<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL , 1997
REGISTRATION STATEMENT NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
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>
<CAPTION>
<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:
WILLIAM W. PRITCHARD, ESQ. KENNETH F. ALBRIGHT, ESQ.
DEL L. GUSTAFSON, ESQ. ALBRIGHT & RUSHER, a
HALL, ESTILL, HARDWICK, GABLE, Professional Corporation
GOLDEN & NELSON, P.C. Fifteen West Sixth Street,
320 South Boston Avenue, Suite 400 Suite 2600
Tulsa, Oklahoma 74103-3708 Tulsa, Oklahoma 74119-5434
(918) 594-0400 (918) 583-5800
BYRON F. EGAN, ESQ.
JACKSON & WALKER, L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202-3797
(214) 953-5727
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the Registration Statement becomes effective.
<PAGE> 2
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 Proposed
Maximum Maximum
Amount Offering Aggregate Amount of
Title of Each Class of to Be Price Per Offering Registration
Securities to Be Registered Registered (1) Share Price Fee
- ------------------------------------- --------------- ---------- ----------- ------------
<S> <C> <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.
================================================================================
-2-
<PAGE> 3
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>
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
</TABLE>
-3-
<PAGE> 4
<TABLE>
<S> <C> <C>
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>
-4-
<PAGE> 5
================================================================================
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 APRIL , 1997
PROSPECTUS
[LOGO OF CONTINENTAL APPEARS HERE]
2,100,000 SHARES
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. (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 $ and $ per
share. See "Risk Factors -- No Prior Public Market" for the factors considered
in determining the initial public offering price.
The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol " ," subject to official notice of issuance.
FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF
COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 9-14 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.
------------------------
-1-
<PAGE> 6
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS
------ --------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share ............... $ $ $ $
Total (3) ............... $ $ $
</TABLE>
- ----------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(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
Underwriting Discounts and Commissions, solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company, will be
$ , $ and $ , respectively. See "Underwriting."
--------------------
The shares of Common Stock are being offered by the Underwriters as
set forth under "Underwriting" herein. It is expected that the delivery of
certificates therefor will be made in New York, New York, on or about ,
1997, against payment therefor. The Underwriters are:
OPPENHEIMER & CO., INC. SOUTHWEST SECURITIES, INC.
The date of this Prospectus is , 1997.
---------------------
-2-
<PAGE> 7
At the top center of the inside front cover page is the Company's logo
and centered below that is the phrase "Natural Gas Systems and Plants."
The center of the page contains on outlined sketch of Texas and
Oklahoma. These states are positioned and connected as they would be on a map
of the United States.
The location of the Company's natural gas systems are indicated as
marked within the states described above.
[Description of Graphics and Pictures of natural gas systems and plants.]
[GRAPHICS APPEAR HERE]
------------------
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.
-3-
<PAGE> 8
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 that the
over-allotment option granted to the Underwriters in connection with the
Offering is not exercised. All information in this Prospectus has been adjusted
to reflect a for stock split in April, 1997.
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 ("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 by (i) connecting 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, edition of "Hart's Report
on Gas Customer Satisfaction" published by Hart Publication and Mastio & Co.
reported that CNG was rated as the most preferred natural gas purchaser in a
survey of 353 natural gas sellers. The Company markets the natural gas it
gathers or processes ("on-system gas"), as well as third-party natural gas it
neither gathers nor processes from over 70 producers via 15 interstate and
intrastate pipelines ("off-system gas"), to serve 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 the month of March, 1997, CNG's average gathering
system throughput was 108 MMcf/d and average processing plant throughput was
135 MMcf/d. Its NGL production for March, 1997, averaged 280 Mgal/d. Over the
last three years, natural gas throughput from gathering systems owned and
operated by the Company has increased 30%. 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.
-4-
<PAGE> 9
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. 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 barrels
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.
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
producers flexible contract terms, value-added services and other arrangements
which allow producers to obtain better terms for the sale of their natural gas.
EXPANSION OF FACILITIES. The Company seeks to acquire or make
investments in projects that complement its existing systems, 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, thus allowing the Company to 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 expansion opportunities into 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 other 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 it has assembled a seasoned management team which allows it to assess and
evaluate acquisition opportunities and integrate acquired assets into CNG's
existing operations.
-5-
<PAGE> 10
IMPROVING THE PROFITABILITY OF EXISTING FACILITIES. The Company seeks
to maximize the profitability of its operations by (i) maintaining and
increasing natural gas throughput and processing levels, (ii) directing natural
gas volumes to facilities that maximize 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 throughput and
processing volumes, the Company obtains additional natural gas supplies for its
facilities by connecting new wells, purchasing and integrating gathering
systems from third parties and entering into contractual natural gas supply
arrangements with producers or other gatherers.
The opportunity to connect new wells to existing facilities is
primarily affected by the level of drilling activity near the Company's
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, an independent engineering firm estimates that the leases and
wells currently under contract with the Company have 700 Bcf of proved,
producing natural gas reserves. The Company believes it has sufficient capacity
within its gathering systems and processing plants to capitalize on the
development potential in the Panhandle Area.
By maintaining geographically-focused operations, the Company believes
it is able to control operating and overhead costs. Furthermore, the location
and strategic nature of CNG's systems and 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 a greater volume of NGLs from the
natural gas stream and enhance the total value of its on-system gas volumes.
EXPANDING ENERGY MARKETING SERVICES AND 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 individual producers and customers at the wellhead
and in the marketing of natural gas. By offering flexible contract terms and
using a portfolio approach to the marketing of natural gas, CNG has been able
to increase substantially its on-system gas and NGL volumes. The Company also
seeks to increase its off-system sales and the marketing of third-party natural
gas. 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 systems and facilities are located in an area where many
interstate pipelines converge, allowing it to take advantage of locational
differences in natural gas prices. CNG provides its customers with a full range
of services including risk management, storage, transportation, scheduling and
peaking requirements. 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 end-users optimum flexibility with respect to
pricing, contract terms and volumes. By aggregating large
-6-
<PAGE> 11
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.
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 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.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company ........................................... 1,800,000 shares
Common Stock offered by the Selling Shareholder ............................... 300,000 shares
---------
Total Common Stock Offered .................................................... 2,100,000
=========
Common Stock to be Outstanding after the Offering (1) ......................... shares
Use of Proceeds by the Company ................................................ Net proceeds to the Company from the Offering will
be used to repay outstanding bank borrowings 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 .................................................
</TABLE>
- ---------------
(1) Excludes (i) 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").
-7-
<PAGE> 12
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
(Dollars In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Natural gas sales $ 208,779 $ 95,631 $ 100,477 $ 126,583 $ 124,981
Natural gas liquids sales 34,757 24,804 19,572 23,177 10,102
Gathering fees 1,995 -- -- -- --
Other 1,130 763 260 1,308 1,239
--------- --------- --------- --------- ---------
Total operating revenue 246,661 121,198 120,309 151,068 136,322
Operating costs and expenses
Cost of purchased natural gas 225,535 107,642 111,038 137,560 125,872
Operating expenses 5,978 4,366 3,930 5,530 3,617
General and administrative 5,623 3,840 3,601 3,847 4,050
Depreciation,depletion and amortization 2,854 1,367 1,505 1,741 1,067
--------- --------- --------- --------- ---------
Total operating costs and expenses 239,990 117,215 120,074 148,678 134,606
Operating income 6,671 3,983 235 2,390 1,716
Other income (expense),net (2,686) (1,047) 4,648 (1,028) (448)
--------- --------- --------- --------- ---------
Income before income taxes, extraordinary item and
cumulative effect of accounting change 3,985 2,936 4,883 1,362 1,268
Income tax (expense) benefit 3,635 2,174 (127) (47)
--------- --------- --------- --------- ---------
Income before extraordinary item and cumulative effect of
accounting change 7,620 5,110 4,756 1,315 1,268
--------- --------- --------- --------- ---------
Net income $ 7,193 $ 5,110 $ 4,756 $ 1,695 $ 1,268
========= ========= ========= ========= =========
Pro forma operating revenue 246,058(1)
---------
Pro forma income before extraordinary item 7,046(1) 786(2)
--------- ---------
EARNINGS PER SHARE:
Primary:
Income before extraordinary item and cumulative effect
of accounting change $ 293.08 $ 218.17 $ 201.17 $ 55.60 $ 55.08
Net income 254.06 216.15 199.17 70.49 55.08
Fully Diluted:
Income before extraordinary item and cumulative effect
of accounting change 233.72 218.11 199.50 55.33 55.01
Net income 220.61 216.10 197.52 70.16 55.01
Pro forma income before extraordinary item:
Primary 270.99(1) 34.15(2)
Fully diluted 216.10(1) 34.11(2)
Weighted average common shares outstanding:
Primary 26,001 23,422 23,642 23,655 23,021
Fully diluted 32,605 23,428 23,840 23,768 23,052
OTHER DATA:
Capital expenditures $ 30,761 $ 12,311 $ 3,097 $ 2,267 $ 13,986
EBITDA 9,526 5,350 1,739 4,132 2,782
Natural gas throughput gathered and/or processed (MMcf/d) 191 140 108 93 60
NGLs production (Mgal/d) 264 288 257 251 105
December 31, 1996
-------------------------
BALANCE SHEET DATA: Actual As Adjusted(3)
----------- -----------
Property, plant and equipment (net) $ 61,045
Total assets 145,929
Long-term debt, excluding current portion 32,946
Capital lease obligations, excluding current portion 6,583
Shareholders' equity 22,153
</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.
(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) Adjusted to give effect to the sale by the Company of 1,800,000 shares of
Common Stock in the Offering and the application of the net proceeds
therefrom.
-8-
<PAGE> 13
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 any of the shares of Common Stock offered
hereby.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Prospectus, such as those
concerning the Company's business strategy, governmental regulation,
acquisition and expansion plans, future system throughput and processing
amounts, values and revenues, capital requirements and other statements
regarding matters that are not historical facts, are forward-looking statements
(as such term is defined in the Securities Act of 1933, as amended (the
"Securities Act")). Because such forward-looking statements include risks and
uncertainties, actual results may differ materially from those expressed in or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those discussed
herein under "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business." The Company undertakes no
obligation to release publicly the results of any revisions of those
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
COMMODITY PRICE FLUCTUATIONS
The Company's products, including NGLs, natural gas and related
by-products, are commodities. As such, their prices are often subject to
material changes 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. The Company's contracts generally do not fix a long-term
price for the product purchased or sold. Accordingly, market changes in the
price of the Company's products have a direct and immediate effect (whether
favorable or adverse) upon 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.
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.
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
deliveries on interstate pipelines. In addition, the Company has
-9-
<PAGE> 14
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 purchase and sales on any given day (or in any given month)
are equal, and has not incurred any significant pipeline imbalance penalties.
Nonetheless, in the event the Company is unable to balance its purchase and
sales within prescribed tolerable limits, 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."
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 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.
NET OPERATING LOSS CARRYFORWARDS
The Company has been able to utilize net operating loss carryforwards
("NOLs") to offset its income in prior years and thereby reduce or eliminate
its tax liability. The Company currently has 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
-10-
<PAGE> 15
utilization of NOLs (totaling approximately $37 million) may be challenged.
Management believes that the Company has been, and will continue to be, legally
entitled to use its NOLs. Should, however, the Internal Revenue Service audit
and disallow prior or future use of the Company's NOLs and such disallowance is
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.
The Offering should not affect the Company's right to utilize its remaining
NOLs. See Note 8 of the Notes to the Consolidated Financial Statements of the
Company included herein.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on a limited number of key management
personnel, particularly its 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 Company's future success will also depend, in part, on its
ability to attract and retain highly qualified personnel. There can be no
assurance that the Company will be successful in hiring or retaining qualified
personnel. The loss of key personnel to death, disability or termination, or
the inability to hire and retain qualified personnel, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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 with the Company's operations. There can be no assurance that suitable
assets will be available for acquisition by the Company in the future or that
such assets will be available on terms acceptable to the Company. In addition,
there can be no assurance that financing will be available to fund future
acquisitions, or, if available, that the cost of such funds will be available
on terms favorable to the Company. In connection with its acquisitions, the
Company has been or may be required to assume certain liabilities, including,
without limitation, environmental liabilities, known or unknown.
POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS
Quarterly revenues and operating results may fluctuate as a result of
changes in the availability of and prices for natural gas and changes in demand
for natural gas and NGLs because of weather and variability in demand for NGLs
in the petrochemical, refining and other industries. Because of these and other
factors, 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."
-11-
<PAGE> 16
DEPENDENCE ON ONE CUSTOMER
Sales of NGLs to a single customer 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
Prior to the Offering, there has been no public market for the
Company's Common Stock and there can be no assurance that an active trading
market for the Common Stock will develop or be sustained after the Offering. In
the event that the Company's Common Stock is thinly traded, shareholders may
not be able to sell a significant amount of Common Stock at the price quoted or
at all. 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. Following the
Offering, the market price for the Common Stock may be volatile depending on
various factors, including the general economy, stock market conditions,
announcements by the Company, its suppliers or competitors and fluctuations in
the Company's operating results. In addition, the stock market historically has
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. The trading price of the Common Stock could also
be subject to significant fluctuations in response to variations in quarterly
results of operations, changes in earnings estimates by analysts, governmental
regulatory action, general trends in the industry and overall market
conditions, and other factors.
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 % of the outstanding
Common Stock ( % if the Underwriters' over-allotment option is exercised in
full) and indirectly will control approximately % of the outstanding Common
Stock ( % if the Underwriters' over-allotment 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
-12-
<PAGE> 17
Common Stock without the Majority Shareholders' consent. See "Principal and
Selling Shareholders" and "Description of Capital Stock."
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 $ 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. Prior to the Offering, the Company will
have outstanding shares of its Common Stock. In addition, the Company will
have 600,000 shares reserved for future issuance upon the exercise of options
or other rights granted under the 1997 Stock Plan and shares reserved
for future issuance upon the exercise of options granted under the 1996 Stock
Plan. Of the shares of Common Stock to 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. The
remaining shares were issued and sold by the Company in private
transactions in reliance upon exemptions from registration under the Securities
Act. Of these shares, except as limited by lock-up agreements, up to shares
will be eligible for resale pursuant to Rule 144 under the Securities Act
("Rule 144"). In connection with the Offering, all executive officers,
directors and certain other shareholders of the Company have agreed not to
offer, sell or otherwise dispose of a total of 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
-13-
<PAGE> 18
additional capital by occurring 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."
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."
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."
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."
-14-
<PAGE> 19
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 revenues
from gathering, processing and marketing activities associated with these
assets. CNG does not own any natural gas reserves.
During 1996, CNG transferred substantially all of its operating assets
to three limited liability companies. 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 Cottonwood Partnership and Adams Affiliates, 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 % 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.
-15-
<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from its sale of 1,800,000 shares of
Common Stock offered hereby, at an assumed initial public offering price of
$ per share, after deduction of the underwriting discounts and
commissions and offering expenses payable by the Company, are estimated to be
approximately $ million ($ 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 $ million
to pay a portion of the Company's existing indebtedness to ING Capital
Corporation under its term loan 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 term loan matures on July 31, 2001.
