<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) March 4, 1997
GATEWAY ENERGY CORPORATION
----------------------------------------------
(Exact Name Of Registrant As Specified In Its Charter)
Delaware 1-4766 44-0651207
----------------------------------------------------------------------
(State Or Other Jurisdiction Of (Commission (IRS Employer
Incorporation Or Organization) File No.) Identification Number)
10842 Old Mill Road, Suite #5
Omaha, NE 68154
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(Address Of Principal Executive Offices) (Zip Code)
(402) 330-8268
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Registrant's Telephone Number, Including Area Code:
Not Applicable
--------------------------------------------------------
(Former Name Or Former Address, If Changed Since Last Report.)
<PAGE>
FORM 8-K
Item 1. Changes in Control of Registrant
Not Applicable
Item 2. Acquisition or Disposition of Assets
Not Applicable
Item 3. Bankruptcy or Receivership.
Not Applicable
Item 4. Changes in the Registrant's Certifying Accountant.
Not Applicable
Item 5. Other Events
The Company announced at its last Annual Stockholders Meeting,
and in consultation with Growth Capital Partners, Inc., the Company's
investment banker, a proposed recapitalization of the Company
("Recapitalization"). The Recapitalization included two steps.
First, pursuant to an Information Statement dated January 13, 1997,
the Company solicited the consent of the holders of Common Stock to
adopt an amendment to the Company's Restated Certificate of
Incorporation to: (i) effect a 1 for 25 reverse stock split of the
outstanding Common Stock of the Company; (ii) decrease the authorized
Common Stock of the Company from 75,000,000 shares to 10,000,000
shares; and (iii) decrease the authorized Preferred Stock from
1,750,000 to 10,000 shares. Filing of the Restated Certificate of
Incorporation to effectuate adoption of the amendment was contingent
upon the Company completing the second step of the Recapitalization
which included the adoption, by each of the outstanding nine series of
Preferred Stock, of an Amended and Restated Certificate of Designation
to allow for the mandatory redemption of a portion and the mandatory
conversion of the remaining portion, of all outstanding Preferred
Stock. Upon completion of the second step of the Recapitalization,
the Preferred Stock outstanding would be redeemed and converted into
other securities, including Common Stock, Subordinated Debt, and
Common Stock Purchase Warrants (collectively the "Recapitalization
Securities").
The Company received the required vote from the holders of Common
Stock to adopt the amendment to the Restated Certificate of
Incorporation on January 31, 1997. The Company received the required
<PAGE>
vote from each series of Preferred Stock to adopt Amended and Restated
Certificates of Designation for each series of Preferred Stock on
February 28, 1997. The 1 for 25 reverse stock split was effected by
the Company on March 4, 1997, the date the Restated Certificate of
Incorporation was filed with the Delaware Secretary of State.
Pursuant to the second step of the Recapitalization, notice of
the approval of the second step of the Recapitalization was sent to
holders of Preferred Stock on March 3, 1997. Each holder of Preferred
Stock has fourteen (14) days from March 3, 1997 to elect to convert
any or all of their Preferred Stock into Common stock of the Company
at the conversion price set forth in each original Certificate of
Designation, or to elect to take the Recapitalization Securities.
As of March 10, 1997, the Company is unable to calculate with any
certainty the number of elections it will receive from holders of
Preferred Stock in the fourteen (14) day election period to convert
Preferred Stock into Common Stock. Based upon calculations as of
February 28, 1997, the Company has determined that it is likely it
will be unable to honor all elections to convert Preferred Stock to
Common Stock because the Company does not have enough Common Stock
authorized.
The Board of Directors adopted a resolution on February 27, 1997
proposing to the holders of Common Stock an additional amendment to
the Restated Certificate of Incorporation to authorize an increase in
Common Stock from 10,000,000 to 17,500,000 shares. Most of the
additional shares will be used to allow the Company to honor all
elections made by holders of Preferred Stock to convert to Common
Stock in lieu of taking the Recapitalization Securities. The
remaining newly authorized shares may be used by the Company for
future acquisitions.
Item 6. Resignations of Registrant's Directors
Not Applicable
Item 7. Financial Statements and Exhibits.
22.10 Solicitation of Consent of Common Stockholders and Related
Information Statement, dated January 13, 1997, filed herein
by reference.
22.11 Solicitation of Consents of Preferred Stockholders and
Related Information Statement, dated February 12, 1997.
