or 14, (a) all of Employer's obligations
hereunder, including Employer's obligations to pay Employee the compensation
provided in paragraph 3 hereof, shall continue until terminated under paragraph
14 above, and (b) notwithstanding anything to the contrary contained herein,
the provisions of paragraph 17 hereof shall not apply.
16. Disclosure of Information. Employee acknowledges that, in and
as a result of Employee's employment with Employer, Employee has and will be
making use of, acquiring, developing and/or adding to confidential information
of special and unique value relating to such matters as Employer Companies'
products, trade secrets, systems, procedures, manuals, confidential reports,
customer and
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<PAGE> 9
supplier lists, and other information, data and displays, whether or not
patented or copyrighted, as well as the nature and type of product sold by
Employer Companies, the identity of Employer Companies' suppliers and
customers, the products and methods used and preferred by Employer Companies'
customers, and the prices paid by such customers (collectively hereinafter
referred to as the "Confidential Information"). As a material inducement to
Employer to enter into this Agreement and to pay to Employee the compensation
referred to in paragraph 3 hereof (as well as any additional benefits referred
to herein), Employee covenants and agrees that Employee and Employee's
partners, agents, representatives, servants, employers, employees and any and
all other persons acting, directly or indirectly, for or with Employee shall
not, at any time during or following the term of Employee's employment
hereunder, directly or indirectly, for any purpose whatsoever, divulge or
disclose any of the Confidential Information which has been obtained by or
disclosed to Employee and shall not at any time during or following the term of
Employee's employment hereunder, directly or indirectly, use, for any purpose
whatsoever, any of the Confidential Information for Employee's benefit or for
any purpose, whether or not beneficial to Employee, except for the purpose of
permitting Employee to perform the services for Employer contemplated by this
Agreement. Employee further covenants and agrees that all such Confidential
Information shall be the exclusive property of Employer and, upon the
expiration of this Agreement, Employee shall deliver to Employer all
Confidential Information then in the possession, custody or control of Employee
and without regard to the form in which such Confidential Information is stored
or the media for storage for such Confidential Information.
17. Covenants Against Competition. Employee acknowledges that
Employee's services to be rendered hereunder are of a special and unusual
character which have a unique value to Employer, the loss of which cannot
adequately be compensated by damages in an action at law. In view of the
unique value to Employer of the services of Employee for which Employer has
contracted hereunder, and because of the Confidential Information to be
obtained by or disclosed to Employee, as hereinabove set forth, and as a
material inducement to Employer to enter into this Agreement, and to pay to
Employee the compensation referred to in paragraph 3 hereof, (as well as any
additional benefits referred to herein), Employee covenants and agrees that
Employee and Employee's partners, agents, representatives, servants, employers,
employees and any and all other persons acting, directly or indirectly, for or
with Employee shall not, during the term of this Agreement and for a period of
two (2) years thereafter, within the continental United States:
(a) Solicit in any manner the termination of any of the
Agreements (the "CNG Agreements") between any of the Employer
Companies and any end-user customer ("CNG End-User") or supplier ("CNG
Supplier");
9
<PAGE> 10
(b) Prior to or immediately upon termination of any CNG
Agreement, compete with or bid competitively against any of the
Employer Companies in order to sell product to any CNG End-User or
obtain supply or product from the same source of supply provided by
any CNG Supplier to any of the Employer Companies; or
(c) Solicit for employment or employ any person who is
then or was at any time during the term of this Agreement an employee
of Employer Companies.
18. Reasonableness of Restrictions. Employee has carefully read
and considered the provisions of paragraphs 16 and 17 hereof and having done
so, agrees that the restrictions set forth in such paragraphs (including, but
not limited to, the time period restriction and the geographical areas of
restriction set forth in paragraphs 16 and 17) are fair and reasonable and are
reasonably required for the protection of the interests of Employer, its
officers, directors and other employees. Notwithstanding the foregoing, in the
event that any of the provisions of paragraphs 16 or 17 shall be held to be
invalid or unenforceable, the remaining provisions thereof shall nevertheless
continue to be valid and enforceable as though the invalid or unenforceable
parts had not been included therein. In the event that any provision of
paragraph 16 or 17 relating to time period and/or areas of restriction shall be
declared by a court of competent jurisdiction to exceed the maximum time period
or areas such court deems reasonable and enforceable, such time period and/or
areas of restriction shall be deemed to become and thereafter be the maximum
time period and/or areas which such court deems reasonable and enforceable.
19. Equitable Relief; Accounting for Profits. In the event of a
breach or threatened breach of any of the provisions of paragraphs 16 or 17,
Employer, in addition to and not in limitation of any other rights or remedies
available to Employer at law or in equity, shall be entitled to a permanent
injunction in order to prevent or to restrain any such breach by Employee or by
Employee's partners, agents, representatives, servants, employers, employees
and/or any and all persons, directly or indirectly, acting for or with
Employee. Employee further covenants and agrees that if Employee shall violate
any of Employee's covenants and agreements pursuant to paragraphs 16 and 17
above, Employer shall be entitled to an accounting and repayment of all
profits, compensations, commissions, remunerations and/or other benefits which
Employee, directly or indirectly, may realize as a result of, growing out of or
in connection with, any such violation. Such remedy shall be in addition to
and not in limitation of any injunctive relief or other rights or remedies
which Employer is or may be entitled to at law or in equity or under this
Agreement. In any action brought by Employer against Employee for the breach
of paragraph 16 or 17, Employer shall be entitled to recover Employer's costs
and expenses, including reasonable attorneys' fees.
10
<PAGE> 11
20. Notices. Any notice required or permitted to be given under
this Agreement shall be sufficient if in writing, and shall be deemed to have
been given if personally delivered or if deposited in the United States mail,
by certified mail, with proper postage prepaid thereon, addressed as follows:
If to Employer: Continental Natural Gas, Inc.
1412 South Boston, Suite 500
Tulsa, Oklahoma 74119
Att'n: Mr. Gary C. Adams
If to Employee: Mr. Scott C. Longmore
9641 South 102nd East Ave.
Tulsa, Oklahoma 74133
or to such other address as either party may hereafter advise the other by
notice given in accordance with the provisions hereof.
21. Waiver of Breach. The waiver by Employer of a breach of any
provision of this Agreement by Employee shall not operate or be construed as a
waiver of any subsequent breach by Employee.
22. Assignment. Employer may assign this Agreement to any
successor in interest of Employer's business. The rights and obligations of
the parties under this Agreement shall inure to the benefit of and shall be
binding upon the successors and assigns of Employer and Employee; provided,
however, that Employee may not assign this Agreement without the prior written
consent of Employer.
23. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
together constitute one and the same Agreement.
24. Governing Law. This Agreement shall be construed in
accordance with, and the rights and duties of the parties hereto shall be
governed by, the internal laws of the State of Oklahoma. The parties hereto
irrevocably and unconditionally consent to and submit themselves to the
exclusive jurisdiction of the courts of the State of Oklahoma located in Tulsa
County, Oklahoma and the courts of the United States of America located in the
Northern District of Oklahoma (collectively, the "Agreed Courts") with respect
to any actions, suits or proceedings arising out of or in connection with this
Agreement and the transactions contemplated hereby and the parties hereto agree
not to commence any action, suit or proceeding relating thereto except in such
Agreed Courts. The parties hereto further agree that service of any process,
summons, notice, or documents in accordance with paragraph 20 hereof shall be
effective service of process for any action, suit or proceeding brought. The
parties hereto irrevocably and unconditionally waive any objection to the
laying of venue of any action, suit or proceeding arising out of this Agreement
or the
11
<PAGE> 12
transactions contemplated hereby in the Agreed Courts and hereby further
irrevocably and unconditionally waive and agree not to plead or claim that any
such action, suit or proceeding brought in any of the Agreed Courts has been
brought in an inconvenient forum.
25. Entire Agreement. This instrument contains the entire
Agreement of the parties pertaining to Employee's employment by Employer,
superseding all other agreements (including, without limitation, the January 1,
1990 Employment Agreement between Employer and Employee, and all amendments,
modifications and supplements thereto) (collectively hereinafter referred to as
the "Prior Employment Agreements") whether oral or written, express or implied.
It may not be changed orally but only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension
or discharge is sought. Further, except as specifically set forth herein,
Employer and Employee do hereby release each other from any and all claims,
known or unknown, fixed or contingent, that either may have against the other
pursuant to the Prior Employment Agreements or otherwise.
26. Severability. The provisions of this Agreement shall be
deemed severable, and the invalidity or unenforceability of any one or more of
the provisions hereof shall not affect the validity and enforceability of the
other provisions hereof.
27. Construction. Every covenant, term and provision of this
Agreement shall be construed simply according to its fair meaning and not
strictly for or against any party.
12
<PAGE> 13
IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year first above set forth.
Continental Natural Gas, Inc.
By /s/ GARY C. ADAMS
----------------------------------
Gary C. Adams, Chairman
"Employer"
/s/ SCOTT C. LONGMORE
----------------------------------
Scott C. Longmore
"Employee"
13
<PAGE> 1
EXHIBIT 10.4
CONTINENTAL NATURAL GAS, INC.
1412 SOUTH BOSTON, SUITE 500
TULSA, OKLAHOMA 74119
1997 STOCK PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
INTRODUCTION ............................................... i
AVAILABLE INFORMATION ...................................... ii
TAX CONSEQUENCES ........................................... ii-iv
CONTINENTAL NATURAL GAS, INC. 1997 STOCK PLAN .............. A1
ANNEX B-1 (INCENTIVE STOCK OPTION AGREEMENT FOR STOCK
OPTIONS GRANTED UNDER THE CONTINENTAL NATURAL GAS, INC
1997 STOCK PLAN) ..................................... B1-1--B-7
ANNEX B-2 (STOCK GRANT AGREEMENT FOR STOCK GRANTED
UNDER THE CONTINENTAL NATURAL GAS, INC
1997 STOCK PLAN) ..................................... B2-1--B2-4
EXERCISE AGREEMENT (OR EXERCISING STOCK OPTIONS GRANTED
UNDER THE CONTINENTAL NATURAL GAS, INC
1997 STOCK PLAN) ..................................... C-i
INSTRUCTIONS ......................................... C-ii--C-iii
EXERCISE AGREEMENT ......................................... C1-C3
</TABLE>
<PAGE> 3
CONTINENTAL NATURAL GAS, INC.
1412 SOUTH BOSTON, SUITE 500
TULSA, OKLAHOMA 74119
CONTINENTAL NATURAL GAS, INC.
1997 STOCK PLAN
This Prospectus describes the Continental Natural Gas, Inc. 1997 Stock
Plan (the "Plan") and some of the major considerations that a person
participating in the Plan ("Participant") should consider before purchasing or
exercising stock options or making any payments with respect to any other
awards under the Plan.
A copy of the Plan is attached to this Prospectus as Annex A and
incorporated herein by reference. Each Participant in the Plan will also be a
party to a stock option or other stock agreement ("Stock Agreement") which sets
forth further terms of the Participant's specific grant or grants under the
Plan. Participants should carefully review the terms of their Stock Agreements
and of the Plan itself. A form of the Stock Agreement is attached to this
Prospectus as Annex B.
This Prospectus relates to the offering of up to 600,000 shares of
common stock (the "Shares") of Continental Natural Gas, Inc. (the "Company").
The Plan provides for the granting of Stock Options ("Stock Option"), Stock
Appreciation Rights ("Stock Appreciation Rights") and Stock Grants ("Stock
Grants"); any such award under the Plan is referred to as an "Award."
----------------------
This document constitutes part of a prospectus covering securities that have
been registered under the Securities Act of 1933. The date of this document is
July 30, 1997.
i
<PAGE> 4
AVAILABLE INFORMATION
The Company will deliver without charge to each Participant who has
received a copy of this Prospectus, upon the Participant's written or oral
request, (i) a copy of the Company's Annual Report to Stockholders for its
latest fiscal year, and (ii) copies of any or all the documents which have been
or may be incorporated by reference into the Form S-8 registration statement
filed by the Company with the Securities and Exchange Commission for the Shares
issuable under the Plan, other than exhibits to such documents (unless such
exhibits are also incorporated therein by reference).
All such documents are also incorporated by reference into this Prospectus.
All such written or oral requests shall be made to the Board of Directors for
the Continental Natural Gas, Inc. 1997 Stock Plan ("Board of Directors"),
c/o _______________________________________, Continental Natural Gas, Inc.,
1412 South Boston, Suite 500, Tulsa, Oklahoma 74119.
TAX CONSEQUENCES
Each Participant is urged to consult his or her personal tax advisor
with respect to the tax consequences relating to the grant or the exercise of
any Award under the Plan. However, the following is a summary of general tax
law information relating to awards granted under the Plan.
1. OPTIONS
a. NONQUALIFIED STOCK OPTION ("NQSO")
This discussion applies to Stock Options which are nonqualified. Under
current law, a Participant receiving an Option does not recognize taxable
income upon the grant of the Option and the Company will not be entitled to a
deduction for federal income tax purposes upon such grant. Upon the exercise of
an Option, ordinary income generally will be recognized by the Participant in
an amount equal to the excess of the fair market value of the Shares acquired
over the exercise price. The Company generally will be entitled to a deduction
for federal income tax purposes in an amount equal to the amount of ordinary
income recognized by the Participant at the time of such recognition, provided
the Company complies with applicable withholding requirements. If the
Participant makes a Section 83(b) election within 30 days after the exercise of
an Option, such Participant will recognize ordinary income upon such exercise.
b. INCENTIVE STOCK OPTION ("ISO")
This discussion applies to Stock Options that are ISOS. Again, a
Participant receiving an ISO does not recognize taxable income upon the grant
of the Option, nor does the Company recognize a deduction for federal income
tax purposes. Upon the exercise of an Incentive Stock Option, the Participant
generally does not recognize taxable income if the exercise is during the term
of the Option either while the Participant is an employee of the Company (or of
a parent or
ii
<PAGE> 5
subsidiary corporation) or within three months thereafter (one year if the
Participant is disabled). If a Participant dies, his or her personal
representative may exercise the Option during its term. Only $100,000 of
aggregate Option Price can be exercised each calendar year by the Participant
in order to avoid recognition of income upon exercise. If the Participant does
not dispose of the shares acquired upon the exercise of an Incentive Option
within two years from the date that the Incentive Option was granted or within
one year after the Incentive Option is exercised, any gain or loss upon
disposition of the shares will be long-term capital gain or loss. If the
Participant disposes of the acquired shares without meeting the statutory
holding period requirements described in the immediately preceding sentence,
the Participant generally will recognize ordinary income in the year of the
disqualifying disposition equal to the difference, if any, between the lesser
of (i) the amount realized on the disposition and (ii) the fair market value of
the shares on the exercise date, and the exercise price. Any remaining gain is
treated as long-term or short-term capital gain depending on whether the shares
have been held for more than one year.
If the statutory holding period requirements are satisfied, the
Company will not be entitled to a deduction for federal income tax purposes
upon the exercise of an Incentive Option or upon the disposition of shares
acquired upon such exercise. However, if the Participant disposes of the shares
in a disqualifying disposition, the Company generally will be entitled to a
deduction for federal income tax purposes in an amount equal to the amount of
the ordinary income recognized by the Participant at that time, provided that
the Company complies with applicable tax withholding requirements.
2. STOCK APPRECIATION RIGHTS
Upon the grant of a Stock Appreciation Right, or during the period
that the unexercised Stock Appreciation Right remains outstanding, the
Participant will not recognize any federal taxable income and the Company will
not be entitled to a federal income tax deduction. On the exercise of a Stock
Appreciation Right, the consideration paid to the Participant, whether in cash,
Shares or both, generally will constitute compensation taxable to the
Participant as ordinary income (in the same manner and at the same time
described in paragraph 1 above) and the Company is entitled to a corresponding
federal income tax deduction, provided it complies with the applicable
withholding requirements. Upon the sale of the Shares acquired by exercise of
Stock Appreciation Rights, the Participant will realize long-term or short-term
capital gain or loss, taxable as described in paragraph 1b. above.
3. STOCK GRANT
Under the Code, a Participant normally will not recognize taxable
income and the Company generally will not be entitled to a deduction upon the
grant of Shares of Restricted Stock. When the Shares are no longer subject to a
substantial risk of forfeiture (as defined in the Code) or become transferable,
the Participant will realize taxable ordinary income in an amount equal to the
fair market value of such number of Shares at the time, and the Company will be
entitled to a deduction in the same amount, provided the Company complies with
applicable withholding requirements.
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<PAGE> 6
Under Section 83(b) of the Code, a Participant may elect to realize
ordinary income in the year the Shares are awarded in an amount equal to their
fair market value at the time, determined without regard to the restrictions.
In that event, the Company will be entitled to a deduction in such year in the
same amount, provided the Company complies with applicable withholding
requirements, and any gain or loss realized by the Participant upon the
subsequent disposition of the Shares will be capital gain or loss (taxable as
described in paragraph 1 above) and will not result in any further deduction to
the Company. Any dividends with respect to the Shares of Restricted Stock which
are paid or made available to a Participant (who has not elected under Code
Section 83(b) to be taxed on the date of the grant) while the Shares remain
forfeitable are treated as additional compensation taxable as ordinary income
to the Participant and deductible to the Company. If an election under Code
Section 83(b) has been made with respect to the Shares, the dividends represent
ordinary dividend income to the Participant which are not deductible to the
Company. If the Participant elects to be taxed on the Shares of the Stock Grant
on the date of grant and the Participant subsequently forfeits the Shares, the
Participant is not entitled to a deduction as a consequence of such forfeiture,
and the Company must include as ordinary income the amount it previously
deducted (which amount is included in the Company's basis) in the year of grant
with respect to such Shares.
4. PARACHUTE PAYMENTS
The termination of restrictions on Stock Grants upon a Change in
Control, or the exercise of any portion of a Stock Option or related Stock
Appreciation Right which is accelerated as a result of a Change in Control, or
a similar event, may cause payments with respect to such Restricted Stock,
Deferred Stock, accelerated Stock Options, or related Stock Appreciation Rights
to be treated as "parachute payments" within the meaning of Section 28OG of the
Code. Any such parachute payments which constitute "excess parachute payments"
are nondeductible to the Company and subject the Participant to a 20% federal
excise tax under Section 4999 of the Code on such excess parachute payments, in
addition to other taxes ordinarily payable. Each Participant should consult his
or her personal tax advisor as to the potential impact of the parachute tax.
iv
<PAGE> 7
CONTINENTAL NATURAL GAS, INC.
1997 STOCK PLAN
ARTICLE I
ESTABLISHMENT
1. Purpose.
The Continental Natural Gas, Inc. 1997 Stock Plan ("Plan") is hereby
established by Continental Natural Gas, Inc. ("Company"). The purpose of the
Plan is to promote the overall financial objectives of the Company and its
shareholders by motivating those persons selected to participate in the Plan to
achieve long-term growth in shareholder equity in the Company and by retaining
the association of those individuals who are instrumental in achieving this
growth. The Plan and the grant of awards thereunder is expressly conditioned
upon the Plan's approval by the security holders of the Company. The Plan is
adopted effective as of the Effective Date.
ARTICLE II
DEFINITIONS
For purposes of the Plan, the following terms are defined as set forth
below:
2.1 "Affiliate" means any individual, corporation, partnership,
association, jointstock company, trust, unincorporated association or other
entity (other than the Company) that directly, or indirectly through one or
more intermediaries, controls, is controlled by, or is under common control
with, the Company including, without limitation, any member of an affiliated
group of which the Company is a common parent corporation as provided in
Section 1504 of the Code.
2.2 "Agreement" or "Award Agreement" means, individually or
collectively, any agreement entered into pursuant to the Plan pursuant to which
an Award is granted to a Participant.
2.3 "Award" means a Stock Option, Stock Appreciation Right, Restricted
Stock or Deferred Stock.
2.4 "Board of Directors" or "Board" means the Board of Directors of
the Company.
2.5 "Cause" shall mean, for purposes of whether and when a Participant
has incurred a Termination of Employment for Cause, any act or omission which
permits the Company to terminate the written agreement or arrangement between
the Participant and the Company or an Affiliate for Cause as defined in such
agreement or arrangement, or in the event there is no such agreement or
arrangement or the agreement or arrangement does not define the term "cause,"
then Cause shall mean an act or acts of dishonesty by the Participant
constituting a felony under applicable law and
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<PAGE> 8
resulting or intending to result directly or indirectly in gain to or personal
enrichment of the Participant at the Company's expense. Notwithstanding the
foregoing, the Participant shall not be deemed to have been terminated for
Cause unless and until there shall have been delivered to him or her a copy of
a resolution, duly adopted by the affirmative vote of not less than a majority
of the entire membership of the Board at a meeting of the Board called and held
for that purpose (after reasonable notice to him or her has been given or has
been made and an opportunity for him or her, together with his or her counsel,
to be heard before the Board), finding that in the good faith opinion of the
Board the Participant was guilty of conduct set forth above in the previous
sentence of this Section and specifying the particulars thereof in detail.
2.6 "Change in Control" and "Change in Control Price" have the
meanings set forth in Sections 9.2 and 9.3, respectively.
2.7 "Code" or "Internal Revenue Code" means the Internal Revenue Code
of 1986, as amended, final Treasury Regulations thereunder and any subsequent
Internal Revenue Code.
2.8 "Commission" means the Securities and Exchange Commission or any
successor agency.
2.9 "Board of Directors" means the person or persons appointed to the
Board of Directors to administer the Plan, as further described in the Plan.
2.10 "Common Stock" means the shares of the regular voting Common
Stock, $ ____ par value, whether presently or hereafter issued, and any other
stock or security resulting from adjustment thereof as described hereinafter or
the common stock of any successor to the Company which is designated for the
purpose of the Plan.
2.11 "Company" means Continental Natural Gas, Inc., an Oklahoma
corporation, and includes any successor or assignee corporation or corporations
into which the Company may be merged, changed or consolidated; any corporation
for whose securities the securities of the Company shall be exchanged; and any
assignee of or successor to substantially all of the assets of the Company.
2.12 "Disability" means permanent and total disability as determined
under procedures established by the Board of Directors for purposes of the
Plan. Notwithstanding the foregoing, a Disability shall not qualify under this
Plan if it is the result of (i) a willfully self-inflicted injury or willfully
self-induced sickness; or (ii) an injury or disease contracted, suffered, or
incurred, while participating in a criminal offense. The determination of
Disability shall be made by the Board of Directors. The determination of
Disability for purposes of this Plan shall not be construed to be an admission
of disability for any other purpose.
2.13 "Non-Employee Director" means a person who is a Director of the
Company and who is not an employee of the Company and who would be a
"Non-Employee Director" within the
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meaning of Rule 16b-3 under the Exchange Act and an "outside director" within
the meaning of Section 162(m) of the Code.
2.14 "Effective Date" means July 30, 1997.
2.15 "Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
2.16 "Fair Market Value" means the mean, as of any given date, between
the highest and lowest reported sales prices of the Common Stock on the NASDAQ.
If there is no regular public trading market for such stock, the Fair Market
Value of the Common Stock shall be determined by the Board of Directors in good
faith.
2.17 "Grant Date" means the date as of which an Award is granted
pursuant to the Plan.
2.18 "Incentive Stock Option" means any Stock Option intended to be
and designated as an "incentive stock option" within the meaning of Section 422
of the Code.
2.19 "Nonqualified Stock Option" means an Option to purchase Common
Stock in the Company granted under the Plan other than an Incentive Stock
Option within the meaning of Section 422 of the Code.
2.20 "Option Period" means the period during which the Option shall be
exercisable in accordance with the Agreement and Article VI.
2.21 "Option Price" means the price at which the Common Stock may be
purchased under an Option as provided in Section 6.3.
2.22 "Participant" means a person who satisfies the eligibility
conditions of Article V and to whom an Award has been granted by the Board of
Directors under the Plan, and in the event a Representative is appointed for a
Participant or a former spouse becomes a Representative, then the term
"Participant" shall mean such appointed Representative, successor,
Representative, or former spouse as the case may be. The term shall also
include any person or entity to whom an Option has been transferred, including
a trust for the benefit of the Participant, the Participant's parents, spouse
or descendants, a partnership, the partners of which include any of the
foregoing, or a custodian under a uniform gifts to minors act or similar
statute for the benefit of the Participant's descendants, to the extent
permitted herein. Notwithstanding the foregoing, the term "Termination of
Employment" shall mean the Termination of Employment of the Participant.
2.23 "Plan" means the Continental Natural Gas, Inc. 1997 Stock Plan,
as herein set forth and as may be amended from time to time.
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<PAGE> 10
2.24 "Representative" means (a) the person or entity acting as the
executor or administrator of a Participant's estate pursuant to the last will
and testament of a Participant or pursuant to the laws of the jurisdiction in
which the Participant had the Participant's primary residence at the date of
the Participant's death; (b) the person or entity acting as the guardian or
temporary guardian of a Participant; (c) the person or entity which is the
beneficiary of the Participant upon or following the Participant's death; or
(d) any person to whom an Option has been permissibly transferred; provided
that only one of the foregoing shall be the Representative at any point in time
as determined under applicable law and recognized by the Board of Directors.
2.25 "Retirement" means the Participant's Termination of Employment
after attaining either the normal retirement age or the early retirement age as
defined in the principal (as determined by the Board of Directors)
tax-qualified plan of the Company or an Affiliate, if the Participant is
covered by such plan, and if the Participant is not covered by such a plan,
then age 65, or age 55 with the accrual of 10 years of service.
2.26 "Rule 16b-3" means Rule 16b-3, as promulgated under the Exchange
Act, as amended from time to time, or any successor thereto.
2.27 "Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
2.28 "Stock Appreciation Right" means a right granted under
Article VII.
2.29 "Stock Grant" means an award under Article VIII.
2.30 "Stock Option" or "Option" means an option granted under
Article VI.
2.31 "Termination of Employment" means the occurrence of any act or
event whether pursuant to an employment agreement or otherwise that actually or
effectively causes or results in the person's ceasing, for whatever reason, to
be an officer, employee or consultant of the Company or of any Affiliate, or to
be an officer, employee or consultant of any entity that provides services to
the Company or an Affiliate, including, without limitation, death, Disability,
dismissal, severance at the election of the Participant, Retirement, or
severance as a result of the discontinuance, liquidation, sale or transfer by
the Company or its Affiliates of all businesses owned or operated by the
Company or its Affiliates. With respect to any person who is not an employee
with respect to the Company or an Affiliate, the Agreement shall establish what
act or event shall constitute a Termination of Employment for purposes of the
Plan. A Termination of Employment shall occur to an employee who is employed by
an Affiliate if the Affiliate shall cease to be an Affiliate and the
Participant shall not immediately thereafter become an employee of the Company
or an Affiliate.
In addition, certain other terms used herein have definitions given to
them in the first place in which they are used.
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ARTICLE III
ADMINISTRATION
3.1 "Board of Directors Structure and Authority." The Plan shall be
administered by the Board of Directors. Subject to the provisions of the Plan,
the Board of Directors shall have the sole discretion and authority to
determine from time to time the participant or participants to whom Awards
shall be granted and the number of shares of Common Stock subject to each
Award, to interpret the Plan, to prescribe, amend, and rescind any rules and
regulations necessary or appropriate for the administration of the Plan, to
determine and interpret the details and provisions of each Agreement, to modify
or amend any Agreement or waive any conditions or restrictions applicable to
any Awards (or the exercise thereof), and to make all other determinations
necessary or advisable for the administration of the Plan. The determination of
an Award will be determined by the Board of Directors. Such Award will be
passed by the majority and in the event that one of the recipients is a member
of the Board of Directors, then that Director will abstain from that particular
vote.