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.
-16-
<PAGE> 21
DIVIDEND POLICY
The Company has paid no dividends on its Common Stock over the last
two fiscal years, does not intend to pay any cash dividends on its Common Stock
and anticipates that, for the foreseeable future, it will continue to 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 until December 30, 1997, and thereafter prohibits the
payment of dividends in excess of 10% of the Company's annual consolidated net
income.
-17-
<PAGE> 22
DILUTION
The pro forma net tangible book value of the Company as of December
31, 1996 was approximately $ million or $ . 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. 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 $ 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 December 31, 1996 would have been $
million, or $ per share. This represents an immediate increase in net
tangible book value of $ per share to existing shareholders and an immediate
dilution of $ per share to new investors.
The following table illustrates this per share dilution:
Assumed initial public offering price $
Pro forma net tangible book
value before the Offering $
Increase in pro forma net tangible
book value attributable to
new investors $
Pro forma net tangible book value after
the Offering $
Dilution to new investors $
The following table summarizes, on a pro forma basis as of December
31, 1996, the differences in the total consideration paid and the average price
per share paid by the Company's existing shareholders and by purchasers of the
shares offered hereby:
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing
shareholders % $ % $
New investors % $ % $
Total % $ % $
</TABLE>
The computations in the tables above exclude 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 vest or are
exercised, there will be further dilution to new investors. See
"Management-Executive Compensation."
-18-
<PAGE> 23
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1996 (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 $ per
share and the application of the estimated net proceeds therefrom and the
conversion of the Company's Convertible Preferred Stock into 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 December 31, 1996
---------------------------
As
Actual Adjusted (1)
---------- --------------
(Dollars in thousands except
number of shares)
<S> <C> <C>
Current portion of long-term debt and capital lease obligations $ 2,032 $
======== ========
Long-term debt and capital lease obligations (2):
Bank borrowings $ 32,946
Capital lease obligations 6,583
-------- --------
Total long-term debt and capital lease obligations $ 39,529 $
-------- --------
Shareholders' equity (3):
Convertible preferred stock: $1 par value; $40,000 liquidation
value; 200 shares authorized; 149 shares issued and outstanding $ 0
Common stock, $1 par value, 50,000 shares authorized;
28,817 shares issued 29
Additional paid-in capital 12,386
Retained earnings 10,042
Treasury stock, at cost (2,250 shares) (204)
Receivable from stock sale (100)
-------- --------
Total shareholders' equity $ 22,153
-------- --------
Total capitalization $ 61,682
======== ========
</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
shares of Common 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.
-19-
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL AND OTHER INFORMATION
(Dollars In Thousands Except Per Share Data)
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. The financial data for the years ended December 31, 1996,
1995, and 1994 have been derived from the Company's Financial Statements
included herein which have been audited by Coopers & Lybrand L.L.P., independent
accountants. 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>
Year Ended December 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Natural gas sales $ 208,779 $ 95,631 $ 100,477 $ 126,583 $ 124,981
Natural gas liquids sales 34,757 24,804 19,572 23,177 10,102
Gathering fees 1,995 -- -- -- --
Other 1,130 763 260 1,308 1,239
--------- --------- --------- --------- ---------
Total operating revenue 246,661 121,198 120,309 151,068 136,322
Operating costs and expenses
Cost of purchased natural gas 225,535 107,642 111,038 137,560 125,872
Operating expenses 5,978 4,366 3,930 5,530 3,617
General and administrative 5,623 3,840 3,601 3,847 4,050
Depreciation,depletion and amortization 2,854 1,367 1,505 1,741 1,067
--------- --------- --------- --------- ---------
Total operating costs and expenses 239,990 117,215 120,074 148,678 134,606
Operating income 6,671 3,983 235 2,390 1,716
Other income (expense),net (2,686) (1,047) 4,648 (1,028) (448)
--------- --------- --------- --------- ---------
Income before income taxes, extraordinary item and cumulative
effect of accounting change 3,985 2,936 4,883 1,362 1,268
Income tax (expense) benefit 3,635 2,174 (127) (47)
--------- --------- --------- --------- ---------
Income before extraordinary item and cumulative effect of
accounting change 7,620 5,110 4,756 1,315 1,268
========= ========= ========= ========= =========
Net income $ 7,193 $ 5,110 $ 4,756 $ 1,695 $ 1,268
========= ========= ========= ========= =========
Pro forma operating revenue 246,058(1)
---------
Pro forma income before extraordinary item 7,046(1) 786(2)
--------- ---------
EARNINGS PER SHARE:
Primary:
Income before extraordinary item and cumulative effect of
accounting change $ 293.08 $ 218.17 $ 201.17 $ 55.60 $ 55.08
Net income 254.06 216.15 199.17 70.49 55.08
Fully Diluted:
Income before extraordinary item and cumulative effect of
accounting change 232.04 218.11 199.50 55.33 55.01
Net income 219.03 216.10 197.52 70.16 55.01
Pro forma income before extraordinary item:
Primary 270.99(1) 34.15(2)
Fully diluted 216.10(1) 34.11(2)
Weighted average common shares outstanding:
Primary 26,001 23,422 23,642 23,655 23,021
Fully diluted 32,840 23,428 23,840 23,768 23,052
OTHER DATA:
Capital expenditures $ 30,761 $ 12,311 $ 3,097 $ 2,267 $ 13,986
EBITDA 9,526 5,350 1,739 4,132 2,782
Natural gas throughput gathered and/or processed (MMcf/d) 191 140 108 93 60
NGLs production (Mgal/d) 264 288 257 251 105
BALANCE SHEET DATA:
Property, plant and equipment (net) $ 61,045 $ 28,346 $ 13,554 $ 22,231 $ 19,899
Total assets 145,929 58,099 35,264 46,298 55,824
Long-term debt, excluding current portion 32,946 6,534 3,750 5,626 5,641
Capital lease obligations, excluding current portion 6,583 2,745 954 2,554 1,565
Shareholders' equity 22,153 16,754 12,153 7,397 5,379
</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.
(2) Includes a pro-forma income tax provision for 1992 when the Company was an
S-corporation and thus not subject to income taxes.
-20-
<PAGE> 25
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 for
stock split effected in April, 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 marketing
activities also contribute to its profitability. Additionally, the Company's
recent acquisitions and facilities expansions have had a major impact on its
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 costs 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.
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 natural 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. 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.
Other revenues including sales from oil and gas properties increased
to $1.1 million in 1996 from $.8 million in 1995. All the Company's oil and gas
properties were sold to an affiliated entity
-21-
<PAGE> 26
in the third quarter of 1996 for $.3 million which approximated book value. Oil
and gas producing activities contributed revenues of $.6 million, $.5 million
and $.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 $.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.
Depreciation, depletion and amortization increased 109% to $2.9
million in 1996 from $1.4 million in 1995 principally 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 $.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.
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
-22-
<PAGE> 27
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 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 $.26 per
gallon in 1995 compared to $.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.
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 marketing
purchases.
Operating expenses increased 11% to $4.4 million in 1995 from $3.9
million in 1994, due mainly 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 mainly to the sale of the Carlsbad system
in 1994 offset partially by the acquisition of the Mocane system in 1995.
OTHER INCOME (EXPENSE). Interest expense decreased 27% to $.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 $.1
million in 1994.
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 certain assets. The Company's principal uses of cash have been to
fund operations and acquisitions.
-23-
<PAGE> 28
The following summary table reflects comparative cash flows for the
Company for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by operating activities $ 23,535 $ 8,825 $ 1,785
Net cash provided by (used in) investing (30,459) (12,286) 10,188
activities
Net cash provided by (used in) financing 23,345 2,325 (7,800)
activities
</TABLE>
Net cash provided by operating activities for the year ended 1996,
increased by approximately $14.7 million from 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. 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 in 1996 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 in 1996 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 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.
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 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.
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 12 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
-24-
<PAGE> 29
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. Under the term loan facility
approximately $33.8 million was outstanding as of December 30, 1996, while an
additional $4.8 million is available for certain future acquisitions. 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 December 31, 1996, the
aggregate amount outstanding under these Letters of Credit was $6.9 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 December 31, 1996, the aggregate amount
outstanding under these Letters of Credit was $20.6 million. The Company pays
Christiania Bank a fee of 1-1/2% per annum for 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. Sales volume 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.
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.
-25-
<PAGE> 30
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 by (i) connecting 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 the CNG
Market Area. The April, 1996, edition of "Hart's Report on Gas Customer
Satisfaction" published by Hart Publication and Mastio & Co. reported that CNG
was rated as the most preferred natural gas purchaser in a survey of 353 natural
gas sellers. The Company markets on-system gas, as well as off-system gas from
over 70 producers via 15 interstate and intrastate pipelines, to serve
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 several acquisitions and system construction projects
at a total cost of approximately $64 million. During the month of March, 1997,
CNG's average throughput for its gathering systems was 108 MMcf/d and for its
processing plants was 135 MMcf/d. Its NGL production for March, 1997, averaged
280 Mgal/d. Over the last three years, natural gas throughput from gathering
systems owned and operated by the Company has increased 30%. As a result of
this growth, the Company's EBITDA has increased to $9.5 million in 1996 from
$1.7 million in 1994.
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. 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 barrels
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 Texas Gathering Assets were
acquired for approximately $20.2 million from subsidiaries of Enron
Corporation.
-26-
<PAGE> 31
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
producers flexible contract terms, value-added services and other arrangements
which allow producers to obtain better terms for the sale of their natural gas.
EXPANSION OF FACILITIES. The Company seeks to acquire or make
investments in projects that complement its existing systems, 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, thus
allowing the Company to 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 expansion opportunities into 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 other value-added services.
In implementing this strategy, CNG has completed approximately $64
million of acquisitions and system expansion projects since 1990. The Company
believes that its acquisition track record and demonstrated ability to complete
transactions with large pipeline companies and other sellers strengthen its
ability to compete for future acquisitions. In addition, the Company believes
that it has assembled a seasoned management team which allows it to assess and
evaluate acquisition opportunities and integrate acquired assets into CNG's
existing operations.
-27-
<PAGE> 32
Set forth below is a summary of the Company's significant acquisitions
and construction projects:
<TABLE>
<CAPTION>
Name Type Year Cost
- ---- ---- ---- ----
($in millions)
<S> <C> <C> <C>
Beaver Gathering System and Acquisition 1990 $1.2
Processing Plant
Beaver Cryogenic Plant Construction 1992 4.9
Addition to Beaver System Acquisition 1992 1.0
Carlsbad Cryogenic Plant(1) Construction 1992 5.8
Beaver/ANR Pipeline Construction 1994 1.8
Interconnection
Mocane Processing Plant Acquisition 1995 3.5
Mocane Fractionator Construction 1995 1.7
Beaver-to-Mocane Gas Pipeline Construction 1995 3.9
Interconnection
Texas Gathering Assets Acquisition(2) 1996 20.2
Occidental Petroleum Well Construction 1996 1.8
Connection
</TABLE>
- -----------------------
(1) The Company sold the Carlsbad Processing Plant, which includes the
Carlsbad Cryogenic Plant, in 1994.
(2) This acquisition was accomplished in three separate transactions.
IMPROVING THE PROFITABILITY OF EXISTING FACILITIES. The Company seeks
to maximize the profitability of its operations by (i) maintaining and
increasing natural gas throughput and processing levels, (ii) directing natural
gas volumes to facilities that maximize 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 throughput and
processing volumes, the Company obtains additional natural gas supplies for its
facilities by connecting new wells, purchasing and integrating gathering
systems from third parties and entering into contractual natural gas supply
arrangements with producers or other gatherers.
The opportunity to connect new wells to existing facilities is
primarily affected by the level of drilling activity near the Company's
gathering systems. The Panhandle Area is within one of the
-28-
<PAGE> 33
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, an independent engineering firm estimates that
the leases and wells currently under contract with the Company have 700 Bcf of
proved, producing natural gas reserves. The Company believes it has sufficient
capacity within its gathering systems and processing plants to capitalize on
the development potential in the Panhandle Area.
By maintaining geographically-focused operations, the Company believes
it is able to control operating and overhead costs. Furthermore, the location
and strategic nature of CNG's systems and 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 a greater volume of NGLs from the
natural gas stream and enhance the total value of its on-system gas volumes.
EXPANDING ENERGY MARKETING SERVICES AND 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 individual producers and customers at the wellhead
and in the marketing of natural gas. By offering flexible contract terms and
using a portfolio approach to the marketing of natural gas, CNG has been able
to increase substantially its on-system gas and NGL volumes. The Company also
seeks to increase its off-system sales and the marketing of third-party natural
gas. 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 systems and facilities are located in an area where many
interstate pipelines converge, allowing it to take advantage of locational
differences in natural gas prices. CNG provides its customers with a full range
of services including risk management, storage, transportation, scheduling and
peaking requirements. 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 end-users 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 sale prices by selling to customers 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 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
-29-
<PAGE> 34
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.
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 December, 1996, 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
-30-
<PAGE> 35
contracts are typically on a "keep-whole" basis, where the Company must
reimburse the producer for the fuel and shrinkage.
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 is one of the largest processors of natural
gas in the Panhandle Area. 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
-31-
<PAGE> 36
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 about 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. 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 per day of extracted NGL. The
average Beaver Plant 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. connected to the Beaver Plant.
-32-
<PAGE> 37
MOCANE PLANT. The Mocane Plant was built in 1959, was partially
updated in 1985 and was acquired by CNG in 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 average Mocane Plant 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.
-33-
<PAGE> 38
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 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
-34-
<PAGE> 39
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 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 sale of NGLs contributes materially to the overall
profitability of the Company.
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
-35-
<PAGE> 40
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.
-36-
<PAGE> 41
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 the 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
-37-
<PAGE> 42
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 $8.6 million in
1997. Approximately $4.4 million is expected to be spent in connection with a
proposed acquisition. 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 December 31, 1996, the
Company had approximately 1,100 miles of natural gas gathering pipelines, two
natural gas processing plants, each of which has extraction 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>
YEAR AVERAGE NATURAL AVERAGE NGL
ACQUIRED OR GAS THROUGH PUT PRODUCTION
PLACED INTO CAPACITY AS OF ---------------------- ----------------------
PROCESSING PLANTS SERVICE 3/31/97 For 1996 For 3/97 For 1996 For 3/97
- ----------------- ----------- -------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Beaver Extraction Plant, 1990 105 MMcf/d 65 MMcf/d 70 MMcf/d 158 Mgal/d 180 Mgal/d
Beaver County, OK
Mocane Extraction Plant, 1995 200 MMcf/d 64 MMcf/d 65 MMcf/d 106 Mgal/d 101 Mgal/d
Beaver County, OK
Mocane Fractionation 1995 281 Mgal/d N/A N/A 12 Mgal/d -0-
Plant, Beaver County,
OK
GATHERING SYSTEMS
- -----------------
Beaver-Mocane Gathering 1990 195 MMcf/d 25 MMcf/d 25 MMcf/d N/A N/A
Texas Gathering Assets 1996 188 MMcf/d 62 MMcf/d 83 MMcf/d N/A N/A
</TABLE>
-38-
<PAGE> 43
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 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 onsystem natural 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
attribute 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.