<PAGE>
Item 8. Change in Fiscal Year
Not Applicable
Item 9. Sales of Equity Securities Pursuant to
Regulation S.
Not Applicable
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GATEWAY ENERGY CORPORATION
/s/ Neil A.Fortkamp
---------------------------------
Chief Financial Officer
March 11, 1997
- ------------------------
(Date)
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[LOGO]
SOLICITATION OF CONSENTS OF PREFERRED STOCKHOLDERS
To the Preferred Stockholders of Gateway Energy Corporation and Gateway Pipeline
Company:
This Solicitation of Consents is being sent to all Preferred Stockholders
of Gateway Energy Corporation (the "Company") and Gateway Pipeline Company, a
wholly owned subsidiary of the Company ("GPC" or "Subsidiary"), in lieu of a
special meeting of Preferred Stockholders, for the following purpose:
To obtain Preferred Stockholders' Consents (each Series of Preferred
Stockholders voting as a separate class) to the adoption of an Amended and
Restated Certificate of Designation for each respective class of Preferred
Stock to require (i) the mandatory redemption of a portion of outstanding
Preferred Stock into Subordinated Debt, and (ii) the mandatory conversion
of the remaining portion of each share of outstanding Preferred Stock into
Common Stock of the Company and Common Stock Purchase Warrants.
As an initial step in the plan to recapitalize the Company
("Recapitalization"), on February 3, 1997, the Common Stockholders approved,
contingent upon receipt of the required vote to adopt Amended and Restated
Certificates of Designation for each class of Preferred Stock as set forth
above, a 1 for 25 reverse stock split, the decrease of the authorized shares of
Common Stock from 75,000,000 shares to 10,000,000 shares and the decrease of the
authorized shares of Preferred Stock from 1,750,000 shares to 10,000 shares.
Unless otherwise indicated, all references to Common Stock and shares
purchasable under Common Stock Purchase Warrants in the Information Statement
are calculated and presented on a post reverse stock split basis.
Under the terms of the Recapitalization, each share of Series A Preferred
Stock with the stated value of $1,000.00 per share will be converted and
redeemed into the following:
a. 210.20 shares of Common Stock with 20 Common Stock Purchase
Warrants attached.
b. $355.00 in Subordinated Debt bearing interest at 10%, including
an additional amount equal to any accrued and unpaid dividends as
of February 28, 1997, and an additional interest provision equal
to .0014% of any operating cash distributions from the Company's
interest in Castex Energy 1995, L.P.
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Each share of Series B and Series M Preferred Stock with the stated value
of $1,000.00 per share will be converted and redeemed into the following:
a. 200.75 shares of Common Stock with 20 Common Stock Purchase
Warrants attached.
b. $390.00 in Subordinated Debt bearing interest at 10%, including
an additional amount equal to any accrued and unpaid dividends as
of February 28, 1997, and an additional interest provision equal
to .0014% of any operating cash distributions from the Company's
interest in Castex Energy 1995, L.P.
Each share of Series G Preferred Stock with the stated value of $1,000.00
per share will be converted and redeemed into the following:
a. 255.24 shares of Common Stock with 20 Common Stock Purchase
Warrants attached.
b. $395.02 in Subordinated Debt bearing interest at 10%, including
an additional amount equal to any accrued and unpaid dividends as
of February 28, 1997, and an additional interest provision equal
to .0014% of any operating cash distributions from the Company's
interest in Castex Energy 1995, L.P.
Each share of Series J Preferred Stock with the stated value of $1,000.00
per share will be converted and redeemed into the following:
a. 198.52 shares of Common Stock with 20 Common Stock Purchase
Warrants attached.
b. $380.09 in Subordinated Debt bearing interest at 10%, including
an additional amount equal to any accrued and unpaid dividends as
of February 28, 1997, and an additional interest provision equal
to .0014% of any operating cash distributions from the Company's
interest in Castex Energy 1995, L.P.
Each share of Series K and Series L Preferred Stock with the stated value
of $1,000.00 per share will be converted and redeemed into the following:
a. 203.03 shares of Common Stock with 20 Common Stock Purchase
Warrants attached.
b. $390.00 in Subordinated Debt bearing interest at 10%, including
an additional amount equal to any accrued and unpaid dividends as
of February 28, 1997, and an additional interest provision
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equal to .0014% of any operating cash distributions from the
Company's interest in Castex Energy 1995, L.P.