Among other things, the Board of Directors shall have the authority,
subject to the terms of the Plan:
(a) to select those persons to whom Awards may be granted from
time to time;
(b) to determine whether and to what extent Stock Options,
Stock Appreciation Rights, Stock Grants or any combination thereof are
to be granted hereunder;
(c) to determine the number of shares of Common Stock to be
covered by each Award granted hereunder;
(d) to determine the terms and conditions of any Award
granted hereunder (including, but not limited to, the Option Price,
the Option Period, any exercise restriction or limitation and any
exercise acceleration or forfeiture waiver regarding any Award and the
shares of Common Stock relating thereto);
(e) to adjust the terms and conditions, at any time or from
time to time, of any Award, subject to the limitations of Section
10.1;
(f) to determine to what extent and under what circumstances
Common Stock and other amounts payable with respect to an Award shall
be deferred;
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(g) to determine under what circumstances an Award may be
settled in cash or Common Stock;
(h) to provide for the forms of Agreement to be utilized in
connection with this Plan;
(i) to determine whether a Participant has a Disability or a
Retirement;
(j) to determine what securities law requirements are
applicable to the Plan, Awards, and the issuance of shares of Common
Stock and to require of a Participant that appropriate action be taken
with respect to such requirements;
(k) to cancel, with the consent of the Participant or as
otherwise provided in the Plan or an Agreement, outstanding Awards;
(1) to interpret and make a final determination with respect
to the remaining number of shares of Common Stock available under
Article IV;
(m) to require as a condition of the exercise of an Award or
the issuance or transfer of a certificate of Common Stock, the
withholding from a Participant of the amount of any federal, state or
local taxes as may be necessary in order for the Company or any other
employer to obtain a deduction or as may be otherwise required by law;
(n) to determine whether and with what effect an individual
has incurred a Termination of Employment;
(o) to determine whether the Company or any other person has
a right or obligation to purchase Common Stock from a Participant and,
if so, the terms and conditions on which such Common Stock is to be
purchased;
(p) to determine the restrictions or limitations on the
transfer of Common Stock;
(q) to determine whether an Award is to be adjusted, modified
or purchased, or is to become fully exercisable, under the Plan or
the terms of an Agreement;
(r) to determine the permissible methods of Award exercise and
payment, including cashless exercise arrangements;
(s) to adopt, amend and rescind such rules and regulations as,
in its opinion, may be advisable in the administration of the Plan;
and
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(t) to appoint and compensate agents, counsel, auditors or
other specialists to aid it in the discharge of its duties.
The Board of Directors shall have the authority to adopt, alter and
repeal such administrative rules, guidelines and practices governing the Plan
as it shall, from time to time, deem advisable, to interpret the terms and
provisions of the Plan and any Award issued under the Plan (and any Agreement)
and to otherwise supervise the administration of the Plan. The Board of
Directors's policies and procedures may differ with respect to Awards granted
at different times or to different Participants.
Any determination made by the Board of Directors pursuant to the
provisions of the Plan shall be made in its sole discretion, and in the case of
any determination relating to an Award, may be made at the time of the grant of
the Award or, unless in contravention of any express term of the Plan or an
Agreement, at any time thereafter. All decisions made by the Board of Directors
pursuant to the provisions of the Plan shall be final and binding on all
persons, including the Company and Participants. Any determination shall not be
subject to de novo review if challenged in court.
ARTICLE IV
STOCK SUBJECT TO PLAN
4.1 Number of Shares. Subject to the adjustment under Section 4.6, the
total number of shares of Common Stock reserved and available for distribution
pursuant to Awards under the Plan shall be 600,000 shares of Common Stock
authorized for issuance on the Effective Date. Such shares may consist, in
whole or in part, of authorized and unissued shares or treasury shares.
4.2 Release of Shares. Subject to Section 7.3(f), if any shares of
Common Stock that have been optioned cease to be subject to an Award, if any
shares of Common Stock that are subject to any Award are forfeited, if any
Award otherwise terminates without issuance of shares of Common Stock being
made to the Participant, or if any shares (whether or not restricted) of Common
Stock that were previously issued under the Plan are received in connection
with the exercise of an Award, such shares, in the discretion of the Board of
Directors, may again be available for distribution in connection with Awards
under the Plan.
4.3 Restrictions on Shares. Shares of Common Stock issued upon
exercise of an Award shall be subject to the terms and conditions specified
herein and to such other terms, conditions and restrictions as the Board of
Directors in its discretion may determine or provide in the Award Agreement.
The Company shall not be required to issue or deliver any certificates for
shares of Common Stock, cash or other property prior to (i) the listing of such
shares on any stock exchange (or other public market) on which the Common Stock
may then be listed (or regularly traded), (ii) the completion of any
registration or qualification of such shares under federal or state law, or any
ruling or regulation of any government body which the Board of Directors
determines to be
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necessary or advisable. The Company may cause any certificate for any share of
Common Stock to be delivered to be properly marked with a legend or other
notation reflecting the limitations on transfer of such Common Stock as
provided in this Plan or as the Board of Directors may otherwise require. The
Board of Directors may require any person exercising an Award to make such
representations and furnish such information as it may consider appropriate in
connection with the issuance or delivery of the shares of Common Stock in
compliance with applicable law or otherwise. Fractional shares shall not be
delivered, but shall be rounded to the next lower whole number of shares.
4.4 Shareholder Rights. No person shall have any rights of a
shareholder as to shares of Common Stock subject to an Award until, after
proper exercise of the Award or other action required, such shares shall have
been recorded on the Company's official shareholder records as having been
issued or transferred. Upon exercise of the Award or any portion thereof, the
Company will have thirty (30) days in which to issue the shares, and the
Participant will not be treated as a shareholder for any purpose whatsoever
prior to such issuance. No adjustment shall be made for cash dividends or other
rights for which the record date is prior to the date such shares are recorded
as issued or transferred in the Company's official shareholder records, except
as provided herein or in an Agreement.
4.5 Best Efforts To Register. The Company will register under the
Securities Act the Common Stock delivered or deliverable pursuant to Awards on
Commission Form S-8 if available to the Company for this purpose (or any
successor or alternate form that is substantially similar to that form to the
extent available to effect such registration), in accordance with the rules and
regulations governing such forms, as soon as such forms are available for
registration to the Company for this purpose. The Company will use its best
efforts to cause the registration statement to become effective as soon as
possible and will file such supplements and amendments to the registration
statement as may be necessary to keep the registration statement in effect
until the earliest of (a) one year following the expiration of the Option
Period of the last Option outstanding, (b) the date the Company is no longer a
reporting company under the Exchange Act and (c) the date all Participants have
disposed of all shares delivered pursuant to any Award. The Company may delay
the foregoing obligation if the Board of Directors reasonably determines that
any such registration would materially and adversely affect the Company's
interests or if there is no material benefit to Participants.
4.6 Anti-Dilution. In the event of any Company stock dividend, stock
split, combination or exchange of shares, recapitalization or other change in
the capital structure of the Company, corporate separation or division of the
Company (including, but not limited to, a split-up, spin-off, split-off or
distribution to Company shareholders other than a normal cash dividend), sale
by the Company of all or a substantial portion of its assets (measured on
either a stand-alone or consolidated basis), reorganization, rights offering, a
partial or complete liquidation, or any other corporate transaction, Company
share offering or event involving the Company and having an effect similar to
any of the foregoing, then the Board of Directors shall adjust or substitute,
as the case may be, the number of shares of Common Stock available for Awards
under the Plan, the number of
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shares of Common Stock covered by outstanding Awards, the exercise price per
share of outstanding Awards, and any other characteristics or terms of the
Awards as the Board of Directors shall deem necessary or appropriate to reflect
equitably the effects of such changes to the Participants; provided, however,
that any fractional shares resulting from such adjustment shall be eliminated
by rounding to the next lower whole number of shares with appropriate payment
for such fractional share as shall reasonably be determined by the Board of
Directors.
ARTICLE V
ELIGIBILITY
5.1 Eligibility. Except as herein provided, the persons who shall be
eligible to participate in the Plan and be granted Awards shall be those
persons who are officers, non-employee directors, employees or consultants of
the Company or any subsidiary who shall be in a position, in the opinion of the
Board of Directors, to make contributions to the growth, management, protection
and success of the Company and its subsidiaries. Of those persons described in
the preceding sentence, the Board of Directors may, from time to time, select
persons to be granted Awards and shall determine the terms and conditions with
respect thereto. In making any such selection and in determining the form of
the Award, the Board of Directors may give consideration to the functions and
responsibilities of the person's contributions to the Company and its
subsidiaries, the value of the individual's service to the Company and its
subsidiaries and such other factors deemed relevant by the Board of Directors.
The Board of Directors may designate any person who is eligible to participate
in the Plan provided that such person is not a member of the Board of
Directors. A Board of Directors comprised of Non-Employee Directors may
designate a person serving on the Board of Directors provided that he or she
would otherwise be eligible.
ARTICLE VI
STOCK OPTIONS
6.1 General. The Board of Directors shall have authority to grant
Options under the Plan at any time or from time to time. Stock Options may be
granted alone or in addition to other Awards and may be either Incentive Stock
Options or Non-Qualified Stock Options. An Option shall entitle the Participant
to receive shares of Common Stock upon exercise of such Option, subject to the
Participant's satisfaction in full of any conditions, restrictions or
limitations imposed in accordance with the Plan or an Agreement (the terms and
provisions of which may differ from other Agreements) including without
limitation, payment of the Option Price. During any calendar year, Options for
no more than 40,000 shares of Common Stock shall be granted to any Participant.
6.2 Grant and Exercise. The grant of a Stock Option shall occur as of
the date the Board of Directors determines. Each Option granted under this Plan
shall be evidenced by an Agreement, in a form approved by the Board of
Directors, which shall embody the terms and conditions of such Option and which
shall be subject to the express terms and conditions set forth in the Plan.
Such
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Agreement shall become effective upon execution by the Participant. Only a
person who is a common-law employee of the Company, any parent corporation of
the Company or a subsidiary (as such terms are defined in Section 424 of the
Code) on the date of grant shall be eligible to be granted an Option which is
intended to be and is an Incentive Stock Option. To the extent that any Stock
Option is not designated as an Incentive Stock Option or even if so designated
does not qualify as an Incentive Stock Option, it shall constitute a
Non-Qualified Stock Option. Anything in the Plan to the contrary
notwithstanding, no term of the Plan relating to Incentive Stock Options shall
be interpreted, amended or altered, nor shall any discretion or authority
granted under the Plan be exercised, so as to disqualify the Plan under Section
422 of the Code or, without the consent of the Participant affected, to
disqualify any Incentive Stock Option under such Section 422.
6.3 Terms and Conditions. Stock Options shall be subject to such terms
and conditions as shall be determined by the Board of Directors, including the
following:
(a) Option Period. The Option Period of each Stock Option
shall be fixed by the Board of Directors; provided that no
Non-Qualified Stock Option shall be exercisable more than fifteen (15)
years after the date the Stock Option is granted. In the case of an
Incentive Stock Option, the Option Period shall not exceed ten (10)
years from the date of grant or five (5) years in the case of an
individual who owns more than ten percent (10%) of the combined voting
power of all classes of stock of the Company, a corporation which is a
parent corporation of the Company or any subsidiary of the Company
(each as defined in Section 424 of the Code). No Option which is
intended to be an Incentive Stock Option shall be granted more than
ten (10) years from the date the Plan is adopted by the Company or the
date the Plan is approved by the shareholders of the Company,
whichever is earlier.
(b) Option Price. The Option Price per share of the Common
Stock purchasable under an Option shall be determined by the Board of
Directors, but in no event shall the Option Price be less than 50% of
the Fair Market Value on the Grant Date. If such Option is intended to
qualify as an Incentive Stock Option, the Option Price per share shall
be not less than the Fair Market Value per share on the date the
Option is granted, or where granted to an individual who owns or who
is deemed to own stock possessing more than ten percent (10%) of the
combined voting power of all classes of stock of the Company, a
corporation which is a parent corporation of the Company or any
subsidiary of the Company (each as defined in Section 424 of the
Code), not less than one hundred ten percent (110%) of such Fair
Market Value per share.
(c) Exercisability. Subject to Section 9.1, Stock Options
shall be exercisable at such time or times and subject to such terms
and conditions as shall be determined by the Board of Directors. If
the Board of Directors provides that any Stock Option is exercisable
only in installments, the Board of Directors may at any
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time waive such installment exercise provisions, in whole or in part.
In addition, the Board of Directors may at any time accelerate the
exercisability of any Stock Option.
(d) Method of Exercise. Subject to the provisions of this
Article VI, a Participant may exercise Stock Options, in whole or in
part, at any time during the Option Period by the Participant's giving
written notice of exercise on a form provided by the Board of
Directors (if available) to the Company specifying the number of
shares of Common Stock subject to the Stock Option to be purchased.
Such notice shall be accompanied by payment in full of the purchase
price by cash or check or such other form of payment as the Company
may accept. If approved by the Board of Directors, payment in full or
in part may also be made (i) by delivering Common Stock already owned
by the Participant having a total Fair Market Value on the date of
such delivery equal to the Option Price; (ii) by the execution and
delivery of a note or other evidence of indebtedness (and any security
agreement thereunder) satisfactory to the Board of Directors and
permitted in accordance with Section 6.3(e); (iii) by authorizing the
Company to retain shares of Common Stock which would otherwise be
issuable upon exercise of the Option having a total Fair Market Value
on the date of delivery equal to the Option Price; (iv) by the
delivery of cash or the extension of credit by a broker-dealer to whom
the Participant has submitted a notice of exercise or otherwise
indicated an intent to exercise an Option (in accordance with Part
220, Chapter 11, Title 12 of the Code of Federal Regulations,
so-called "cashless" exercise); or (v) by any combination of the
foregoing. If payment of the Option Price of a Non-Qualified Stock
Option is made in whole or in part in the form of Restricted Stock or
Deferred Stock, the number of shares of Common Stock to be received
upon such exercise equal to the number of shares of Restricted Stock
or Deferred Stock used for payment of the Option Price shall be
subject to the same forfeiture restrictions or deferral limitations to
which such Restricted Stock or Deferred Stock was subject, unless
otherwise determined by the Board of Directors. In the case of an
Incentive Stock Option, the right to make a payment in the form of
already owned shares of Common Stock of the same class as the Common
Stock subject to the Stock Option may be authorized only at the time
the Stock Option is granted. No shares of Common Stock shall be issued
until full payment therefor has been made. Subject to any forfeiture
restrictions or deferral limitations that may apply if a Stock Option
is exercised using Restricted Stock or Deferred Stock, a Participant
shall have all of the rights of a shareholder of the Company holding
the class of Common Stock that is subject to such Stock Option
(including, if applicable, the right to vote the shares and the right
to receive dividends), when the Participant has given written notice
of exercise, has paid in full for such shares and such shares have
been recorded on the Company's official shareholder records as having
been issued or transferred.
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(e) Company Loan or Guarantee. Upon the exercise of any
Option and subject to the pertinent Agreement and the discretion of
the Board of Directors, the Company may at the request of the
Participant:
(i) lend to the Participant, with recourse, an amount
equal to such portion of the Option Price as the Board of
Directors may determine; or
(ii) guarantee a loan obtained by the Participant from a
third-party for the purpose of tendering the Option Price.
The terms and conditions of any loan or guarantee, including the term, interest
rate, and any security interest thereunder, shall be determined by the Board of
Directors, except that no extension of credit or guarantee shall obligate the
Company for an amount to exceed the lesser of the aggregate Fair Market Value
per share of the Common Stock on the date of exercise, less the par value of
the shares of Common Stock to be purchased upon the exercise of the Award, or
the amount permitted under applicable laws or the regulations and rules of the
Federal Reserve Board and any other governmental agency having jurisdiction.
(f) Non-transferability of Options. No Incentive Stock Option
or interest therein shall be transferable by the Participant other
than by will or by the laws of descent or distribution, and all Stock
Options shall be exercisable during the Participant's lifetime only by
the Participant.
6.4 Termination by Reason of Death, Disability or Retirement. Unless
otherwise provided in an Agreement or determined by the Board of Directors, if
a Participant incurs a Termination of Employment due to death, Disability or
Retirement, any unexpired and unexercised Stock Option held by such Participant
shall thereafter be fully exercisable for a period of five (5) years (or such
other period or no period as the Board of Directors may specify) immediately
following the date of such death, Disability or Retirement (as applicable) or
until the expiration of the Option Period, whichever period is the shorter. In
the event of Termination of Employment by reason of Disability, if an Incentive
Stock Option is exercised after the expiration of the exercise periods that
apply for purposes of Section 422 of the Code, such Stock Option will
thereafter be treated as a Non-Qualified Stock Option.
6.5 Other Termination. Unless otherwise provided in an Agreement or
determined by the Board of Directors, if a Participant incurs a Termination of
Employment that is not due to death, Retirement, Disability or with Cause) any
Stock Option held by such Participant shall thereupon terminate, except that
such Stock Option, to the extent then exercisable, may be exercised for the
lesser of a period of two (2) years commencing with the date of such
Termination of Employment or until the expiration of the Option Period, or in
the case of a voluntary Termination of Employment (other than due to death,
Retirement, Disability or with Cause), for a period of six (6) months
commencing with the date of such Termination of Employment in the case of a
voluntary
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Termination of Employment or until the expiration of the Option Period,
whichever is less. If the Participant incurs a Termination of Employment which
is with Cause, the Option shall terminate immediately. The death, Disability or
Retirement of a Participant after a Termination of Employment otherwise
provided herein shall not extend the exercisability of the time permitted to
exercise an Option.
6.6 Cashing Out of Option. On receipt of written notice of exercise,
the Board of Directors may elect to cash out all or part of the portion of any
Stock Option to be exercised by paying the Participant an amount, in cash or
Common Stock, equal to the excess of the Fair Market Value of the Common Stock
that is subject to the Option over the Option Price times the number of shares
of Common Stock subject to the Option on the effective date of such cash out.
The Board of Directors may determine Fair Market Value under the pricing rule
set forth in Section 7.3(b).
ARTICLE VII
STOCK APPRECIATION RIGHTS
7.1 General. The Board of Directors shall have authority to grant
Stock Appreciation Rights under the Plan at any time or from time to time.
Subject to the Participant's satisfaction in full of any conditions,
restrictions or limitations imposed in accordance with the Plan or an
Agreement, a Stock Appreciation Right shall entitle the Participant to
surrender to the Company the Stock Appreciation Right and to be paid therefor
in shares of the Common Stock, cash or a combination thereof as herein
provided, the amount described in Section 7.3(b).
7.2 Grant. Stock Appreciation Rights may be granted in conjunction
with all or part of any Stock Option granted under the Plan in which case the
exercise of the Stock Appreciation Right shall require the cancellation of a
corresponding portion of the Stock Option and the exercise of the Stock Option
will result in the cancellation of a corresponding portion of the Stock
Appreciation Right. In the case of a Non-Qualified Stock Option, such rights
may be granted either at or after the time of grant of such Stock Option. In
the case of an Incentive Stock Option, such rights may be granted only at the
time of grant of such Stock Option. A Stock Appreciation Right may also be
granted on a stand alone basis. The grant of a Stock Appreciation Right shall
occur as of the date the Board of Directors determines. Each Stock Appreciation
Right granted under this Plan shall be evidenced by an Agreement, which shall
embody the terms and conditions of such Stock Appreciation Right and which
shall be subject to the terms and conditions set forth in the Plan. During any
calendar year, no more than 40,000 Stock Appreciation Rights shall be granted
to any Participant.
7.3 Terms and Conditions. Stock Appreciation Rights shall be subject
to such terms and conditions as shall be determined by the Board of Directors,
including the following:
(a) Period and Exercise. The term of a Stock Appreciation
Right shall be established by the Board of Directors. If granted in
conjunction with a Stock
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Option, the Stock Appreciation Right shall have a term which is the
same as the Option Period and shall be exercisable only at such time
or times and to the extent the related Stock Options would be
exercisable in accordance with the provisions of Article VI. A Stock
Appreciation Right which is granted on a stand alone basis shall be
for such period and shall be exercisable at such times and to the
extent provided in an Agreement. Stock Appreciation Rights shall be
exercised by the Participant's giving written notice of exercise on a
form provided by the Board of Directors (if available) to the Company
specifying the portion of the Stock Appreciation Right to be
exercised.
(b) Amount. Upon the exercise of a Stock Appreciation Right,
a Participant shall be entitled to receive an amount in cash, shares
of Common Stock or both as determined by the Board of Directors or as
otherwise permitted in an Agreement equal in value to the excess of
the Fair Market Value per share of Common Stock over the Option Price
per share of Common Stock specified in the related Agreement
multiplied by the number of shares in respect of which the Stock
Appreciation Right is exercised. In the case of a Stock Appreciation
Right granted on a stand alone basis, the Agreement shall specify the
value to be used in lieu of the Option Price per share of Common
Stock. The aggregate Fair Market Value per share of the Common Stock
shall be determined as of the date of exercise of such Stock
Appreciation Right.
(c) Special Rules. In the case of Stock Appreciation Rights
relating to Stock Options held by Participants who are actually or
potentially subject to Section 16(b) of the Exchange Act; no Stock
Appreciation Right shall be exercisable during the first six months of
its term, except that this limitation shall not apply in the event of
death or Disability of the Participant prior to the expiration of the
six-month period.
(d) Non-transferability of Stock Appreciation Rights. Stock
Appreciation Rights shall be transferable only when and to the extent
that a Stock Option would be transferable under the Plan unless
otherwise provided in an Agreement.
(e) Termination. A Stock Appreciation Right shall terminate
at such time as a Stock Option would terminate under the Plan, unless
otherwise provided in an Agreement.
(f) Incentive Stock Option. A Stock Appreciation Right
granted in tandem with an Incentive Stock Option shall not be
exercisable unless the Fair Market Value of the Common Stock on the
date of exercise exceeds the Option Price. In no event shall any
amount paid pursuant to the Stock Appreciation Right exceed the
difference between the Fair Market Value on the date of exercise and
the Option Price.
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ARTICLE VIII
STOCK GRANTS
8.1 General. The Board of Directors shall have authority to make a
Stock Grant under the Plan at any time or from time to time. Shares of Stock
may be awarded either alone or in addition to other Awards granted under the
Plan. The Board of Directors shall determine the persons to whom and the time
or times at which a Stock Grant will be awarded, the number of shares of Shares
to be awarded to any Participant, the time or times within which such Awards
may be subject to forfeiture and any other terms and conditions of the Awards.
Each Award shall be confirmed by, and be subject to the terms of, an Agreement.
The Board of Directors may condition the grant of Stock upon the attainment of
specified performance goals by the Participant or by the Company or an
Affiliate (including a division or department of the Company or an Affiliate)
for or within which the Participant is primarily employed or upon such other
factors or criteria as the Board of Directors shall determine. The provisions
of Stock Grants need not be the same with respect to any Participant.
8.2 Awards and Certificates. Notwithstanding the limitations on
issuance of shares of Common Stock otherwise provided in the Plan, each
Participant receiving a Stock Grant Award shall be issued a certificate in
respect of such shares. Such certificate shall be registered in the name of
such Participant and shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such Award as determined by the
Board of Directors. The Board of Directors may require that the certificates
evidencing such shares be held in custody by the Company until the restrictions
thereon shall have lapsed and that, as a condition of any Stock Grant Award,
the Participant shall have delivered a stock power, endorsed in blank, relating
to the Common Stock covered by such Award. During any calendar year, no more
than 40,000 shares shall be granted to any Participant.
8.3 Terms and Conditions. Stock Grant shares shall be subject to the
following terms and conditions:
(a) Limitations on Transferability. Subject to the provisions
of the Plan and except as provided in an Agreement, during a period
set by the Board of Directors, commencing with the date of such Award
(the "Restriction Period"), the Participant shall not be permitted to
sell, assign, transfer, pledge or otherwise encumber any interest in
Stock Grant shares.
(b) Rights. Except as provided in Section 8.3(a), the
Participant shall have, with respect to the Stock Grant shares, all of
the rights of a shareholder of the Company holding the class of Common
Stock that is the subject of the Stock Grant, including, if
applicable, the right to vote the shares and the right to receive any
cash dividends. Unless otherwise determined by the Board of Directors
and subject to the Plan, cash dividends on the class of Common Stock
that is the subject of the Stock
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Grant shall be automatically deferred and reinvested in additional
restricted stock, and dividends on the class of Common Stock that is
the subject of the Stock Grant payable in Common Stock shall be paid
in the form of the same class as the Common Stock on which such
dividend was paid.
(c) Criteria. Based on service, performance by the
Participant or by the Company or the Affiliate, including any division
or department for which the Participant is employed or such other
factors or criteria as the Board of Directors may determine, the Board
of Directors may provide for the lapse of restrictions in installments
and may accelerate the vesting of all or any part of any Award and
waive the restrictions for all or any part of such Award.
(d) Forfeiture. Unless otherwise provided in an Agreement or
determined by the Board of Directors, if the Participant incurs a
Termination of Employment during the Restriction Period due to death
or Disability, the restrictions shall lapse and the Participant shall
be fully vested in the Stock Grant. Except to the extent otherwise
provided in the applicable Agreement and the Plan, upon a
Participant's Termination of Employment for any reason during the
Restriction Period other than death or Disability, all shares of the
Stock Grant still subject to restriction shall be forfeited by the
Participant, except the Board of Directors shall have the discretion
to waive in whole or in part any or all remaining restrictions with
respect to any or all of such Participant's shares under the Stock
Grant.
(e) Delivery. If and when the Restriction Period expires
without a prior forfeiture of the stock subject to such Restriction
Period, unlegended certificates for such shares shall be delivered to
the Participant.
(f) Election. A Participant may elect to further defer
receipt of the shares under the Stock Grant for a specified period or
until a specified event, subject in each case to the Board of
Directors's approval and to such terms as are determined by the Board
of Directors. Subject to any exceptions adopted by the Board of
Directors, such election must be made one (1) year prior to completion
of the Restriction Period.
ARTICLE IX
CHANGE IN CONTROL PROVISIONS
9.1 Impact of Event. Notwithstanding any other provision of the Plan
to the contrary, in the event of a Change in Control (as defined in Section
9.2):
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(a) Any Stock Appreciation Rights and Stock Options
outstanding as of the date such Change in Control and not then
exercisable shall become fully exercisable to the full extent of the
original grant.
(b) The restrictions and deferral limitations applicable to
any Stock Grant shall lapse, and such restricted stock shall become
free of all restrictions and become fully vested and transferable to
the full extent of the original grant.