-39-
<PAGE> 44
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 17,000 square feet,
expiring in June, 1997. The annual rental payments are approximately $161,000.
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
-40-
<PAGE> 45
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 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.
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
-41-
<PAGE> 46
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
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
-42-
<PAGE> 47
FERC-mandated rate controls when their associated default period expires at
the end of this year. 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
-43-
<PAGE> 48
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.
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
-44-
<PAGE> 49
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.
EMPLOYEES
As of April 1, 1997, the Company had 97 employees. Of these, 56
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 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
involves primarily 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 natural gas liquids 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 companies
from which CHI purchased the Mocane Plant (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 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.
-45-
<PAGE> 50
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.
-46-
<PAGE> 51
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 after 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 after
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 company, where he was responsible for its
-47-
<PAGE> 52
oil and gas operations. Mr. Adams graduated from Kansas University 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 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. 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.
-48-
<PAGE> 53
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 from 1993 to 1994 and a Vice President with Howard, Weil,
Labouissee & 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 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 the
law firm of Hall, Estill, Hardwick, Gable, Golden & Nelson of Tulsa, Oklahoma
("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.
-49-
<PAGE> 54
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. 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.
SUMMARY COMPENSATION TABLE
<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) (500)(4) --
Garry D. Smith (4)
Vice President and Controller $104,195 $ 80,293 $ 12,600(3) (500)(4) --
Terry K. Spencer $ 97,500 $ 80,293 $ 12,600(3) (500)(4) --
Vice President of Operations
</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.
(4) Bracketed share amounts shall be adjusted by amendment to reflect post-
stock split amounts.
EMPLOYMENT 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
$150,000, subject to annual CPI adjustment, and for annual bonuses based upon
the Company exceeding designated annual income levels. In addition, Mr.
Longmore's employment agreement
-50-
<PAGE> 55
provides for the payment of annual commissions based upon gross margins of
natural gas sales.
Options Granted. The following table provides information regarding
options granted to each of the named executives during 1996:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realized Value
Date # of Shares # of Total at Assumed Annual Rates of
of Underlying Options Exercise Expiration Stock Price Appreciation
Grant Options Granted to Price Date for Option Term
Name (Mo/Day) Granted Employees ($ share) (Mo/Yr) 5%(3) 10%(4)
---- -------- ------- --------- --------- ------- ----- ------
<S> <C> <C> <C> <C> <C>
Scott C. 2/28 (500)(1) 33.3% $35.00 (2) $3,771 $8,121.50
Longmore
Garry D. Smith 2/28 (500)(1) 33.3% $35.00 (2) $3,771 $8,121.50
Terry K. 2/28 (500)(1) 33.3% $35.00 (2) $3,771 $8,121.50
Spencer
</TABLE>
(1) Bracketed share amounts shall be adjusted by amendment to reflect post-
stock split amounts.
(2) Term expires upon termination of the named person's employment
agreement.
(3) 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.
(4) 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 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 shares of Common Stock at an exercise price of
$35 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
-51-
<PAGE> 56
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 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 ISO, 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
-52-
<PAGE> 57
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.
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
-53-
<PAGE> 58
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.
-54-
<PAGE> 59
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding
beneficial ownership of the Company's Common Stock as of April 15, 1997, and as
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
Name and Address of Shares Being
of Beneficial Owner (1)(2) Offered(1) Before Offering(1) After Offering(1)
- ------------------- ------ ---------- ------------------ -----------------
<S> <C> <C> <C>
Executive Officers and Directors:
Gary C. Adams (3) (27,485) 89.0%
Garry D. Smith (926.5) 3.0%
Scott C. Longmore (1,235) 4.0%
Terry K. Spencer (926.5) 3.0%
William W. Pritchard
William H. Bauch
All directors and executive officers as a (30,573) 99%
group of (6 people)
Selling Shareholder:
Adams Affiliates, Inc. (4,396) 14.2%
</TABLE>
- ----------------------
(1) Assumes the conversion of shares of Convertible Preferred Stock into
Common Stock prior to completion of the Offering.
(2) Bracketed share amounts shall be adjusted by amendment to reflect post-
stock split amounts.
(3) Gary C. Adams does not own of record any shares of Common Stock.
Disclosed here are shares held of record by Cottonwood Partnership and
Adams Affiliates. See "Certain Transactions-General" for a description
of Mr. Adams' relationship to such companies.
-55-
<PAGE> 60
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.
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 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, CNGM owed the Company
approximately $5 million 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.
-56-
<PAGE> 61
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. The Company rents two airplanes from CPA
Aviation on an "as needed" basis at a usage rate of $1,000 per hour for one
plane and $100 per hour for the other. Approximately $56,000 of the amount paid
in 1996 was related to services rendered in 1995.
As of December 31, 1996, Mountain Meadows Partnership was indebted
to the Company in the amount of approximately $800,000, and various other
affiliates of the Company were indebted to it in the aggregate amount of
approximately $180,000.
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 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 after
completion of the Offering be reviewed by CNG's independent directors.
-57-
<PAGE> 62
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
500,000 shares of Preferred Stock, $0.01 par value. The Convertible Preferred
Stock will be converted into ____ shares of Common Stock prior to completion of
the Offering.
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 500,000 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.
-58-
<PAGE> 63
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 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
-59-
<PAGE> 64
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 .
LISTING
The Common Stock has been approved for listing on the Nasdaq National
Market under the trading symbol subject to official notice of issuance.
-60-
<PAGE> 65
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 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
shares of Common Stock outstanding, all of which are restricted securities (the
"Restricted Shares") under the Securities Act of 1933 (the "Securities Act").
All executive officers, directors and certain other shareholders of the Company
have agreed they will not sell 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 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
shares subject to purchase under the Company's 1996 Stock Option Plan
are Restricted Shares.
-61-
<PAGE> 66
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement among the Company 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 Company has 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:
Underwriters Number of Shares
------------ ----------------
Oppenheimer & Co., Inc......................................
Southwest Securities, Inc...................................
Total............................................
The Underwriting Agreement provides that the obligations of the
Underwriters thereunder are subject to approval of certain legal matters 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 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 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 Offering amount. 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.
-62-
<PAGE> 67
The Company and its officers and directors holding
outstanding shares of Common Stock in the aggregate 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.
-63-
<PAGE> 68
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.
-64-
<PAGE> 69
EXPERTS
The consolidated balance sheets as of December 31, 1996 and 1995 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.
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.
-65-
<PAGE> 70
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. EBITDA is not intended to represent cash flows for the period,
nor has it been presented as an alternative to operating income as an indicator
of operating performance. It should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles. EBITDA is included in this Prospectus because
it is a basis upon which the Company assesses its financial performance.
"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.
-66-
<PAGE> 71
"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.
"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.
-67-
<PAGE> 72
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting
requirements of the Securities and Exchange Act of 1934, as amended.
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. Copies of the Registration Statement and the exhibits and schedules
thereto may be inspected, without charge, at the offices of the Commission, or
obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
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.
-68-
<PAGE> 73
CONTINENTAL NATURAL GAS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants......................................F-1
Balance Sheets.........................................................F-2
Statements of Operations...............................................F-3
Statements of Shareholders' Equity.....................................F-4
Statement of Cash Flows................................................F-5
Notes to Financial Statements..........................................F-7
<PAGE> 74
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, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years ended December 31, 1996, 1995 and 1994.
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, 1996 and
1995, and the consolidated results of their operations and their cash flows for
the years ended December 31, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles.
Tulsa, Oklahoma
March 21, 1997
F-1
<PAGE> 75
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------ ------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,077,438 $ 4,655,867
Accounts receivable:
Trade, net of allowance for doubtful accounts of $257,619 and $252,979 44,930,884 18,028,283
Affiliates 5,969,458 272,926
Other 1,150,334 531,683
Notes receivable - affiliates 17,801 795,711
Gas inventory 3,148,657 885,247
Prepaid expenses 164,085 61,106
------------- ------------
Total current assets 76,458,657 25,230,823
Investments (Note 3) 655,589 786,424
Property and equipment, net (Note 4) 61,045,047 28,345,593
Notes receivable - affiliates -- 542,442
Deferred tax asset 7,075,000 2,600,000
Other assets 694,305 593,376
------------- ------------
Total assets $ 145,928,598 $ 58,098,658
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 56,707,979 $ 24,508,073
Affiliate payables 463,884 294,185
Contract advances 24,787,831 --
Current portion of long-term debt 867,000 2,715,669
Current portion of capital lease obligations 1,165,361 543,052
------------- ------------
Total current liabilities 83,992,055 28,060,979
Long-term debt 32,945,500 6,534,331
Capital lease obligations 6,583,478 2,745,371
Deferred gain on sale-leaseback 254,154 376,149
Contract advances -- 1,956,055
------------- ------------
Total liabilities 123,775,187 39,672,885
Minority interest -- 1,671,456
Commitments and contingencies (Notes 4, 6, 8 and 9)
Shareholders' equity (Note 11):
Convertible preferred stock, $1 par value, $40,000 liquidation value, 200
shares
authorized and 149 shares issued and outstanding in 1996 149 --
Common stock, $1 par value, 50,000 shares
authorized and 28,817 shares issued in 1996 and 25,420 issued in 1995 28,817 25,420
Additional paid-in capital 12,385,902 12,043,465
Retained earnings 10,042,763 4,889,652
Treasury stock, at cost (204,220) (204,220)
Receivable from stock sale (100,000) --
------------- ------------
Total shareholders' equity 22,153,411 16,754,317
------------- ------------
Total liabilities and shareholders' equity $ 145,928,598 $ 58,098,658
============= ============
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
F-2
<PAGE> 76
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Natural gas sales $ 196,729,349 $ 95,630,817 $ 100,476,775
Natural gas sales - related party 12,049,421 -- --
Natural gas liquids sales 34,757,184 24,803,858 19,572,332
Gathering fees 1,994,711 -- --
Other 1,130,751 762,770 259,837
------------- ------------- -------------
Total operating revenue 246,661,416 121,197,445 120,308,944
------------- ------------- -------------
Operating costs and expenses:
Cost of purchased gas 225,535,172 107,641,631 111,038,275
Operating expenses 5,977,953 4,366,125 3,930,447
General and administrative 5,622,871 3,840,084 3,600,982
Depreciation, depletion and amortization 2,854,624 1,366,544 1,504,608
------------- ------------- -------------
Total operating costs and expenses 239,990,620 117,214,384 120,074,312
------------- ------------- -------------
Operating income 6,670,796 3,983,061 234,632
------------- ------------- -------------
Other income (expense):
Interest income 131,947 309,832 224,418
Equity in loss of investee (136,196) (82,769) (51,486)
Interest expense (2,702,304) (914,331) (1,251,747)
Minority interest -- (403,872) (1,501,550)
Gain on sale of gathering system and
processing plant -- -- 5,178,925
Other, net 20,827 43,726 2,049,920
------------- ------------- -------------
Total other income (expense) (2,685,726) (1,047,414) 4,648,480
------------- ------------- -------------
Income before income taxes and extraordinary item 3,985,070 2,935,647 4,883,112
Income tax (expense) benefit 3,635,210 2,174,304 (127,000)
------------- ------------- -------------
Income before extraordinary item 7,620,280 5,109,951 4,756,112
Extraordinary loss on retirement of debt (net of
income taxes of $261,842) (427,220) -- --
------------- ------------- -------------
Net income $ 7,193,060 $ 5,109,951 $ 4,756,112
============= ============= =============
Primary earnings per share:
Income before extraordinary item $ 293.08 $ 218.17 $ 201.17
============= ============= =============
Net income $ 254.06 $ 216.15 $ 199.17
============= ============= =============
Fully diluted earnings per share:
Income before extraordinary item $ 232.04 $ 218.11 $ 199.50
============= ============= =============
Net income $ 219.03 $ 216.10 $ 197.52
============= ============= =============
Weighted average common shares outstanding:
Primary 26,001 23,422 23,642
Fully diluted 32,840 23,428 23,840
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
<PAGE> 77
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Number of Shares
----------------------------- Additional Retained Receivable
Preferred Common Treasury Preferred Common Paid-in Earnings Treasury from Stock
Stock Stock Stock Stock Stock Capital (Deficit) Stock Sale Total
--------- --------- ------- ---------- -------- ----------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1993 1,000 25,420 1,937 $ 315,000 $ 25,420 $12,043,465 $(4,830,132) $(156,470) $ $ 7,397,283
Net income 4,756,112 4,756,112
--------- --------- ------- ---------- -------- ----------- ----------- --------- --------- -----------
Balance at
December 31,
1994 1,000 25,420 1,937 315,000 25,420 12,043,465 (74,020) (156,470) 12,153,395
Acquisition of
preferred (1,000) (315,000) (315,000)
stock
Purchase of
treasury stock 313 (47,750) (47,750)
Common stock
dividends
($.95
per share) (24,217) (24,217)
Preferred stock
dividends
($122.06
per share) (122,062) (122,062)
Net income 5,109,951 5,109,951
--------- --------- ------- ---------- -------- ----------- ----------- --------- --------- -----------
Balance at
December 31,
1995 25,420 2,250 25,420 12,043,465 4,889,652 (204,220) 16,754,317
Issuance of pre-
ferred stock 200 200 199,834 200,034
Sale of common
stock to
manage-
ment (Note 11) 3,397 3,397 142,603 (100,000) 46,000
Redemption of
preferred (51) (51) (2,039,949) (2,040,000)
stock
Net income 7,193,060 7,193,060
--------- --------- ------- ---------- -------- ----------- ----------- --------- --------- -----------
Balance at
December 31,
1996 149 28,817 2,250 $ 149 $ 28,817 $12,385,902 $10,042,763 $(204,220) $(100,000) $22,153,411
========= ========= ======= ========== ======== =========== =========== ========= ========= ===========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
F-4
<PAGE> 78
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,193,060 $ 5,109,951 $ 4,756,112
------------ ------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 2,854,624 1,366,544 1,504,608
Amortization of debt issuance costs 269,697 128,473 91,881
Gain on disposition of assets (133,945) (123,793) (5,196,221)
Minority interest -- 403,872 1,501,550
Equity in loss of investee 136,196 82,769 51,486
Deferred income tax benefit (4,213,158) (2,220,000) --
Noncash compensation on stock issuance 46,000 -- --
Extraordinary loss on retirement of debt 427,220 -- --
Changes in operating assets and liabilities:
Accounts receivable (35,408,754) (6,716,615) 6,580,031
Gas inventory (2,263,410) 85,070 (533,857)
Prepaid expenses (102,979) (42,424) 280,310
Accounts payable 31,899,220 11,508,016 (9,963,457)
Contract advances 22,831,776 (756,534) 2,712,589
------------ ------------ ------------
Total adjustments 16,342,487 3,715,378 (2,971,080)
------------ ------------ ------------
Net cash provided by operating activities 23,535,547 8,825,329 1,785,032
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (30,761,492) (12,310,634) (3,096,999)
Proceeds from sale of property and equipment 308,000 7,000 12,784,452
(Increase) decrease in investments (5,361) 54,852 68,392
(Increase) decrease in notes receivable - affiliate -- 98 (260,000)
(Increase) decrease in other assets -- (37,500) 692,642
------------ ------------ ------------
Net cash provided by (used in) investing activities (30,458,853) (12,286,184) 10,188,487
------------ ------------ ------------
Cash flows from financing activities:
Dividends paid -- (146,279) --
Purchase of preferred and Treasury Stock -- (362,750) --
Principal payments on long-term debt (45,903,667) (11,125,868) (47,950,348)
Proceeds of long-term debt 70,466,167 14,750,000 41,700,000
Purchase of warrants -- (315,000) --
Debt issuance costs (523,688) (141,716) (15,000)
Principal payments under capital lease obligations (693,935) (333,074) (814,574)
Minority interest distributions -- -- (720,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities 23,344,877 2,325,313 (7,799,922)
------------ ------------ ------------
</TABLE>
(Continued)
F-5
<PAGE> 79
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents 16,421,571 (1,135,542) 4,173,597
Cash and cash equivalents at beginning of year 4,655,867 5,791,409 1,617,812
----------- ----------- ----------
Cash and cash equivalents at end of year $21,077,438 $ 4,655,867 $5,791,409
=========== =========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 2,472,515 $ 745,967 $1,159,866
=========== =========== ==========
Income taxes paid $ 100,000 $ 100,000 $ 120,000
=========== =========== ==========
</TABLE>
Supplemental disclosure of noncash investing and financing activities - In
1996, 1995, and 1994, the Company incurred $5,154,349, $2,416,887 and
$1,997,249, 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> 80
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.