Each share of Series N Preferred Stock with the stated value of $1,000.00
per share will be converted and redeemed into the following:
a. 223.33 shares of Common Stock with 20 Common Stock Purchase
Warrants attached.
b. $360.00 in Subordinated Debt bearing interest at 10%, including
an additional amount equal to any accrued and unpaid dividends as
of February 28, 1997, and an additional interest provision equal
to .0014% of any operating cash distributions from the Company's
interest in Castex Energy 1995, L.P.
The sole outstanding share of Series O Preferred Stock will be converted to
the following:
a. 180,927 shares of Common Stock.
Stockholders of record at the close of business on January 24, 1997 (the
"Record Date") are entitled to vote on the Recapitalization. Information
concerning the matters to be voted upon is set forth in the attached Information
Statement. We encourage you to review the attached material carefully.
IN ORDER FOR THE COMPANY TO MOVE FORWARD ON ITS PROPOSED RECAPITALIZATION
AS DESCRIBED IN THE ATTACHED INFORMATION STATEMENT, CONSENT CARDS MUST BE
RECEIVED BY THE COMPANY NOT LATER THAN FEBRUARY 28, 1997.
By Order of the Board of Directors
/s/ Larry J. Horbach
------------------------------
Larry J. Horbach
President
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GATEWAY ENERGY CORPORATION
10842 OLD MILL ROAD, SUITE 5
OMAHA, NEBRASKA 68154
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INFORMATION STATEMENT
SOLICITATION OF CONSENTS OF PREFERRED STOCKHOLDERS
FEBRUARY 12, 1997
SOLICITATION AND VOTING
This Information Statement is furnished to all holders of preferred stock
("Preferred Stock") of Gateway Energy Corporation (the "Company") and Gateway
Pipeline Company, a majority owned subsidiary of the Company ("GPC" or
"Subsidiary") in connection with the solicitation of consents ("Consents") by
the Board of Directors ("Board") of the Company to effect a recapitalization
("Recapitalization") which will include the adoption of an Amended and Restated
Certificate of Designation for each class of Preferred Stock outstanding to (i)
require the mandatory redemption of a portion of each share of outstanding
Preferred Stock in exchange for Subordinated Debt; and (ii) require the
mandatory conversion of the remaining portion of each share of outstanding
Preferred Stock in exchange for Common Stock and Common Stock Purchase Warrants
("Warrants") of the Company (the Subordinated Debt, Common Stock and Warrants
are collectively referred to as the "Recapitalization Securities"). The first
mailing of this Information Statement and accompanying material to the holders
of Preferred Stock will be made on February 12, 1997.
Delaware law permits stockholders to vote by consent in lieu of an actual
meeting. The Company has determined not to hold an actual meeting of
stockholders in order to save cash and reduce expenses.
The cost of solicitation of Consents will be borne by the Company. In
addition to the use of the mails, Consents may be solicited personally, or by
telephone or electronic media by regular employees of the Company or persons
engaged by the Company to solicit such Consents. The Company will reimburse
brokers and other custodians, nominees or fiduciaries for their expenses in
forwarding the Information Statement and accompanying material to security
owners and obtaining the Consents.
Preferred Stockholders of record at the close of business on January 24,
1997, are entitled to vote on matters set forth herein. On that date there were
outstanding and entitled to vote 537.50 shares of Series A Preferred Stock,
1,650 shares of Series B Preferred Stock, 7,934.84 shares of Series G Preferred
Stock, 747.50 shares of Series J Preferred Stock, 750 shares of Series K
Preferred Stock, 238 shares of Series
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L Preferred Stock, 437.50 shares of Series M Preferred Stock, 5,601 shares of
Series N Preferred Stock and one share of Series O Preferred Stock.
VOTE REQUIREMENTS
The effectuation of an Amended and Restated Certificate of Designation for
each class requires receipt of the affirmative vote, by consent, of a majority
of the outstanding shares of each class of Preferred Stock, with each class of
Preferred Stock being entitled to vote as a separate class.