(c) Notwithstanding any other provision of the Plan, unless
the Board of Directors shall provide otherwise in an Agreement, a
Participant shall have the right, whether or not the Award is fully
exercisable or may be otherwise realized by the Participant, by giving
notice during the 60-day period from and after a Change in Control to
the Company, to elect to surrender all or part of the Award to the
Company and to receive cash, within 30 days of such notice, in an
amount equal to the amount by which the "Change in Control Price" (as
defined in Section 9.3) per share of Common Stock on the date of such
election shall exceed the amount which the Participant must pay to
exercise the Award per share of Common Stock under the Award (the
"Spread") multiplied by the number of shares of Common Stock granted
under the Award as to which the right granted hereunder shall have
been exercised; provided, however, that if the end of such 60-day
period from and after a Change in Control is within six months of the
date of grant of the Award held by a Participant (except a Participant
who has died during such six month period) who is an officer or
director of the Company (within the meaning of Section 16b of the
Exchange Act), such Award shall be canceled in exchange for a payment
to the Participant at the time of the Participant's Termination of
Employment, equal to the Spread multiplied by the number of shares of
Common Stock granted under the Award, plus interest on such amount at
the prime rate compounded annually and determined from time to time.
9.2 Definition of Change in Control. For purposes of the Plan, a
"Change in Control" shall mean the happening of any of the following events:
(a) there shall be consummated (i) any consolidation or
merger of the Company in which the Company is not the continuing or
surviving corporation or pursuant to which shares of the Company's
common stock would be converted into cash, securities or other
property, other than a merger of the Company in which the holders of
the Company's common stock immediately prior to the merger have
substantially the same proportionate ownership of common stock of the
surviving corporation immediately after the merger; or (ii) 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
Company; or
A17
<PAGE> 24
(b) the shareholders of the Company shall approve any plan or
proposal for the liquidation or dissolution of the Company; or
(c) any person (as such term is used in Sections 13d and
14d(2) of the Exchange Act), other than the Company or any employee
benefit plan sponsored by the Company, shall become the beneficial
owner (within the meaning of Rule 13d-3 under the Exchange Act) of
securities of the Company representing an amount greater than two
times the aggregate percentage held or controlled by Cottonwood
Partnership and Adams Affiliates, Inc. (and apart from rights accruing
in special circumstances) having the right to vote in the election of
directors, as a result of a tender or exchange offer, open market
purchases, privately negotiated purchases or otherwise; or
(d) any three persons (as such term is used in Sections 13d
and 14d(2) of the Exchange Act), other than the Company or any
employee benefit plan sponsored by the Company, shall become the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange
Act) of securities of the Company whose ownership represents an amount
greater than four times the aggregate percentage held or controlled by
Cottonwood Partnership and Adams Affiliates, Inc. combined (and apart
from rights accruing in special circumstances) having the right to
vote in election of directors, as a result of a tender or exchange
offer, open market purchases, privately negotiated purchases or
otherwise; or
(e) at any time during a period of two consecutive years,
individuals who at the beginning of such period constituted the Board
of Directors of the Company shall cease for any reason to constitute
at least a majority thereof, unless the election or the nomination for
election by the Company's shareholders of each new director during
such two-year period was approved by a vote of at least two-thirds of
the directors then still in office who were directors at the beginning
of such two-year period. A Change of Control shall not be deemed to
have occurred if banks or other creditors receive the Company's stock
in conjunction with transactions involving forgiveness of outstanding
debt or debt restructuring agreements.
(f) at any time an individual is elected to the Board of
Directors who was not nominated by the Board of Directors of the
Company to stand for election.
9.3 Change in Control Price. For purposes of the Plan, "Change in
Control Price" means the higher of (a) the highest reported sales price of a
share of Common Stock in any transaction reported on NASDAQ or other principal
exchange on which such shares are listed during the 60-day period prior to and
including the date of a Change in Control or (b) if the Change in Control is
the result of a tender or exchange offer or a Corporate Transaction, the
highest price per share of Common Stock paid in such tender or exchange offer
or a Corporate Transaction, except that, in the case of Incentive Stock Options
and Stock Appreciation Rights relating to Incentive Stock Options,
A18
<PAGE> 25
such price shall be based only on the Fair Market Value of the Common Stock on
the date such Incentive Stock Option or Stock Appreciation Right is exercised.
To the extent that the consideration paid in any such transaction described
above consists all or in part of securities or other non-cash consideration,
the value of such securities or other non-cash consideration shall be
determined in the sole discretion of the Board of Directors.
ARTICLE X
MISCELLANEOUS
10.1 Amendments and Termination. The Board may amend, alter,
discontinue or terminate the Plan at any time, but no amendment, alteration,
discontinuation or termination shall be made which would impair the rights of a
Participant under a Stock Option, Stock Appreciation Right or Stock Grant
theretofore granted without the Participant's consent. In addition, no such
amendment shall be made without the approval of the Company's shareholders to
the extent such approval is required by law or agreement.
The Board of Directors may amend the Plan at any time provided that
(a) no amendment shall impair the rights of any Participant under any Award
theretofore granted without the Participant's consent, and (b) any amendment
shall be subject to the approval or rejection of the Board.
The Board of Directors may amend the terms of any Award or other Award
theretofore granted, prospectively or retroactively, but no such amendment
shall impair the rights of any Participant without the Participant's consent.
The Board of Directors may also substitute new Stock Options or Stock
Appreciation Rights for previously granted Stock Options, including previously
granted Stock Options or Stock Appreciation Rights having higher Option Prices
but no such substitution shall be made which would impair the rights of
Participants under such Stock Option or Stock Appreciation Right theretofore
granted without the Participant's consent.
Subject to the above provisions, the Board shall have authority to
amend the Plan to take into account changes in law and tax and accounting
rules, as well as other developments and to grant Awards which qualify for
beneficial treatment under such rules without shareholder approval.
10.2 Unfunded Status of Plan. It is intended that the Plan be an
"unfunded" plan for incentive and deferred compensation. The Board of Directors
may authorize the creation of trusts or other arrangements to meet the
obligations created under the Plan to deliver Common Stock or make payments;
provided, however, that, unless the Board of Directors otherwise determines,
the existence of such trusts or other arrangements is consistent with the
"unfunded" status of the Plan.
A19
<PAGE> 26
10.3 General Provisions.
(a) Representation. The Board of Directors may require each
person purchasing or receiving shares pursuant to an Award to
represent to and agree with the Company in writing that such person is
acquiring the shares without a view to the distribution thereof. The
certificates for such shares may include any legend which the Board of
Directors deems appropriate to reflect any restrictions on transfer.
(b) No Additional Obligation. Nothing contained in the
Plan shall prevent the Company or an Affiliate from adopting other or
additional compensation arrangements for its employees.
(c) Withholding. No later than the date as of which an amount
first becomes includible in the gross income of the Participant for
Continental Natural Gas, Inc. income tax purposes with respect to any
Award, the Participant shall pay to the Company (or other entity
identified by the Board of Directors), or make arrangements
satisfactory to the Company or other entity identified by the Board of
Directors regarding the payment of any federal, state, local or
foreign taxes of any kind required by law to be withheld with respect
to such amount required in order for the Company or an Affiliate to
obtain a current deduction. Unless otherwise determined by the Board
of Directors, withholding obligations may be settled with Common
Stock, including Common Stock that is part of the Award that gives
rise to the withholding requirement provided that any applicable
requirements under Section 16 of the Exchange Act are satisfied. The
obligations of the Company under the Plan shall be conditional on such
payment or arrangements, and the Company and its Affiliates shall, to
the extent permitted by law, have the right to deduct any such taxes
from any payment otherwise due to the Participant.
(d) Reinvestment. The reinvestment of dividends in additional
Deferred or Restricted Stock at the time of any dividend payment shall
only be permissible if sufficient shares of Common Stock are available
for such reinvestment (taking into account then outstanding Options
and other Awards).
(e) Representation. The Board of Directors shall establish
such procedures as it deems appropriate for a Participant to designate
a Representative to whom any amounts payable in the event of the
Participant's death are to be paid.
(f) Controlling Law. The Plan and all Awards made and actions
taken thereunder shall be governed by and construed in accordance with
the laws of the State of Oklahoma. The Plan shall be construed to
comply with all applicable law, and to avoid liability to the Company,
an Affiliate or a Participant, including, without limitation,
liability under Section 16b of the Exchange Act.
A20
<PAGE> 27
(g) Offset. Any amounts owed to the Company or an Affiliate
by the Participant of whatever nature may be offset by the Company
from the value of any shares of Common Stock, cash or other thing of
value under this Plan or an Agreement to be transferred to the
Participant, and no shares of Common Stock, cash or other thing of
value under this Plan or an Agreement shall be transferred unless and
until all disputes between the Company and the Participant have been
fully and finally resolved and the Participant has waived all claims
to such against the Company or an Affiliate.
10.4 Mitigation of Excise Tax. If any payment or right accruing to a
Participant under this Plan (without the application of this Section 10.4),
either alone or together with other payments or rights accruing to the
Participant from the Company or an Affiliate ("Total Payments") would
constitute a "parachute payment" (as defined in Section 28OG of the Code and
regulations thereunder), such payment or right shall be reduced to the largest
amount or greatest right that will result in no portion of the amount payable
or right accruing under the Plan being subject to an excise tax under Section
4999 of the Code or being disallowed as a deduction under Section 28OG of the
Code. The determination of whether any reduction in the rights or payments
under this Plan is to apply shall be made by the Board of Directors in good
faith after consultation with the Participant, and such determination shall be
conclusive and binding on the Participant. The Participant shall cooperate in
good faith with the Board of Directors in making such determination and
providing the necessary information for this purpose. The foregoing provisions
of this Section 10.4 shall apply with respect to any person only if after
reduction for any applicable federal excise tax imposed by Section 4999 of the
Code and federal income tax imposed by the Code, the Total Payments accruing to
such person would be less than the amount of the Total Payments as reduced, if
applicable, under the foregoing provisions of the Plan and after reduction for
only federal income taxes.
10.5 Rights with Respect to Continuance of Employment. Nothing
contained herein shall be deemed to alter the relationship between the Company
or an Affiliate and a Participant, or the contractual relationship between a
Participant and the Company or an Affiliate if there is a written contract
regarding such relationship. Nothing contained herein shall be construed to
constitute a contract of employment between the Company or an Affiliate and a
Participant. The Company or an Affiliate and each of the Participants continue
to have the right to terminate the employment or service relationship at any
time for any reason, except as provided in a written contract. The Company or
an Affiliate shall have no obligation to retain the Participant in its employ
or service as a result of this Plan. There shall be no inference as to the
length of employment or service hereby, and the Company or an Affiliate
reserves the same rights to terminate the Participant's employment or service
as existed prior to the individual becoming a Participant in this Plan.
10.6 Awards in Substitution for Awards Granted by Other Corporations.
Awards may be granted under the Plan from time to time in substitution for
awards held by employees, directors or service providers of other corporations
who are about to become officers, directors or employees of the Company or an
Affiliate as the result of a merger or consolidation of the employing
corporation with the Company or an Affiliate, or the acquisition by the Company
or an Affiliate of
A21
<PAGE> 28
the assets of the employing corporation, or the acquisition by the Company or
Affiliate of the stock of the employing corporation, as the result of which it
becomes a designated employer under the Plan. The terms and conditions of the
Awards so granted may vary from the terms and conditions set forth in this Plan
at the time of such grant as the majority of the members of the Board of
Directors may deem appropriate to conform, in whole or in part, to the
provisions of the awards in substitution for which they are granted.
10.7 Procedure for Adoption. Any Affiliate of the Company may by
resolution of such Affiliate's board of directors, with the consent of the
Board of Directors and subject to such conditions as may be imposed by the
Board of Directors, adopt the Plan for the benefit of its employees as of the
date specified in the board resolution.
10.8 Procedure for Withdrawal. Any Affiliate which has adopted the
Plan may, by resolution of the board of directors of such direct or indirect
subsidiary, with the consent of the Board of Directors and subject to such
conditions as may be imposed by the Board of Directors, terminate its adoption
of the Plan. If the Participant disposes of shares of Common Stock acquired
pursuant to an Incentive Stock Option in any transaction considered to be a
disqualifying transaction under the Code, the Participant must give written
notice of such transfer and the Company shall have the right to deduct any
taxes required by law to be withheld from any amounts otherwise payable to the
Participant.
10.9 Delay. If at the time a Participant incurs a Termination of
Employment (other than due to Cause) or if at the time of a Change in Control,
the Participant is subject to "short-swing" liability under Section 16 of the
Exchange Act, any time period provided for under the Plan or an Agreement to
the extent necessary to avoid the imposition of liability shall be suspended
and delayed during the period the Participant would be subject to such
liability, but not more than six (6) months and one (1) day and not to exceed
the Option Period, or the period for exercise of a Stock Appreciation Right as
provided in the Agreement, whichever is shorter. The Company shall have the
right to suspend or delay any time period described in the Plan or an Agreement
if the Board of Directors shall determine that the action may constitute a
violation of any law or result in liability under any law to the Company, an
Affiliate or a shareholder of the Company until such time as the action
required or permitted shall not constitute a violation of law or result in
liability to the Company, an Affiliate or a shareholder of the Company.
10.10 Headings. The headings contained in this Plan are for reference
purposes only and shall not affect the meaning or interpretation of this Plan.
10.11 Severability. If any provision of this Plan shall for any reason
be held to be invalid or unenforceable, such invalidity or unenforceability
shall not effect any other provision hereby, and this Plan shall be construed
as if such invalid or unenforceable provision were omitted.
10.12 Successors and Assigns. This Plan shall inure to the benefit of
and be binding upon each successor and assign of the Company. All obligations
imposed upon a Participant, and all
A22
<PAGE> 29
rights granted to the Company hereunder, shall be binding upon the
Participant's heirs, legal representatives and successors.
10.13 Entire Agreement. This Plan and the Agreement constitute the
entire agreement with respect to the subject matter hereof and thereof,
provided that in the event of any inconsistency between the Plan and the
Agreement, the terms and conditions of the Agreement shall Control.
EXECUTED on this day of July 30, 1997.
CONTINENTAL NATURAL GAS, INC.
By:
-----------------------------------
Gary C. Adams
Chairman and Chief Executive Officer
A23
<PAGE> 30
ANNEX B-1
INCENTIVE STOCK OPTION AGREEMENT
FOR STOCK OPTIONS GRANTED
UNDER THE
CONTINENTAL NATURAL GAS, INC.
1997 STOCK PLAN
B1-1
<PAGE> 31
INCENTIVE STOCK OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT dated
as of ________, 199___ ("Grant Date"), is between
Continental Natural Gas, Inc., an Oklahoma corporation
(the "Company"), and __________, an employee of the
Company or one of its Subsidiaries (the "Participant").
WHEREAS, the Company desires, by affording the Participant an
opportunity to purchase shares of the Company's Common Stock as hereinafter
provided, to carry out the purposes of the Continental Natural Gas, Inc. 1997
Stock Incentive Plan (the "Plan"); and
WHEREAS, the Board of Directors has duly made all determinations
necessary or appropriate to the grants hereunder;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth and for other good and valuable consideration,
receipt of which is hereby acknowledged, the parties hereto have agreed, and do
hereby agree, as follows:
1. Grant of Option, Option Price and Term.
(a) The Company hereby grants to the Participant, as a matter
of separate agreement and not in lieu of salary or any other
compensation for services, the right and option (the "Option") to
purchase _______ shares of the Common Stock of the Company ("Option
Shares") on the terms and conditions herein set forth.
(b) For each of the Option Shares purchased, the Participant
shall pay to the Company $_______ per share (the "Option Price"),
which represents the Fair Market value on _________, 199___, the date
of grant. Accordingly, the aggregate Option Price to exercise all of
the Option is $__________ ("Aggregate Option Price").
(c) The term of this Option shall be a period of ten (10)
years from the Grant Date (the "Option Period").
(d) The Option granted hereunder is designated as an incentive
stock option.
(e) The Company shall not be required to issue any fractional
Option Shares.
B1-2
<PAGE> 32
2. Termination of Option. Subject to the schedule of
Section 1(c).
(a) If the Termination of Employment is on account of the
death of the Participant, this Option shall be canceled five (5) years
after the date of the occurrence of the death or after the remaining
Option Period if shorter.
(b) If a Participant incurs a Termination of Employment for
reasons of a Disability, this Option shall be canceled one (1) year
after such Termination of Employment or after the remaining Option
Period if shorter.
(c) If a Participant incurs a Termination of Employment
(other than due to Disability or death), this Option will
automatically be canceled three (3) months after such Termination of
Employment or after the remaining Option Period, if shorter.
(d) If a Participant incurs a Termination of Employment for
Cause, the Option will be automatically canceled with the date of the
Termination of Employment.
3. Exercise.
The Option shall be exercisable during the Participant's lifetime only
by the Participant or his or her Representative, and after the Participant's
death only by a Representative. The Option may only be exercised by the
delivery to the Company of a properly completed written notice, in form
satisfactory to the Board of Directors, which notice shall specify the number
of Option Shares to be purchased and the aggregate Option Price for such
shares, together with payment in full of such aggregate Option Price. Payment
shall be made in one or more of the following methods and in a manner so as not
to violate Rule 16b of the Securities and Exchange Act of 1 934, as amended:
(a) in cash or by check;
(b) by the delivery to the Company of a valid and enforceable
stock certificate (or certificates) representing shares of Common
Stock, which is endorsed in blank or accompanied by an executed stock
power (or powers) and guaranteed in a manner acceptable to the Board
of Directors;
(c) by reducing the number of shares of Common Stock to be
issued and delivered to the Participant upon such exercise;
(d) in cash by a broker-dealer to whom the Participant has
submitted a notice of exercise; or
(e) in any combination of (a), (b), (c) or (d).
B1-3
<PAGE> 33
If any part of the payment of the Option Price is made in shares of Common
Stock, such shares shall be valued by using their Fair Market Value as of their
date of delivery.
The Option shall not be exercised unless there has been compliance
with all the preceding provisions of this Section 3, and, for all purposes of
this Incentive Stock Option Agreement, the date of the exercise of the Option
shall be the date upon which there is compliance with all such requirements.
4. Payment of Withholding Taxes.
If the Company is obligated to withhold an amount on account of any
federal, state or local tax imposed as a result of the exercise of the Option,
including, without limitation, any federal, state or other income tax, or any
F.I.C.A., state disability insurance tax or other employment tax, then the
Participant shall (1) pay, concurrently with such exercise, such amount to the
Company in cash or by check payable to the Company; (2) irrevocably elect at
least six (6) months in advance of such exercise (or elect incident to a
Termination of Employment, Retirement, death or Disability) to have shares of
Common Stock, which would otherwise be issued, withheld by the Company; or (3)
as otherwise permitted by the Plan.
5. Requirements of Law; Registration and Transfer Requirements.
The Company shall not be required to sell or issue any shares under
the Option if the issuance of such shares shall constitute a violation of any
provision of any law or regulation of any governmental authority. This Option
and each and every obligation of the Company hereunder are subject to the
requirement that the Option may not be exercised or performed, in whole or in
part, unless and until the Option Shares are listed, registered or qualified,
properly marked with a legend or other notation, or otherwise restricted, as is
provided for in the Plan.
6. Adjustments/Change in Control.
In the event of a Change in Control or other corporate restructuring
provided for in the Plan, the Participant shall have such rights, and the Board
of Directors shall take such actions, as are provided for in the Plan.
7. Nontransferability.
The Option and any interest in the Option may not be sold, assigned,
conveyed, gifted, pledged, hypothecated or otherwise transferred in any manner
other than by will or the laws of descent and distribution. Notwithstanding any
other provision of this Incentive Stock Option Agreement, any such attempted
sale, assignment, conveyance, gift, pledge, hypothecation or transfer shall be
null and void and shall nullify the Option immediately.
B1-4
<PAGE> 34
8. Plan.
Notwithstanding any other provision of this Incentive Stock Option
Agreement, the Option is granted pursuant to the Plan, as in effect on the date
hereof, and is subject to all the terms and conditions of the Plan, as the same
may be amended from time to time; provided, however, that no amendment to
either the Plan or this Incentive Stock Option Agreement shall deprive the
Participant, without the Participant's consent, of the Option or of any of
Participant's rights under this Incentive Stock Option Agreement. The
interpretation and construction by the Board of Directors of the Plan, this
Incentive Stock Option Agreement, the Option, and such rules and regulations as
may be adopted by the Board of Directors for the purpose of administering the
Plan, shall be final and binding upon the Participant. Until the Option shall
expire, terminate or be exercised in full, the Company shall, upon written
request therefor, send a copy of the Plan, in its then-current form, to the
Participant or any other person or entity then entitled to exercise the Option.
Participant hereby acknowledges receipt of a copy of the Plan.
9. Stockholder Rights.
Until the Option shall have been duly exercised to purchase such
Option Shares and such shares have been officially recorded as issued on the
Company's official stockholder records, no person or entity shall be entitled
to vote, receive dividends or be deemed for any purpose the holder of any
Option Shares, and adjustments for dividends or otherwise shall be made only if
the record date therefor is subsequent to the date such shares are recorded and
after the date of exercise and without duplication of any adjustment.
10. Employment Rights.
No provision of this Incentive Stock Option Agreement or of the Option
granted hereunder shall give the Participant any right to continue in the
employ of the Company or any of its Affiliates, create any inference as to the
length of employment of the Participant, affect the right of the Company or its
Affiliates to Terminate the Employment of the Participant, with or without
Cause, or give the Participant any right to participate in any employee welfare
or benefit plan or other program (other than the Plan) of the Company or any of
its Affiliates.
11. Disclosure Rights.
The Company shall have no duty or obligation to affirmatively disclose
to the Participant or a Representative, and the Participant or Representative
shall have no right to be advised of, any material information regarding the
Company or an Affiliate at any time prior to, upon or in connection with the
exercise of an Option or the Company's purchase of Common Stock in accordance
with the terms of this Incentive Stock Option Agreement.
B1-5
<PAGE> 35
12. Investment Representation and Agreement.
The Board of Directors may require the Participant to furnish to the
Company, prior to the issuance of any shares of Common Stock upon the exercise
of all or any part of this Option, an agreement (in such form as such Board of
Directors may specify) in which the Participant represents that the shares of
Common Stock acquired by him upon exercise are being acquired for investment
and not with a view to the sale or distribution thereof.
13. Governing Law.
This Incentive Stock Option Agreement and the Option granted hereunder
shall be governed by, and construed and enforced in accordance with, the laws
of the State of Oklahoma.
14. Entire Agreement.
This Incentive Stock Option Agreement, together with the Plan,
constitute the entire obligation of the parties hereto with respect to the
subject matter hereof and shall supersede any prior expressions of intent or
understanding with respect to this transaction.
15. Definitions.
Wherever initial capitalization of a term is used in this Incentive
Stock Option Agreement, it shall have the same meaning as that given to it by
the Plan, except to the extent such meaning should conflict with any meaning
afforded to such term in this Incentive Stock Option Agreement.
16. Amendment.
Any amendment to this Incentive Stock Option Agreement shall be in
writing and signed by the Company.
17. Waiver; Cumulative Rights.
The failure or delay of either party to require performance by the
other party of any provision hereof shall not affect its right to require
performance of such provision unless and until such performance has been waived
in writing. Each and every right hereunder is cumulative and may be exercised
in part or in whole from time to time.
18. Counterparts.
This Incentive Stock Option Agreement may be signed in two
counterparts, each of which shall be an original, but both of which shall
constitute but one and the same instrument.
B1-6
<PAGE> 36
19. Notices.
Any notice which either party hereto may be required or permitted to
give the other shall be in writing and may be delivered personally or by mail,
postage prepaid, addressed to the Secretary of the Company, 1412 South Boston,
Suite 500, Tulsa, Oklahoma, and the Participant at his or her address as shown
on the Company's payroll records, or to such other address as the Participant,
by notice to the Company, may designate in writing from time to time.
20. Headings.
The headings contained in this Incentive Stock Option Agreement are
for reference purposes only and shall not affect the meaning or interpretation
of this Incentive Stock Option Agreement.
21. Severability.
If any provision of this Incentive Stock Option Agreement shall for
any reason be held to be invalid or unenforceable, such invalidity or
unenforceability shall not effect any other provision hereof, and this
Incentive Stock Option Agreement shall be construed as if such invalid or
unenforceable provision were omitted.
22. Successors and Assigns.
This Incentive Stock Option Agreement shall inure to the benefit of
and be binding upon each successor and assign of the Company. All obligations
imposed upon the Participant or a Representative, and all rights granted to the
Company hereunder, shall be binding upon the Participant's or the
Representative's heirs, legal representatives and successors.
IN WITNESS WHEREOF, the Company has caused this Incentive Stock Option
Agreement to be duly executed by an officer thereunto duly authorized, and the
Participant has hereunto set his hand, all as of the day and year first above
written.
CONTINENTAL NATURAL GAS, INC.
By:
-----------------------------------
Title:
--------------------------------
PARTICIPANT
By:
-----------------------------------
B1-7
<PAGE> 37
ANNEX B-2
STOCK GRANT AGREEMENT
FOR STOCK GRANTED
UNDER THE
CONTINENTAL NATURAL GAS, INC.
1997 STOCK PLAN
B2-1
<PAGE> 38
STOCK GRANT AGREEMENT
STOCK GRANT AGREEMENT dated as of between CONTINENTAL NATURAL GAS,
INC., an Oklahoma corporation (the "Company"), and , an (officer, non-employee
director, employee or consultant) of the Company or one of its subsidiaries
(the "Holder").
WHEREAS, the Board of Directors of the Company has established
Continental Natural Gas, Inc. 1997 Stock Plan (the "Plan");
WHEREAS, the Plan's Board of Directors, in accordance with the
provisions of the Plan, has selected the Holder as a salaried key management
employee who, in the Board of Directors's judgment, has significant potential
for making substantial contributions to corporate growth and objectives;
WHEREAS, in order to reward the Holder for services to be rendered in
a manner that relates directly to the Company's earnings growth and further the
identity of interests of the Holder and the Company's shareholders through
opportunities for increased stock ownership by the Holder, each Board of
Directors has determined that the Holder receive a Stock Grant under the Plan;
NOW, THEREFORE, in consideration of the foregoing and the Holder's
acceptance of the terms and conditions hereof, the parties hereto have agreed,
and do hereby agree, as follows:
1. The Company hereby grants to the Holder, as a matter of separate
agreement and not in lieu of salary or any other compensation for services,
shares of Common Stock of the Company on the terms and conditions herein set
forth.
2. The certificates representing the shares of Common Stock granted to
the Holder shall be registered in the name of the Holder and retained in the
custody of the Company until such time as they are delivered to the Holder or
forfeited to the Company in accordance with the terms hereof (the "Restriction
Period"). During the Restriction Period, the Holder will be entitled to vote
such shares and to receive dividends paid on such shares (less any amounts
which the Company is required to withhold for taxes).
3. If the Holder shall not have incurred a Termination of Employment
prior to ______________ , the Company shall deliver to the Holder on or about
such date a certificate, registered in the name of the Holder and free of
restrictions hereunder, representing ____% of the total number of shares
granted to the Holder pursuant to this Agreement. If the Holder shall be so
continuously employed on , the Company on or about such date shall deliver
additional certificates representing ____% of the total number of such shares.
If the Holder shall be so continuously employed on _______________________, the
Company on or about such date shall deliver additional certificates
representing ____% of the total number of such shares. If the Holder shall be
so continuously employed on ______________________, the Company on or about such
date shall
B2-2
<PAGE> 39
deliver additional certificates representing ____% of the total number of such
shares. No payment (except for tax withholding) shall be required from the
Holder in connection with any delivery to the Holder of shares hereunder.