F-7
<PAGE> 81
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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 1995 and 1994 amounts have been
reclassified to conform to the current year presentation.
2. RELATED PARTY TRANSACTIONS
In 1996, 1995 and 1994, the Company provided office space to
an affiliated entity and billed it for rentals of $40,399, $40,399 and
$47,759, respectively. The Company provided general and administrative
services to affiliates and billed them $218,253, $265,351 and $231,055
in 1996, 1995 and 1994, respectively. Additionally, the Company in
1996, 1995 and 1994, was charged by affiliates $190,366, $36,786 and
$11,212, respectively, for general and administrative expenses
incurred on its behalf and $210,000 in 1996 and $138,000 in 1995 and
1994 for management services.
F-8
<PAGE> 82
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. RELATED PARTY TRANSACTIONS, Continued
The Company purchased gas from Bird Creek Resources ("BCR"),
an affiliated entity, totaling $316,466, $125,284 and $895,803 in
1996, 1995 and 1994, respectively. At December 31, 1996 and 1995, the
Company had accounts payable to BCR totaling $463,884 and $139,185,
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 $602,656, $461,984 and $202,278 for the
years ended December 31, 1996, 1995 and 1994, 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 on 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, 1996 and 1995, 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 1996, 1995 and 1994, the Company has recognized
losses of $136,196, $82,769 and $51,486, respectively, from the
investment.
F-9
<PAGE> 83
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1995,
consisted of:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Gathering systems and processing plants $ 55,722,149 $ 25,720,568
Compressor equipment 10,162,571 4,779,303
Oil and gas properties, under the full-cost method -- 753,647
Furniture, fixtures and other 1,342,984 919,255
Less accumulated depreciation, depletion
and amortization (6,182,657) (3,827,180)
------------ ------------
Net property and equipment $ 61,045,047 $ 28,345,593
============ ============
</TABLE>
In March and May of 1996, the Company purchased gas gathering
assets 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 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.
F-10
<PAGE> 84
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995 consists of the
following:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Termloan 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 $ --
Termloan 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 (867,000) (2,715,669)
------------ -----------
Long-term debt $ 32,945,500 $ 6,534,331
============ ===========
</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
also accrues interest at either the bank's base rate 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 940 shares of common stock of the Company. During 1995, all
such warrants were repurchased by the Company for a total of $315,000.
F-11
<PAGE> 85
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT, Continued
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.
6. CAPITAL LEASES
Property and equipment include the following property under
capital leases at December 31:
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Compressor equipment $ 9,105,261 $ 3,950,912
Less accumulated amortization (616,643) (344,703)
--------------- ---------------
$ 8,488,618 $ 3,606,209
=============== ===============
</TABLE>
Future minimum lease payments as of December 31, 1996 under
capital leases are as follows:
<TABLE>
<CAPTION>
<C> <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>
F-12
<PAGE> 86
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- --------
<S> <C> <C> <C>
Current $ 577,948 $ 45,696 $127,000
Deferred (4,213,158) (2,220,000) --
----------- ----------- --------
$(3,635,210) $(2,174,304) $127,000
=========== =========== ========
</TABLE>
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>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Income tax expense computed by
applying statutory rate $ 1,354,924 $ 998,120 $ 1,660,258
State income taxes 159,403 117,425 195,324
Nontaxable life insurance proceeds -- -- (760,000)
Other 29,506 18,825 24,530
Benefit of net operating loss
carryforward (965,885) (1,088,674) (993,112)
Change in valuation allowance
associated with deferred tax assets (4,213,158) (2,220,000) --
----------- ----------- -----------
Income tax expense (benefit) $(3,635,210) $(2,174,304) $ 127,000
=========== =========== ===========
</TABLE>
F-13
<PAGE> 87
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES, Continued
Deferred tax assets and liabilities at December 31, 1996 and
1995 are comprised of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Allowance for losses and other $ 158,503 $ 127,900
Deferred gain on sale leaseback 96,579 142,936
Contract advances 9,419,375 --
Net operating loss carryforwards 4,448,500 14,554,295
Deferred gain on futures contracts 411,573 --
Alternative minimum tax credit carryforwards 773,851 195,700
------------ ------------
Total deferred tax assets 15,308,381 15,020,831
------------ ------------
Deferred tax liabilities:
Depreciation, depletion and amortization of property
and equipment (2,225,498) (617,700)
Change from cash basis to accrual basis of
accounting for income tax purposes -- (441,800)
------------ ------------
Total deferred tax liabilities (2,225,498) (1,059,500)
------------ ------------
Valuation allowance (6,007,883) (11,361,331)
------------ ------------
Net deferred tax asset $ 7,075,000 $ 2,600,000
============ ============
</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.
F-14
<PAGE> 88
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES
The Company, in the ordinary course of business, enters into
fixed price sales contracts of natural gas. 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. 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.
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 $1,931,708, $1,839,000 and $1,461,300 in 1996, 1995 and 1994,
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
defamed CIG and committed other wrongful acts 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 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 certainty, the Company believes that CIG is seeking
actual damages in excess of $3 million. 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.
F-15
<PAGE> 89
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
1996, 1995 and 1994 was approximately $141,500, $106,000 and $120,000,
respectively.
11. SHAREHOLDERS' EQUITY
Preferred stock of the Company is convertible at the option
of the holders into 4,315 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.
F-16
<PAGE> 90
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SHAREHOLDERS' EQUITY, Continued
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
500 shares of common stock exercisable at $200 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 and certain members of management were granted stock
options for 1,500 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 $35 per share and [expire at April 30, 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 3,397 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.
F-17
<PAGE> 91
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 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. 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. Also, 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 swap contracts on
natural gas totaling approximately $1.3 million for the period of
January and February of 1996. 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, 1996 and 1995, the Company had
deposits totaling $962,553 and $458,873, 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, 1995 and 1994, no futures contracts or
options were designated as hedges. At December 31, 1995, gains of
$278,020 related to open futures contracts have been recognized and
included in Marketing Fees and Other Revenues. At December 31, 1994,
losses of $1,027,519 on futures contracts have been included in costs
of purchased gas.
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, 1996
and 1995, such contracts were not material.
F-18
<PAGE> 92
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FINANCIAL INSTRUMENTS, Continued
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, 1996 and 1995 approximate fair
value.
The estimated fair value of the contract advance liabilities
at December 31, 1996 and 1995, assuming repayment under the scheduled
terms of the agreements, is approximately $24.3 and $1.7 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. The fair value of the Company's futures and swaps at
December 31, 1995 was approximately $.3 million and $1.2 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 $32,197,000 and $5,039,000 of cash balances with banks at December
31, 1996 and 1995, respectively.
In fiscal years 1996 and 1995, one customer accounted for
approximately 12% and 23% of consolidated revenues, respectively. At
December 31, 1996 and 1995, accounts receivable from this customer
were $2,429,662 and $3,538,932, respectively.
F-19
<PAGE> 93
UNAUDITED PRO FORMA FINANCIAL DATA
Unaudited Condensed Pro Forma Statement of Operations
For the Year Ended December 31, 1996
(In thousands, except per share data)
The unaudited condensed pro forma statement of operations gives effect to
the disposition of the Company's oil and gas properties, assuming the
disposition occurred at the beginning of the year.
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) (2,686)
--------- ---------
Income before income taxes and
extraordinary item 3,985 (416) 3,569
--------- ---------
Income taxes 3,635 (158)(a) 3,477
--------- ---------
Income before extraordinary item $ 7,620 $ 7,046
========= =========
Primary earnings per share:
Income before extraordinary item $ 293.08 $ 270.99
========= =========
Fully diluted earnings per share:
Income before extraordinary item $ 233.72 $ 216.10
========= =========
Weighted average shares:
Primary 26,001 26,001
========= =========
Fully diluted 32,605 32,605
========= =========
</TABLE>
- ---------------
(a) Adjustment to reflect the disposition of the Company's oil and gas
properties.
F-20
<PAGE> 94
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Continental Natural Gas, Inc. and Subsidiaries
In connection with our audits of the consolidated financial statements of
Continental Natural Gas, Inc. and Subsidiaries as of December 31, 1996 and 1995,
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, the 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
F-21
<PAGE> 95
SCHEDULE II
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Allowance for Doubtful Accounts:
<TABLE>
<CAPTION>
Additions
Balance Charged
at Charged to to other Deductions Balance
beginning costs and accounts- & net at end of
Description of period expenses recoveries write-offs period
- ----------- --------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1996 $253 $ -- $ 5 $ -- $258
---- ---- ---- ---- ----
Year ended
December 31, 1995 $323 $ -- $ -- $(70) $253
---- ---- ---- ---- ----
Year ended
December 31, 1994 $323 $ -- $ -- $ -- $323
---- ---- ---- ---- ----
</TABLE>
<PAGE> 96
[Insert Logos, Mission Statement/Catch Phrase, Maps and Graphics on inside and
back of back cover page]
At the top center of the inside back cover page, within a text box, is
a "Management Phrase" followed by the CNG logo.
Below that, arranged from left to right on the pages is a
schematic/pictorial of CNG's business.
[Description of top of inside back of cover page]
<PAGE> 97
[Back Cover]
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, SHARES OF
COMMON STOCK IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE
ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
Page
Prospectus Summary........................................................... 4
Risk Factors................................................................. 9
The Company..................................................................15
Use of Proceeds..............................................................16
Dividend Policy..............................................................17
Dilution.....................................................................18
Capitalization...............................................................19
Selected Consolidated Financial and Other Information........................20
Management's Discussion and Analysis of Financial Condition and Results
of Operations..............................................................22
Business.....................................................................27
Management...................................................................48
Principal and Selling Shareholders...........................................56
Certain Transactions.........................................................57
Description of Capital Stock.................................................59
Shares Eligible for Future Sale..............................................62
Underwriting.................................................................63
Legal Matters................................................................65
Experts......................................................................66
Glossary.....................................................................67
Additional Information.......................................................69
Index to Consolidated Financial Statements
---------------
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.
<PAGE> 98
[LOGO OF CONTINENTAL APPEARS HERE]
CONTINENTAL NATURAL GAS, INC.
-----------------
2,100,000 SHARES
COMMON STOCK
PROSPECTUS
, 1997
----------------
OPPENHEIMER & CO., INC.
SOUTHWEST SECURITIES, INC.
================================================================================
<PAGE> 99
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
II-1
<PAGE> 100
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. Where an officer or direct 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 of 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 940.49 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 3,397 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.
II-2
<PAGE> 101
The issuance of 200 shares of Convertible Preferred Stock on January
1, 1996, and the issuance in , 1997, of 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.
<TABLE>
<CAPTION>
Exhibit
No. Name of Exhibit
- ------- ---------------
<S> <C>
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 Employment Agreement between the Registrant and Garry D. Smith
dated as of April , 1997.*
10.2 Employment Agreement between the Registrant and Terry K.
Spencer dated as of April , 1997.*
10.3 Employment Agreement between the Registrant and Scott C.
Longmore dated as of April , 1997.*
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.*
11. Computation of per share earnings.
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.
24. Power of Attorney (included in Signature Page).
</TABLE>
- -------------------
* To be filed by amendment.
II-3
<PAGE> 102
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> 103
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Tulsa,
State of Oklahoma, on the 23rd day of April, 1997.
CONTINENTAL NATURAL GAS, INC.
By: /s/ GARY CLARK ADAMS
-----------------------------------
Gary Clark Adams
President, Chairman, Chief Executive
Officer and Director (Principal
Executive Officer)
II-5
<PAGE> 104
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Gary C. Adams and Garry D. Smith
and each of them acting individually, as his attorney-in-fact, each with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Registration Statement, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorney to any and all amendments to said Registration
Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities
indicated below and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ GARY C. ADAMS Chairman, President and Chief Executive April 23, 1997
- ---------------------------- Officer (Principal Executive Officer) and
Gary C. Adams Director
/s/ GARRY D. SMITH Vice President and Controller April 23, 1997
- ---------------------------- (Principal Financial and Accounting
Garry D. Smith Officer) and Director
/s/ TERRY K. SPENCER Vice President of Operations and Director April 23, 1997
- ----------------------------
Terry K. Spencer
/s/ SCOTT C. LONGMORE Vice President of Marketing and Director April 23, 1997
- ----------------------------
Scott C. Longmore
</TABLE>
II-6
<PAGE> 105
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Name of Exhibit
- ------- ---------------
<S> <C>
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 Employment Agreement between the Registrant and Garry D. Smith
dated as of April , 1997.*
10.2 Employment Agreement between the Registrant and Terry K.
Spencer dated as of April , 1997.*
10.3 Employment Agreement between the Registrant and Scott C.
Longmore dated as of April , 1997.*
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.*
11. Computation of per share earnings.
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.
24. Power of Attorney (included in Signature Page).
</TABLE>
- -------------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CONTINENTAL NATURAL GAS, INC.