AVAILABLE INFORMATION
Enclosed with this Information Statement are the Form 10-KSB for the year
ended February 29, 1996 and the Form 10-QSB for the period ended November 30,
1996 for the Company. Please review these documents carefully as there is no
separate historical information provided about the Company's operations and
financial condition. In addition, the Company is subject to the informational
requirements of the Securities Exchange Act of 1934 as amended, pursuant to
which the Form 10-KSB and Form 10-QSB were filed with the Securities and
Exchange Commission ("Commission"). Similar reports for prior periods, as well
as proxy statements and additional information filed by the Company may be
inspected and copies obtained at the public reference facilities maintained by
the Commission at Room 1024 Judiciary Plaza, 450 Fifth Street N.W., Washington,
D.C. 20549 and at the Commission's regional offices located at New York Regional
Office, Seven World Trade Center, Suite 1300, New York, New York, 10048, and
Midwest Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can also be obtained from the
Public Reference Section of the Commission, Judiciary Plaza, 450 Fifth Street
N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a
Web site that contains reports, proxy and information statements and other
materials that are filed through the Commission's Electronic Data Gathering
Analysis and Retrieval (EDGAR) System. This Web site can be accessed at
http:\\www.sec.gov.
If you have any questions regarding this Information Statement and
attachments you may contact Larry Horbach, President or Neil Fortkamp, CFO at
the Company by calling (402) 330-8268.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
Certain statements contained in "REASONS FOR RECAPITALIZATION ", "POST
RECAPITALIZATION STRATEGY", "PRO FORMA FINANCIAL INFORMATION", "PROJECTED
STATEMENTS OF CASH GENERATED BEFORE WORKING CAPITAL CHANGES" and certain
statements incorporated
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by reference from documents accompanying this Information Statement regarding
matters that are not historical facts, are or may constitute forward-looking
statements (as that term is defined in the Private Securities Litigation Reform
Act of 1995). Because such statements are subject to risks and uncertainties,
actual results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, those discussed under the captions
"FACTORS AFFECTING FUTURE RESULTS" on Page 13 of Form 10-KSB enclosed, "PRO
FORMA FINANCIAL INFORMATION", "PROJECTED STATEMENTS OF CASH GENERATED BEFORE
WORKING CAPITAL CHANGES" and the inability of management of the Company to
successfully implement its "POST RECAPITALIZATION STRATEGY" as described below.
REASONS FOR RECAPITALIZATION
At the 1996 Annual Stockholders' Meeting, the Company announced that it
would initiate a program to recapitalize the Company. The Company subsequently
engaged Growth Capital Partners, Inc. ("GCP") of Houston, Texas to serve as the
Company's investment banker in this endeavor. Because of its limited capital
resources and lack of common equity at the conclusion of its 1992 restructuring,
the Company has utilized preferred equity as its primary source of initial
acquisition capital over the past four years. Preferred equity, although very
costly, was selected because the Company had net operating loss tax
carryforwards and was able to pay dividends with pre-tax dollars, providing an
attractive current return to preferred stock investors. Over the past four
years, the Company has issued a number of series of Preferred Stock to
accredited investors to initially secure the capitalization of the Company for
the acquisition of its gas pipelines and producing properties.
In mid 1996, it became apparent to management that the current high cost of
raising funds through private placements and the preferred stock dividends were
severely limiting the Company's ability to retain cash flow for expansion and
enhance and improve existing properties. Additionally, and perhaps more
detrimental to the Company in the long run, the Company was not able to attract
affordable outside capital to acquire significant new properties.
As of January 24, 1997, the Company and Subsidiary had outstanding nine (9)
separate series of Preferred Stock. All but one series of Preferred Stock carry
a dividend requirement which in total is approximately $2,200,000 annually. As
set forth in the accompanying "PROJECTED STATEMENTS OF CASH GENERATED BEFORE
WORKING CAPITAL CHANGES" for the fiscal year ending February 28, 1997, the
Company estimates it will have a deficit in cash generated before working
capital changes of approximately $425,000. As a result, the Company is neither
able to honor its preferred stock dividend requirements nor make cash
redemptions. Due to the capital intensive nature of the Company's business, the
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Company will need to reinvest internally generated cash flow in order to make
the necessary property improvements and acquisitions needed to improve cash
flow. As a result of the current situation, management also believes it is
doubtful the Company will be able to honor all of its preferred stock dividend
obligations or make any cash redemptions at any time in the foreseeable future.
In 1996, several factors and circumstances combined to create severe cash
flow problems for the Company and caused it to suspend dividend payments on
Series G effective October 1, 1996, and on other Series of Preferred Stock
effective January 1, 1997.
First, late in 1995, the Company invested $1,630,000 in Castex Energy 1995,
L.P., a limited partnership managed by one of the Company's former subsidiaries.