4. In the event the Holder has a Termination of Employment for reasons
of Retirement at or after age 65, or Disability, and if there then remain any
undelivered shares subject to restrictions hereunder, then such restrictions
shall be deemed to have lapsed and the certificates for the remaining shares
shall forthwith be delivered to such retired Holder.
5. Subject to the provisions of paragraph 4 above, if the Holder has a
Termination of Employment for any reason (including Retirement prior to age 65
or death) during the Restriction Period, then the Holder shall cease to be
entitled to delivery of any of the shares covered by this Agreement which have
not theretofore been delivered by the Company pursuant to paragraph 3 above,
and all rights of the Holder in and to such undelivered shares shall be
forfeited; provided, however, the appropriate Board of Directors may, within
120 days after such Termination of Employment, in its sole discretion,
determine whether such former Holder (or his beneficiary, estate or heirs)
shall receive all or any part of the undelivered shares granted pursuant to
this Stock Grant Agreement and whether to impose any conditions in connection
therewith. In addition, each Board of Directors shall from time to time
determine in its sole discretion whether any period of nonactive employment,
including authorized leaves of absence by reason of military or governmental
service, shall constitute Termination of Employment for the purposes of this
paragraph.
6. The granting of this Stock Grant shall not in any way prohibit or
restrict the right of the Company to terminate the Holder's employment at any
time, for any reason.
7. While shares of Common Stock are held in custody for the Holder
pursuant to this Agreement, they may not be sold, transferred, pledged,
exchanged, hypothecated or disposed of by the Holder and shall not be subject
to execution, attachment or similar process.
8. This Agreement and each and every obligation of the Company
hereunder are subject to the requirement that if at any time the Company shall
determine, upon advice of counsel, that the listing, registration or
qualification of the shares covered hereby upon any securities exchange or
under any state or Federal law, or the consent or approval of any governmental
regulatory body, is necessary or desirable as a condition of or in connection
with the granting hereof or the delivery of shares hereunder, then the delivery
of shares hereunder to the Holder may be postponed until such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Board of Directors of the
Company.
9. In addition to amounts in respect of taxes which the Company shall
be required by law to deduct or withhold from any dividend payments on the
shares covered hereby, the Company may defer making any delivery of shares
under this Agreement until completion of arrangements satisfactory to the
Company for the payment of any other applicable taxes.
B2-3
<PAGE> 40
10. In the event of a "change in control," as that term is defined in
the Plan, then the Holder shall have all the rights specified in Article IX of
the Plan.
11. Defined words used in this Agreement shall have the same meaning
as set forth in the definitions section or elsewhere in the Plan, the terms and
conditions of which shall constitute an integral part hereof.
12. Any notice which either party hereto may be required or permitted
to give the other shall be in writing and may be delivered personally or by
mail, postage prepaid, addressed to the Secretary of the Company, 1412 South
Boston, Suite 500, Tulsa, Oklahoma 74119, and to the Holder at his address as
shown on the Company's payroll records, or to such other address as the Holder
by notice to the Company may designate in writing from time to time.
CONTINENTAL NATURAL GAS, INC.
BY:
-----------------------------------
ACCEPTED:
- -------------------------------
HOLDER
*I hereby elect to be taxed (check one):
( ) as the restrictions lapse, or such later date as may result
from the application of Section 16b of the Securities Exchange
Act of 1934, as amended.
( ) as of the date of grant for all of the shares of Common Stock.
- -------------------------------
HOLDER
- -------------------------------
DATE
*ANY ELECTION TO BE TAXED AS OF THE DATE OF GRANT MUST BE FILED WITH THE
INTERNAL REVENUE SERVICE NOT LATER THAN 30 DAYS AFTER THE DATE HEREOF AND A
COPY FILED WITH THE SECRETARY OF THE COMPANY.
B2-4
<PAGE> 41
EXERCISE AGREEMENT
FOR EXERCISING STOCK OPTIONS
GRANTED UNDER THE
CONTINENTAL NATURAL GAS, INC.
1997 STOCK PLAN
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<PAGE> 42
INSTRUCTIONS
FOR EXERCISING STOCK OPTION GRANTED
UNDER THE
CONTINENTAL NATURAL GAS, INC.
1997 STOCK PLAN
===============================================================================
General:
In order to exercise your Option granted under the Continental Natural
Gas, Inc. 1997 Stock Plan ("Plan") pursuant to your stock Option Agreement,
please complete and sign the attached Continental Natural Gas, Inc. 1997 Stock
Plan Exercise Agreement ("Exercise Agreement"). On the Exercise Agreement, you
should indicate the manner in which you will pay (1) the exercise price of the
Option ("Option Price") and (2) any required withholding taxes.
Participants who are directors of the Company, who are officers of the
Company subject to the provisions of Section 16 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and/or who beneficially own (as
defined in rules issued under such Section 16) over ten percent of the
outstanding Shares of the Company (collectively the "Insiders"), are subject to
the reporting and short-swing profits recapture rules under such Section 16.
Therefore, before making any elections or transactions with respect to Stock
Options (and stock acquired upon exercise thereof) under the Plan, these
participants should consult with their legal advisors and ____________ of the
Company regarding the Section 16 implications.
If you have any questions regarding this Exercise Agreement, please
contact _____________.
Endorsement:
1 . Cash: If you are paying the Option Price or arranging for
payment of tax withholding by certified check or casher's check, checks should
be made payable to Continental Natural Gas, Inc..
2. Stock Certificate: If you are paying the Option Price or
arranging for payment of tax withholding by delivering a stock certificate the
stock certificate should be properly endorsed as follows.
a. The record holder of the stock certificate being
surrendered should sign and date the stock certificate on the reverse
side. The signature should correspond exactly (including misspellings)
with the name shown on the front side of the stock certificate.
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<PAGE> 43
. If the stock certificate being surrendered is held of record
in joint tenancy, both joint tenants must sign.
. If the endorsement is by a corporation or by a person
acting in a fiduciary or other representative capacity,
proper evidence of the authority of the person making the
endorsement should be included with the stock certificate
being surrendered.
b. If the stock certificate being surrendered represents a
larger number of shares of Common Stock than are being surrendered as
the Option Price (i.e., having a Fair Market Value on the date the
Option is exercised in excess of the Option Price), indicate on the
reverse side of the stock certificate the number of shares of Common
Stock being transferred to the Company pursuant to the exercise of the
Option. A new certificate representing any excess shares of Common
Stock will be issued in the name appearing on the surrendered stock
certificate and delivered to you by the transfer agent for the
Company.
c. The method of delivery of a stock certificate representing
Common Stock is at the option and risk of the holder of such
certificates. If a stock certificate is sent by mail, insured
registered mail is recommended.
Defined Terms:
Each term defined in the Plan or a Stock Option Agreement shall, when
capitalized herein, have the same meaning for the purpose of this Exercise
Agreement as given to it in the Plan or the Stock Option Agreement. The Plan
and the Stock Option Agreement shall control if there is any conflict between
the Plan (or the Stock Option Agreement) and this Exercise Agreement, and as to
all matters not provided in this Exercise Agreement.
C-iii
<PAGE> 44
CONTINENTAL NATURAL GAS, INC.
1997 STOCK PLAN
EXERCISE AGREEMENT
This Exercise Agreement is made by and between Continental Natural Gas,
Inc. ("Company") and _____________________ ("Participant"). The Participant
entered into a Stock Option Agreement, dated __________, in accordance with the
Continental Natural Gas, Inc. 1997 Stock Plan ("Plan").
The Participant desires to exercise the Option on the following terms
and conditions:
1. General. Each term defined in the Plan or a Stock Option Agreement
shall, when capitalized herein, have the same meaning for the purpose of this
Exercise Agreement as given to it in the Plan or the Stock Option Agreement.
The Plan and the Stock Option Agreement shall control if there is any conflict
between the Plan (or the Stock Option Agreement) and this Exercise Agreement,
and as to all matters not provided in this Exercise Agreement.
2. Exercise. Subject to the terms of this Exercise Agreement, the
Participant hereby irrevocably elects to exercise, as of the date accepted
hereunder by the Board of Directors, the Option with respect to __________
Option Shares at the Option Price of $ _________per Option Share (as set forth
in the Stock Option Agreement). The exercise pursuant hereto shall reduce the
number of shares subject to the Stock Option Agreement by the same amount.
3. Consideration. The Option Shares to be received pursuant to this
Exercise Agreement are being transferred in consideration for: [Please check
the applicable Option payment provision.]
a. cash in the amount of $_______(the Option Price). Enclosed
herewith is a certified check or cashier's check for this
amount.
b. delivery of valid and enforceable stock certificates
representing shares of Common Stock and endorsed for transfer to
the Company, in accordance with the Instructions accompanying
this Exercise Agreement.
c. the Company reducing the number of Option Shares to be issued
and delivered to the Participant upon such exercise.
d. cash by a broker-dealer to whom the holder of the Option has
submitted an irrevocable notice of exercise.
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<PAGE> 45
e. any combination of (a), (b), (c) or (d) having an aggregate Fair
Market Value equal to the aggregate Option Price.
Describe any combination:
--------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
4. Withholding. Because the Company is obligated to withhold an amount
presently or an estimated amount in the future on account of any tax (including
employment taxes) imposed as a result of the exercise of this Option, the
Participant does hereby: [Please check the applicable tax withholding
provision]
a. -- request that this exercise not be accepted by the Board of
Directors for six (6) months and the Company withhold and
not transfer or issue to the Participant by virtue of this
exercise, that number of Option Shares having an aggregate
Fair Market Value equal to the Company's federal, state or
local tax withholding obligations with respect to the
exercise of the Option.
b. -- (if the Participant is an employee of the Company as of the
date hereof) authorize the Company to withhold from my
future paychecks such amounts, in addition to any other
amounts to be withheld from such paychecks, equal to the
Company's federal, state or local tax withholding
obligations with respect to the exercise of the Option.
c -- deliver a certified check or cashier's check to the Company
equal to the Company's federal, state or local tax
withholding obligations with respect to the exercise of the
Option, as reported to the Participant by the Company.
5. Rule 144 Sales. If any Participant wishes to dispose of any Option
Shares in accordance with Rule 144 under the Act or otherwise, the Participant
shall promptly notify the Company of such intended disposition and shall
deliver to the Company at or prior to the time of such disposition such
documentation as the Company may reasonably request in connection with such
sale and, in the case of a disposition pursuant to Rule 144, shall deliver to
the Company an executed copy of any notice on Form 144 required to be filed
with the Securities and Exchange Commission.
6. Prospectus. The Participant represents and warrants that he or she
has received a Prospectus describing the Plan.
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<PAGE> 46
7. Successors and Assigns. This Exercise Agreement shall inure to the
benefit of and be binding upon each successor and assignee of the Participant
and the Company.
8. Choice of Laws. This Exercise Agreement shall be governed by and
construed in accordance with the laws of the State pursuant to which the Stock
Option Agreement shall be governed and construed.
9. Entire Exercise Agreement. This Exercise Agreement, together with
the Plan and the Stock Option Agreement, constitute the entire obligation of
the parties hereto with respect to the subject matter hereof and shall
supersede any prior expressions of intent or understanding with respect to this
exercise of your Option.
TENDERED BY THE PARTICIPANT ACCEPTED BY THE Board of Directors FOR
ON THE CONTINENTAL NATURAL GAS, INC.
-------------------------- 1997 STOCK PLAN
ON
------------------------------------
By:
- ----------------------------- -----------------------------------
Title:
--------------------------------
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<PAGE> 1
EXHIBIT 10.9
LEASE
LEASE, effective as of July __, 1997 (the "Effective Date") between
K/B FUND IV, a Delaware general partnership, with an office at 1437 South
Boulder, Tulsa, Oklahoma 74119 ("Landlord"), and CONTINENTAL NATURAL GAS, INC.,
an Oklahoma corporation, with an office at Suite 500, 1412 South Boston,
Tulsa, Oklahoma 74119 ("Tenant").
ARTICLE ONE - LEASE OF PREMISES
Section 1.01 Lease of Premises.
(a) Landlord hereby leases to Tenant, and Tenant hereby leases
from Landlord, upon and subject to the covenants, agreements, terms, provisions
and conditions of this Lease, for the term and at the rent hereinafter stated,
the premises referred to in subsection (b) below (the "Leased Premises") in the
building, together with parking spaces as hereinafter provided and certain
non-exclusive rights to the parking garage and related improvements known as
The Texaco Building, 1437 South Boulder, Tulsa, Oklahoma 74119 (the
"Building").
(b) The Leased Premises shall include a total of approximately
20,347 rentable square feet (rsq) of demised office space located on the entire
twelfth (12th) floor West Tower of the Building and on a portion of the twelfth
(12th) floor East Tower of the Building as shown on the attached Floor Plans on
Exhibit A1, (i) together with such additional space as Tenant may lease at the
Building pursuant hereto (when added to the Leased Premises) and all fixtures,
equipment, improvements, installations and appurtenances which at the
commencement of or during the term of this Lease are attached to, situated or
located in, or used in connection with such space leased by Tenant but
excluding any personal property or trade fixtures of Tenant and (ii) less such
space as may be deleted from the Leased Premises pursuant to any provision of
this Lease (when so deleted). The rentable area of the Leased Premises
described above is represented by Landlord to Tenant to be 20,347 square feet.
The rentable area of the Building is represented by Landlord to Tenant to be
515,738 square feet. Landlord's stated calculation of the rentable area of
Leased Premises and Building shall be determinative.
(c) This Lease includes the right of Tenant to use the Common
Building Facilities (as defined below) in common with other tenants in the
Building and Tenant's Parking Spaces (as provided for in Article Six) in the
Building Parking Garage and Additional Parking Area (referred to in Article
Six).
(d) The term "Common Building Facilities" shall mean all of the
common facilities in or around the Building designed and intended for use by
all tenants in the Building in common with Landlord and each other, including
but not limited to the parking garage constructed on the land (the "Building
Parking Garage") the other parking areas (the "Additional Parking"), hallways,
elevators, fire stairs, telephone and electric closets, aisles, walkways, truck
docks, plazas, courts, restrooms, service areas, lobbies, landscaped areas, and
all other common and service areas of the land and the
<PAGE> 2
Building intended for such use. Floors wholly occupied by Tenant shall not
have any facilities which shall be used in common with other tenants, except
for (i) fire stairs and (ii) mechanical, equipment and janitorial rooms and
general service areas for Landlord's exclusive use serving the Building
generally. Use of the Common Building Facilities is subject to rules and
regulations promulgated by the Landlord.
(e) The term "Building" means all of the land and improvements
thereon included within the office projects known as the Texaco Building, 1437
South Boulder Street, Tulsa, Oklahoma as described on Exhibit "A".
The term "The Texaco Building Complex" means any and all driveways,
roadways, sidewalks, landscaped area and other facilities and amenities from
time to time located within The Texaco Building Complex which are all for the
common use of all occupants and business visitors of The Texaco Building.
ARTICLE TWO - TERM
Section 2.01 Initial Term. This Lease is effective as of the date
hereof. The initial term of this Lease (the "Initial Term") shall commence on
the Term Commencement Date (as defined in Section 3.01 below) and shall
terminate on midnight of last day of the sixtieth (60th) month following the
(i) the Term Commencement Date, if the Term Commencement Date occurs on the
first day of a calendar month, or (ii) if not, the first day of the calendar
month immediately following the calendar month containing the Term Commencement
Date (the "Expiration Date") or on such earlier date on which the term may
expire or be terminated pursuant to the provisions of this Lease or pursuant to
law.
Section 2.02 Renewal Terms.
(a) Provided Tenant is not then in default in any of its
obligations under this Lease after applicable notice and curative periods have
expired, Tenant shall have the option to renew the term of this Lease as to all
of the Leased Premises for a one (1) two-(2) year renewal term (the "Renewal
Term"). Such option shall be exercised by written notice to Landlord given at
least six (6) months prior to the expiration of the Initial Term. The Renewal
Term shall be on the same covenants, agreements, terms, provisions and
conditions as are contained herein for the Initial Term, except as expressly
provided herein to the contrary and except for such as are, by their terms,
inapplicable to a Renewal Term. Tenant shall have no further renewal options
following the Renewal Term. The rent payable during the Renewal Term shall be
as provided in Section 4.04.
(b) At any time after the Renewal Term has become effective and
the rent payable during such Renewal Term determined, Landlord and Tenant, upon
request of either, shall execute an agreement supplementary hereto setting out
the date to which such Renewal Term shall extend, the Annual Rental payable
during such Renewal Term and the Leased Premises for such Renewal Term.
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<PAGE> 3
(c) Tenant's renewal rights may not be exercised by any sublessee
or assignee except by a permitted assignee (including an Affiliate of Tenant as
provided in Section 16.01) of all of Tenant's rights under this Lease.
Section 2.04 Expansion Option. Tenant shall have the right and
option to expand the Leased Premises ("Expansion Option") to include all of
office space adjacent to the initial premises on the twelfth (12th) floor of
the East Tower ("Expansion Space") on the following terms:
(a) Landlord shall notify Tenant in writing if it receives a
request for lease proposal or bona fide interest to lease the Expansion Space
from a third party (the "Third Party") and Tenant shall have seven (7) days
from receipt of Landlord's notice to add the Expansion Space to this Lease by
way of Lease Amendment as hereinafter provided.
(b) If after Landlord's notice of offer, Tenant does not notify
Landlord of its election to lease the Expansion Space, Landlord may proceed to
lease the Expansion space to such Third Party on terms and conditions,
including rental rate, acceptable to Landlord. If a lease is not entered into
by Landlord with such Third Party within six (6) months of Landlord's notice,
Tenant's right to first offer and option for the Expansion shall revest.
(c) At any time during the Term when the Expansion Space is not
leased to a third party or subject to negotiation by Landlord within six (6)
months of Landlord's notice to Tenant as provided in Section 2.04(a), Tenant
shall have the right by giving notice to Landlord to include the Expansion
Space in this Lease by way of Lease Amendment as hereinafter provided.
(d) If the Expansion Option is exercised by Tenant with a term
commencing on or before December 31, 1997, the Lease Amendment shall provide:
(1) An Annual Rental for the Expansion Space of TEN AND
50/100 DOLLARS ($10.50) per rentable square foot.
(2) A Tenant Improvement Allowance equal to 1/60th of the
sum of TEN AND NO/100 DOLLARS ($10.00) times the
rentable square footage of the Expansion Space times
the number of months then remaining in the Initial
Term.
(3) All other provisions of the Lease shall remain the
same.
(e) If the Expansion Option is exercised by Tenant with a term
commencing after December 31, 1997, the Lease Amendment shall provide:
(1) An Annual Rental Rate for the Expansion Space equal
to One Hundred Percent (100%) of the Fair Market
Value of the Expansion Space as determined under the
procedures set forth on Exhibit "C" .
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<PAGE> 4
(2) All other provisions of the Lease shall remain the
same.
(f) Tenant's Expansion Option for the Expansion Space shall expire
upon an Event of Default of this Lease and upon the expiration of the Initial
Term if not previously exercised before such date.
Section 2.05 Term of this Lease. The term "term of this Lease"
shall mean the Initial Term and the Renewal Term which may become effective
pursuant to Section 2.02.
ARTICLE THREE - TERM COMMENCEMENT DATE
Section 3.01 Term Commencement Date.
(a) Landlord shall make the Leased Premises available to Tenant
for the performance by Tenant of its Tenant finish work simultaneously with the
Effective Date of this Lease. Such space shall be delivered to Tenant in "as
is" condition, Landlord having no obligation to do any demolition, construction
or improvement work with respect to such space, except as provided in Exhibit
"B". Rent and occupancy for Tenant's business operations shall commence upon
the earlier of (i) the date Tenant has completed its move in and has commenced
its business operations or (ii) September 15, 1997.
(b) Except as specifically and expressly provided in this Lease,
Landlord makes no express or implied warranties as to the condition of such
space (or any other space subsequently leased by Tenant) or its suitability for
the conduct of Tenant's business except as provided in Exhibit "F".
(c) Prior to performing any work in the Leased Premises, Tenant
shall submit working drawings and specifications sufficient to complete
construction based thereon ("Tenant's Plans") for Tenant's improvements,
additions, installations, alterations and trade fixtures to be installed in the
Leased Premises (and for any subsequent improvements or changes to the Leased
Premises, including as to additional space added thereto) for Landlord's review
and written approval. Landlord shall have ten (10) days from receipt of
Tenant's Plans to either approve or reject or comment to same, specifying the
reason for any objections or comments in reasonable detail in writing.
Landlord shall not unreasonably withhold its approval to any of Tenant's Plans
provided (i) the same provide for improvements which will be compatible and
integrate with and not unduly drain from the base building systems for the
Building and will meet all structural design load requirements; (ii) no
improvements of Tenant will be visible from the exterior of the Building; (iii)
any improvements visible from common areas, including elevator lobbies, will be
aesthetically compatible with the Building common areas; (iv) all of Tenant's
improvements and the construction thereof will be consistent with good
construction, engineering and safety practices; and (v) any additional
requirements of Sections 7.01 or 11.01 , the Rules and Regulations attached
hereto as Exhibit "H" and other provisions of this Lease are met. Landlord
shall charge no plan review fee or fee for third-
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<PAGE> 5
party architectural, engineering, consultant and other professional fees and
expenses incurred by Landlord in connection with the review of Tenant's Plans.
Tenant shall perform all construction with contractors and
subcontractors of its choice, subject to the prior written approval of
Landlord, which approval shall not be unreasonably withheld or delayed. Tenant
shall cooperate in providing Landlord with the information that it requests to
qualify contractors or subcontractors.
Tenant and Tenant's contractors and subcontractors shall comply with
all Applicable Laws and all of the Building Rules and Regulations as set forth
in performing its construction. All such construction shall be performed in a
good and workmanlike manner in keeping with good construction practice. Tenant
shall be responsible for obtaining all of its required building permits and the
certificate of occupancy (if required) for the Leased Premises, as well as any
special permits or licenses required pursuant to Section 7.01.
Tenant shall indemnify and hold harmless Landlord from and against any
and all losses, damages, costs and expenses (includes costs of suit and
attorneys' fees), liabilities, or causes of action arising out of or relating
to any alterations, additions, installations, or improvements made by Tenant to
the Leased Premises, including but not limited to, mechanics, materialmen's or
other liens or claims (and all costs or expenses associated therewith)
asserted, filed or arising out of any such work. All contracts with
materialmen, contractors, artisans, mechanics, laborers and other parties
hereafter contracting with Tenant for the furnishing of any labor, services,
materials, supplies or equipment with respect to any portion of the Leased
Premises must provide that they look solely to Tenant for payment for same.
Without limiting the generality of the foregoing, Tenant shall repair or cause
to be repaired at its expense all damage caused by Tenant or any of its
contractors, their subcontractors or their employees, to the Building or any
mechanical system therein, or at Landlord's option, following notice to Tenant
which is reasonable under the circumstances, Landlord shall repair such damage
at Tenant's cost and expense.
ARTICLE FOUR - RENTAL
Section 4.01 Annual Rental. Tenant shall pay to Landlord as rent,
at the office of the Building or elsewhere as directed from time to time by
Landlord's written notice to Tenant, a base rental (the "Annual Rental")
computed on the basis of the Annual Rate in Exhibit "C" for each rentable
square foot of the Leased Premises. The Annual Rental shall be payable in
equal monthly installments, in advance, on the first day of each and every
month of the term of this Lease, the first such payment becoming due and
payable on the Term Commencement Date as to the space leased by Tenant on the
Term Commencement Date. Also, a prorated monthly installment shall be paid, if
the Term Commencement Date is other than the first day of a month or if the
term of this Lease terminates on a day other than the last day of a month.
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<PAGE> 6
Section 4.02 Additional Rental.
(a) For calendar year 1998 and for each calendar year thereafter
Tenant shall pay as additional rental together with all sums other than Annual
Rental payable by Tenant under this Lease (the "Additional Rental") for each
Operating Expense Year (as hereinafter defined) Tenant's Share (as hereinafter
defined) of the increase, if any, in the direct expenses paid or incurred by
Landlord for the operation, repair and maintenance of the Building, Building
Parking Garage, other Common Building Facilities, and the Additional Parking
Area ("Operating Expenses" as more fully defined in Exhibit D). As of the
Effective Date of this Lease, the total rentable area of the leasable space
within the Building is 515,738 square feet; therefore, as of the Effective Date
of this Lease, the Tenant's Share of Operating Expenses is three point
nine-five percent (3.95%). Notwithstanding the foregoing, for purposes of
calculating Additional Rental hereunder (i) the Operating Expenses for 1998
shall not exceed four percent (4%) of the Operating Expense Base, and (ii) the
Operating Expenses for each Operating Expense Year following 1998 shall not
exceed four percent (4%) of the Operating Expenses for the immediately
preceding Operating Expense Year (as limited pursuant to this paragraph
4.02(a)); provided however that such limitation shall apply only to all
Operating Expenses other than the real estate taxes and assessments. In
calculating the maximum amount of Operating Expenses for Tenants Share, the
amount of actual real estate taxes and assessments shall first be deducted from
Operating Expenses then the four percent (4%) limitation shall be applied to
the remainder and then real estate taxes and assessments shall be added back
and the sum of the above amounts shall be the Operating Expenses used in
determining Tenant's Share of Operating Expenses; provided however that the
amount of real estate taxes and assessments in 1998 shall not be in excess of
ten percent (10%) more than the amount of 1997 taxes and for each year after
1998 shall not be in excess of ten percent (10%) of the amount for the prior
year. Such Additional Rental shall be payable by Tenant to Landlord as
hereinafter provided.
(b) The term "Operating Expense Year" shall mean each calendar
year commencing with the calendar year in which the Term Commencement Date
occurs, falling, in whole or in part, within the term of this Lease. If a Term
Commencement Date for space leased by Tenant occurs on a date other than
January 1 or the term of this Lease terminates or expires on a date other than
December 31, the Additional Rental for the pertinent Operating Expense Year for
such space shall be prorated based upon the number of days in such Operating
Expense Year occurring after such Term Commencement Date or before the
termination or expiration of the term of this Lease, as applicable.
(c) The term "Tenant's Share" shall mean that number, stated above
as a percentage in Section 4.02(a). In the event of any change in the area of
the Leased Premises or the Building or in the event Tenant is entitled to a
rent abatement for Operating Expenses hereunder as to all or any portion of the
Leased Premises, Tenant's Share shall be adjusted to reflect such change or
event on a prorated, daily basis determined by dividing the number of rentable
square feet in the Leased Premises by the greater of (i) ninety-five (95%)
percent of the number of square feet of rentable area in the Building (as
represented by Landlord in Section 1.01(b)), or (ii) actual number of square
feet of rentable area then leased in the Building.
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<PAGE> 7
(d) The term "Operating Expense Base" shall mean an amount equal
to the product of Operating Expenses for the calendar year 1997 per rentable
square foot and ninety-five (95%) percent of the number of rentable square feet
in the Building (as represented by Landlord in Section 1.01 (b). On or before
April 1, 1998, Landlord will submit a statement setting forth the computation
of Operating Expenses for the calendar year 1997.
(e) Landlord's "Operating Statement" shall mean a statement
setting forth (1) the Operating Expenses for such Operating Expense Year,
showing in detail the amount of each item included in Operating Expenses, (2) a
detailed computation of any Additional Rental for such Operating Expense Year
and (3) a reconciliation of the actual Additional Rental payable by Tenant for
such year with the estimated Additional Rental paid by Tenant for such year.