STATE OF OKLAHOMA )
) ss
COUNTY OF TULSA )
TO THE SECRETARY OF STATE OF THE STATE OF OKLAHOMA:
We the undersigned, Gary C. Adams and Garry D. Smith of Tulsa,
Oklahoma, President and Secretary, respectively, of Continental Natural Gas,
Inc., formerly Adams Gas Marketing Company which was originally incorporated
under the laws of the State of Oklahoma on November 10, 1983, being legally
competent to execute and certify the Amended and Restated Certificate of
Incorporation of said corporation pursuant to the provisions of Section 1080 of
the Oklahoma General Corporation Act, do hereby execute and certify in such
official capacity the following Amended and Restated Certificate of
Incorporation.
FIRST. The name of the Corporation is:
Continental Natural Gas, Inc.
SECOND. The address of the registered office of the Corporation in
the State of Oklahoma is 2600 Boatmen's Center, 15 West Sixth Street, City of
Tulsa, County of Tulsa, State of Oklahoma 74119. The name of its registered
agent at such address is Kenneth F. Albright.
THIRD. The nature of the business or purposes to be conducted or
promoted by the Corporation is:
(a) To engage in any lawful act or activity for which
corporations may be organized under the General Corporation Act of
Oklahoma;
(b) In general, to possess and exercise all the powers
and privileges granted by the General Corporation Act of Oklahoma or
by any other law of Oklahoma or by this Certificate of Incorporation,
together with any powers incidental thereto, so far as such powers and
privileges are necessary or convenient to the conduct, promotion or
attainment of the businesses or purposes of the Corporation.
The businesses and purposes specified in the foregoing clauses shall,
except where otherwise expressed, be in no way limited or restricted by
reference to, or inference from, the terms of any other clause in this
Certificate of Incorporation, but the businesses and purposes specified in each
of the foregoing clauses of
1
<PAGE> 2
this article shall be regarded as independent businesses and purposes.
FOURTH.
(a) The total authorized capital of this Corporation is
Six Hundred Fifty Thousand ($650,000), consisting of: (a) Sixty
Million (60,000,000) shares of Common Stock of a par value of One Cent
($0.01) per share, amounting in the aggregate to Six Hundred Thousand
Dollars ($600,000.00), and (b) Five Million (5,000,000) shares of
Preferred Stock of a par value of one cent ($0.01) per share,
amounting in the aggregate to Fifty Thousand Dollars ($50,000.00).
(b) Shares of Common Stock may be issued by this
Corporation from time to time for such consideration, as provided by
law, as may be fixed from time to time by the Board of Directors of
this Corporation. The holders of Common Stock shall be entitled to
one vote for each share of such stock held by such holder on each
matter submitted to the shareholders of this Corporation. Holders of
Common Stock shall not be entitled to cumulate their votes for the
election of directors.
(c) The Board is hereby expressly authorized, subject to
any limitations prescribed by law, to provide for the issuance of the
shares of Preferred Stock in series, and by filing a certificate
pursuant to the applicable law of the State of Oklahoma (such
certificate being hereinafter referred to as a "Preferred Stock
Designation"), to establish from time to time the number of shares to
be included in each such series, and to fix the designation, powers,
preferences and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof to the full extent
now or hereafter permitted by law.
(d) Except as otherwise provided by law, the presence, in
person or by proxy, of the holders of record of shares of capital
stock of the Corporation entitling the holders thereof to cast a
majority of the votes entitled to be cast by the holders of shares of
capital stock of the Corporation entitled to vote shall constitute a
quorum at all meetings of the shareholders, and every reference in
this Certificate of Incorporation to a majority or other proportion of
capital stock (or the holders thereof) for purposes of determining any
quorum requirement or any requirement for shareholder consent or
approval shall be deemed to refer to such majority or other proportion
of the votes (or the holders thereof) then entitled to be cast in
respect of such capital stock.
FIFTH. The Corporation shall have perpetual existence.
2
<PAGE> 3
SIXTH. In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized:
(a) To make, alter or repeal the bylaws of the
Corporation.
(b) To authorize and cause to be executed mortgages and
liens upon the real and personal property of the Corporation.
(c) To set apart out of any of the funds of the
Corporation available for dividends a reserve or reserves for any
proper purpose and to abolish any such reserve in the manner in which
it was created.
(d) When and as authorized by the shareholders in
accordance with statute, to sell, lease or exchange all or
substantially all of the property and assets of the Corporation,
including its good will and its corporate franchises, upon such terms
and conditions and for such consideration, which may consist in whole
or in part of money or property including shares of stock in, and/or
other securities of, any other corporation or corporations, as its
Board of Directors may deem expedient and for the best interests of
the Corporation.
SEVENTH:
(a) The number of directors shall be fixed from time to
time exclusively by the Board of Directors pursuant to a resolution
adopted by a majority of the whole board. The directors, other than
those who may be elected by the holders of any class or series of
Preferred Stock, shall be divided into three classes, as nearly equal
in number as reasonably possible, with the term of office of the first
class to expire at the conclusion of the 1998 annual meeting of
shareholders, the term of office of the second class to expire at the
conclusion of the annual meeting of shareholders one year thereafter
and the term of office of the third class to expire at the conclusion
of the annual meeting of shareholders two years thereafter, with each
director to hold office until his or her successor shall have been
duly elected and qualified. At each annual meeting of shareholders
following such initial classification and election, directors elected
to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of
shareholders after their election, with each director to hold office
until his or her successor shall have been duly elected and qualified.
(b) Subject to the rights of the holders of any Preferred
Stock then outstanding, newly created directorships
3
<PAGE> 4
resulting from any increase in the authorized number of directors or
any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification, removal from office or
other cause may be filled only by a majority vote of the directors
then in office, though less than a quorum, and directors so chosen
shall hold office for a term expiring at the annual meeting of
shareholders at which the term of office of the class to which they
have been elected expires, and until such director's successor shall
have been duly elected and qualified. No decrease in the number of
directors constituting the Board of Directors shall shorten the term
of any incumbent director.
(c) Subject to the rights of the holders of any Preferred
Stock then outstanding, any directors, or the entire Board of
Directors, may be removed from office at any time, but only for cause
and only by the affirmative vote of the holders of a majority of the
voting power of all of the then-outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
EIGHTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its shareholders or any class of them, any court of equitable
jurisdiction within the State of Oklahoma may, on the application in a summary
way of this Corporation or of any creditor or shareholder thereof, or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 1106 of Title 18 of the Oklahoma Statutes or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under the provisions of Section 1100 of Title 18
of the Oklahoma Statutes, order a meeting of the creditors or class of
creditors, and/or of the shareholders or a class of shareholders of this
Corporation, as the case may be, to be summoned in such manner as the court
directs. If a majority in number representing three-fourths (3/4) in value of
the creditors or class of creditors, and/or of the shareholders or class of
shareholders of this Corporation, as the case may be, agree to any compromise
or arrangement and to any reorganization of this Corporation as a consequence
of such compromise or arrangement, the compromise or arrangement and the
reorganization, if sanctioned by the court to which the application has been
made, shall be binding on all the creditors or class of creditors, and/or on
all the shareholders or class of shareholders, of this Corporation, as the case
may be, and also on this Corporation.
NINTH. Meetings of shareholders may be held within or without the
State of Oklahoma, as the bylaws may provide. The books of the Corporation may
be kept (subject to any provision contained in the Oklahoma Statutes) outside
the State of Oklahoma at such place or
4
<PAGE> 5
places as may be designated from time to time by the Board of Directors or in
the bylaws of the Corporation. Elections of Directors need not be by written
ballot unless the bylaws of the Corporation shall so provide.
TENTH.
(a) The Corporation may, to the fullest extent permitted
by the Oklahoma General Corporation Act, as the same exists or may
hereafter be amended, indemnify any and all persons who it has power
to indemnify under such Act from and against any and all of the
expenses, liabilities or other matters referred to in or covered by
such Act. Such indemnification may be provided pursuant to any bylaw,
agreement, vote of shareholders or disinterested directors or
otherwise, will continue as to a person who has ceased to be a
director, officer, employee or agent, and inure to the benefit of the
heirs, executors and administrators of such a person.
(b) If a claim under paragraph (a) of this Article TENTH
is not paid in full by the Corporation within 30 days after a written
claim has been received by the Corporation, the claimant may at any
time thereafter bring suit against the Corporation to recover the
unpaid amount of the claim and, if successful in whole or in part, the
claimant will also be entitled to be paid the expense of prosecuting
such claim. It will be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending
any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation)
that the claimant has not met the standards of conduct that make it
permissible under the laws of the State of Oklahoma for the
Corporation to indemnify the claimant for the amount claimed, but the
burden of proving such defense will be on the Corporation.
ELEVENTH. To the fullest extent permitted by law, a director of this
Corporation shall not be personally liable to the Corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except for liability: (i) for any breach of the director's duty of loyalty to
the Corporation or its shareholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 1053 of the Oklahoma General Corporation Act or (iv) for
any transaction from which the director derived an improper personal benefit.
If the Oklahoma General Corporation Act is hereafter amended to further
eliminate or limit the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Oklahoma General Corporation Act, as so amended.
5
<PAGE> 6
Any repeal or modification of the foregoing paragraph by the
shareholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
TWELFTH. The Corporation reserves the right to amend, alter, change
or repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
the shareholders herein are granted subject to this reservation.
That by unanimous consent of the Board of Directors, a resolution was
duly adopted setting forth the foregoing Amended and Restated Certificate of
Incorporation of said Corporation, declaring adoption and approval of such
Amended and Restated Certificate of Incorporation to be advisable and that the
shareholders of said Corporation approved adoption of such Amended and Restated
Certificate of Incorporation.
That thereafter, pursuant to said resolution of its Board of
Directors, the shareholders, by unanimous consent, adopted and approved said
Amended and Restated Certificate of Incorporation.
Such Amendment was duly adopted in accordance with 18 O.S. Section
1080.
Dated as of the ____ day of _________, 1997.
CONTINENTAL NATURAL GAS, INC.
ATTEST:
By
- --------------------------- --------------------------------
Garry D. Smith, Secretary Gary C. Adams, President
(SEAL)
6
<PAGE> 7
ACKNOWLEDGMENT
STATE OF OKLAHOMA )
) ss
COUNTY OF TULSA )
I, the undersigned Notary Public, do hereby certify that on the ____
day of ________, 1997, Gary C. Adams and Garry D. Smith, President and
Secretary, respectively, of Continental Natural Gas, Inc., an Oklahoma
corporation, known to me to be such officers, personally appeared before me,
and being first duly sworn, acknowledged that they signed the foregoing
instrument in their respective capacities therein set forth, and declared the
statements therein contained to be true.
Given under my hand and seal the day and year first written above.
----------------------------
Notary Public
My Commission Expires:
- ------------------------
(SEAL)
7
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
CONTINENTAL NATURAL GAS, INC.
ARTICLE I
Offices
Section 1. Principal Office.
The principal office of the corporation shall be located in the City
of Tulsa, County of Tulsa, State of Oklahoma. The corporation may have such
other offices, either within or without the State of Oklahoma, as the Board of
Directors may from time to time determine or as the business of the corporation
may from time to time require.
Section 2. Registered Office.
The registered office of the corporation in the State of Oklahoma
shall be located in the City of Tulsa, County of Tulsa. The address of the
registered office may be, but need not be, identical with that of the principal
office of the corporation in the State of Oklahoma, and the address of the
registered office may be changed from time to time by the Board of Directors.
Section 3. Registered Agent.
The registered agent of the corporation in the State of Oklahoma shall
have its business address in the City of Tulsa, County of Tulsa. The address
of the registered agent shall be identical with that of the registered office
of the corporation in the State of Oklahoma; the identity and/or address of the
registered agent may be changed from time to time by the Board of Directors.
ARTICLE II
Meetings of Shareholders
Section 1. Annual Meeting.
The annual meeting of the shareholders of the Corporation shall be
held at a date and time set by the Board of Directors, for the purposes of
electing directors and transacting such other business as may properly come
before the meeting.
Section 2. Special Meetings.
Special meetings of the shareholders may be called only by (i) the
President of the Corporation, (ii) the Board of Directors
<PAGE> 2
pursuant to a resolution adopted by a majority of the total number of directors
which the Corporation would have if there were no vacancies on the Board of
Directors (the "Whole Board") or (iii) by one or more shareholders holding at
least twenty-five percent (25%) of the outstanding shares of the Corporation
entitled to vote at the special meeting. Only such business shall be
transacted at a special meeting as may be stated or indicated in the notice of
such meeting.
Section 3. Place of Meeting.
Any annual, regular or special meeting of the shareholders of the
corporation shall be held at any place designated by the Board of Directors,
either within or without of the State of Oklahoma, and such place shall be
designated in a written notice of the meeting sent to all shareholders or in a
waiver of notice signed by all shareholders entitled to vote at a meeting. If
no specific designation is made, the place of meeting shall be the principal
office of the corporation.
Section 4. Notice of Meeting.
Written or printed notice stating the place, day, and hour or the
meeting and, in case of a special meeting, the purpose or purposes for which
the meeting is called, shall be delivered not less than ten (10) nor more than
sixty (60) days before the date of the meeting, either personally or by mail,
by or at the direction of the President, or the Secretary, or the officer or
persons calling the meeting, to each shareholder of record entitled to vote at
such meeting. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail, addressed to the shareholder at his
address as it appears on the stock transfer books of the corporation, with
postage prepaid thereon. If any annual or special meeting of the shareholders
be adjourned to another time or place, no notice as to such adjourned meeting
need be given other than by announcement at the meeting at which such
adjournment is taken; provided, however, that in the event such meeting be
adjourned for thirty (30) days or more, notice of the adjourned meeting shall
be given as in the case of an original meeting. Notice of the place, day,
hour, and purpose of any annual or special meeting of the shareholders of the
corporation may be waived in writing by any shareholder or by his attendance at
such meeting. Such waiver may be given before or after the meeting, and shall
be filed with the Secretary or entered upon the records of the meeting.
Section 5. Quorum.
(a) Except as otherwise provided by statute, or in the Certificate
of Incorporation (such Certificate and any amendments thereto
being hereinafter collectively referred to as the "Certificate
of Incorporation"), at
2
<PAGE> 3
all meetings of shareholders of the Corporation, the presence
in person or by proxy of shareholders holding of record a
majority of the total number of shares of the Corporation,
then issued and outstanding and entitled to vote, shall be
necessary and sufficient to constitute a quorum for the
transaction of any business. Once a quorum is present at a
meeting of shareholders, the shareholders presented in person
or by proxy at the meeting may conduct such business as may be
properly brought before the meeting until it is adjourned, and
the subsequent withdrawal from the meeting of any shareholder
or the refusal of any shareholder represented in person or by
proxy to vote shall not affect the presence of a quorum at the
meeting.
(b) In the absence of a quorum at any annual or special meeting of
shareholders, the shareholders present in person or by proxy
and entitled to vote thereat or, if by proxy, any officer
authorized to preside at or act as Secretary of such meeting,
may adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall
be present. At any such adjourned meeting at which a quorum
is present, any business may be transacted which might have
been transacted at the meeting as originally called if a
quorum had been present.