This partnership acquired oil and gas producing properties in Louisiana and has
developed and drilled several additional wells. Total equity contributions of
$2,400,000 plus a bank line of credit provided the funds for this acquisition
and development. This partnership has been successful in its drilling program
and has generated significant cash flow. However, this cash flow has been
retained by the partnership to repay the bank financing and to develop
additional gas production. No cash distributions have been made to the Company.
The Company's funds were provided by the proceeds from the sale of Series N
Preferred Stock of approximately $1,900,000 requiring $232,000 of annual
dividends.
Second, the weather in Caddo County Oklahoma was extremely unfavorable for
retail gas sales in the summer and fall of 1996. Ft. Cobb Fuel Authority serves
rural and residential customers in this area. Primary demand for natural gas is
for irrigation and crop drying. In 1996, utility natural gas sales for the
period July-November were 99,900 MMBtus compared to 190,000 MMBtus in the same
period of 1995. This reduction in volume reduced cash flow by approximately
$105,000 for this period.
Third, in August 1996, Industrial Gas Transmission ("IGT"), a wholly owned
entity, entered into an annual gas purchase contract for purchase of natural gas
to serve its industrial customers. This contract was entered into with its
previous supplier which had been acquired by a larger entity. This new owner,
in accordance with its credit policy, required that IGT either provide a letter
of credit or a cash deposit of $295,000, which is approximately equal to two
months of gas purchases. This deposit was provided by the Company through an
operating line of credit, however, operating revenues from the properties
purchased with proceeds from the sale of Series G Preferred Stock are being used
to repay the line of credit.
Fourth, in July 1995, GPC acquired the Guymon Pipeline for $600,000 cash
plus finder's fees contingent upon performance of the pipeline. Shortly after
the acquisition, in November 1995, the City of Guymon acquired another source of
gas
4
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supply and the Guymon Pipeline sales were reduced substantially. Although the
pipeline was eventually sold for $595,000, there was no cash flow from this
property to fund dividends which accrued on the Series N Preferred Stock sold to
finance this acquisition.
Fifth, the Company's general and administrative costs were too high
relative to the properties managed and the revenues generated by these
properties. The Company had hired several executives to operate its Houston
office; they were to concentrate primarily on finding attractive acquisitions.
However, the Company's financial situation, particularly its inability to
attract outside capital, made it difficult to find and acquire properties.
Therefore, effective December 1, 1996, the Company terminated all of its Houston
employees and entered into a six-month management agreement to manage certain
properties.
All of the above factors made it extremely difficult for the Company to
continue to meet its required dividend payments. The dividends on Series G
Preferred Stock were especially affected because the cash flows from its
dedicated properties were reduced by the decrease in Ft. Cobb utility sales, the
required deposit for IGT and poor performances on certain other properties
managed by another joint venture partner. In addition, this lack of cash flow
made it necessary for the Company to forego several potential smaller
acquisitions.
In management's opinion, it will be increasingly difficult for the Company
to generate sufficient cash flow from operations to fully meet its dividend and
redemption requirements. As discussed later in "POST RECAPITALIZATION
STRATEGY", the Company has implemented actions which can be expected to improve
cash flow. However, it is unlikely that the Company's situation will improve to
the point that the conversion privileges currently held by the Preferred
Stockholders would be of significant value without the Recapitalization.
In order to address the Company's current cash flow problems and position
Preferred Stockholders to earn a positive return on their investment, GCP, the
Company's investment advisors, recommended and the Board approved the
Recapitalization, which involves a conversion and redemption of all Preferred
Stock for the Recapitalization Securities described herein. The underlying
rationale for selecting the particular mix of Recapitalization Securities
offered herein was to (i) continue providing existing holders of Preferred Stock
with regular income payments in the form of Subordinated Debt interest, and (ii)
create greater liquidity and upside potential for existing Preferred
Stockholders through the Company's Common Stock and Common Stock Purchase
Warrants.
Following the Recapitalization, management plans to take the required
action necessary to seek a listing on NASDAQ of the Company's Common Stock. At
the present time, the only NASDAQ listing requirement the Company believes it
does not
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satisfy is the $3.00 per share minimum bid price. In addition to the 1 for 25
reverse stock split approved by the Common Stockholders, other actions
management plans to take to help satisfy the $3.00 bid price requirement,
including operating improvements, are described under "POST RECAPITALIZATION
STRATEGY".