Each Operating Statement shall be furnished by Landlord to Tenant not later
than April 1 of the calendar year following the Operating Expense Year to which
such statement relates.
Beginning with January 1, 1998, and for each calendar year thereafter
during the term of this Lease, Landlord shall provide Tenant on or before April
1 of such year with a comparison of the projected Operating Expenses for the
year and the Operating Expense Base and the projected Tenant's Share of any
positive differences between them. Commencing on the later of (i) the receipt
by Tenant of the Operating Statement for each year or (ii) January 1 of each
year, Tenant shall pay one-twelfth (1/12th) of such positive difference each
month during the year. If Tenant's Additional Rental for Operating Expenses
reflected in the Operating Statement for any Operating Expense Year are greater
than the amounts actually paid by Tenant for such Operating Expense Year,
Tenant shall pay Landlord such difference within thirty (30) days of receipt of
the Operating Statement for such Operating Expense Year. If Tenant's
Additional Rental for Operating Expenses reflected in the Operating Statement
for any Operating Expense Year are less than the amounts actually paid by
Tenant for such Operating Expense Year, such difference shall be credited to
Tenant's next payment(s) of Annual Rental and/or Additional Rental, unless the
term has expired, in which event such difference shall be paid by Landlord to
Tenant within thirty (30) days of delivery of the Operating Statement (net of
any sums otherwise owed by Tenant to Landlord).
(g) In no event shall Tenant's Annual Rental be reduced, nor shall
Landlord owe any amount to Tenant, if, for any reason, Operating Expenses for
any Operating Expense Year are less than the Operating Expense Base.
(h) Landlord shall permit Tenant, at any reasonable time after
reasonable notice, to inspect and do a complete audit at Tenant's sole expense,
but only with the use of a "Big Six" accounting firm, of all of the books of
accounts and records of Landlord to the extent reasonably required to establish
Operating Expense. Tenant may not request such an audit more than once per
calendar year. If Tenant shall ask for an audit to be made, and if Operating
Expenses for any period shall be found to be overstated or understated, then
Landlord shall pay Tenant the amount of overpayment, or Tenant shall pay to
Landlord the amount of the underpayment, as the case may be, together with
interest thereon at the rate specified in Section 8.02(b) of this Lease, from
the date of such overpayment or underpayment to the date the overpayment or
underpayment is refunded or
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paid. Tenant's right to make such an audit with respect to any calendar year
shall expire twelve (12) months after Landlord's Operating Statement for the
calendar year shall have been delivered to Tenant, and each such Operating
Statement shall be final and binding on Tenant and shall, as between the
parties, be conclusively deemed correct, at the end of such twelve (12) months,
unless prior thereto Tenant has served Landlord with a notice challenging the
accuracy of same.
Section 4.03 Real Estate Taxes, Assessed Valuation.
(a) If Landlord fails to pay any real estate tax or assessment
includable in Operating Expenses prior to the time that any penalty or interest
may be charged, any penalty or interest levied shall not be included by
Landlord in Operating Expenses for purposes of calculating Tenant's Additional
Rental.
(b) Landlord may petition for reduction of the assessed valuation
of the Building and the land comprising The Texaco Building Complex, claim a
refund of real estate taxes or assessments or otherwise challenge the validity
or applicability of any real estate tax, assessment or similar or related laws.
Section 4.04 Renewal Rental. Annual Rental for the Renewal Term
shall be in accordance with Renewal Term Rental Rate as indicated in Exhibit C.
ARTICLE FIVE - SERVICES
Section 5.01 Standard of Operations.
(a) Landlord shall at all times operate and maintain the Building
in accordance with a standard at least as high as that customarily followed in
the operation and maintenance of office buildings similar to the Building and
with similar tenants in the vicinity of the Building ("Comparable Buildings")
and, without limiting the foregoing, shall provide the specific facilities,
utilities and services set forth in this Article.
(b) The office space in the Building, other than the space
occupied by Tenant, shall be leased only to tenants who are similar in
character to those found in Comparable Buildings. Ground floor retail space,
if any, may be leased to commercial occupants of the following character:
banks, restaurants, department stores and retail merchants and other tenants
found in office and retail space in Comparable Buildings. Landlord may (but
shall not be obligated to) lease space in the Building to a first-class club
facility.
Section 5.02 Heating, Ventilating and Air Conditioning.
(a) Landlord shall provide a heating, ventilating and air
conditioning system ("HVAC") meeting the requirements of Exhibit F. Landlord
shall furnish HVAC services meeting the
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requirements of Exhibit F in season as required for Tenant's comfortable use
and normal occupancy of the Leased Premises, from 7:00 a.m. to 6:00 p.m.
(Landlord shall turn on the HVAC system of the Building by 6:00 a.m. on
Tenant's floors to enable the comfortable use and normal occupancy of the
Leased Premises to be met by 7:00 a.m.) Mondays through Fridays and from 8:00
a.m. to 1:00 p.m. on Saturday. For purposes of this Lease, holidays shall be
indicated in writing by Landlord annually (the "Building Holiday Schedule").
Tenant shall make arrangements for building services at least sixty (60) days
in advance if the Building is scheduled to be closed.
(b) Landlord shall, upon reasonable advance notice from Tenant,
furnish Tenant HVAC services at any time or times other than the regular hours
specified above in accordance with the schedule attached hereto as Exhibit 1.
(c) For HVAC and humidity control systems requiring special
operating hours or other conditions which necessitate the use of self-contained
units (the "Special Systems"), Landlord shall furnish electrical power to
Tenant for Tenant's use in installing and operating, at Tenant's expense, one
or more Special Systems. Tenant shall bear any extra expense incurred by
Landlord in furnishing such power from the Building's system or in expanding
the Building's system, if necessary, to provide such electrical power,
including the cost to Landlord of providing direct and separate metering if
either Landlord or Tenant requests separate metering. Such expansion of the
Building's system, if necessary, shall be subject to the approval of Landlord,
which shall not be unreasonably withheld or delayed. Landlord shall review
Tenant's HVAC plans prior to construction of Tenant's interior improvements and
notify Tenant if Landlord will charge Tenant for the installation and or use
any Special Systems.
Section 5.03 Electrical Service.
(a) Landlord shall provide an electrical distribution system for
the Building meeting the requirements of Paragraph II of Exhibit F. Landlord
shall cause to be furnished and pay for all electricity used in the Leased
Premises or in operating any and all facilities serving the Leased Premises
(the cost of same to be Operating Expenses); provided, however, that Tenant
shall bear any extra expense incurred by Landlord in furnishing electric power
in excess of the normal office use which may be required for use by Tenant for
electronic data processing equipment (including computers), if furnishing such
excess power is reasonably feasible, given the reasonable needs of the Building
and other occupants, including the cost to Landlord of providing direct and
separate metering if either Landlord or Tenant requests separate metering. If
direct and separate meters are not used, the amounts chargeable to Tenant under
the preceding provision shall be Landlord's average cost of electric power
multiplied by Tenant's excess usage, as reasonably determined by Landlord's
professional engineer. Landlord shall review Tenant's electrical plans prior
to initial installation and advise Tenant whether excess capacity is required
to be installed at Tenant's expense and whether Landlord anticipates that
Tenant's usage shall exceed the amount for normal office use.
(b) Landlord will notify Tenant at least seventy-two (72) hours in
advance of any planned shut down of the electrical system for repairs or
maintenance. Landlord will attempt to schedule
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such shut downs for weekends starting on Friday evenings. Any such shut downs
shall not entitle Tenant to any abatement of rent during the scheduled shut
down period or be construed as an interruption of services under Section 5.08
of this Lease.
Section 5.04 Elevators.
(a) Landlord shall provide passenger elevators to serve the Leased
Premises. The passenger elevators shall generally be available during all
working hours of all working days, and, at all other times, there shall be at
least one passenger elevator available to serve the Leased Premises subject to
events beyond Landlord's reasonable control and emergencies which may arise.
In the event of such interruption, Landlord shall, as promptly as is practical
under the circumstances, commence to use all reasonable efforts to cause such
service to be reinstated as soon as is practical.
(b) There is a designated freight elevator in the Building.
Tenant shall provide Landlord with twenty-four (24) hours' advance notice of
its need for a freight elevator and Landlord shall endeavor to make the freight
elevator available to Tenant. Tenant's use of the freight elevator is limited
by the Building's Rules and Regulations, which are subject to change. Failure
to provide said notice shall relieve Landlord of its obligation to provide a
dedicated freight elevator.
Section 5.05 Light Bulbs and Water. Landlord shall furnish and/or
install as an Operating Expense (a) all initial and replacement fluorescent and
incandescent light bulbs and ballast in the Leased Premises, Common Building
Facilities and Building Parking Garage, provided that they are the Building's
standard bulbs and ballasts. Tenant will comply with all of Landlord's
standards for energy efficient lighting fixtures; provided however if Landlord
is required to make replacement of lighting fixtures in the Premises by reason
of legal requirements, such replacement shall be at Landlord's expense.
Landlord shall furnish water, including chilled and heated water, at those
points of supply provided for general use of all tenants in the Building as
required for lavatory and drinking purposes and such other uses as are
permitted pursuant to Section 7.01. The fire stand pipe water system shall
comply with the National Fire Protection Agency "NFPA Code" and applicable
local laws.
Section 5.06 Access Control.
(a) Landlord may install and maintain access control for the
Building and Building Parking Garage. Such access control may include
electronic access control to the Building and Leased Premises.
(b) Landlord shall not be liable to Tenant for losses due to theft
or burglary, or for damages or injuries caused by the entry of unauthorized
persons to the Building, Building Parking Garage, the Leased Premises or other
portions of the Building; provided however that Landlord shall, subject to
Section 9.02 hereof, remain liable for damages or injuries arising directly
from the gross negligence of Landlord. If installed, Landlord's access control
system shall comply with the requirements of all Applicable Laws.
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(c) Tenant, at its expense and with the prior written approval of
Landlord, which approval shall not be unreasonably withheld or delayed, may
install such additional safety and security systems or devices within or
controlling access to the Leased Premises (but not in any lobbies or other
common areas), including, without limitation, smoke detectors, electronic
security devices and auxiliary emergency electric power supplies, as Tenant may
deem reasonably appropriate. Tenant shall have the right by installation of a
card or key system, to control access from all public elevators to floors
wholly occupied by Tenant; provided that Tenant's use of such system shall not
interfere with Landlord's obligations to provide services or perform any work
under this Lease; and provided, further, that, Landlord shall have reasonable
access to the Leased Premises in emergencies and provided that such system does
not interfere with the proper operating of the elevator system or require the
Landlord to incur additional costs to retrofit or maintain the elevators in
order to accommodate such a system.
(d) Tenant, at its expense, may install and operate a cardkey or
similar security system for the Leased Premises so long as it does not
interrupt ingress and egress of other tenants on multi-tenant floors.
(e) Any additional safety or security systems installed by Tenant
shall be compatible with Landlord's security and safety systems, programs and
procedures and shall comply with all Applicable Laws.
Section 5.07 Janitorial Services.
(a) Landlord shall provide, as an Operating Expense the cleaning
and janitorial services ("Janitorial Services") and window cleaning services
set forth in Exhibit G hereto.
Section 5.08 Interruption of Services.
(a) If, for any reason within Landlord's reasonable control there
is a failure to furnish the facilities, utilities or services specified in this
Article which are essential for Tenant's beneficial occupancy of the Leased
Premises or to provide parking spaces required by Article Six and, after
written notice thereof by Tenant to Landlord and to any holder of a First
Mortgage for which Tenant has been provided a notice address, Landlord does not
remedy same within thirty (30) days following delivery of such written notice
(provided as to matters which cannot reasonably be remedied within thirty (30)
days, Landlord shall not be deemed to be in default of its obligations, and
Tenant shall have no remedy hereunder except as may be provided in Section
5.08(d), provided Landlord has commenced such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion). If
Landlord is in default after the applicable cure period, then Tenant shall, if
it is not then in default of any of its obligations under this Lease, have the
option to provide such facilities, utilities or services for its own account
until Landlord remedies the default and performs such obligations in accordance
with this Lease. If any interruption of services shall continue for more than
sixty (60) days, Tenant may, by written notice to Landlord given at any time
prior to the resumption of service to a reasonable level, terminate this Lease,
and, upon giving such notice, this
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Lease shall terminate and expire on the date set forth in such notice, which
date shall not be more than ninety (90) days after the date of such notice.
(b) In addition to Tenant's self-help remedies described in
subsection (a) above, if for any reason within Landlord's reasonable control
there is a failure to furnish the facilities, utilities or services required to
be furnished by this Lease and such failure results in an imminent threat to
persons, Tenant's property or Tenant's business, Tenant may, after providing
Landlord with such notice and the first right to remedy such failure as is
practical under the circumstances, provide for its own account such facilities,
utilities or services to the extent necessary to remove the threat to persons
or property.
(c) Any reasonable sums expended by Tenant in exercising its
remedies described in Sections 5.08(a) or 5.08(b) above shall be reimbursed by
Landlord within sixty (60) days of Tenant's invoice therefore together with
invoices and paid receipts and other reasonable evidence of such costs (a copy
of same shall be simultaneously delivered by Tenant to any holder of a First
Mortgage for which Tenant has been given a notice address).
(d) If any impairment or cessation of Building Services pursuant
to Section 5.08(a) or Section 5.08(b) renders part or all of the Leased
Premises unusable for the normal conduct of Tenant's business for more than
five (5) consecutive business days, rent shall thereafter abate as to the
portion of the Leased Premises rendered unusable until such service is
reinstated so that Tenant's Leased Premises are again useable for the normal
conduct of Tenant's business.
(e) The remedies set forth in subsections (a)-(d) above shall be
Tenant's exclusive remedies for interruption of Building Services resulting
from Landlord's negligent or wrongful acts or omissions. If an impairment or
cessation of Building Services results from the failure of any utility company
or other third party service provider to furnish such services, or other event
beyond Landlord's reasonable control, Landlord shall have no liability to
Tenant under this Lease and, except as provided in the next sentence, rent
shall not abate, provided Landlord promptly notifies the service provider of
such impairment or cessation and thereafter employs all reasonable efforts to
cause such services to be reinstated. If such impairment or cessation of
Building Services resulting from the failure of any utility company or other
third party service provider to furnish such services or other events beyond
Landlord's reasonable control renders part or all of the Leased Premises
unusable for the normal conduct of Tenant's business for more than five (5)
consecutive business days, rent shall thereafter abate as to the portion of the
Leased Premises rendered unusable until such service is reinstated so that
Tenant's Leased Premises are again useable for the normal conduct of Tenant's
business.
Section 5.09 Personnel. Landlord shall employ and/or contract
with persons of sufficient number and experience to maintain the Building and
Common Building Facilities and to perform the services within its control which
Landlord is required to perform under this Lease.
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Section 5.10 Insurance.
(a) Tenant shall maintain at its sole cost, at all times during
the terms of this Lease the insurance coverage set forth below with companies
rated A8 or higher by AM Best with full policy limits applying, but not less
than as stated.
(i) Workers' Compensation Insurance as required by laws
and regulations applicable to and covering employees
of Tenant;
(ii) Employers' Liability Insurance protecting Tenant
against common law liability in the absence of
statutory liability, for employee bodily injury
arising out of the master-servant relationship with a
limit of not less than $1,000,000;
(iii) Commercial General Liability Insurance including
contractual liability and products and completed
operations with limits of not less than $500,000 per
occurrence and $1,000,000 in the aggregate,
(iv) Automobile Liability Insurance including non-owned
and hired vehicle coverage with limits of liability
of not less than $500,000;
(v) Excess Liability Insurance over Automobile Liability,
Commercial General Liability, and Employers'
Liability coverage afforded by the primary policies
described above with minimum limits of $1,000,000 in
excess of specified limits;
(vi) All-Risk Property Insurance for the ninety (90%)
percent replacement value of any leasehold
improvements, additions, alterations and/or
installations made by tenant and for all contents.
(b) Landlord shall maintain insurance coverage applicable to the
Texaco Building Complex similar to the coverage required to be maintained by
Tenant in Section 5.10 above including, without limitation All-Risk Property
insurance for ninety percent (90%) of replacement value on the Texaco Building
Complex excluding (at Landlord's discretion) leasehold improvements,
alterations, and property of tenants of the Texaco Building Complex.
(c) Prior to commencement of the Lease, a certificate evidencing
the required coverage shall be delivered by each party to the other, naming the
other as an additional insured as respects liability coverages. This
certificate shall provide that any change restricting or reducing coverage or
the cancellation of any policies under which certificates are issued shall not
be valid until the other party has received 30 days' written notice of such
change or cancellation. Further, the certificate shall state that the
insurance is primary coverage and not concurrent or excess over other valid
insurance which may be available. The Workers' Compensation policy shall be
endorsed to provide
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waiver of subrogation rights in favor of the other party. Such insurance may
be carried under a blanket policy covering the Leased Premises and other
locations, if any, provided such policy contains an endorsement (i) naming the
other party as an additional insured, (ii) specifically referencing the Leased
Premises on the Texaco Building Complex; and (iii) guaranteeing a minimum limit
available equal to the limits of liability required under this Lease.
(d) Tenant agrees to comply with all terms of the insurance
contracts referenced in this section. Failure of Tenant to keep the required
insurance policies in full force and effect during the term of this Lease and
during any extensions, shall constitute a breach of this Lease and Landlord
shall have the right, in addition to any other rights, to cancel and terminate
this Lease without further cost to Landlord. Nothing contained in these
provisions relating to coverage and amounts set out herein shall operate as a
limitation of tenant's liability in tort or contract under the terms of this
Lease.
ARTICLE SIX - TENANT'S PARKING
Section 6.01 Tenant's Parking.
(a) At all times during the Initial Term or any Renewal Term
Landlord, at its expense, will provide Tenant with sixty-three (63) spaces at
no charge, twenty-one (21) of which shall be reserved covered parking as
indicated in Exhibit A-2. Landlord may provide Tenant on request during the
Initial Term and the Renewal Term, up to five (5) additional covered parking on
a month-to-month basis at a cost of TWENTY-FIVE AND NO/100 DOLLARS ($25.00) per
space per month; provided however that Landlord may recapture such additional
spaces upon thirty (30) days notice to Tenant. Tenant shall have no claim on
any additional parking not expressly assigned to it in this paragraph. Both
the Building Parking Garage and Additional Parking Area shall be available for
use 24 hours a day. Landlord shall keep and maintain both the Building Parking
Garage and the Additional Parking Area in a clean, safe and first-class
condition. Landlord shall not be obligated to provide personnel to perform
parking service but may provide access control to the Building Parking Garage,
provided however Landlord shall not be liable to Tenant for losses due to the
theft or burglary, or for injury to persons or property done by unauthorized
persons unless directly due to the gross negligence of Landlord.
(b) If Tenant, its permitted assignees or subtenants and/or their
respective employees, licensees and guests at any time during the Initial Term
or the Renewal Term are not able to use the Building Parking Garage and/or
Additional Parking Area for the parking spaces provided herein because of
unauthorized use thereof, Landlord shall take whatever steps are necessary,
including, if appropriate, the posting of signs, the distribution of parking
stickers and the towing away of unauthorized vehicles, to the end of preventing
further unauthorized use. However, Landlord shall not be financially liable
for unauthorized use of Tenant's parking, provided that it has made reasonable
efforts insure the availability of such parking. Tenant shall use reasonable
efforts to ensure that its employees and guests restrict their use of parking
to Tenant's parking spaces.
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ARTICLE SEVEN - USE AND ACCESS
Section 7.01 Use.
(a) Tenant, its Affiliates (as defined in Section 16.01), and
permitted assignees and subtenants, shall have the right to use the Leased
Premises for general office purposes.
(b) To the extent Tenant's use as set forth in subsection (a)
above or any other special uses to which Tenant is permitted by Landlord to put
the Leased Premises require a specific Certificate of Occupancy, or a special
entry on the general Certificate of Occupancy for the Building, Tenant shall
obtain the same at its sole expense and shall provide Landlord with a copy upon
request; and Tenant shall be responsible for obtaining any special health,
safety or other governmental permit, approval or license required in connection
with any such specific use as well as the building permits for Tenant's work
and Certificate of Occupancy (if required) for the Leased Premises. Landlord
shall cooperate with Tenant and shall execute all applications, authorizations
and other instruments reasonably required to enable Tenant to fulfill its
responsibilities under this subsection. Tenant shall use the Leased Premises
so that (i) no extra noise, smell (including those resulting from food
preparation) or vibrations will emanate from the Leased Premises into common
areas or areas leased by other tenants or occupants of the Building; (ii) other
occupants of the Building are not disturbed or interfered with in their use and
enjoyment of their premises, the Building or the Common Building Facilities;
(iii) all Applicable Laws and good health, safety and engineering practice will
be complied with; (iv) such use will not create design load or other problems
for the structural, mechanical, electrical, plumbing or HVAC systems of the
Building; (v) ventilation, fire hazard and special waste disposal problems are
addressed to Landlord's reasonable satisfaction; and (vi) Landlord's other
concerns for the safe and efficient operation, maintenance and repair of the
Building and Common Building Facilities are addressed to Landlord's reasonable
satisfaction.
Section 7.02 Environmental.
(a) Tenant acknowledges that Landlord has made available at
Landlord's office certain environmental reports and surveys of the Building,
including asbestos surveys and asbestos remediation certifications and current
activities. A list of the environmental reports and surveys are listed in
Exhibit J - Environmental, which is made a part of this Lease. The purpose of
providing the reports and surveys listed in Exhibit J is to indicate the
presence or absence of asbestos. Landlord makes no representations or
warranties whatsoever to Tenant regarding:
The materials listed in Exhibit J and made available to Tenant for its
review (Landlord has informed Tenant that the materials listed in Exhibit J are
not a comprehensive hazardous substance survey of the Building for all forms of
hazardous or toxic materials, including, but not limited to, asbestos
containing hazardous materials, and can not be relied upon as a representation
that there are no hazardous or toxic materials at the Building, whether
addressed therein or not). Tenant: (x) shall not rely on and Tenant hereby
represents to Landlord that it has not relied on the materials listed in
Exhibit J with respect to the leasing of the Leased Premises, the same having
been provided for
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informational purposes only. Prior to commencement of interior improvements
made prior to the Term Commencement Date by Tenant, Tenant shall have ten (10)
days to engage such specialists and to make studies and investigations and such
tests and surveys of the Leased Premises from an environmental standpoint as
Tenant deems necessary and appropriate. If Tenant determines from the
resulting study, test, investigation or survey as conducted by an independent
third party engineer experienced in such matters that the Leased Premises are
contaminated or otherwise contain hazardous materials and adversely affect
Tenant's use and or occupancy of the Leased Premises and cannot be controlled
or contained in a manner reasonably acceptable to Tenant, then Tenant shall
have a one-time right exercisable within five (5) days of receiving such
results to notify Landlord in writing and terminate this Lease, otherwise such
right of termination shall be deemed waived for all purposes hereunder.
Tenant shall furnish Landlord with a complete and legible copy of any
study, report, test, survey or investigation performed by or on behalf of
Tenant at any time involving the Leased Premises and shall fully restore all
improvements where samples were taken or work performed and repair all damage
resulting from any of the same and shall indemnify and hold Landlord harmless
from any and all claims, actions, liabilities, damages, losses, injuries or
deaths in connection with or arising out of or from any inspection, sampling or
similar or dissimilar activity conducted by Tenant, Tenant's agents or
contractors at the Leased Premises for hazardous or toxic materials, whether
under this section or otherwise under or in connection with this Lease.
(b) Landlord and its agents shall have the right to periodically
inspect, take samples for testing and otherwise investigate the Leased
Premises, at times reasonably acceptable to Tenant, for the presence of
hazardous or toxic materials. Landlord's inspections, sampling or testing will
not unreasonably interfere with Tenant's use of the Leased Premises and
Landlord shall fully restore all improvements where samples were taken or work
performed and repair all damage resulting from any of the same and shall
indemnify and hold Tenant harmless from any and all claims, actions,
liabilities, damages, losses, injuries or deaths in connection with or arising
out of or from any inspection, sampling or similar or dissimilar activity
conducted by Landlord, Landlord's agents or contractors at the Leased Premises
for hazardous or toxic materials, whether under this section or otherwise under
or in connection with this Lease.
(c) Tenant shall not knowingly incorporate into or use, or
otherwise place or dispose of at the Leased Premises or within The Texaco
Building Complex any hazardous materials in concentrations or levels sufficient
so that by the then applicable EPA, OSHA or other applicable standards the
specific materials would be classified or identified as toxic or hazardous
materials except for the limited purposes of use and storage only where (i)
such materials are in small quantities, properly labeled and contained, (ii)
such materials are handled and disposed of in accordance with the highest
accepted industry standard for safety, storage, use and disposal, (iii) such
materials are used for use in the ordinary course of business (i.e., as with
office cleaning supplies), (iv) Tenant complies with Landlord's Hazard
Communication Program (a copy of which is available at the Landlord's office).
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Landlord shall not knowingly dispose of at the Leased Premises, any
toxic or hazardous materials in concentration or levels sufficient that by then
applicable governmental standards cause the specific material so identified to
be classified or identified as toxic or hazardous materials and shall otherwise
deal with all toxic or hazardous materials at the Leased Premises in a manner
that will not adversely affect Tenant's access, use or occupancy of the Leased
Premises. Any remediation or control at the Leased Premises will be in
accordance with all applicable governmental laws, rules, and regulations. If
Landlord or Tenant ever have knowledge of the presence in the Leased Premises
of such toxic or hazardous materials which affect the Leased Premises, the
party having knowledge shall notify the other party thereof in writing promptly
after receiving such knowledge. For purposes of this Lease, hazardous or toxic
materials shall mean hazardous or toxic chemicals or any materials or wastes
containing hazardous or toxic chemicals or materials at levels or content which
causes such materials or wastes to be classified as hazardous or toxic as then
prescribed by the then current levels or contents as set from time to time by
EPA or OSHA or as identified under 29-CFR-1910 or 29-CFR-1925 or other
applicable governmental laws, rules and regulations.
(d) If Tenant or its employees, agents or contractors shall ever
violate the provisions of Paragraph a or c above (that apply to Tenant
regarding toxic or hazardous materials), or if Tenant's acts, negligence,
breach of this provision or business operations directly and materially expand
the scope of or materially worsen any contamination from toxic or hazardous
materials installed or introduced by Tenant, then Tenant shall clean up, remove
and dispose of the material causing the violation, in compliance with all
applicable governmental standards, laws, rules and regulations and repair any
damage to the Leased Premises or any part of the Building or The Texaco
Building Complex within such period as may be reasonable under the
circumstances after written notice by Landlord, provided that such work shall
commence not later than fifteen (15) days from such notice and be diligently
and continuously carried to completion by Tenant or Tenant's designated
contractors.
Tenant shall notify Landlord of its method, time and procedure for any
clean-up or removal of toxic or hazardous materials under this provision; and
Landlord shall have the right to require reasonable changes in such method,
time or procedure or to require the same to be done after normal business hours
or when the Building or The Texaco Building Complex is otherwise closed (i.e.,
weekends and holidays).