Section 6. Voting.
(a) Except as otherwise provided herein, or by statute, or by the
Certificate of Incorporation, the affirmative vote of those
persons holding of record in the aggregate at least a majority
of the issued and outstanding shares of stock present in
person or by proxy and entitled to vote at a meeting of
shareholders with respect to a question or matter brought
before such meeting shall be necessary and sufficient to
decide such question or matter.
(b) Except as otherwise provided herein, or by statute, or by the
Certificate of Incorporation, at each meeting of shareholders,
each holder of record of stock of the Corporation entitled to
vote thereat shall be entitled to one vote for each share or
fraction thereof of stock held by him and registered in his
name on the books of the Corporation.
(c) Any resolution in writing, signed by all of the shareholders
entitled to vote thereon, shall be and constitute action by
such shareholders to the effect therein expressed, with the
same force and effect as if the same had been duly passed by
vote at a duly called meeting of such shareholders; and it
shall be the duty of
3
<PAGE> 4
the Secretary to place such resolution so signed in the Minute
Book of the Corporation under its proper date.
Section 7. Proxies.
At all meetings of shareholders, a shareholder may vote either in
person or by proxy executed in writing by the shareholder or by his duly
authorized attorney-in-fact. Such proxies shall be filed with the Secretary of
the Corporation before or at the time of the meeting. No proxy shall be valid
after eleven (11) months from the date of its execution unless otherwise
provided in the proxy. Each proxy shall be revocable, unless (i) the proxy
form conspicuously states that the proxy is irrevocable, and (ii) the proxy is
coupled with an interest. Proxies coupled with an interest include the
appointment as proxy of:
(a) a pledgee;
(b) a person who purchased or agreed to purchase or owns
or holds an option to purchase, the shares;
(c) a creditor of the corporation who extended it credit
under terms requiring the appointment;
(d) an employee of the corporation whose employment
contract requires the appointment; or
(e) a party to a voting agreement.
Section 8. Prohibition Against Exercise of Voting Rights.
Shares of stock shall not be voted at any meeting of shareholders in
any of the following events:
(a) If any portion of the purchase price owing the Corporation for
such shares is unpaid, whether or not then due (this provision
shall not apply in the case of shares which, when disposed of
by the Corporation, were treasury shares); or
(b) If such shares are treasury shares held by the Corporation, or
shares held by the Corporation in a fiduciary capacity, or
shares owned by another corporation the majority of the voting
stock of which is owned or controlled, directly or indirectly,
by the Corporation.
Section 9. Inspectors of Election.
In advance of any meeting of shareholders, the Board of Directors may
appoint inspectors of the election to act at such meeting or any adjournment
thereof. If the inspectors of the
4
<PAGE> 5
election be not so appointed, the Chairman of any such meeting may, and on the
request of any shareholder of his proxy shall, make such appointment at the
meeting. The number of such inspectors shall be one or three. If appointed at
a meeting on the request of one or more shareholders or proxies, the majority
of shares present and entitled to vote shall determine whether one or three
inspectors are to be appointed. An inspector need not be a shareholder, but no
person who is a candidate for an office of the corporation shall act as an
inspector.
Section 10. Balloting.
Upon the demand of any shareholder, by a resolution adopted by the
Board of Directors prior to the shareholder meeting or at the request of the
Chairman of the meeting, the vote upon any question before the meeting shall be
by ballot. The number of votes cast by shares in the election of directors
shall be recorded in the minutes. Unless inspectors of election have been
appointed by the Board of Directors pursuant to the terms of Section 10 hereof,
such inspectors of election may be appointed by the presiding officer of the
meeting.
Section 11. Organization.
Such person as the Board of Directors may have designated or, in the
absence of such a person, the President of the Corporation or, in his or her
absence, such person as may be chosen by the holders of a majority of the
shares entitled to vote who are present, in person or by proxy, shall call to
order any meeting of the shareholders and act as chairman of the meeting. In
the absence of the Secretary of the Corporation, the secretary of the meeting
shall be such person as the chairman appoints.
Section 12. Conduct of Business.
(a) The chairman of any meeting of the shareholders shall
determine the order of business and the procedure at the
meeting, including such regulation of the manner of voting and
the conduct of discussion as seems to him or her in order.
(b) At any annual meeting of the shareholders, only such business
shall be conducted as shall have been properly brought before
the meeting: (i) by or at the direction of the Board of
Directors or (ii) by any shareholder of the Corporation who is
entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 12(b). For
business to be properly brought before an annual meeting by a
shareholder, such business shall be a proper matter for
determination by the shareholders and the shareholder must
have given timely notice thereof in writing to the Secretary
of the
5
<PAGE> 6
Corporation. To be timely, a shareholder's notice must be
delivered or mailed to and received at the principal offices
of the Corporation not less than thirty (30) days prior to the
date of the annual meeting; provided, however, that in the
event that less than forty (40) days' notice of the date of
the meeting is given or made to shareholders, notice by the
shareholder to be timely must be received not later than the
close of business on the tenth (10th) day following the day on
which such notice of the date of the annual meeting was
mailed. A shareholder's notice to the Secretary shall set
forth as to each matter such shareholder proposes to bring
before the annual meeting: (i) a brief description of the
business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual
meeting, (ii) the name and address, as they appear on the
Corporation's books, of the shareholder who proposed such
business, (iii) the class and number of shares of the
Corporation's capital stock that are beneficially owned by
such shareholder, and (iv) any material interest of such
shareholder in such business. Notwithstanding anything in
these Bylaws to the contrary, no business shall be brought
before or conducted at an annual meeting except in accordance
with the provisions of this Section 12(b). The officer of the
Corporation or other person presiding over the annual meeting
shall, if the facts so warrant, determine and declare to the
meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section
12(b) and, if he should so determine, he shall so declare to
the meeting any such business so determined to be not properly
brought before the meeting shall not be transacted. At any
special meeting of the shareholders, only such business shall
be conducted as shall have been brought before the meeting by
or at the direction of the President, the Board of Directors
or by or at the direction of the one or more shareholders
holding at twenty-five percent (25%) of the outstanding shares
of the Corporation at whose instance the special meeting is
called.
(c) Only persons who are nominated in accordance with the
procedures set forth in these Bylaws shall be eligible for
election as directors. Nominations of persons for election to
the Board of Directors of the Corporation may be made at a
meeting of shareholders at which directors are to be elected
only: (i) by or at the direction of the Board of Directors or
(ii) by any shareholder of the Corporation entitled to vote
for the election of directors at the meeting who complies with
the notice procedures set forth in this Section 12(c). Such
nominations, other than those made by or at the direction
6
<PAGE> 7
of the Board of Directors, shall be made by timely notice in
writing to the Secretary of the Corporation. To be timely, a
shareholder's notice shall be delivered or mailed to and
received at the principal offices of the Corporation not less
than thirty (30) days prior to the date of the meeting;
provided, however, that in the event that less than forty (40)
days' notice of the date of the meeting is given or made to
shareholders, notice by the shareholder to be timely must be
so received not later than the close of business on the tenth
(10th) day following the day on which such notice of the date
of the meeting was mailed. Such shareholder's notice shall
set forth: (i) as to each person whom such shareholder
proposes to nominate for election or re-election as a
director, all information relating to such person that is
required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended (including such person's written consent
to being named in the proxy statement as a nominee and to
serving as a director if elected); and (ii) as to the
shareholder giving the notice: (x) the name and address, as
they appear on the Corporation's books, of such shareholder
and (y) the class and number of shares of the Corporation's
capital stock that are beneficially owned by such shareholder.
At the request of the Board of Directors, any person nominated
by the Board of Directors for election as a director shall
furnish to the Secretary of the Corporation that information
required to be set forth in a shareholder's notice of
nomination which pertains to the nominee. No person shall be
eligible for election as a director of the Corporation unless
nominated in accordance with the provisions of this Section
12(c). The officer of the Corporation or other person
presiding at the meeting shall, if the facts so warrant,
determine that a nomination was not made in accordance with
such provisions and, if he or she should so determine, he or
she shall so declare to the meeting and the defective
nomination shall be disregarded.
Section 13. List of Shareholders.
A complete list of shareholders entitled to vote at each shareholders'
meeting, arranged in alphabetical order, with the address of and number of
shares held by each, shall be prepared by the Secretary and filed at the
principal office of the Corporation and be subject to inspection by any
shareholder during usual business hours for a period of ten (10) days prior to
such meeting and shall be produced at such meeting and at all times during such
meeting be subject to inspection by any shareholder.
7
<PAGE> 8
Section 14. Record of Shareholders.
The Corporation shall keep at its principal place of business, or the
office of its transfer agents or registrars, a record of its shareholders,
giving the names and addresses of all shareholders and the number and class of
the shares held by each.
ARTICLE III
Directors
Section 1. Number, Election and Term of Office.
(a) The number of directors shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution
adopted by a majority of the Whole Board. The directors,
other than those who may be elected by the holders of
Preferred Stock, shall be divided into three classes, as
nearly equal in number as reasonably possible, with the term
of office of the first class to expire at the conclusion of
the 1998 annual meeting of shareholders, the term of office of
the second class to expire at the conclusion of the annual
meeting of shareholders one year thereafter and the term of
office of the third class to expire at the conclusion of the
annual meeting of shareholders two years thereafter, with each
director to hold office until his or her successor shall have
been duly elected and qualified. At each annual meeting of
shareholders following such initial classification and
election, directors elected to succeed those directors whose
terms expire shall be elected for a term of office to expire
at the third succeeding annual meeting of shareholders after
their election, with each director to hold office until his or
her successor shall have been duly elected and qualified.
(b) Except as herein or in the Certificate of Incorporation
otherwise provided, the members of the Board of Directors of
the Corporation shall be elected by the vote of shareholders
holding of record in the aggregate at least a plurality of the
shares of stock of the Corporation present in person or by
proxy and entitled to vote at the annual meeting of
shareholders. The persons receiving the greatest number of
votes shall be elected as directors.
Section 2. Duties, Powers and Committees.
(a) The Board of Directors shall be responsible for the control
and management of the affairs, property and interests of the
Corporation and may exercise all powers
8
<PAGE> 9
of the Corporation except as herein provided, in the
Certificate of Incorporation, or by statute expressly
conferred upon or reserved to the shareholders.
(b) The Board of Directors may create and appoint committees to
assist the directors in the conduct of the Corporation's
affairs.
Section 3. Regular Meetings; Notice.
(a) The Board of Directors from time to time may provide by
resolution for the holding of other regular meetings of the
Board of Directors and may fix the time and place thereof.
(b) Notice of any regular meeting of the Board of Directors shall
not be required to be given; provided, however, that in case
the Board of Directors shall fix or change the time or place
of any regular meeting, notice of such action shall be mailed
promptly to each director who shall not have been present at
the meeting at which such action was taken, addressed to him
at his residence or usual place of business, unless such
notice shall be waived in the manner set forth in paragraph
(c) of Section 4 of this Article III.
Section 4. Special Meeting; Notice.
(a) Special meetings of the Board of Directors shall be held
whenever called by the President or by the Secretary upon the
written request of any two directors then in office, which
request shall state the object of the meeting, at such time
and place as may be specified in the respective notices or
waivers of notice thereof.
(b) Except as otherwise required by statute, notice of such
special meetings shall be mailed directly to each director,
addressed to him at his residence or usual place of business,
at least two (2) days before the date on which the meeting is
to be held.
(c) Notice of any special meeting shall not be required to be
given to any director who shall attend such meeting in person
or to any director who shall waive notice of such meeting in
writing or by telegram, radio or cable, whether before or
after the time of such meetings; and any such meeting shall be
a legal meeting without any notice thereof having been given
if all the directors shall be present thereat. Notice of any
adjourned meeting shall not be required to be given.
9
<PAGE> 10
Section 5. Business.
At all meetings of the Board of Directors, the Chairman of the Board
shall preside or in his absence, a chairman of the meeting, as chosen by the
directors shall preside.
Section 6. Quorum.
(a) At all meetings of the Board of Directors, the presence of a
majority of the total number of directors shall be necessary
and sufficient to constitute a quorum for the transaction of
business, except as otherwise provided by statute, by the
Certificate of Incorporation or by these Bylaws.
(b) A majority of the directors present at the time and place of
any regular or special meeting, although less than a quorum,
may adjourn the same from time to time without further notice,
until a quorum shall be present.
Section 7. Manner of Acting.
(a) At all meetings of the Board of Directors, each director
present shall have one vote, irrespective of the number of
shares of stock, if any, which he may hold.
(b) Except as otherwise provided by statute, by the Certificate of
Incorporation or by these Bylaws, the action of a majority of
the directors present at any meeting at which a quorum is
present shall be the act of the Board of Directors.
(c) Members of the Board of Directors may participate in any
regular or special meeting by means of a conference telephone
or similar communication equipment by means of which all
persons participating in the meeting can hear each other at
the same time and participation by such means shall constitute
presence in person at a meeting.
(d) Unless otherwise provided herein, any action to be taken at a
meeting of the Board of Directors may be taken without a
meeting if a consent in writing, setting forth the action so
taken, shall be signed by all of the members of the Board of
Directors. Such consent shall have the same effect as a
unanimous vote.
Section 8. Vacancies.
Any vacancy in the Board of Directors occurring by reason of an
increase in the number of Directors or by reason of the death, resignation,
disqualification, removal or inability to act of any director, or otherwise,
shall be filled by a majority vote of the
10
<PAGE> 11
remaining directors, though less than a quorum, at any regular meeting or
special meeting of the Board of Directors called for that purpose. Except for
directors elected to fill a vacancy occurring by reason of an increase in the
number of Directors, a director elected to fill a vacancy shall be elected for
the unexpired term of his predecessor in office.
Section 9. Resignation.
Any director may resign at any time by giving written notice to the
Board of Directors, the President or the Secretary of the Corporation. Unless
otherwise specified in such written notice, such resignation shall take effect
upon receipt thereof by the Board of Directors or such officer, and the
acceptance of such resignation shall not be necessary to make it effective
Section 10. Removal.
Subject to the rights of the holders of Preferred Stock then
outstanding, any directors, or the entire Board of Directors, may be removed
from office at any time, but only for cause and only by the affirmative vote of
the holders of a majority of the voting power of all of the then outstanding
shares of capital stock of the Corporation entitled to vote, voting together as
a single class.
Section 11. Salary.
Compensation shall be paid to directors, as such, for their services,
as may be provided by resolution of the Board of Directors, and such
compensation may include a fixed sum and expenses for attendance at each
regular or special meeting of the Board; provided, however, that nothing herein
contained shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
Section 12. Presumption of Assent.
A director of the Corporation who is present at a meeting of the Board
of Directors at which action on any corporate matter is taken shall be presumed
to have assented to the action unless his dissent shall be entered in the
minutes of the meeting or unless he shall file his written dissent to such
action with the person acting as Secretary of the meeting before the
adjournment thereof or shall forward such dissent by registered mail to the
Secretary of the Corporation immediately after the adjournment of the meeting.