POST RECAPITALIZATION STRATEGY
The Company, along with the consultation and assistance of GCP, is
implementing a number of strategies to build enhanced stockholder value and
liquidity for stockholders. If the Recapitalization becomes effective, because
of the 1 for 25 reverse stock split and the elimination of all preferred stock
dividends, management anticipates that the Company's Common Stock will trade at
a significantly higher price. Management further anticipates that if it can
successfully implement the Recapitalization, the Company should be in a position
to seek a NASDAQ listing for its Common Stock which might attract additional
market makers sooner than if preferred stock dividends resulted in continued
losses on Common Stock for the Company.
Management, in connection with the Recapitalization, has taken several
steps to reduce operating expenses and improve earnings. As noted above, the
Company has terminated all of its Houston employees and entered into a six-month
management contract saving $25,000 per month. Management has also taken steps
to reduce audit fees, printing expenses, and other general and administrative
expenses. Additionally, subsidiary accounting functions have been consolidated
into the corporate finance department.
The Board is also actively seeking knowledgeable people in the natural gas
industry to serve on the Board. The Board strongly believes that individuals
with industry experience can significantly help the Company position itself in
the gathering and delivery segment of the industry.
As part of the overall Recapitalization strategy, the Company is committed
to seeking ways to reduce its reliance on its joint venture partners.
Management is currently holding discussions with an experienced industry
executive in Houston, Texas, who will, if employed by the Company as the Chief
Operating Officer, review and analyze current properties and supervise the
Company's joint venture partners in an effort to reduce management costs and
improve their performance. This individual will also assume operating
management. The Company does not intend to acquire additional properties
operated by joint venture partners. However, it may be economically profitable
to continue to expand several existing joint venture properties. The Company
will actively seek ways to obtain operating management of existing joint
ventures or reorganize properties in such a way as to assure the Company's
operating control. This effort will take time and patience as joint venture
partners who currently operate these properties may not agree readily to such a
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change. Legal action may be required to allow the Company, as a majority
partner, to operate and manage these properties.
The Company, at the appropriate time, will continue to seek acquisitions
which strategically enhance the value of its existing properties. The Company
may also sell certain assets which do not fit its strategy and reinvest the
proceeds in other properties. Management believes that the natural gas industry
is a growth industry and that there is a place for small niche players such as
the Company. The Company will continue to concentrate on "above ground"
segments of the natural gas industry, particularly gas gathering and delivery.
The Company also believes that there are opportunities in the retail segment
particularly as they complement the Ft. Cobb utility operations. Although these
segments are competitive, management is convinced that the Company can
profitably exist in this arena.
The Company intends to implement the Post Recapitalization Strategy
described above regardless of the outcome of this Solicitation of Consents. The
Company will also reinstate the payment of dividends as the cash flow of the
Company allows. However, the Company will need to make essential repairs and
improvements to provide long-term cash flow for the Company. Management
believes, and GCP concurs, that it will be very difficult, if not impossible, to
generate sufficient cash flow from current operations to meet the capital needs,
fund current dividends and redeem the existing Preferred Stock.
The Company's management, its Board and its investment advisor believe that
this Recapitalization is in the best interest of the Preferred Stockholders and
the Company.
MANAGEMENT RECOMMENDS THAT YOU VOTE "FOR" THE RECAPITALIZATION.
PRO FORMA FINANCIAL INFORMATION
The information presented below is intended to reflect the financial
condition of the Company as if the securities issued in connection with the
Recapitalization had been issued on March 1, 1996, the beginning of the
Company's fiscal year. The Pro Forma Statement of Operations presents the pro
forma results of operations for the nine month period ended November 30, 1996.
The Pro Forma Balance Sheet assumes the affirmative vote of each series of
Preferred Stock and also assumes that all stockholders accept the mandatory
conversion/redemption contemplated by the Recapitalization. It is likely that
some stockholders will elect to convert their Preferred Stock to Common Stock
under the original Certificates of Designation. Such conversions would increase
total stockholders' equity and reduce the amount of the Subordinated Debt
issued.
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The pro forma adjustments include the Series G stock converted to Common
Stock during the period from November 30, 1996, through January 24, 1997, the
Record Date. The adjustments also include the accrual of dividends through
February 28, 1997, and the recognition of certain expenses incurred in
connection with the Recapitalization, including legal fees, mailing and printing
costs and fees for GCP, as the investment advisor.
The pro forma statements should be read in connection with the notes.