(e) Landlord represents and warrants that the Leased Premises, the
Building and The Texaco Building Complex are in substantial compliance with all
federal, state and local laws relating thereto (including, without limitation,
all laws relating to health or the environment) sufficient to afford Tenant's
quiet and save enjoyment of the Leased Premises. If Landlord or its employees,
agents or contractors shall ever violate the representations contained in this
Paragraph (e), or if Landlord's acts, negligence or business operations
directly or materially expand the scope of or materially worsen any
contamination from toxic or hazardous materials, then Landlord shall clean up,
remove and dispose of the material causing the violation, in compliance with
all applicable governmental standards, laws, rules and regulations and repair
any damage to the Leased Premises or any part of the Building or The Texaco
Building Complex within such period as may be
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reasonable under the circumstances, and such remedial activities shall be
diligently and continuously carried to completion by Landlord or Landlord's
designated contractors.
Landlord shall notify Tenant of its method, time and procedure for any
clean-up or removal of toxic or hazardous materials in the Leased Premises, and
Tenant shall have the right to request reasonable changes in such method, time
or procedure and to require the same to be done after normal business hours or
when the Tenant is closed for business (i.e., weekends and holidays) if such
creates a disruption to Tenant's operations or constitutes a potential risk to
public health or safety.
Section 7.03 Access. Subject to events beyond Landlord's
reasonable control and emergencies which may arise, Tenant, its permitted
subtenants and their employees, licensees and guests, shall have access to the
Leased Premises at all times, 24 hours per day, every day of the year, except
if the building is closed due to an emergency or the facility is closed by
governmental order.
Section 7.04 Use of the Common Areas for Certain Purposes.
Tenant, subject to the prior written consent of Landlord, not to be
unreasonably withheld, and subject to scheduling as to date and time when the
common areas are not otherwise in use, shall have the nonexclusive right to use
the common areas and other public portions of the Building to present public
events and other exhibits, provided same do not impair the character the
dignity of the Building or interfere with other tenants in the Building.
Landlord reserves the right to restrict or deny the use of the lobby.
Section 7.05 Building Directory. Landlord, at its expense, shall
maintain a Building directory in the lobby of the Building for all tenants of
the Building. Landlord shall also provide floor signage in the elevator lobby
of Tenant's floor at Tenant's expense. The exact size, location, and design to
be approved by Landlord. Landlord shall list Tenant on such directory at no
charge for the initial listing, such initial listings on the directory as
Tenant shall reasonably require up to Tenant's prorata share of the available
listings. All changes, additions and subtractions to and from Tenant's initial
listings shall be at Tenant's sole expense, and Tenant shall pay Landlord's
cost for the same. Landlord reserves the right to modify or replace the
directory at any time in the future in its sole discretion.
ARTICLE EIGHT - REPAIRS AND MAINTENANCE
Section 8.01 Landlord's obligation to Repair and Maintain.
Landlord shall, at its sole cost and expense (except as otherwise provided
herein) such cost and expense to be Operating Expenses, keep and maintain in
good repair and working order and make all repairs to and perform necessary
maintenance upon the Building, the base building systems within the Leased
Premises and the Common Building Facilities and all parts thereof, including,
but not limited to, the ceilings, lighting, base building HVAC, plumbing,
walls, floors, corridors, lobbies, and base building equipment within and
serving the Leased Premises and the Building (including the Building Parking
Garage and Additional Parking Area) which are required in the normal
maintenance and operation of the Leased Premises and the Building.
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Section 8.02 Tenant's obligations.
(a) Tenant shall maintain the Leased Premises (except the base
building systems contained therein), including all of Tenant's additions,
alterations, installations, improvements and trade fixtures, all special HVAC
equipment and other special facilities installed by or on behalf of Tenant, and
all of Tenant's property within the Leased Premises and shall repair any and
all damage caused by it to the Building or the Leased Premises, ordinary wear
and tear, damage by fire or other casualty and damage caused by others for whom
Tenant is not responsible excepted. Upon termination of this Lease, Tenant
shall surrender and deliver up the Leased Premises in the same condition in
which existed at the commencement of this Lease, except for ordinary wear and
tear, Tenant's alterations, additions, installations and improvements, repairs
and maintenance assumed by Landlord, damage arising from fire or other casualty
and damage caused by others for whom Tenant is not responsible and which damage
Tenant is otherwise not obligated to repair or restore under this Lease.
(b) If Tenant fails to perform any maintenance or repair required
under this Section 8.02, Landlord may, following thirty (30) days' written
notice to Tenant, perform the same and Tenant shall reimburse Landlord for the
reasonable cost of such maintenance and/or repair within thirty (30) days of
Landlord's invoice therefor, together with invoices and paid receipts and other
reasonable evidence of such costs. If such amounts are not paid by Tenant
within the thirty (30) day period, interest shall accrue on such sums based on
Chase Manhattan Bank's New York published prime rate or in the event Chase
Manhattan Bank no longer publishes a prime rate, another major bank substituted
by Landlord, plus 150 basis points (the "Default Rate"). In addition, if
Tenant's failure to maintain or repair causes an imminent threat to persons or
property, Landlord may, after providing Tenant with such notice as is
reasonable under the circumstances, perform such maintenance or repair and
Tenant shall reimburse Landlord for the reasonable cost of such maintenance
and/or repair within thirty (30) days of Landlord's invoice therefor, together
with invoices and paid receipts and other reasonable evidence of such costs.
If such amounts are not paid by Tenant within the thirty (30) day period,
interest shall accrue on such sums until paid at the Default Rate.
ARTICLE NINE - FIRE AND OTHER CASUALTY
Section 9.01 Damage or Destruction.
(a) If the Building or any part thereof should be destroyed or
damaged by fire or other casualty during the term of this Lease, then (unless
this Lease is terminated by Landlord or Tenant as hereinafter provided)
Landlord shall within sixty (60) days of the date of the casualty, proceed to
reconstruct, restore and repair the Building and the base building systems and
Building standard improvements contained in the Leased Premises, as the case
may be, to a condition substantially equivalent to their former condition. If
Landlord does not so commence such restoration or, if having done so, does not
proceed with reasonable diligence until same are restored, then upon receipt of
written notice to Landlord and any holder of a First Mortgage for which Tenant
has been given a notice address from Landlord, Landlord or such First Mortgage
holder shall have twenty (20) days
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to so commence or so proceed. If Landlord fails and the First Mortgage holder
also fails to commence or proceed with such action within this period of time,
Tenant, as its sole remedy for such failure, may forthwith terminate this
Lease, effective as of the date of the casualty.
(b) Notwithstanding anything seemingly to the contrary in Section
9.01 (a), Landlord's obligation to restore shall be limited to the insurance
proceeds it receives, plus applicable deductibles; provided however, such
limitation shall not impair or limit Tenant's right to terminate the Lease for
Landlord's failure to timely commence or to complete restoration as provided in
Section 9.01 (a).
(c) Commencing with the date of such damage, the Rent provided for
herein shall abate prorata to the extent that, and for so long as, any portion
of the Leased Premises is not reasonably usable; provided however that upon
substantial completion by Landlord of its restoration work Rent shall commence
on the earlier of the reasonable time thereafter required for Tenant to
substantially complete its restoration work under Section 9.01 (e) or sixty
(60) days after reasonable ingress and egress has been provided and reasonably
sufficient parking has been provided (which may be provided by shuttle bus or
other reasonable means).
(d) It is agreed that if the Building is totally destroyed by any
cause or is so substantially destroyed that reconstruction would require more
than one hundred eighty (1 80) days, as reasonably estimated by Landlord's
architect or contractor, either Landlord or Tenant may elect to terminate this
Lease by giving the other party written notice of such election within thirty
(30) days after the giving of the notice from Landlord hereinafter provided.
Such termination shall be effective as of the date of such election. In the
event of any substantial casualty, Landlord shall within thirty (30) days
thereafter, give Tenant written notice of the estimated time required to repair
the same as reasonably estimated by Landlord's contractor or architect.
(e) For any casualty to the Leased Premises only, or any casualty
to the Building and Leased Premises in which Landlord is obligated to restore
the Building or otherwise elects to restore the Building, Tenant shall promptly
commence and diligently prosecute to completion the restoration of the
leasehold improvements, alterations, installations, additions and trade
fixtures which are damaged or destroyed to a completion substantially
equivalent to their former condition.
Section 9.02 Waiver of Subrogation Rights. Provided that
Landlord's right of full recovery under its policy or policies aforesaid is not
adversely affected or prejudiced thereby, Landlord hereby waives any and all
right of recovery which it might otherwise have against Tenant, its servants,
agents and employees, for loss or damage occurring to the Building, the Parking
Garage and the fixtures, appurtenances and equipment therein, to the extent the
same is covered by Landlord's insurance, notwithstanding that such loss or
damage may result from the negligence or fault of Tenant, its servants, agents
or employees. Provided that Tenant's right of full recovery under its
aforesaid policy or policies is not adversely affected or prejudiced thereby,
Tenant hereby waives any and all right of recovery which it might otherwise
have against Landlord, its servants, and employees and against every other
tenant in the Building and/or the Parking Garage who shall have
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executed a similar waiver as set forth in this Section 9.02 for loss or damage
to Tenant's furniture, furnishings, fixtures and other property removable by
Tenant under the provisions hereof to the extent that same is covered by
Tenant's insurance required under this Lease, notwithstanding that such loss or
damage may result from the negligence or fault of Landlord, its servants,
agents or employees, or such other tenant and the servants, agents or employees
thereof.
Landlord and Tenant hereby agree to advise the other promptly if the
clauses to be included in their respective insurance policies above cannot be
obtained on the terms hereinbefore provided and thereafter to furnish the other
with a certificate of insurance or copy of such policies showing the naming of
the other as an additional insured, as aforesaid. Landlord and Tenant hereby
also agree to notify the other promptly of any cancellation or change of the
terms of any such policy which would affect such clauses or naming. All such
policies which name both Landlord and Tenant as additional insureds shall, to
the extent obtainable, contain agreements by the insurers to the effect that no
act or omission of any additional insured will invalidate the policy as to the
other additional insureds.
ARTICLE TEN - LIABILITY
Section 10.01 Waiver. To the extent permitted by law, Tenant
releases the Landlord, holders of any Mortgage on the Texaco Building, property
manager and their respective partners, employees, officers, directors and
agents ("Indemnitees") from, and waives all claims for, damage to person or
property sustained by the Tenant, resulting from any accident or event in or
about the Texaco Building Complex, or directly or indirectly from any act or
neglect of any tenant or occupant of the Building and the Parking Garage or of
any other person, including the Indemnitees, except where such results from the
gross negligence of an Indemnitee in which event such Indemnitee and Landlord
shall be liable to Tenant, subject to the provisions of Section 9.02.
Section 10.02 Indemnity by Tenant. To the extent permitted by law,
Tenant agrees to indemnify, protect, defend and hold the Indemnitees harmless
against any and all actions, claims, demands, costs and expenses, including
reasonable attorney's fees and expenses for the defense thereof, arising from
Tenant's breach or default on the part of Tenant in the performance of any
covenant or agreement on the part of Tenant to be performed pursuant to the
terms of this Lease, in or about the Leased Premises and the Building,
Additional Parking Area and The Texaco Building Complex (subject to Section
9.02 and excluding actions and claims arising from the gross negligence of the
Indemnitees), but only to the extent required by this Lease or to the extent of
Landlord's liability, if any, in excess of amounts, if any, paid to Landlord
under insurance covering such claims or liabilities. In case of any action or
proceeding brought against the Indemnitees by reason of any such claim, upon
notice from Landlord, Tenant covenants to defend such action or proceeding by
counsel reasonably satisfactory to Landlord.
10.03 Indemnity by Landlord. Landlord agrees to indemnify, protect,
defend and hold the Tenant, Tenant's employees, officers, directors, and
agents, (hereinafter the "Tenant Indemnitees")
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harmless against any and all actions, claims, demands, costs and expenses,
including reasonable attorney's fees and expenses for the defense thereof,
arising from any breach or default on the part of Landlord in the performance
of any covenant or agreement on the part of Landlord to be performed pursuant
to the terms of this Lease, in or about the Building, Additional Parking Area,
The Texaco Building Complex (subject to Section 9.02 and excluding actions and
claims arising from the gross negligence of Tenant's Indemnitees), but only to
the extent required by this Lease or to the extent of Tenant's liability, if
any, in excess of amounts, if any, paid to Tenant under insurance covering such
claims or liabilities. In case of any action or proceeding brought against the
Tenant Indemnitees by reason of any such claim, upon notice from Tenant,
Landlord covenants to defend such action or proceeding by counsel reasonably
satisfactory to Tenant.
ARTICLE ELEVEN - ALTERATIONS AND FIXTURES
Section 11.01 Alterations by Tenant.
(a) Tenant may make such alterations in or additions to the Leased
Premises as it shall from time to time elect to make; provided, however, that
any material alteration in or addition to the Leased Premises (it being
expressly agreed that decorations, substitutions and nonstructural changes
which are not visible from the exterior of the Building or Leased Premises and
do not adversely affect the base building HVAC or mechanical, electrical or
plumbing systems shall not be deemed material) shall be subject to the prior
written consent of Landlord in each instance, which consent shall not be
unreasonably withheld or delayed, except as to changes visible from the
exterior of the Building or changes which impair or cause load design problems
for the structural, HVAC, mechanical, electrical or plumbing systems of the
Building, as to which Landlord may withhold consent in its sole discretion.
Subject to the approval of Landlord, which will not be unreasonably withheld,
Tenant may use contractors of its own selection and there shall be no overhead
or supervision fees to Landlord for any such work. Except for the initial
installation of Tenant's improvements which are to be funded by Tenant
Improvement Allowance, Tenant shall reimburse Landlord for any reasonable
out-of-pocket fees or expenses paid to third-party architects, engineers,
consultants and/or other professionals in evaluating any alteration requested
by Tenant pursuant to this Section 1 1.01.
(b) All alterations or additions made by Tenant in the Leased
Premises shall be constructed and completed in a good and workmanlike manner at
Tenant's expense by contractors approved by Landlord, such approval not to be
unreasonably withheld or delayed. Tenant shall furnish to Landlord in advance
the plans and specifications for and any other information which Landlord may
reasonably request pertaining to such alterations or additions. Tenant shall
obtain all necessary governmental permits, licenses and approvals and shall
comply with all Applicable Laws and the requirements of Landlord as to work
schedule, noise abatement, safety, security, elevator access, trash removal and
other activities to minimize disruption and annoyance to other tenants in the
Building. Upon termination of Tenant's lease of any floors in which Tenant has
installed special cabling and systems and/or other additions or alterations,
Landlord may require Tenant to restore at
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Tenant's sole cost and expense such portions of the Leased Premises to their
original condition prior to the termination or expiration of this Lease or the
partial termination of this Lease, normal wear and tear excepted.
(c) Tenant shall pay all taxes and assessments levied with respect
to Tenant's trade fixtures and personal property in the Leased Premises and
shall reimburse Landlord for any portion of the ad valorem taxes and
assessments levied against the equitably attributable to the cost of such trade
fixtures, and personal property.
Section 11.02 Tenant's Property.
(a) Tenant, at its expense, may, at any time and from time to
time, install in and remove from the Leased Premises its trade fixtures,
equipment, movable partitions, walls and wall systems (excluding the Virginia
Panel Wall System which shall remain the property of Landlord), furniture and
furnishings, provided such installation or removal is accomplished without
material damage to the Leased Premises or the Building and Tenant promptly
repairs any damage thereto.
(b) Upon the expiration of this Lease, Tenant shall remove all of
Tenant's property not affixed to the Building walls, floors and ceilings which
can be removed without material damage to the Leased Premises or the Building
and Tenant promptly repairs any damage thereto. If Tenant fails to remove any
personal property of Tenant that Tenant may remove upon the termination of this
Lease, any such property not so removed shall, at Landlord's election, become
the property of Landlord or be removed by Landlord at Tenant's expense.
ARTICLE TWELVE - CONDEMNATION
Section 12.01 Total Taking. If all of the Building or the Leased
Premises shall be taken by condemnation or in any other manner for any public
or quasi-public use or purpose (other than for temporary use or occupancy), the
term of this Lease shall terminate as of the date of vesting of title (the
"Date of the Taking"), and, subject to a proration and apportionment of Annual
Rental and proration, apportionment and reconciliation of Additional Rental and
other sums due hereunder as of the Date of the Taking, no further rent shall be
due hereunder.
Section 12.02 Partial Taking. If a part of the Leased Premises
shall be so taken, then Landlord shall give Tenant prompt written notice
thereof and the part so taken shall no longer constitute part of the Leased
Premises, but this Lease shall continue in force and effect as to the part not
so taken; provided, however, that Tenant may elect to terminate this Lease (a)
if a partial taking is more than ten percent (10%) of the Leased Premises
(unless Landlord is able to provide alternate premises in the Building
reasonably acceptable to Tenant for the normal conduct of Tenant's business for
the portion of the Leased Premises which was taken), (b) if, in the good faith,
reasonable judgment of Tenant, the remaining portion of the Leased Premises
cannot be economically and practicably used by Tenant for the conduct of its
business or (c) if a partial taking has a material and
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adverse effect upon the means of access to the Leased Premises or the entrances
or lobbies of the Building, thereby rendering the Leased Premises unfit for the
normal conduct of Tenant's business, unless Landlord shall have provided
reasonable substitutes therefor. Tenant shall give notice of any election to
terminate to Landlord not later than sixty (60) days after notice of such
taking is given by Landlord to Tenant. Upon the date specified in Tenant's
notice (which shall be a date as soon thereafter as is practical for Tenant to
relocate from the Building, but in no event more than one hundred eighty (180)
days thereafter), the term of this Lease shall terminate and, subject to a
proration and apportionment of Annual Rental and proration, apportionment and
reconciliation of Additional Rental and other sums due hereunder as of the date
of the termination, no further rent shall be due hereunder. Upon a partial
taking and the term of this Lease continuing in force as to any part of the
Leased Premises, the Annual Rental or any Additional Rental shall be reduced
proportionately based upon the part or parts of the Leased Premises and/or
other parts of the Building so taken. If a part of the Building is taken, and
either (i) Landlord's architect or contractor reasonably estimates that
reconstruction would require more than one hundred eighty (180) days; (ii) in
Landlord's good faith, reasonable judgment the remaining portion of the
Building cannot be restored to a functional whole or cannot be restored so as
to be efficient and economically viable to own, operate and maintain as a
commercial office building or (iii) the cost of restoration will require more
than the condemnation proceeds paid to Landlord, then Landlord may elect to
terminate this Lease by delivering written notice of such election to Tenant
not later than sixty (60) days following the Date of the Taking, and this Lease
shall terminate as of a date mutually acceptable to Landlord and Tenant, but in
no event more than one hundred eighty (180) days following such notice, subject
to a proration and apportionment of Annual Rental and proration, apportionment
and reconciliation of Additional Rental and other sums due hereunder.
Section 12.03 Claims of Landlord and Tenant. Landlord shall be
entitled to receive the entire award in any proceeding with respect to any
taking (other than for temporary use and occupancy) provided for in this
Article without deduction therefrom for any estate vested in Tenant by this
Lease and Tenant shall receive no part of such award, except as hereinafter
expressly provided. Tenant shall have the right to make a separate claim with
the condemning authority for (a) any moving expenses incurred by Tenant as a
result of such condemnation; (b) any costs incurred and paid by Tenant in
connection with the layout work, tenant's work or any alteration or improvement
made by and paid for by Tenant to the Leased Premises; (c) the value of any of
Tenant's property taken; and (d) any other separate claim which Tenant may
hereafter be permitted to make, provided, however, that such separate claim
shall not reduce or adversely affect the amount of Landlord's award. If Tenant
shall not be permitted to make a separate claim in such proceeding, Landlord
may prosecute all claims in such proceeding on behalf of both Landlord and
Tenant in which event Tenant may, if it so elects and at its expense, join with
Landlord in such proceeding, retain co-counsel, attend hearings, present
arguments and generally participate in the conduct of the proceeding; provided,
however, that if Landlord incurs any additional expense because of Tenant's
exercising its rights under this sentence, Tenant will bear such additional
expense.
Section 12. 04 Distribution of the Award. The aggregate amount of
all awards received in any proceeding relating to any taking (other than awards
to Tenant pursuant to Section 12.03 or for
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temporary use or occupancy) is hereinafter called the "Award." Regardless of
the apportionment of the Award in such proceeding, and regardless of any
termination of this Lease, the Award shall be paid to Landlord and distributed
in the following order of priority:
(a) If Landlord shall be obligated to repair, alter and/or restore
the remaining part of the Building or base building systems and Building
standard improvements within the Leased Premises pursuant to Section 12.06, the
amount actually expended by Landlord for such repair, alteration and/or
restoration shall be paid to Landlord out of the Award in construction draws,
as such work is performed.
(b) Next, if Tenant shall be obligated to repair, alter and/or
restore its above Building standard additions, alterations, installations,
improvements and trade fixtures in the Leased Premises pursuant to Section
12.06, the reasonable amount actually expended by Tenant for such repair,
alteration and/or restoration shall be paid to Tenant out of the Award in
construction draws, as such work is performed and if not performed then
retained by Landlord.
(c) Then (whether or not restoration is to be performed under
Section 12.04(a) and 12.04(b)) there shall be paid to Tenant any specifically
awarded sums from the condemning authority for the items enumerated in Section
12.03 less all restoration costs, included in such specific sums awarded to
Tenant, if any.
(d) The balance of the Award shall then be paid to Landlord.
Section 12.05 Temporary Taking of Premises. If all or any part of
the Leased Premises shall be temporarily taken by condemnation or otherwise for
any public or quasi-public use or purpose (unless Tenant shall have elected to
terminate the term of this Lease in accordance with the option provided in the
last sentence of this Section), this Lease shall nevertheless remain in full
force and effect. Tenant shall continue to be responsible for all of its
obligations hereunder insofar as such obligations are not affected by such
taking; provided, however, that Tenant shall not be liable for the payment of
Annual Rental, Additional Rental or other sums for the part of the Leased
Premises so temporarily taken. The Award claims of Landlord and Tenant shall
be handled as provided in Section 12.03. In the event of a temporary taking
which meets the requirement of subsection (a), (b), or (c) of Section 12.02 for
a period in excess of one hundred eighty (180) consecutive days, Tenant may
terminate the term of this Lease upon notice to Landlord given within thirty
(30) days after such taking or, in the case of an indefinite temporary taking
under subsection (a) of Section 12.02, within thirty (30) days after such one
hundred eighty (180) day period has expired.
Section 12.06 Landlord's Obligation to Restore.
(a) In the event of a taking which taking does not result in the
termination of this Lease, Landlord shall, at its expense to the extent of the
amount of the Award or Awards to Landlord as (subject to Landlord's right of
termination of Section 12.02), proceed with due diligence to repair, alter
and/or restore the remaining part of the Building and the base building systems
and Building
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standard improvements within the Leased Premises substantially to their former
condition to the extent feasible to constitute a complete and tenantable
Building and Leased Premises (assuming Tenant performs its restoration pursuant
to Section 12.06(b)). Upon the expiration of any temporary taking which did not
result in a termination of this Lease, Landlord shall restore the base building
systems and Building standard improvements within the Leased Premises to their
former condition as aforesaid.
(b) In the event of a taking which does not result in the
termination of this Lease and to the extent that any Award or Awards to Tenant
shall be sufficient for the purpose, Tenant shall restore Tenant's alterations,
improvements, installations, additions and trade fixtures in the remaining
portion of the Leased Premises.
(c) During any period of restoration of the Building and the base
building systems and Building standard improvements within the Leased Premises
pursuant to subsection (a) above, the rent provided for herein shall abate
prorata to the extent that, and for so long as, any portion of the Leased
Premises is not reasonably useable, and is not actually used, by Tenant in the
ordinary conduct of its business.
ARTICLE THIRTEEN - REMEDIES AND DEFAULTS
Section 13.01 Default by Tenant.
(a) Any of the following shall be an "Event of Default" by Tenant
under this Lease:
(i) Tenant fails or refuses to pay any installment of
Annual Rental or Additional Rental and such failure or refusal continues for
more than ten (10) days following delivery of written notice to Tenant;
provided, however, following the second (2nd) notice of nonpayment of Annual
Rental and/or Additional Rental given by Landlord in any lease year, Landlord
shall not be required to give any written notice for any subsequent failure of
Tenant to timely pay any installment of Annual Rental or Additional Rental
occurring during such calendar year; or
(ii) Tenant fails or refuses to perform any of its other
covenants under this Lease, and such failure or refusal continues beyond a
reasonable time to cure such nonperformance, not to exceed thirty (30) days
after written notice from Landlord unless additional time, up to a maximum of
one hundred eighty (180) days in the aggregate is required to cure the default
which despite diligent and continuous effort, cannot by its very nature be
cured within thirty (30) days, provided cure is commenced as soon as
commercially reasonable and is diligently prosecuted to completion.
(b) Following an Event of Default and which is not cured within
the cure periods set out above, Landlord shall have the following remedies in
addition to those other remedies at law or in equity which are not inconsistent
therewith:
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(i) Landlord may terminate this Lease and forthwith
repossess the Leased Premises and be entitled to recover forthwith as damages a
sum of money equal to the total of (a) the cost of recovering the Leased
Premises, (b) the unpaid rent earned through the date of termination, plus
interest thereon at the Default Rate from the due date, and (c) any other sum
of money and damages owed by Tenant to Landlord under this Lease at the time of
termination.
(ii) Landlord may terminate Tenant's right of possession
(but not the Lease) and may repossess the leased premises by self-help,
forcible entry or detainer suit or otherwise, without demand or notice of any
kind to Tenant and without terminating this Lease, in which event Landlord may,
but shall be under no obligation to do so, relet the same for the account of
Tenant, such right to relet being on the following terms and conditions: (a)
Landlord shall only relet on commercially reasonable terms and rent, and if the
Leased Premises are relet in whole or in part, Tenant shall be entitled to a
credit in the net amount of the Annual Rent or Additional Rental received by
Landlord as a result (after deducting all reasonable costs incurred by Landlord
in finding a new tenant, including brokerage fees, agent's commissions,
redecorating costs, construction allowance, lease concessions, parking,
attorneys' fees and any other reasonable costs and expenses incident thereto).
Tenant shall remain obligated to pay the amount of any deficiency in the Annual
Rental or any Additional Rental obtained on such reletting, but if the Annual
Rental or any Additional Rental obtained on such reletting is greater than that
provided for herein plus Landlord's costs, such excess rentals shall be the
sole property of Landlord, and (b) Landlord shall have the right to collect
from Tenant amounts equal to said deficiencies provided for above by suits or
proceedings brought from time to time on one or more occasions without Landlord
being obligated to wait until the expiration of the term of this Lease. Any
rentals not paid by Tenant when due shall bear interest at the Default Rate.
No such reletting or other action of Landlord shall be construed as an
election on the part of Landlord to terminate this Lease unless a written
notice of such intention is given to Tenant by Landlord.
(c) An election by Landlord of its remedies to terminate Tenant's
right of possession under Section 13.01(b)(ii) shall not prohibit Landlord from
subsequently exercising its rights to terminate the Lease under Section
13.01(b)(i).