Such right to dissent shall not apply to a director who voted in favor of such
action.
Section 13. Executive and Other Committees.
(a) The Board of Directors by resolution adopted by a majority of
the full Board, may designate the President
11
<PAGE> 12
and such other members of the Board as desired to constitute
an Executive Committee. The Executive Committee shall have
any of the authority of the Board as the Board may delegate
and as permitted by law.
(b) The Board may also create any other committees of the Board as
may be desired with powers and duties as permitted by the
Board and as permitted by law.
Section 14. Compensation Committee.
The Board of Directors may appoint a Compensation Committee of the
Board, consisting of at least two (2) independent members (neither of which
shall be employees of the Corporation) and the President of the Corporation;
provided, that, if any part of the responsibilities of the Compensation
Committee includes the making of grants or awards under a stock-related
compensation plan of the Corporation, then the Compensation Committee shall be
composed solely of two (2) or more "Non-Employee Directors" as such term is
defined in Rule 16b-3 of the Securities and Exchange Commission under Section
16 of the Securities Exchange Act of 1934. Subject to the delegation of
authority by the Board of Directors, the Compensation Committee may have
authority (a) to review and evaluate any compensation (including, without
limitation, salary, bonuses and stock grants and/or options) to be paid to any
officers of the Corporation, and (b) to recommend to the Board of Directors the
amount and types of such compensation to be paid to the officers of the
Corporation.
Section 15. Audit Committee.
The Board of Directors shall appoint a Audit Committee of the Board,
consisting of at least three (3) members, of which at least a majority shall be
independent directors. The Audit Committee shall have authority to: (a)
interview and recommend auditors for retention by the corporation; (b) aid
management in establishment and supervision of the corporation's financial
controls; (c) evaluate the scope of annual audits; (d) review audit results,
(e) consult with management and the corporation's auditors prior to
presentation of the financial statements to stockholders; and (f) initiate
inquiries into aspects of the corporation's finances. For purposes of this
Section 15, a "independent director" shall be a person other than an officer or
employee of the Corporation or its subsidiaries or any other individual having
a relationship which interferes with the exercise of independent judgment in
carrying out the responsibilities of a director.
Section 16. Committee Meetings.
(a) Regular or special meetings of the committee may be held
either within or without this state.
12
<PAGE> 13
(b) Regular meetings of the committee thereby may be held with or
without notice as prescribed in the Bylaws. Special meetings
of the committee designated thereby shall be held upon such
notice as is prescribed in the Bylaws. Neither the business
to be transacted at, nor the purpose of, any regular or
special meeting of the committee need be specified in the
notice or waiver of notice of such meeting unless required by
the Bylaws.
(c) Except as may be otherwise restricted by the Bylaws, members
of the Board may participate in a meeting of such committee by
means of a conference telephone or similar communication
equipment by means of which all persons participating in the
meeting can hear each other at the same time and participation
by such means shall constitute presence in person at a
meeting.
(d) Unless otherwise provided by the Bylaws any action to be taken
at a meeting of a committee may be taken without a meeting if
a consent in writing, setting forth the action so taken, shall
be signed by all of the members of the committee. Such
consent shall have the same effect as a unanimous vote.
ARTICLE IV
Officers
Section 1. Number.
The officers of the corporation shall be a President, a Secretary and
a Treasurer, each of whom shall be elected by the Board of Directors. The
Board of Directors may elect or appoint one or more Vice-Presidents, and any
other officers, assistant officers and agents as it shall deem necessary or
desirable, who shall hold their offices for such terms and shall have such
authority and perform such duties as shall be determined from time to time by
the Board. The Board of Directors may also elect a Chairman of the Board and
one or more Vice Chairmen of the Board as it shall deem necessary, who shall
hold their offices for such terms and shall have such authority and exercise
such powers and perform such duties as shall be determined from time to time by
the Board by resolution not inconsistent with these Bylaws. Any two or more
corporate offices, except those of President and Vice-President may be held by
the same person; but no officer shall execute, acknowledge or verify any
instrument in more than one capacity if such instrument be required by law or
by these Bylaws to be executed, acknowledged or verified by any two or more
officers.
13
<PAGE> 14
Section 2. Election and Term Office.
The officers of the corporation to be elected by the Board of
Directors shall be elected annually by the Board of Directors at the first
meeting of the Board of Directors held after each annual meeting of the
shareholders. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as conveniently may be.
Additional officers and assistant officers may be elected or appointed by the
Board of Directors during the year. Each officer shall hold office until his
successor shall have been duly elected and shall have qualified, or until his
death or until he shall resign or shall have been removed in the manner
hereinafter provided.
Section 3. Qualification.
To be qualified to take office, an officer shall be legally competent
to enter into contracts. Officers need not be residents of Oklahoma or of the
United States. Officers need not be shareholders of the corporation, and only
the President need be a Director of this corporation. The Treasurer
may be a corporation.
Section 4. Removal.
(a) Any officer specifically designated in Section 1 of this
Article IV may be removed, either with or without cause, and a
successor elected by a majority vote of the Board of Directors
regularly convened at a regular or special meeting.
(b) The officers and agents appointed in accordance with the
provisions of Section 13 of this Article IV may be removed,
either with or without cause, by a majority vote of the Board
of Directors regularly convened at a regular or special
meeting or by any superior officer or agent upon whom such
power of removal shall have been conferred by the Board of
Directors.
Section 5. Vacancies.
(a) A vacancy in any office specifically designated in Section 1
of this Article IV by reason of death, resignation, inability
to act, disqualification, removal or any other cause, shall be
filled for the unexpired portion of the term by a majority
vote of the Board of Directors regularly convened at any
regular or special meeting.
(b) In the case of a vacancy occurring in the office of an officer
or agent appointed in accordance with the provisions of
Section 13 of this Article IV, such vacancy may be filled by
vote of the Board of Directors or by any
14
<PAGE> 15
officer or agent upon whom such power shall have been
conferred by the Board of Directors.
Section 6. Compensation.
The salaries or other compensation of the officers shall be fixed from
time to time by the Board of Directors, and no officer shall be prevented from
receiving such salary or any compensation by reason of the fact that he is also
a director of the Corporation. The Board of Directors may delegate to any
officer or agent the power to fix from time to time the salaries or other
compensation of officers or agents appointed in accordance with the provisions
of Section 13 of this Article IV.
Section 7. Chairman of the Board.
The Chairman of the Board, if one is elected, shall preside at all
meetings of the Board of Directors and shall have such other powers and duties
as may from time to time be prescribed by the Board of Directors upon written
directions given to him pursuant to resolutions duly adopted by the Board of
Directors.
Section 8. President.
The President shall be the principal executive officer of the
corporation and subject to the control of the Board of Directors, shall in
general supervise and control all of the business and affairs of the
corporation. He shall, when present, preside at all meetings of the Board of
Directors unless there be elected a Chairman of the Board and the same is
present at the meeting. He shall have general and active management of the
business of the corporation, and shall see that all orders and resolutions of
the Board of Directors are carried into effect. He shall have the power to
execute bonds, mortgages and other contracts requiring a seal, under the seal
of the corporation, except where required by law to be otherwise signed and
executed and except where the signing and execution thereof shall be expressly
delegated by the Board of Directors to some other officer or agent of the
corporation. He shall have the power to superintend any officers or heads of
departments and to dismiss any of the subordinate employees when he shall deem
proper, and shall perform such other duties and exercise such other powers as
the Board of Directors may from time to time prescribe.
Section 9. Vice Presidents.
In absence of the President or in the event of his death, or inability
or refusal to act, the Vice-President (or in the event there be more than one
Vice-President, the Vice-Presidents in the order designated at the time of
their election or in the absence of any designation, then in the order of their
election) shall perform the duties of the President, and when so acting, shall
have all the
15
<PAGE> 16
powers of and be subject to all the restrictions upon the President. Any
Vice-President may sign, with the Secretary or an Assistant Secretary,
certificates for shares of the corporation, and shall perform such other duties
as from time to time may be assigned to the President.
Section 10. The Secretary.
The Secretary shall: (a) keep the minutes of the shareholders'
meeting and of the Board of Directors' meeting in one or more books provided
for that purpose; (b) see that all notices are duly given in accordance with
the provisions of these Bylaws and as required by law; (c) be custodian of the
corporate records and of the seal of the corporation and see that the seal of
the corporation is affixed to all documents, the execution of which on behalf
of the corporation under its seal is duly authorized; (d) keep a register of
the post office address of each shareholder; (e) sign, with the President or a
Vice-President, certificates for shares of the corporation, the allotment of
which shall have been authorized by resolution of the Board of Directors; (f)
have general charge of the stock transfer books of the corporation; (g) in
general, perform all duties incident to the office of Secretary and such other
duties as from time to time may be assigned to him by the President or by the
Board of Directors.
Section 11. The Treasurer.
If required by the Board of Directors, the Treasurer shall give a bond
for the faithful discharge of his duties in such sum and with such surety or
sureties as the Board of Directors shall determine. He shall: (a) have charge
and custody of and be responsible for all funds and securities of the
corporation, receive and give receipts for moneys due and payable to the
corporation from any source whatsoever, and deposit all such moneys in the name
of the corporation in such banks, trust companies or other depositories as
shall be selected; and (b) in general, perform all the duties as from time to
time may be assigned to him by the President or by the Board of Directors.
Section 12. Assistant Secretaries and Assistant Treasurers.
The Assistant Secretaries shall, in the absence or disability of the
Secretary, perform the duties and exercise the powers of the Secretary, and may
sign with the President or a Vice-President, certificates for shares of the
corporation, the allotment of which shall have been authorized by a resolution
of the Board of Directors. The Assistant Treasurers shall, in the absence or
disability of the Treasurer, perform the duties and exercise the powers of the
Treasurer, and, if required by the Board of Directors, give bonds for the
faithful discharge of their duties in such sums and with such sureties as the
Board of Directors shall determine. The Assistant Secretaries and Assistant
Treasurers, in
16
<PAGE> 17
general, shall perform such duties as shall be assigned to them by the
Secretary or the Treasurer, respectively, or by the President of the Board of
Directors.
Section 13. Subordinate Officers and Agents.
The Board of Directors may from time to time appoint other officers
and agents as it may deem necessary or advisable, to hold office for such
period, have such authority and perform such duties as the Board of Directors
may from time to time determine. The Board of Directors may delegate to any
officer or agent the power to appoint any such subordinate officers or agents,
and to prescribe their respective terms of office, authorities and duties.
ARTICLE VI
Indemnification of Officers and Directors
Section 1.
(a) Definitions. As used herein, the term "director" shall
include each present and former director of the corporation
and the term "officer" shall include each present and former
officer of the corporation as such, and the terms "director"
and "officer" shall also include each such director or officer
who, at the corporation's request, is serving or may have
served as a director or officer of another corporation in
which the Corporation owns, directly or indirectly, shares of
capital stock or of which it is a creditor, in his capacity as
a director or officer of such corporation. The term "officer'
means Chairman of the Board of Directors, President,
Vice-President, Treasurer, Secretary and each assistant or
divisional officer. The term "expenses" shall include, but
shall not be limited to, reasonable amounts for attorneys'
fees, costs, disbursements and other expenses and the amount
or amounts of judgments, fines, penalties and other
liabilities.
(b) Indemnification Granted. Each director and officer shall be
and hereby is indemnified by the Corporation against:
(i) expenses incurred or paid by him in
connection with any claim made against him, or any actual or
threatened action, suit or proceeding (civil, criminal,
administrative, investigative or other, including appeals, and
whether or not relating to a date prior to the adoption of
this Bylaw) in which he may be involved as a party or
otherwise, by reason of his being or having been a director or
officer, or by reason of any action taken or not taken by him
in such capacity; and
17
<PAGE> 18
(ii) the amount or amounts paid by him in
settlement of any such claim, action, suit or proceeding or
any judgment or order entered therein, subject, however to the
following provisions:
(A) excluded from the indemnity given in
subparagraphs (i) and (ii) above are any amounts paid
or payable by any such director or officer to the
corporation or to any other corporation referred to
in paragraph (a) hereof;
(B) a director or officer who has been
wholly successful, on the merits or otherwise, in
defense of any claim, issue or matter therein, shall
be entitled as of right to indemnification for
expenses incurred by him therein. In any other case
indemnification shall be made only upon a
determination made, in the manner provided in the
subsection (C) below, that the director or officer
acted in good faith for a purpose which he reasonably
believed to be in the best interest of the
corporation or such other corporation, as the case
may be, and in addition in any criminal action or
proceeding that he had no reasonable cause to believe
that his conduct was unlawful and, in case of any
amount or amounts paid in settlement is or was
reasonable and in the interest of the corporation;
provided, however, if at any time any provisions are
contained in the laws of the State of Oklahoma
prohibiting indemnification in respect of any claim,
issue or matter except upon a determination of the
extent thereof in the manner provided therein, then
indemnification in respect thereof shall be made only
in accordance with such provisions; and
(C) Any indemnification pursuant to this
Article shall be made by the Corporation only as
authorized in the specific case upon the
determination that indemnification of the director or
officer is proper under the circumstances because
such person has met the applicable standard of
conduct set forth herein. Such determination shall
be made (1) by the Board of Directors of the
Corporation by a majority vote of a quorum consisting
of directors who were not parties to such action,
suit or proceeding, (2) if such a quorum is not
obtainable, or even if obtainable, if a quorum of
disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the
shareholders.
18
<PAGE> 19
Subject to the limitations hereinabove imposed, it is intended by this
Bylaw to grant indemnity to the full extent permissible under the law.
It is not intended that the provisions of this Bylaw shall be
applicable to, and they are not to be construed as granting indemnity
with respect to, matters as to which indemnification would be in
contravention of the laws of the State of Oklahoma or of the United
States of America, whether as a matter of public policy or pursuant to
statutory provision.
(c) Miscellaneous.
(i) Expenses incurred and amounts paid in
settlement with respect to any claim, action, suit or
proceeding of the character described in paragraph (b)(i)
above may be advanced by the corporation prior to the final
disposition thereof upon receipt of an undertaking by or on
behalf of the recipient to repay such amount as shall not
ultimately be determined to be payable to him under this
Bylaw.
(ii) The rights of indemnification herein provided
for shall be severable, shall not be exclusive of other rights
to which any director or officer now or hereafter may be
entitled, shall continue as to a person who has ceased to be
an indemnified person and shall inure to the benefit of the
heirs, executors, administrator and other legal
representatives of such a person.
(iii) The provisions of this Bylaw shall be deemed
to be a contract between the corporation and each director or
officer who serves in such capacity at any time while such
Bylaw is in effect.
(iv) The Board of Directors shall have power on
behalf of the Corporation to grant indemnification to any
person other than a director or officer to such extent as the
Board in its discretion may from time to time determine.
(v) The Corporation shall have power to, but
shall not be obligated to, purchase and maintain insurance at
its expense on behalf of any person who is or was a director,
officer employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any
liability asserted against him and incurred by him in any
such capacity or arising out of his status as such, whether or
not the corporation would have the power to indemnify him
against such liability.