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GATEWAY ENERGY CORPORATION
PRO FORMA BALANCE SHEET
AS OF NOVEMBER 30, 1996
(UNAUDITED)
As Reported Pro Forma
ASSETS 11/30/96 Adjustments Pro Forma
-------- ------------ ---------
CURRENT ASSETS
Cash and cash equivalents $1,545,500 $(269,300)(1) $1,276,200
Restricted cash 58,100 58,100
Trade accounts receivable 4,480,600 4,480,600
Other current assets 802,100 802,100
------------ ----------- -----------
Total current assets 6,886,300 $(269,300) 6,617,000
------------ ----------- -----------
PROPERTY AND EQUIPMENT - AT COST
Gas gathering and processing 12,280,200 12,280,200
Oil and gas properties 16,238,800 16,238,800
Office furniture and other 414,000 414,000
------------ -----------
Total property and equipment 28,933,000 28,933,000
Less accumulated depreciation
and depletion (3,714,300) (3,714,300)
------------ -----------
Net property and equipment 25,218,700 25,218,700
------------ -----------
OTHER ASSETS
Note receivable - related party 293,900 (293,900)(2) 0
Other 671,000 (80,000)(3) 591,000
------------ ----------- -----------
964,900 (373,900) 591,000
------------ ----------- -----------
$ 33,069,900 $(643,200) $32,426,700
------------ ----------- -----------
------------ ----------- -----------
See notes to Pro Forma Balance Sheet on page 11.
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GATEWAY ENERGY CORPORATION
PRO FORMA BALANCE SHEET
AS OF NOVEMBER 30, 1996
(UNAUDITED)
LIABILITIES AND As Reported Pro Forma
STOCKHOLDERS' EQUITY 11/30/96 Adjustments Pro Forma
-------- ----------- ---------
CURRENT LIABILITIES
Notes payable $ 1,133,100 $ $1,133,100
Current maturities of
long-term debt 2,973,500 2,973,500
Accounts payable 3,742,000 3,742,000
Accrued expenses 720,300 720,300
Preferred dividends payable 549,400 (549,400)(4) 0
------------ ----------- -----------
Total current liabilities 9,118,300 (549,400) 8,568,900
------------ ----------- -----------
Long-term debt, less current
maturities 10,111,500 10,111,500
Subordinated Debt 0 6,825,200(5) 6,825,200
Minority interests 1,077,400 1,077,400
Preferred stock of subsidiary 466,500 (466,500)(6) 0
Mandatory redeemable
preferred stock 7,809,500 (7,809,500)(7) 0
STOCKHOLDERS' EQUITY
Preferred stock 9,400 (9,400)(8) 0
Common stock 373,600 1,164,300(9) 1,537,900
Additional paid-in capital 10,926,800 741,400(10) 11,668,200
Accumulated deficit (6,823,100) (539,300)(11) (7,362,400)
------------ ----------- -----------
Total Stockholders' Equity 4,486,700 1,357,000 5,843,700
------------ ----------- -----------
$ 33,069,900 $(643,200) $32,426,700
------------ ----------- -----------
------------ ----------- -----------
See notes to Pro Forma Balance Sheet on page 11.
10
<PAGE>
Notes to Pro Forma Balance Sheet
(1) Includes additional expenses to be incurred in connection with
implementing the Recapitalization and the payment of dividends in
December 1996.
(2) Reflects the cancellation of the Note Receivable from Pipeline Capital,
Inc. in connection with the cancellation of Series O Preferred Stock.
(3) Expenses incurred prior to November 30, 1996, in connection with the
Recapitalization.
(4) Accrued dividends which are paid through the issuance of Subordinated
Debt.
(5) Subordinated Debt which will be issued in connection with the
Recapitalization, including $919,400 for accrued dividends.
(6) Conversion/Redemption of Series A Preferred Stock of Gateway Pipeline
Company.
(7) Conversion/Redemption of Series G and Series O Preferred Stock,
including the amortization of unamortized Series G Offering costs.
(8) Conversion/Redemption of all other Series of Preferred Stock; Series B,
Series J, Series K, Series L, Series M, and Series N.
(9) 4,653,000 shares of Common Stock issued in connection with the
Recapitalization and Series G conversions at $.25 par value per share,
after the reverse stock split.
(10) The change in paid-in capital due to i) issuance of Common Stock, ii)
expenses incurred in connection with the Plan, iii) write off of Series
G Offering costs, and iv) elimination of all other offering costs on
other preferred stock.
(11) Additional dividends to be accrued through February 28, 1997.