Section 13.02 Default by Landlord. Landlord shall be in default
hereunder in the event Landlord has not begun and pursued with reasonable
diligence the cure of any failure of Landlord to meet its obligations hereunder
within thirty (30) days of the receipt by Landlord of written notice from
Tenant of the alleged failure to perform. Except as specifically and expressly
provided in this Lease, Tenant shall not have the right to terminate or rescind
this Lease as a result of Landlord's default as to any covenant or agreement
contained in this Lease. Tenant hereby waives such remedies of termination and
rescission and hereby agrees that Tenant's remedies for default hereunder and
for breach of any promise or inducement shall be limited to a suit for damages
and/or injunction. In addition, Tenant hereby covenants that, prior to the
exercise of any such remedies, it will give the Mortgagees holding mortgages on
the Building notice and a reasonable time to cure any default by Landlord.
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ARTICLE FOURTEEN - BANKRUPTCY
Section 14.01 Bankruptcy by Tenant. If at any time during the term
of this Lease a petition in bankruptcy or insolvency or for reorganization or
for the appointment of a receiver or trustee of all or substantially all of
Tenant's assets is filed against Tenant in any court pursuant to any statute
either of the United States or of any state and Tenant fails to secure a
discharge thereof within ninety (90) days, or if Tenant voluntarily files a
petition in bankruptcy or makes an assignment for the benefit of creditors or
petitions for or enters into an arrangement with creditors, the term of this
Lease, at the option of Landlord, exercised within thirty (30) days after
notice of the happening of any one or more of such events, shall terminate on
such date as Landlord shall specify by notice to Tenant, with the same effect
as if the date of termination were the Expiration Date of this Lease, but
Tenant shall remain liable for rent and/or damages attorneys' fees as provided
in Article Thirteen and other damages as may be provided to landlords under the
United States Bankruptcy Code (or any successor thereto). However, if a
petition for reorganization or for an arrangement is filed by or against
Tenant, Landlord may not terminate the term of this Lease so long as Tenant is
not in default hereunder and, provided this Lease is assumed or affirmed in
such reorganization or arrangement proceeding within the time periods provided
by law.
ARTICLE FIFTEEN - COMPLIANCE WITH LAWS
Section 15.01 Tenant's Compliance with Laws. Tenant, at its
expense, shall comply with all applicable laws, rules, orders, ordinance,
regulations and other requirements, present or future (collectively,
"Applicable Laws"), affecting the Leased Premises and/or the Building that are
promulgated by any governmental authority or agency having jurisdiction over
the Leased Premises and/or the Building and with any reasonable requirements of
the insurance companies insuring Landlord against damage, loss or liability for
accidents in or connected with the Building or Common Building Facilities to
the extent that the same shall affect or be applicable to (i) Tenant's use of
the Leased Premises, Building, Common Building Facilities, Additional Parking
Area and/or The Texaco Building Complex, (ii) additions, installations,
alterations and improvements made by Tenant, trade fixtures and/or personal
property of Tenant or (iii) a breach by Tenant of its obligations under this
Lease. Tenant shall not at any time use or occupy the Leased Premises so as to
violate the Certificate of Occupancy for the Building or Common Building
Facilities. Nothing contained in this Section 15.01, however, shall be deemed
to impose any obligation upon Tenant to make any structural changes or repairs
unless necessitated by reason of a particular use by Tenant of the Leased
Premises. Tenant shall be responsible for compliance with all current and
future requirements for handicap accessibility within the Leased Premises.
Section 15.02 Landlord's Compliance with Laws. Landlord shall be
responsible for complying with all valid and Applicable Laws affecting the
design, construction and operation of the Building (excluding the Leased
Premises) or relating to the performance by Landlord of any duties or
obligations to be performed by it hereunder. Without limiting the foregoing,
Landlord shall
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comply or cause the Building to comply with all present and future energy
conservation and fire and safety laws, regulations and codes, as the same are
interpreted from time to time.
ARTICLE SIXTEEN -ASSIGNMENT AND SUBLETTING
Section 16.01 Assignment and Subletting by Tenant.
(a) Except as permitted pursuant to this Section 16.01, any
attempted assignment or subletting by Tenant of this Lease of all or any part
of the Leased Premises shall be null and void.
(b) Except for an assignment to an "Affiliate" pursuant to Section
16.01 (c) below, if Tenant desires to assign this Lease or sublease all or any
part of the Leased Premises, Tenant shall notify Landlord in writing at least
thirty (30) days prior to the effective date of any proposed assignment or
sublease, describing the terms of the proposed assignment or sublease and the
identity of the proposed assignee or sublessee and available financial
information concerning the business and history of the proposed assignee or
sublessee (and any additional information which Landlord may reasonably
request). Landlord shall have fifteen (15) days from receipt of all of the
foregoing to elect to (i) reject such proposed assignment or sublease; or (ii)
consent to the proposed assignment or sublease; provided, however, Landlord
will not unreasonably withhold its consent to a proposed assignment or
sublease.
(c) Tenant (and any permitted subtenant or assignee) shall have
the right, without the consent of Landlord, to assign this Lease or sublet the
Leased Premises or any portion thereof to, or to permit occupancy of any
portion of the Leased Premises by, any Affiliate (as hereinafter defined), any
entity that acquires substantially all of the assets of Tenant, any entity into
which Tenant is merged and any entity resulting from a consolidation of Tenant
with some other entity. The term "Affiliate" shall mean any corporation or
other entity controlled by, under common control with or which controls Tenant
or in which Tenant, directly or indirectly, has a fifty (50%) percent or
greater voting or ownership interest. However, such subletting or assignment
shall not relieve Tenant of any of its obligations under this Lease.
(d) Any assignee of this Lease must execute a written assumption
agreement assuming all of the obligations of Tenant accruing from and after the
date of assignment.
(e) No assignment or sublease shall relieve the Tenant which was
the assignor or sublessor from any of its obligations or liabilities under this
Lease; the original Tenant and any subsequent assignee of Tenant's interest
under this Lease shall always remain liable under this Lease.
(f) Anything to the contrary not withstanding any and all sums
collected by Tenant (Assignor or Sublessor) in excess of Annual and Additional
Rentals payable hereunder shall be retained by Tenant.
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(g) No assignment or subletting will be allowed at a rental rate
that is below the rental rate for tenants for the Building located on floors
above the lobby level at the time of the subletting or assignment. If Landlord
and Tenant can not agree on the rental rate for the Building, the rate will be
determined by the arbitration provision in Exhibit E. Tenant shall pay all of
the costs associated with the arbitration.
Section 16.02 Assignment by Landlord. Landlord shall have the
continuing right to transfer, sell and/or assign all of its rights and
obligations under this Lease and in the Building, land and Common Building
Facilities and to assign, in whole or in part, the rent payable by Tenant under
this Lease (subject to the terms of this Lease). Upon the transfer of the
entire estate and interest of Landlord under this Lease, the transferor shall
have no liability for obligations to Tenant relating to events occurring after
and to claims accruing after the date of such transfer. "Landlord" shall mean
the then-current owner of Landlord's interest and any transferee of the
Landlord's interest shall not be liable for liabilities and obligations of any
former Landlord.
Section 16.03 No Personal Liability. Tenant specifically agrees to
look solely to Landlord's interest in the Building, Common Building Facilities
for the recovery of any judgment from Landlord, its officers, employees or
agents, it being agreed that Landlord shall never be personally liable for any
such judgment. The provisions contained in the foregoing sentence is not
intended to, and shall not, limit any right that Tenant might otherwise have to
obtain injunctive relief against Landlord or Landlord's successors in interest.
ARTICLE SEVENTEEN - LANDLORD'S ACCESS
Section 17.01 Landlord's Right to Use Certain Facilities. Landlord
may install, use and maintain utility and other pipes, ducts, lines, flues and
conduits in and through the Leased Premises and serving other portions of the
Building and/or Leased Premises, provided that such installations are concealed
within the permanent walls, floors, columns and ceilings of the Leased Premises
and in the shafts provided in the Leased Premises for such installations, not
damaging the appearance or reducing the floor area of the Leased Premises or
affecting Tenant's layout, and provided further, that the installation work is
performed without substantially interfering with Tenant's use of the Leased
Premises to the extent commercially reasonable under the circumstances. Any
damage to the Leased Premises resulting from Landlord's exercise of the
foregoing rights shall be repaired by Landlord, at Landlord's expense.
Section 17.02 Landlord's Access to Premises. Landlord, and
Landlord's employees, agents and contractors, shall have the right to enter and
pass through the Leased Premises or any part or parts thereof (i) during
non-business hours, to examine the Leased Premises and to show them to
underlying or ground lessees or mortgagees and to prospective purchasers,
mortgagees, lessees (during the last year of the term of this Lease) or
insurers, and (ii) for cleaning and maintenance and making such repairs or
changes in or to the Leased Premises or in or to the Building or its facilities
as may be provided for or permitted by this Lease or as may be mutually agreed
upon by the parties
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or as Landlord may be required to make by laws and requirements of public
authorities, provided, however, that the foregoing shall be done upon prior
notice to Tenant, in a manner so as to cause little interference with Tenant's
business operations and, if required by Tenant, accompanied by a designated
representative of Tenant; (iii) during non- business hours to perform
Janitorial Services; and (iv) in emergencies. Tenant may designate one or more
areas in the Leased Premises as secure areas, and Landlord shall have no access
thereto without being accompanied by a designated representative of Tenant
except in the case of emergencies where life or property is threatened.
ARTICLE EIGHTEEN - NAME OF BUILDING and TENANTS SIGNAGE
Section 18.01 Name.
(a) Landlord reserves the right to designate and change the name
of the Building at any time.
(b) No sign, notice or other advertisement shall be inscribed,
painted, affixed, or displayed on any windows or doors or on any other part of
the outside or inside of the Leased Premises or any where in the Complex
without Landlord's prior written consent.
ARTICLE NINETEEN - QUIET ENJOYMENT
Section 19.01 Landlord's Covenant of Quiet Enjoyment. Landlord
covenants and agrees, provided Tenant performs all terms, conditions and
covenants of this Lease, Tenant shall quietly hold and enjoy the Leased
Premises for the term of this Lease, without hindrance, claim or molestation by
Landlord, subject to the terms and provisions of this Lease and subject to any
other leases, mortgages and other matters to which this Lease is subject.
ARTICLE TWENTY - NONWAIVER
Section 20.01 Non-Waiver By Either Party. Failure by either party
to complain of any action, nonaction or default of the other party shall not
constitute a waiver of any aggrieved party's rights hereunder. Waiver by
either party of any right for any default of the other party shall not
constitute a waiver of any right for either a subsequent default of the same
obligation or for any other default, past, present or future.
ARTICLE TWENTY-ONE - NOTICES
Section 21.01 Notices to Landlord or Tenant. Any notice or
communication to Landlord or Tenant required or permitted to be given under
this Lease shall be effectively given only if in writing and sent by Federal
Express or other national overnight express courier service, or sent by United
States Registered or Certified Mail, postage prepaid, return receipt requested,
addressed as follows:
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IF TO TENANT, AS FOLLOWS: CONTINENTAL NATURAL GAS, INC.
1412 South Boston Avenue, Suite 500
Tulsa, Oklahoma 74119
Attn: Gary D. Smith
C.F.O.
IF TO LANDLORD,
ADDRESSED AS FOLLOWS: K/B FUND IV
c/o Koll: Investment Management Division
4343 Von Karman Avenue
Newport Beach, California 92660
Attn: Rodney Richerson
WITH COPY TO: HALL, ESTILL, HARDWICK, GABLE, GOLDEN &
NELSON
320 South Boston Avenue, Suite 400
Tulsa, OK 74103-3708
Attn: Thomas F. Golden
If notices, demands or requests are sent by registered or certified
mail, said notices, demands or requests shall be effective upon being deposited
in the United States mail. However, the time period in which a response to any
such notice, demand or request must be given shall commence to run from the
date of receipt on the return receipt of the notice, demand or request by the
addressee thereof. Rejection or other refusal to accept or the inability to
deliver because of changed address of which no notice was given shall be deemed
to be receipt of notice, demand or request sent. Notices may also be served by
personal service upon any officer, director or partner of Landlord or Tenant or
in the case of delivery by Federal Express or other overnight courier service,
notices shall be effective upon acceptance of delivery by an employee, officer,
director or partner of Landlord or Tenant.
Either party shall have the right to change the address to which
notices shall thereafter be sent by giving notice to the other party as
aforesaid.
ARTICLE TWENTY-TWO - PARTIAL INVALIDITY
Section 22.01 Severability Clause. If any term, covenant,
condition or provision of this Lease, or the application thereof to any person
or circumstance, shall ever be held to be invalid or unenforceable, then in
each such event the remainder of this Lease or the application of such term,
covenant, condition or provision to any other person or any other circumstance
(other than those as to which it shall be invalid or unenforceable) shall not
be thereby affected, and each term, covenant, condition and provision hereof
shall remain valid and enforceable to the fullest extent permitted by law.
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<PAGE> 33
ARTICLE TWENTY-THREE - BROKERAGE
Section 23.01 Brokerage. Landlord and Tenant mutually represent to
each other that the only broker with whom they have dealt with respect to this
Lease are Tooman Collins Associates, Inc. and Maritch Services, Inc. and
Landlord agrees to pay all commissions that may be owing to such brokers under
the commission agreement between Landlord and Tooman Collins Associates, Inc.
which broker has agreed to recognize Maritch Services, Inc. as the co-broker.
Landlord agrees to indemnify and hold Tenant harmless against any claims for
commissions that may be asserted in connection with this Lease based upon acts,
conversations or communications of Landlord that may be asserted in connection
with the lease of premises hereunder by any brokers other than the two
companies named above. Tenant agrees to indemnify and hold Landlord harmless
against any claims for commissions that may be asserted in connection with this
Lease based upon acts, conversations or communications by Tenant that may be
asserted in connection with this Lease by any brokers other than the two
companies named above.
ARTICLE TWENTY-FOUR - SUBORDINATION, NONDISTURBANCE
Section 24.01 Subordination. Landlord may, from time to time,
grant first and secondary lien deeds of trust, mortgages or other lien security
interests covering its estate in the land and the Building (herein,
collectively, a "First Mortgage") and any subordinate liens as Landlord may
elect. Tenant, subject to the provisions of Section 24.02, agrees that this
Lease shall be subject and subordinate to each First Mortgage, including any
modifications, substitutions, extensions or renewals thereof and advances
thereunder from time to time in effect. Upon the request of Landlord, Tenant
agrees to execute a subordination agreement incorporating the provisions of
this Article Twenty-Four and otherwise in form reasonably acceptable to Tenant
and Landlord.
Section 24.02 Nondisturbance. The subordination of this Lease to
any First Mortgage pursuant to Section 24.01 is expressly conditioned upon the
holder thereof expressly agreeing in the First Mortgage, or a separate
instrument recorded contemporaneously with or at a reasonable time after the
recordation of the First Mortgage, that (i) Tenant will not be named or joined
in any proceeding (or trustee's sale) to enforce the First Mortgage unless such
be required by law in order to perfect the proceeding (or sale) (ii)
enforcement of any First Mortgage shall not terminate this Lease or disturb
Tenant in the possession and use of the Leased Premises (except in the case
where Tenant is in default beyond the period, if any, provided in this Lease to
remedy such default), and (iii) any party succeeding to the interest of
Landlord as a result of the enforcement of any First Mortgage shall be bound to
Tenant as to obligations and liabilities of the Landlord thereafter accruing
and as provided in this Lease, and Tenant shall be bound to it, under all the
terms, covenants, and conditions of this Lease, including Renewal Terms, with
the same force and effect as if such party were the original Landlord under
this Lease.
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ARTICLE TWENTY-FIVE - RULES AND REGULATIONS
Section 25.01 General. This Lease Controls in Event of Conflict.
(a) Annexed hereto as Exhibit H are Landlord's Rules and Regulations for the
Building. Tenant shall faithfully observe and comply with such Rules and
Regulations (except as hereinafter provided) and such changes therein as
Landlord at any time or times hereafter may make and communicate in writing to
Tenant. The Rules and Regulations, as changed in accordance with this Section
from time to time, are hereinafter called the "Rules and Regulations."
ARTICLE TWENTY-SIX - SECURITY DEPOSIT
Tenant shall upon execution of this Lease deposit the amount of one
(1) months of Annual Rent with Landlord as its security deposit which shall be
held by Landlord to be applied to any Event of Default by Tenant and if none
refunded to Tenant within thirty (30) days of the expiration of this Lease.
ARTICLE TWENTY-SEVEN - MISCELLANEOUS
Section 27.01 Certain Miscellaneous Provisions. This Lease
(including the Exhibits referred to herein) contains the entire agreement
between the parties and all prior negotiations and agreements are merged into
this Lease. This Lease may not be changed, modified or amended, in whole or in
part, except by a writing, executed by the party against whom enforcement of
the change, modification or amendment is to be sought. The Article and Section
headings or titles in this Lease are inserted for convenience only and are not
to be given any effect in its construction. Wherever appropriate in this
Lease, personal pronouns shall be deemed to include the other genders and the
singular to include the plural. The covenants and agreements contained herein
shall inure to and be binding upon Landlord, its successors and assigns, and
Tenant its successors and assigns.
Section 27.02 Holding Over. If Tenant holds over in all or any
part of the Leased Premises after the expiration or termination of this Lease
(or partial/termination as to the portion of the Leased Premises in which
Tenant is holding over) , Tenant shall pay as liquidated damages one hundred
twenty-five percent (125%) of the Annual Rental and Additional Rental then
applicable to the Leased Premises (or applicable portion thereof. No such
holding over shall extend the Lease and Tenant shall indemnify Landlord from
any and all claims resulting from such holding over, including those of any
other tenant to which or whom Landlord may have leased such space and any
purchaser of The Texaco Building Complex. Tenant shall be a tenant at will and
at sufferance of Landlord for any unauthorized holding over.
Section 27.03 Estoppel Certificate. Upon the written request of
the other, each of Landlord and Tenant agree to execute from time to time
certificates stating (a) if true, that the Lease is in full force and effect;
(b) if true, that the certifying party is not in default under the Lease and
has no knowledge of any default of the other party; (c) the then applicable
rentable area of the Leased Premises, Annual Rental, Additional Rental and the
expiration date of the Lease; (d) the date through which rent has been paid;
(e) a covenant to send notices of default (which notices shall be duplicate and
not additional notice except as specifically provided in this Lease) by the
other party to a
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<PAGE> 35
designated person or entity and to provide such designated party with the
opportunity to cure such default provided in this Lease; (an agreement to not
modify or terminate the Lease (except as provided in the Lease) without the
prior written consent of a designated person or entity; and (f) such other
information as is reasonably requested.
Section 27.04 Attorneys' and Professional Fees. In the event any
dispute between Landlord and Tenant is resolved by a judgment in a court of
law, the prevailing party shall be entitled to all of its court costs
reasonable professional's fees and reasonable attorneys' fees incurred in
connection with such action.
Section 27.05 Governing Law. This Lease shall be governed in all
respects by the laws of the State of Oklahoma without reference to those laws
dealing with conflicts of law.
This LEASE is hereby executed and delivered effective as of the date
and year first above written.
K/B FUND IV
(LANDLORD)
By
--------------------------------------
Printed Name
----------------------------
Title
-----------------------------------
CONTINENTAL NATURAL GAS, INC.
(TENANT)
By
--------------------------------------
Printed Name
----------------------------
Title
-----------------------------------
STATE OF _____________ )
)
COUNTY OF ___________ )
The foregoing instrument was acknowledged before me this ____ day of
_______________, 1997, by ____________________________________________________
as _________________ of CONTINENTAL NATURAL GAS, INC. , an Oklahoma
corporation, on behalf of said entity.
----------------------------------------
Notary Public
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<PAGE> 36
My Commission Expires:
____________________
[SEAL]
STATE OF _____________ )
)
COUNTY OF ___________ )
The foregoing instrument was acknowledged before me this ____ day of
_______________, 1997, by ____________________________________________________
as _________________ of K/B FUND IV, a Delaware general partnership, on behalf
of said partnership.
----------------------------------------
Notary Public
My Commission Expires:
____________________
[SEAL]
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<PAGE> 37
EXHIBIT A
LEGAL DESCRIPTION OF PROPERTY
Lots 12, 13 and 14, Block 1, Bayne Addition, City of Tulsa, Tulsa
County, State of Oklahoma.
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<PAGE> 38
EXHIBIT A2
<TABLE>
<CAPTION>
Lot Number Number of Parking Spaces
---------- ------------------------
<S> <C>
</TABLE>
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<PAGE> 39
EXHIBIT B
ALLOWANCES
Tenant Improvement Allowance
1 . Tenant shall be entitled to tenant finish allowance of $10.00
per rentable square foot of office space comprising the Leased Premises for a
total allowance of $203,470 'Tenant Improvement Allowance." The Tenant
Improvement Allowance will be paid or credited to Tenant within 30 days of the
submission of invoices for work performed within the Leased Premises. Tenant
shall maintain and make available to Landlord accurate records of any and all
such disbursements, along with draw requests signed by the contractors and
other bills and invoices establishing that any disbursement was in fact made
and lien waivers for all work which Landlord is reimbursing. This allowance
can be used for physical construction, architectural space planning,
construction documents, moving expenses and computer wiring.
Tenant will indemnify Landlord for all damage to and liens
against the Building and The Texaco Building Complex arising from work
authorized by Tenant and performed within the Leased Premises and the Building
and will, within ten (10) days have all liens removed from the Building and The
Texaco Building Complex or secure a bond in Landlord's name for the
satisfaction of said liens.
2. Tenant may use the Virginia Wall Panel system in the Leased
Premises. The relocation, removal and installation of this Panel Wall System
shall be at the expense of Tenant, but may be funded out of the Tenant
Improvement Allowance at the option of Tenant. Landlord shall have the sole
discretion in determining whether there are any section of panel wall systems
located outside of the Leased Premises available for Tenant's use.
3. Landlord shall install a fire sprinkler system on the twelfth
(12th) floor West Tower of the Leased Premises at Landlord's sole cost.
4. Landlord shall, at its sole cost, install new ceiling and
lighting in the elevator lobby of the twelfth (12th) floor similar to the
ceiling and lighting currently existing in the thirteenth (13th) Floor elevator
lobby.
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EXHIBIT C
ANNUAL RENTAL RATE
Base Rent Schedule
The foregoing rental rates shall be applicable from and after the Term
Commencement
Date.
For purposes of this Lease, the total Annual Rental payable by Tenant under
this Lease for the Initial Term for office space is TEN AND 50/100 DOLLARS
($10.50) per rentable square feet for a total of TWO HUNDRED THIRTEEN THOUSAND
SIX HUNDRED FORTY-THREE AND 50/100 DOLLARS ($213,643.50) and such rental is
payable monthly in advance to Landlord according to the following schedule:
Monthly Rental Rate - Initial Term - Office Space: Months 1-60 - $17,803.63 per
month.
Renewal Term Rental Rate - Office Space and Storage Space: 100% of Fair Market
Value for Comparable Buildings in the Midtown Tulsa Area. The Midtown Tulsa
Area shall be considered to be that area bounded by Interstate 51 to the North,
Boulder Avenue to the West, Harvard Avenue to the East and 31st Street to the
South. For purposes of defining Fair Market Value, the average rental rate for
Comparable Buildings in the Midtown Tulsa Area will be the standard. Subject
to the notice provisions of Section 2.02(a) of this Lease, Tenant shall provide
Landlord with its estimate of the Fair Market Value. Within fifteen (15)
calendar days from Tenant giving written notice to Landlord of its intent to
renew the Lease, Landlord and Tenant will simultaneously provide their
estimates of Fair Market Value for the Renewal Term. If the estimates are
within five (5%) percent of each other, the estimates will be averaged and that
will be the Fair Market Value. If Tenant's and Landlord's estimates are at
variance with each other by more than five (5%) percent Landlord and Tenant
will have an additional fifteen (15) days to attempt to negotiate a
determination of the Fair Market Value. If Tenant and Landlord can not agree
to a determination of Fair Market Value in the fifteen (15) days provided for
above, Tenant may withdraw from negotiations or both parties may submit to
arbitration as described in Exhibit E to this Lease.
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EXHIBIT D
OPERATING EXPENSES
"Operating Expenses" as used in Section 4.02 shall mean the costs and
expenses specified below in Category A actually incurred by Landlord for a
given Operating Expense Year, to the extent properly allocable (in accordance
with generally accepted accounting principles consistently applied) to the
operation, repair, maintenance and access control for the Building (including
the Building Parking Garage and the Common Building Facilities) and the costs,
and expenses of the operation, repair, maintenance and access control for the
Additional Parking Area and the Common Area Allocation of the same with respect
to The Texaco Building Complex Common Area. If the Building is not fully
occupied during any given operating Expense Year, the Operating Expenses
actually incurred shall be adjusted to reflect the amount of Operating Expenses
which would have been incurred at full occupancy for such Operating Expense
Year. It is agreed that any cost allocable to the items specified below in
Category B shall be excluded from Operating Expenses. Any local real estate
tax incentives or abatements which relate to any Operating Expense Year
received by Landlord from local authorities as to real estate taxes includable
in Operating Expenses shall be passed through to Tenant to the extent of
Tenant's Share.
A. Items Included in Operating Expense:
All costs and expenses reasonably and necessarily incurred by
Landlord in the operation, repair, maintenance and access control for the
Building, Common Building Facilities (which includes, without limitation, the
Building Parking Garage) and the Additional Parking Area, of the costs and
expenses of the operation, repair, maintenance and access control for the
Building and The Texaco Building Complex of whatever kind or nature (but
excluding those items specified in category B below) and including, without
limitation, the following:
(1) real estate and improvement taxes and assessments,
whether ordinary or extraordinary, anticipated or unanticipated, and all
utility district charges, rents and assessments, assessed by any governmental
or quasi-governmental body, whether federal, state, county or municipal and
whether now existing or hereafter created, and the costs and expenses incurred
in any contest of such taxes on application for reduction in same, and any
assessments and dues of any private property owner's association for property
including the Building, which are assessed, levied or charged against the
Building, Common Building Facilities, land, and/or Additional Parking Area of
those assessed, levied and/or charged against The Texaco Building Complex;
(2) wages, normal and routine salaries, taxes, insurance
and benefits (collectively, "Personnel Costs") of all persons engaged in the
operation, maintenance, repair, and/or access control for the Building and/or
Common Building Facilities, Personnel Costs incurred in providing access and
traffic control to the Building, Common Building Facilities, and/or Additional
Parking Area and The Texaco Building Complex. Personnel Costs shall include a
fair and reasonable
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<PAGE> 42
allocation of Landlord's or its affiliates' senior property management
personnel consisting of a senior property manager and a senior comptroller, but
shall otherwise not include personnel above the grade of Building Manager
and/or equally held positions. The allocation to Personnel Costs of the senior
property manager and senior comptroller shall be the percentage of their time
that they spend on the Building and The Texaco Building Complex.