19
<PAGE> 20
ARTICLE VII
Shares of Stock
Section 1. Certificates for Shares.
Certificates representing shares of the corporation shall be in such
form as shall be determined by the Board of Directors. Such certificates shall
be signed by the President or a Vice-President and by the Secretary or an
Assistant Secretary, and the corporate seal or a facsimile thereof affixed
thereto. All certificates for shares shall be consecutively numbered or
otherwise identified. The name and address of the persons to whom the
certificate is issued, the number of shares represented thereby and the date of
issue shall be issued on the stock transfer books of the corporation. All
certificates surrendered to the corporation for transfer shall be cancelled,
and no new certificate shall be issued until the former certificate for a like
number of shares shall have been surrendered and cancelled, except that in case
of a lost, destroyed, or mutilated certificate, a new one may be issued
therefor upon such terms and indemnity to the corporation as the Board of
Directors may prescribe.
Section 2. Transfer of Shares.
Transfer of shares of the corporation shall be made only on the stock
transfer books of the corporation by the holder of record thereof or by his
legal representative, who shall furnish proper evidence of authority to
transfer, or by his attorney thereunto authorized by power of attorney duly
executed and filed with the Secretary of the corporation, and on surrender for
cancellation of the certificate for such shares. The person in whose name
shares stand on the books of the corporation shall be deemed by the corporation
to be the owner thereof for all purposes.
Section 3. Lost or Destroyed Certificates.
The holder of any shares of stock of the Corporation shall immediately
notify the Corporation of any loss or destruction of the certificate
representing the same. The Corporation may issue a new certificate in the
place of any certificate theretofore issued by it alleged to have been lost or
destroyed, and the Board of Directors may require the owner of the lost or
destroyed certificate, or his legal representatives, to give the Corporation a
bond in such sum as the Board may direct, and with such surety or sureties as
may be satisfactory to the Board, to indemnify the Corporation against any
claim that may be made against it on account of the alleged loss or destruction
of any such certificate. A new certificate may be issued without requiring any
bond when, in the judgment of the Board of Directors, it is proper so to do.
20
<PAGE> 21
ARTICLE VIII
Closing of Transfer Books and Fixing of Record Date
Section 1. Fixing Record Dates for Matters Other Than Consents to Action.
For the purpose of determining shareholders entitled to notice of or
to vote at any meeting of shareholders or any adjournment thereof, or entitled
to receive a distribution by the Corporation (other than distribution involving
a purchase or redemption by the Corporation of any of its own shares) or a
share dividend, or in order to make a determination of shareholders for any
other proper purpose (other than determining shareholders entitled to consent
to action by shareholders proposed to be taken without a meeting of
shareholders), the Board of Directors of the Corporation may provide that the
share transfer records shall be closed for a stated period but not to exceed,
in any case, sixty (60) days. If the share transfer records shall be closed
for the purpose of determining shareholders entitled to notice of or to vote at
a meeting of shareholders, such records shall be closed for at least ten (10)
days immediately preceding such meeting. In lieu of closing the share transfer
records, the Board of Directors may fix in advance a date as the record date
for any such determination of shareholders, such date in any case to be not
more than sixty (60) days and, in the case of a meeting of shareholders, not
less than ten (10) days, prior to the date on which the particular action
requiring such determination of shareholders is to be taken. If the share
transfer records are not closed and no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholders entitled to receive a distribution (other than a
distribution involving a purchase or redemption by the Corporation of any of
its own shares) or a share dividend, the date on which notice of the meeting is
mailed or the date on which the resolution of the Board of Directors declaring
such distribution or share dividend is adopted, as the case may be, shall be
the record date for such determination of shareholders. When a determination
of shareholders entitled to vote at any meeting of shareholders has been made
as provided in this Article VIII, such determination shall apply to any
adjournment thereof except where the determination has been made through the
closing of the share transfer records and the stated period of closing has
expired.
Section 2. Fixing Record Dates for Consents to Action.
Unless a record date shall have previously been fixed or determined
pursuant to this section, whenever action by shareholders is proposed to be
taken by consent in writing without a meeting of shareholders, the Board of
Directors may fix a record date for the purpose of determining shareholders
entitled to consent to that action, which record date shall not precede, and
21
<PAGE> 22
shall not be more than ten (10) days after, the date upon which the resolution
fixing the record date is adopted by the Board of Directors. If no record date
has been fixed by the Board of Directors and the prior action of the Board of
Directors is not required by the General Corporation Act of Oklahoma, the
record date for determining shareholders entitled to consent to action in
writing without a meeting shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the Corporation by delivery to its registered office, its principal place of
business, or an officer or agent of the Corporation having custody of the books
in which proceedings of meetings of shareholders are recorded. Delivery shall
be by hand or by certified or registered mail, return receipt requested.
Delivery to the Corporation's principal place of business shall be addressed to
the president or the principal executive officer of the Corporation. If no
record date shall have been fixed by the Board of Directors and prior action of
the Board of Directors is required by the General Corporation Act of Oklahoma,
the record date for determining shareholders entitled to consent to action in
writing without a meeting shall be at the close of business on the date on
which the Board of Directors adopts a resolution taking such prior action.
ARTICLE IX
Fiscal Year
The fiscal year of the corporation shall be fixed by resolution of the
Board of Directors.
ARTICLE X
Annual Report
The Board of Directors shall not be required to cause an annual report
to be sent to the shareholders, but may do so in its discretion.
ARTICLE XI
Dividends
The Board of Directors may declare, and the corporation may pay,
dividends on its outstanding shares in cash, property or its own shares,
subject to the provisions of the statutes and any provision of the Certificate
of Incorporation.
Before the payment of any dividend or other distribution of profits,
there may be set aside out of any funds of the corporation
22
<PAGE> 23
available for such purpose such sum or sums as the Directors from time to time,
in their absolute discretion for contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the corporation, or for such other
purpose as the Directors shall determine to be in the interest of the
corporation, and the Directors may modify or abolish any such reserve in the
manner in which it was created.
ARTICLE XII
Seal
The Board of Directors shall adopt and provide a corporate seal, which
shall be circular in form and shall have inscribed thereon the name of the
corporation, the state of incorporation and the words "Corporate Seal."
ARTICLE XIII
Transactions Between the
Corporation and an Officer, Director or Shareholder
With respect to any contract or other transaction between the
corporation and any of its directors, officers or security holders or any
corporation or firm in which any of them are directly or indirectly interested
if:
(a) the material facts of the relationship or interest of each
such director, officer or security holder are known or
disclosed:
(1) to the board of directors and it nevertheless
authorizes or ratifies the contract or transaction by
a majority of the directors present, each such
interested director to be counted in determining
whether a quorum is present but not in calculating
the majority necessary to carry the vote; or
(2) to the shareholders and they nevertheless authorize
or ratify the contract or transaction by a majority
of the shares present, each such interested person to
be counted for quorum and voting purposes; or
(b) the contract or transaction is fair to the corporation as of
the time it is authorized or ratified by the board of
directors or the shareholders, then such contract or
transaction shall not be invalid solely because of such
relationship or because of the presence of the director,
officer or security holder at the meeting authorizing the
contract or transaction, or his participation or vote in
23
<PAGE> 24
the meeting or authorization. This section shall not be
construed to invalidate a contract or transaction which would
be valid in the absence of this section.
ARTICLE XIV
Amendments
These Bylaws may be altered or repealed, or new bylaws may be adopted by a
majority vote of a quorum of the members of the Board of Directors at any
annual, regular or special meeting duly convened after notice to the Directors
setting out the purpose of the meeting, subject to the power of the
shareholders to alter or repeal such bylaws.
24
<PAGE> 1
EXHIBIT 10.8
CONTRIBUTION AGREEMENT
This Agreement is made and entered into as of the 1st day of January,
1996 (the "Effective Date"), by and among Cottonwood Partnership, an Oklahoma
general partnership ("Cottonwood"), Continental Natural Gas, Inc., an Oklahoma
corporation ("CNG"), Gary Adams Ranch, Inc., an Oklahoma corporation ("GAR")
and Continental Gas Marketing, Inc., a Texas corporation ("CGM").
RECITALS
A. Cottonwood owns a nine and nine-tenths percent (9.9%) interest
in the Beaver Joint Venture, an Oklahoma general partnership (the "Joint
Venture").
B. GAR owns a one-tenth percent (0.1%) interest in the Joint
Venture.
C. CGM owns a ten percent (10%) interest in the Joint Venture.
D. The Joint Venture owns all right, title and interest in the
Beaver plant and gathering system (the "Beaver Plant") located in Beaver
County, Oklahoma. Cottonwood, GAR and CGM, as nominees for the Joint Venture,
hold record title to certain interests in the Beaver Plant.
E. Cottonwood, GAR and CGM desire to transfer their interest in
the Joint Venture to CNG on the terms and conditions hereinafter set forth.
STATEMENT OF AGREEMENT
NOW, THEREFORE, for and in consideration of the mutual covenants
herein contained and other good and valuable consideration this day exchanged
among the parties hereto, the receipt and sufficiency of which are acknowledged
by execution of this Agreement, the parties hereby agree as follows:
1. Transfer of Joint Venture Interests. For the consideration
and subject to the terms and conditions hereinafter set forth, Cottonwood, GAR
and CGM transfer all of their interests in the Joint Venture to CNG.
Cottonwood, GAR and CGM shall execute and deliver such deeds, assignments and
bills of sale as are reasonably necessary to fully vest CNG with all right,
title and interest of Cottonwood, GAR and CGM in and to the Beaver Plant.
2. Consideration for Transfer of Assets. For and in
consideration of the transfer of the interests set forth in paragraph 1 above,
CNG has issued 200 shares of its Convertible Preferred Stock to Cottonwood, GAR
and CGM, as follows:
<PAGE> 2
<TABLE>
<CAPTION>
NAME SHARES STOCK CERTIFICATE NO.
---- ------ ---------------------
<S> <C> <C>
Cottonwood 99 CP1
GAR 1 CP2
CGM 100 CP3
</TABLE>
3. Assumption of Liabilities and Obligations. CNG hereby assumes
any and all liabilities and agrees to perform any and all obligations of the
Joint Venture, Cottonwood, GAR and CGM, respectively, with respect to their
interests in the Joint Venture to the extent such liabilities and obligations
arise or relate to periods from and after the Effective Date.
4. Miscellaneous.
(a) Benefit. This Agreement shall be binding upon and
enure to the benefit of the parties hereto and their respective
successors and assigns. Nothing in this Agreement, express or
implied, is intended to confer upon any other person any rights or
remedies under or by reason of this Agreement.
(b) 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.
(c) Entire Agreement. This Agreement embodies the entire
understanding between the parties hereto and supersedes all prior
agreements and understandings relating to the subject matter hereof.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the day and year first above written.
CONTINENTAL NATURAL GAS, INC.
By
---------------------------------
Garry D. Smith, Vice President
COTTONWOOD PARTNERSHIP
By
---------------------------------
Gary C. Adams, Chief Executive
Officer
GARY ADAMS RANCH, INC.
By
---------------------------------
H. Ric Hedges, President
CONTINENTAL GAS MARKETING, INC.
By
---------------------------------
H. Ric Hedges, President
3
<PAGE> 1
EXHIBIT 11
Continental Natural Gas, Inc. and Subsidiaries
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Income before extraordinary item and cumulative effect of accounting change $ 7,620,280 $ 5,109,951 $ 4,756,112
=========== =========== ===========
Net income 7,193,060 5,109,951 4,756,112
Cumulative preferred dividends (587,250) (47,250) (47,250)
----------- ----------- -----------
Adjusted net income $ 6,605,810 $ 5,062,701 $ 4,708,862
=========== =========== ===========
Reconciliation of weighted average number of shares outstanding to amount used
in primary earnings per share computation:
Weighted average number of shares outstanding 26,001 23,170 23,170
Dilutive effect of assumed exercise of options and warrants 252 472
----------- ----------- -----------
Weighted average number of common and common
equivalent shares outstanding 26,001 23,422 23,642
=========== =========== ===========
Primary Earnings Per Share:
Income before extraordinary item and cumulative effect of accounting change $ 293.08 $ 218.17 $ 201.17
=========== =========== ===========
Net income $ 254.06 $ 216.15 $ 199.17
=========== =========== ===========
FULLY DILUTED EARNINGS PER SHARE
Income before extraordinary item and cumulative effect of accounting change 7,620,280 5,109,951 4,756,112
=========== =========== ===========
Net income 7,193,060 5,109,951 4,756,112
Cumulative preferred dividends on nonconvertible
preferred stock (47,250) (47,250)
----------- ----------- -----------
Adjusted net income 7,193,060 5,062,701 4,708,862
=========== =========== ===========
Reconciliation of weighted average number of shares outstanding to amount used
in fully diluted earnings per share computation:
Weighted average number of
shares outstanding 26,001 23,170 23,170
Dilutive effect of assumed conversion
of preferred stock 5,667
Dilutive effect of assumed exercise of options and warrants 1,172 258 670
----------- ----------- -----------
Weighted average number of common and common
equivalent shares outstanding 32,840 23,428 23,840
----------- ----------- -----------
FULLY DILUTED EARNINGS PER SHARE:
Income before extraordinary item and cumulative effect of accounting change $ 232.04 $ 218.11 $ 199.50
=========== =========== ===========
Net income $ 219.03 $ 216.10 $ 197.52
=========== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. ) of our report dated March 21, 1997 on our audits of the
consolidated financial statements and financial statement of schedule of
Continental Natural Gas, Inc. and Subsidiaries. We also consent to the
reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
April 21, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF ENGINEERING FIRM
We hereby consent to the use in the Prospectus constituting party of the
Registration Statement of Form S-1 of Continental Natural Gas, Inc. ("CNG") of
our estimate of proved, producing natural gas reserves of the leases and wells
currently under contract with CNG. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
LEE KEELING AND ASSOCIATES, INC.
By: /s/ KENNETH RENBERG
-------------------------------
Kenneth Renberg, Vice President
Tulsa, Oklahoma
April 21, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF FUTURE DIRECTOR
I consent to the references to myself as a future director of
Continental Natural Gas, Inc. (the "Company") contained in the Registration
Statement (Form S-1 No. 333- _______) and related Prospectus of the Company
for the registration of 2,100,000 shares of its Common Stock.
/s/ WILLIAM W. PRITCHARD
-------------------------------
William W. Pritchard
Tulsa, Oklahoma
April 9, 1997
<PAGE> 1
EXHIBIT 23.5
CONSENT OF FUTURE DIRECTOR
I consent to the references to myself as a future director of
Continental Natural Gas, Inc. (the "Company") contained in the Registration
Statement (Form S-1 No. 333- ) and related Prospectus of the Company for the
registration of 2,100,000 shares of its Common Stock.
/s/ WILLIAM H. BAUCH
------------------------------
William H. Bauch
Tulsa, Oklahoma
April 4, 1997