(3) the cost of materials and supplies used in the
operation, repair and maintenance of the Building, Common Building Facilities,
Additional Parking Area and The Texaco Building Complex;
(4) the cost of replacements for tools and equipment used
in the normal and routine operation, repair, maintenance and access control for
the Building and Common Building Facilities, Additional Parking Area, and The
Texaco Building Complex, it being agreed that such replacement of equipment
shall not include major air conditioning equipment, boilers, elevators or any
similar major items;
(5) amounts charged to Landlord by independent
contractors for services (including full or part- time labor), materials,
supplies, tools and equipment furnished in connection with the operation,
repair, maintenance and access control for any part of the Building, Common
Building Facilities and the Additional Parking Area and the heating, air
conditioning, ventilating, plumbing, electrical and elevator systems of the
Building, Common Building Facilities and the Additional Parking Area and The
Texaco Building Complex;
(6) amounts paid by Landlord, or charged to Landlord by
independent contractors, for window cleaning and janitorial, rubbish removal
and porter services;
(7) water charges and sewer rents;
(8) the cost of repainting or otherwise redecorating any
part of the exterior of the Building, the Common Building Facilities and the
Additional Parking Area of the cost of repainting or otherwise redecorating The
Texaco Building Common Area;
(9) Holiday and other decorations for the lobby and other
public portions of the Building below the second floor, the exterior of the
Building, the Common Building Facilities and the Additional Parking Area;
(10) the cost of telephone service, postage, office
supplies, normal and routine maintenance and repair and replacement of office
equipment, telex, facsimile and photocopying charges, furniture costs, and
similar charges related to operation of the Building Managers Office in the
Building;
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<PAGE> 43
(11) the cost of licenses, permits and similar fees and
charges related to the operation, repair and maintenance and access control of
the Building (including the tenanted areas thereof), Common Building
Facilities, Additional Parking Area and The Texaco Building Complex;
(12) premiums for property insurance, liability insurance,
employer's liability insurance, workers compensation insurance, boiler and
machinery insurance, rental abatement insurance and such other insurance as is
customarily carried by prudent owners of Comparable Buildings, in amounts and
with companies as Landlord determines, with respect to the Building, Common
Building Facilities, Additional Parking Area and The Texaco Building Complex;
(13) fees for the management of the Building, Common
Building Facilities and Texaco Building Complex, not exceeding the greater of
Three Percent (3%) of gross rentals of the Building (including parking
rentals), or the fees customarily charged for Comparable Buildings and
excluding any leasing commissions or compensations;
(14) fees and reimbursements for costs and expenses paid
to the operator of the Building Parking Garage and similar fees and charges
with respect to the Additional Parking Area if the Additional Parking Area is
operated under a similar arrangement;
(15) Subject to the exclusions set forth in Category B
herein below, amortization of the cost of installation of capital investment
items which are primarily for the purpose of reducing operating costs or which
are required by governmental authority. All such costs shall be amortized over
the reasonable life of the capital investment items, with the reasonable life
and amortization schedule being determined in accordance with general accepted
accounting principles and in no event to extend beyond the reasonable life of
the Building. In the case of installations for the purpose of reducing
operating costs, Landlord shall provide a cost justification for its
practicality; and
(16) charges (including applicable taxes) for water,
sewage, electricity, gas, steam and all other utilities required in the
operation, heating, air conditioning and ventilation of the Building (including
tenanted areas thereon, the Common Building Facilities, Additional Parking
Area, and The Texaco Building Complex;
Operating Expenses shall be "net" of any reimbursement, refund or
credit received by Landlord (net of the reasonable costs and expenses of
obtaining the same, if any) with respect to any item of cost that is included
in Operating Expenses.
B. Items Excluded from Operating Expenses:
(1) the cost of any work or service performed for any
specific tenant (including Tenant) at such tenant's cost (except pursuant to
tenant pass-throughs);
(2) the cost of correcting material defects in the
construction of the
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<PAGE> 44
Building or in the Building equipment;
(3) except as otherwise includable under A(2) above,
salaries of officers and executives of Landlord,
(4) except with respect to the Common Building
Facilities, The Texaco Building Complex and the Additional Parking Area, the
cost of any work or service performed for the exclusive benefit of any facility
other than the Building;
(5) the cost of any items for which Landlord is
reimbursed by insurance proceeds;
(6) except as otherwise included in Category A above, the
cost of any repairs, alterations, additions, changes, replacements and other
items which under generally accepted accounting principles are properly
classified as capital expenditures or which are made in order to prepare for a
new tenant's occupancy;
(7) the cost of any capital repair in accordance with
Articles Nine and Twelve of this Lease;
(8) interest on debt or amortization payments on any
mortgage and rental under any ground lease or other underlying lease;
(9) any real estate brokerage commissions or other costs
incurred in procuring tenants;
(10) charges (including applicable taxes) for extra
electricity, steam and other utilities for which Landlord is entitled to direct
reimbursement from any tenant;
(11) except as provided in Category A above, any costs of
painting or decorating of Landlord's space in the Building (except for the
management office) or any occupied part of the Building;
(12) any expenses for repairs or maintenance if and to the
extent reimbursed pursuant to warranties and service contracts in existence on
the Term Commencement Date; and
(13) any expenses incurred in order to cause the Building,
the Common Building Facilities, The Texaco Building Complex or the Additional
Parking Area as they exist today to be, or come into, compliance with any
currently binding federal, state or local laws effecting or relating to such
facilities as such laws are in effect on the Effective Date.
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<PAGE> 45
EXHIBIT E
ARBITRATION
In any circumstance for which arbitration or a determination of fair
market rental value (the "Fair Market Value Rate") is specialty provided for
pursuant to this Lease, such arbitration or determination shall be conducted in
accordance with the following provisions:
(a) For purposes of determining the Fair Market Value Rate,
Landlord and Tenant shall first meet to attempt to agree upon the Fair Market
Value Rate in accordance to the Provisions in Exhibit C. Each party shall be
entitled to have its consultants and experts participate in the meetings and
discussions between the parties. If Landlord and Tenant have not agreed upon
the Fair Market Value Rate and executed and delivered between them a supplement
to this Lease setting forth the same within the time frame called for in
Exhibit C, then either Landlord or Tenant may notify the other that it desires
to invoke the arbitration procedure set forth below.
(b) If (i) the Fair Market Value Rate has not been determined
pursuant to subsection (a) above or (ii) the matter being arbitrated does not
involve a determination of the Fair Market Value Rate, then the party invoking
the procedure set forth in subsections (b) through (c) of this Exhibit E shall
give a notice (the "Arbitration Notice") to the other party meeting the
requirements of the (UNIFORM ARBITRATION ACT) (the "Act"), or any successor
statute, and stating that the party sending the Arbitration Notice desires to
meet within ten (10) days to attempt to agree on a single arbitrator to
determine the dispute in question or the Fair Market Value Rate, as the case
may be (the "Arbitrator"). If Landlord and Tenant have not agreed on the
Arbitrator within fifteen (15) days after giving of the Arbitration Notice,
then either Landlord or Tenant, on behalf of both, may apply to the local
office of the American Arbitration Association or any organization which is the
successor thereof (the "AAA") for appointment of the Arbitrator, or, if the AAA
shall not then exist or shall fail, refuse or be unable to act such that the
Arbitrator is not appointed by the AAA within sixty (60) days after application
therefore, then either party may apply to the presiding judge of the court (as
that term is defined in Article 234 of the Act) (the "Court") for the
appointment of the Arbitrator and the other party shall not raise any question
as to the Court's full power and jurisdiction to entertain the application and
make the appointment. The date on which the Arbitrator is appointed, by the
agreement of the parties, or otherwise, is referred to herein as the
"Appointment Date". If any Arbitrator appointed hereunder shall be unwilling
to unable, for any reason, to serve, or continue to serve, a replacement
arbitrator shall be appointed in the same manner as the original Arbitrator.
(c) The arbitration shall be conducted in accordance with the then
prevailing rules of the local office of the AAA, modified as follows:
(i) To the extent that the Act or any successor statute
imposes requirements different than those of the AAA in order for the decision
of the Arbitrator to be enforceable in the courts of the State of Oklahoma,
such requirements shall be complied with in the arbitration.
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<PAGE> 46
(ii) The Arbitrator shall be disinterested and impartial,
have no economic interest in the outcome, shall not be affiliated with the
Landlord or the Tenant and shall be (A) for purposes of determining the Fair
Market Value Rate, an MAI appraiser with at least ten (10) years experience in
the determination of fair market rentals in Comparable Buildings (B) for
purposes of any dispute under Section 4.02(e) or Exhibit D, an independent
certified public accountant with at least ten (10) years experience in public
accounting with respect to real estate matters and (C) for purposes of all
other disputes or determinations to be made in accordance with this section, a
qualified and impartial person who shall have had at least ten (10) years
experience in the City of Tulsa, Oklahoma in a calling connected with the
matters of the dispute.
(iii) Before hearing any testimony or receiving any
evidence, the Arbitrator shall be sworn to hear and decide the controversy
faithfully and fairly by an officer authorized to administer an oath and a
written copy thereof shall be delivered to the Landlord and the Tenant.
(iv) Within twenty (20) days after the Appointment Date,
Landlord and Tenant shall deliver to the Arbitrator two (2) copies of (A) a
written statement setting forth in reasonable detail their respective positions
with respect to the dispute in question, which statement may be accompanied by
such evidence as the submitting party shall deem appropriate, or (B) their
respective written determinations of the Fair Market Value Rate, as applicable
(in each case, a "Determination"). After the submission of any Determination,
the submitting party may not make any additions to or deletions from or
otherwise change such Determination. If either party fails to so deliver its
Determination within such time period, time being of the essence with respect
thereto, such party shall be deemed to have irrevocably waived its right to
deliver a Determination and the Arbitrator without holding a hearing, shall
accept the Determination of the submitting party as the result with respect to
the dispute in question or the Fair Market Value Rate, as applicable. If each
party submits a Determination within the twenty (20) day period described
above, the Arbitrator shall, promptly after its receipt of the second
Determination, deliver a copy of each party's Determination to the other party.
For purposes of determining the Fair Market Value Rate, if the higher of the
Determinations so submitted by the parties exceeds the lower of such
Determinations by not more than five percent (5%) of the lower Determination,
then the Arbitrator, without holding a hearing, shall determine that the Fair
Market Value Rate is the mathematical average of the two Determinations
thereof.
(v) If (A) the Fair Market Value Rate has not been
determined pursuant to clause (iv) of this subparagraph or (B) the matter being
arbitrated does not involve a determination of the Fair Market Value Rate, then
not less than fifteen (1 5) days nor more than thirty (30) days after the
earlier to occur of (1) the expiration of the twenty (20) day period provided
for in clause (iv) of this subparagraph or (2) the Arbitrator's receipt of both
of the Determinations from the parties (such earlier date is referred to herein
as the ("Submission Date"), and upon not less than ten (10) days notice to the
parties, the Arbitrator shall hold one or more hearings with respect to the
dispute in question or the determination of the Fair Market Value Rate, as
applicable. The hearings shall be held in the City of Tulsa, Oklahoma at such
location and time as shall be specified by the Arbitrator. Each of the parties
shall be entitled to present all relevant evidence and to cross-examine
witnesses
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<PAGE> 47
at the hearings. The Arbitrator shall have the authority to adjourn any
hearing to such later date as the Arbitrator shall specify, provided that in
all events all hearings, pursuant to this Section, shall be concluded not later
than forty five (45) days after the Submission Date.
(vi) Except as otherwise provided in clause (iv) of this
subparagraph, the Arbitrator shall be instructed, and shall be empowered only,
to select that one of the Determinations which the Arbitrator believes is the
more accurate determination of the dispute in question for the Fair Market
Value Rate, as applicable. Without limiting the generality of the foregoing,
in rendering his or her decision, the Arbitrator shall not add to, subtract
from or otherwise modify the provisions of this Lease or either of the
Determinations.
(vii) The Arbitrator shall render his or her determination
as to the selection of a Determination in a signed and acknowledged written
instrument, original counterparts of which shall be sent simultaneously to the
Landlord and the Tenant, within ten (10) days after the earlier to occur of (A)
his or her determination of the dispute in question or the Fair Market Value
Rate, as applicable, pursuant to clause (iv) of this subparagraph or (B) the
conclusion of the hearing(s) required by clause (v) of this subparagraph,
(viii) If the rental commencement date for any space to be
leased by Tenant pursuant to this Lease for which the Fair Market Value Rate is
being determined begins prior to the commencement of or completion of the
procedures for determining such rental rate as herein provided, rent shall be
provisionally determined and paid for by Tenant based on Landlord's initial
calculation of the Fair Market Value Rate beginning on the commencement date
provided in the Lease. Any overpayment by, Tenant resulting from any reduction
in the Fair Market Value Rate upon its final determination pursuant to the
provisions hereof, together with interest thereon from the date or dates of
overpayment at the Prime Interest Rate, until such rent is credited to Tenant,
shall be credited to Tenant's next succeeding Annual Rental payments.
(ix) The Arbitrator shall resolve any Operating Expense
dispute as he may determine and his decision shall be binding on Landlord and
Tenant. Each party shall present its case to the Arbitrator and each party's
auditors involved in the dispute shall be entitled to present evidence and
attend hearings.
(d) This provision shall constitute a written agreement under the
Act to submit those disputes for which arbitration is specifically provided for
pursuant to this Lease, including any dispute regarding the determination of
the Fair Market Value Rate, to arbitration.
(e) The arbitration decision, determined as provided in this
Section, shall be conclusive and binding on the parties, shall constitute an
"award" by the Arbitrator within the meaning of the AAA rules and applicable
law and judgment may be entered thereon in any court of competent jurisdiction.
-47-
<PAGE> 48
(f) Each party shall pay its own fees and expenses relating to the
arbitration (including, without being limited to, the fees and expenses of its
counsel and of experts and witnesses retained or called by it). Each party
shall pay one-half ( 1/2) of the fees and expenses of the AAA and of the
Arbitrator, provided, that if either party fails to submit a Determination
within the period provided therefor, such non-submitting party shall pay all of
such fees and expenses.
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<PAGE> 49
EXHIBIT F
I. Heating, Ventilation and Air Conditioning.
The HVAC system that is in place will be in good working
order. Tenant accepts the main duct distribution system in
as-is/where-is condition with any modifications to ducts at
Tenant's sole cost.
II. Electrical Distribution and Service.
Tenant accepts the electrical system in as-is/where is
condition.
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<PAGE> 50
EXHIBIT G
JANITORIAL
Landlord reserves the right to modify these specifications upon notice to
Tenant.
Landlord will maintain janitorial specifications consistent with those of
Comparable Buildings in the Midtown Tulsa area.
I. NIGHTLY - ALL FLOORS.
--------------------
A. Empty trash can and change liners as needed.
B. Pick up recycle paper on recycle floors, deliver to designated
area for pick up. Clean all private rest rooms (stock paper
towels, tissue, and soap. Clean sink, stool, and mirror).
D. Clean all kitchenette and coffee bar areas (stock paper towels
and clean sink and counter tops).
E. Clean all conference rooms.
F. Service areas (clean sink and stock paper towels).
G. Clean all drinking fountains.
H. Clean and mop floor of Tenant elevator lobbies.
I. Trash taken to designated area for pick up.
J. Blot and clean all liquid spills from lobby area, service area,
and carpet areas.
K. Remove all trash from all floors to trash pick-up area.
II. TWICE A WEEK - ALL FLOORS.
-------------------------
A. Wipe desk bookshelves and all furniture off with damp cloth.
Dust desk where papers prohibit using water.
B. Wipe telephone with damp cloth.
C. Wipe spots from walls and doors; if glass, use window cleaner.
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<PAGE> 51
D. Clean spots from glass partitions and glass doors.
E. Whisk broom chairs as needed. Clean vinyl or leather.
F. Clean ladies' lounge on floors where located.
G. Wipe trash cans out as needed.
H. Break down cardboard boxes and take to recycle area twice per
week.
III. WEEKLY.
------
A. Clean window sills.
B. Dust hanging picture frames.
C. Dust partitions.
IV. MONTHLY.
-------
A. Clean wooden desks with furniture polish.
B. Clean glass-topped desks with window cleaner.
C. Wipe or dust file cabinets, dust bookshelves, all furniture in
the office (if wooden, use furniture polish; if glass top, use
window cleaner).
D. Dust base boards.
E. Dust chair bottoms and legs.
V. ANNUAL.
------
A. Wash marble lobby walls on all floors once a year.
B. Common hallways where carpeted and all office areas to be
shampooed (cleaned) 1 time per year on a scheduled basis.
VI. VACUUM CLEANING.
---------------
A. Vacuum carpeted areas 2 times a week. Once a week detail
vacuuming is done on a rotation basis.
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<PAGE> 52
B. Vacuum diffusers in Tenant elevator lobbies once a month.
C. StaticGuard carpet as needed.
VII. ELEVATORS.
---------
A. Polish handrails and wipe down wall panels daily.
B. Shampoo carpet once per week.
VIII. REST ROOMS - NIGHTLY.
--------------------
A. Clean, sweep, and mop.
B. Clean sinks with disinfectant and chrome polish.
C. Clean stools and urinals with bowl cleaner.
D. Clean toilet seats (both sides) with disinfectant.
E. Clean mirrors and polish stainless steel.
F. Restock paper towels, tissue, and soap dispensers.
G. Empty sanitary napkin disposal boxes nightly and clean with
disinfectant, once a week.
H. Clean spots on tile behind sinks and urinals.
L. Empty trash nightly and take to designated area for pick up.
J. Dust partition tops and plumbing fixtures as needed.
K. Clean stall walls as needed.
L. Scrub floors with scrubber 4 times per year.
M. Completely wash walls and partitions twice per year.
IX. ALL OTHER FLOORS.
----------------
- Refinish hard floors (strip, wax, and buff) as follows:
- Service Area: Clean and mop 2 times weekly; stock paper towels
and soap.
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<PAGE> 53
X. DAY UTILITY.
A. Main Lobby - daily - mid morning - police the lobby for trash
or spills after lunch rush, pick up any trash in the lobby and
hand vacuum the seating areas if needed.
B. Miscellaneous - early a.m. - start at the top of the building
and come down, turning on the floor lights. After the lunch
rush, vacuum out the elevator cabs as needed. Be available to
clean up spills and messes which may occur, as well as any
special cleaning which may be required from time to time.
Alert engineers of any leaks or mechanical problems which you
may observe.
C. Maintain the lighting systems in the building by replacing
lamps observed or reported to be out.
XI. WINDOW CLEANING.
Wash windows in all Tenant premises of building twice a year.
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<PAGE> 54
EXHIBIT H
THE TEXACO BUILDING
BUILDING RULES AND REGULATIONS
Sidewalks, doorways, vestibules, halls, stairways, and other similar areas
shall not be obstructed by tenant or used by any tenant for any purpose other
than ingress and egress to the Leased Premises and for going from one part of
the Building to another part of the Building.
Plumbing fixtures and appliances shall be used only for the purpose for which
designated and no sweeping, rubbish, rags or other unsuitable material shall be
thrown or placed therein. Damage resulting from misuse by Tenant shall be paid
by Tenant and Landlord shall not in any case be responsible therefore.
No signs, advertisements, or notices shall be painted or affixed in any way on
or to any windows or doors or any other parts of the Building except of such
color, size and style and in such places as designated by Landlord.
Landlord will provide and maintain a directory board for all the tenants in the
main lobby of the Building, and no other directory will be permitted unless
previously consented to by Landlord in writing.
Landlord shall be provided with a key for all locks for doors in tenant's
leased area and no tenant shall place any additional lock or locks on any door
in its leased area without Landlord's written consent. All requests for
duplicate keys shall be made to the Property Manager. Tenant, with Landlord's
approval which approval shall not be unreasonably withheld, can designate
certain areas as closed access and will not have to provide Landlord with a
key.
Proposed plans for alterations affecting floors, walls, woodwork, trim,
windows, ceiling, equipment, and/or other physical portion of the Building must
be approved in writing by Landlord. Tenants will refer all contractors,
contractors representatives and installation technicians tendering any service
to them to Landlord for Landlord's reasonable supervision, approval and control
before the performance of any contractual services. This provision shall apply
to all work performed in the Building, including, but not limited to,
installation of telephones, telegraph equipment, electrical devices and
attachments, any and all installation of every nature affecting floors, walls,
woodwork, trim, windows, ceilings, equipment, and any other physical portion of
the Building.
Movement in or out of the Building of furniture or office equipment, or
dispatch or receipt by tenants of any bulky material, merchandise or materials
which requires use of elevators or stairways or movement through the Building
entrances or lobby shall be restricted to such hours as Landlord shall
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<PAGE> 55
designate. All such movement shall be under the supervision of Landlord and in
the manner agreed between the tenant and Landlord by prearrangement before
performance. Such prearrangement initiated by a tenant shall include
determination by Landlord, and subject to his decision and control as to the
time, method, and routine of movement and as to limitations for safety or other
concern which may prohibit any article, equipment, or any other item from being
brought into the Building.
The tenants are to assume all risks as to damage to articles moved and injury
to persons or public engaged or not engaged in such movement, including
equipment, property, and personnel of Landlord if damaged or injured as a
result of entering property to completion of work; and Landlord shall not be
liable for acts of any persons engaged in, or any damage or loss to any of said
property or persons resulting from any act in connection with such service
performed for a tenant.
Landlord reserves the right to prescribe the weight and position of safes and
other heavy equipment, which shall, in all cases, distribute weight, stand on
supporting devices approved by Landlord. All damages done to the building by
taking in or putting out any property of a tenant, or done by a tenant's
property while in the building, shall be repaired at the expense of that
tenant.
A tenant shall notify the Property Manager when safes or other heavy equipment
are to be taken in or out of-the building, and the moving shall be done under
the supervision of the Property manager, after receiving written permission
from Landlord. Persons employed to move such property must be acceptable to
Landlord.
Corridor doors, when not in use, will be kept closed.
Each tenant shall cooperate with Landlord's employees in keeping its leased
area neat and clean. Tenant shall not employ cleaning and maintenance
personnel. Landlord shall be in no way responsible to the tenants, their
agents, employees, or invitees for any loss of property from the leased
premises or public areas or for any damage to any property thereon from any
cause whatsoever, unless due to gross negligence by Landlord.
Tenant shall not make or permit any improper noises in the building or
otherwise interfere with other tenants or persons having business with them.
Tenant shall cooperate with Landlord's reasonable efforts to minimize energy
consumption.
Tenant shall comply with Landlord's life safety plans, including all
requirements for fire drills and building evacuation plans.
Nothing shall be swept or thrown into the corridors, halls, elevator shafts or
stairways. No birds or animals shall be brought into or kept in, on, or about
the tenant's area.
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<PAGE> 56
Tenant may be allowed vending machines for bottled or canned soda and drinks
for its employees. Landlord reserves the right to contract for the
installation of the vending machines or to designate a specific company to
provide the vending machines.
No machinery of any kind except office equipment, shall be operated by any
tenant in its leased area without the prior written consent of Landlord, nor
shall any tenant use, or keep, in the building any flammable or explosive fluid
or substance.
No portion of the tenant's leased area shall at any time be used or occupied as
sleeping or lodging quarters.
Tenants are requested to lock all office doors leading to corridors and to turn
out all lights at the close of their working day.
Landlord shall not be held responsible for lost or stolen personal property,
money or jewelry from tenant's leased area or public areas regardless of
whether such loss occurs when area is locked against entry or not, unless due
to gross negligence by Landlord.
Tenant shall not tamper with or attempt to adjust the temperature control
thermostats in the leased premises. Landlord shall make adjustments in
thermostats on call from the tenant. Landlord shall provide initial balancing
of Tenant's HVAC system and will attempt to make adjustments to the thermostats
to provide a comfortable temperature and humidity level in the Leased Premises.
Landlord will preapprove thermostats that Tenant can control so long as they
are indicated on Tenant's HVAC plans and approved by Landlord's engineer.
Tenant shall have access to the building before and after normal working hours.
Such
access shall be through the front door and shall be controlled by the security
guard on duty.
Landlord reserves the right to rescind any of these rules and regulations and
to make such other and further reasonable rules and regulations as in its
judgment shall, from time to time, be needed for the safety, protection, care
and cleanliness of the building, the operation thereof, the preservation of
good order therein and the protection and comfort of the tenants and their
agents, employees and invitees, which rules and regulations, when made and
written notice thereof is given to a tenant, shall be binding upon it in like
manner as if originally herein prescribed.
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<PAGE> 57
EXHIBIT I
OVERTIME HVAC CHARGES
Any HVAC services ("Overtime HVAC") furnished to Tenant at times or on
days other than during the regular business hours specified in Section 5.02(a)
shall be at $50.00 per hour for the first partial or full floor for which
Tenant requests Overtime HVAC and $50.00 per hour for each additional partial
or full floor for which Tenant requests overtime HVAC. Such charges shall be
adjusted from time to time for the actual increases or decreases to Landlord of
providing Overtime HVAC resulting from increases or decreases in Landlord's
cost's including costs per kilowatt hour of electricity from the charges in
effect as of the Effective Date of this Lease.
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<PAGE> 58
EXHIBIT J
ENVIRONMENTAL
The following is a listing of documentation, reports, surveys, and test
results that are available for Tenant's inspection. It is Tenant's
responsibility to review these documents.
1. November 1996 report from Pathcon Laboratories to identify
certain microbiological forming units of Legionella bacteria.
2. June 1995 report from Morrison & Associates Services detailing
the locations and makeup of the asbestos containing material
(chrysolite or amosite) in the Building.
3. Certification letters from ClHs on past asbestos abatement
projects.
4. All air monitoring done by Morrison & Associates in 1996, and
1992 and 1993 EH&S reports on the ambient monitoring for
airborne asbestos fibers.
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<PAGE> 1
EXHIBIT 15.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Continental Natural Gas, Inc.
Registration on Form S-1
We are aware that our report dated June 10, 1997 on our review of interim
financial information of Continental Natural Gas, Inc. for the periods ended
March 31, 1997 and 1996 is included in this registration statement. Pursuant to
Rule 436(c) under the Securities Act of 1933, this report should not be
considered a part of the registration statement prepared or certified by us
within the meaning of Sections 7 and 11 of that Act.
COOPERS & LYBRAND L.L.P.
July 28, 1997
<PAGE> 1
EXHIBIT 21.1
DESCRIPTION OF SUBSIDIARIES
SUBSIDIARY CORPORATIONS
<TABLE>
<CAPTION>
PARENT SUBSIDIARY INTEREST
- ------ ---------- --------
<S> <C> <C>
Continental Natural Continental Holdings 100%
Gas, Inc. Company
</TABLE>
SUBSIDIARY LIMITED LIABILITY COMPANIES
<TABLE>
<CAPTION>
PARENT SUBSIDIARY INTEREST
- ------ ---------- --------
<S> <C> <C>
Continental Natural Continental Natural Gas 99% Ownership Interest*
Gas, Inc. Gathering, L.L.C.
Continental Natural Continental Hydrocarbons, 99% Ownership Interest*
Gas, Inc. L.L.C.
Continental Natural Continental Gas Processing, 99% Ownership Interest*
Gas, Inc. L.L.C.
Continental Natural Continental Laverne Gas 99% Ownership Interest*
Gas, Inc. Processing, L.L.C.
Continental Natural Continental Spearman Gas 99% Ownership Interest*
Gas, Inc. Processing, L.L.C.
Continental Natural Continental Energy 99% Ownership Interest*
Gas, Inc. Services, L.L.C.
</TABLE>
- -----------
* Remaining 1% interest owned by Continental Holdings Company
All of the companies listed in this Exhibit are organized under the
laws of the State of Oklahoma.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-25719) of our report dated March 21, 1997 on our audits of the
consolidated financial statements of Continental Natural Gas, Inc. and
Subsidiaries. We also consent to the reference to our firm under the caption
"Independent Public Accountants."
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
July 28, 1997