11
<PAGE>
GATEWAY ENERGY CORPORATION
PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 1996
(UNAUDITED)
As Reported Pro Forma
11/30/1996 Adjustments Pro Forma
---------- ----------- ---------
Operating revenues $ 17,581,100 $ $ 17,581,100
Operating costs and expenses 16,272,600 16,272,600
------------ -----------
Operating profit 1,308,500 1,308,500
Interest expense (1,107,400) (512,000)(1) (1,619,400)
Other income (expense) (398,900) (398,900)
------------ ----------- -----------
Loss before taxes (197,800) (512,000) (709,800)
Income taxes 0 0 0
------------ ----------- -----------
Net Loss (197,800) (512,000) (709,800)
Provision for preferred
dividends(3) 2,695,400 2,695,400(2) 0
------------ ----------- -----------
Net loss for per common shares $ (2,893,200) $ 2,183,400 $(709,800)
------------ ----------- -----------
------------ ----------- -----------
Primary loss per share $ (0.09) $ (0.12)
------------ -----------
------------ -----------
Shares used in calculation 33,651,400 5,999,100
------------ -----------
------------ -----------
Notes to Pro Forma Statement of Operations
(1) Interest expense on the $6,825,200 Subordinated Debt issued in
connection with the Recapitalization.
(2) Delete the provision for preferred stock dividends including
amortization of offering costs and the charge for settlement with
Pipeline Capital, Inc.
(3) Includes accrued for preferred dividends, amortization of Series G
offering costs and the charge related to the settlement with Pipeline
Capital, Inc.
(4) Reflects the 1 for 25 reverse stock split, shares issued in the
Recapitalization and Series G conversions after November 30, 1996.
12
<PAGE>
PROJECTED STATEMENTS OF CASH GENERATED BEFORE WORKING
CAPITAL CHANGES
The accompanying forecasted statements present, to the best of management's
knowledge and belief, the Company's expected operating income before
depreciation, interest and taxes and cash generated before working capital
changes for each of the fiscal years in the period ending February 29, 2000.
Accordingly, the forecasted statements reflect management's judgment as of
February 12, 1997, the date of these statements, of the expected conditions and
its expected course of action. This presentation is intended for use by the
Preferred Stockholders in evaluating the Recapitalization and should not be used
for any other purpose. Numerous factors may cause the Company's actual
financial results for the periods indicated to differ from these expectations
and such factors include items which are not within the control of the Company
or its management, such as general economic conditions, competitive factors in
the oil and gas industry, gas pricing fluctuations and other matters described
in more detail under the caption "Factors Affecting Future Results" appearing on
Page 13 of Form 10-KSB for the year ended February 29, 1996. Accordingly, the
actual financial results of the Company for the periods depicted in the
forecasts could be materially different from those shown in the forecasts.
Because future operating results are difficult to predict with accuracy, the
Company makes no warranty of any kind with respect to the accuracy or
completeness of the forecasts and Preferred Stockholders are cautioned not to
attribute undue certainty to the forecasts. The forecasted statements present
operating income before depreciation, interest and taxes. Accordingly, it is
not intended to be a forecast of financial position, results of operations or
cash flows. The forecasted statements were not compiled, reviewed or audited by
the Company's independent accountants or other independent financial advisors to
the Company.
The Company intends to employ an experienced industry executive in Houston
who will be responsible for all joint venture operations and supervise the
operations of the Company owned properties. The Company will analyze its
existing joint venture operations and attempt to increase the operating net
income of these properties through higher gathering and transportation volumes
and reduced operating expenses. The Company expects to ultimately receive at
least a portion of the management fees currently paid to the joint venture
partners, or at a minimum, reduce the management fees.
Except for reduced operating expenses, the expected improvement in the
joint venture properties has not been fully reflected in the accompanying
projections. Until these properties are reviewed closely it is difficult to
predict future improvements. Therefore, net operating revenue from these
properties is expected to be relatively constant except for volume increases due
to additional drilling and well connections which are currently in process.
13
<PAGE>
The Company also intends to invest the funds necessary to improve and
enhance its existing properties. After the Recapitalization, cash flow
generated from operations is expected to be sufficient to fund capital
additions. Reserves behind the pipeline systems are a declining asset,
therefore, these additions are necessary to maintain volumes and revenues at
current levels. The accompanying projections do not specifically include
increases in revenues from these capital improvements.
The projections include only the properties owned by the Company as of
February 1997 with the exception of acquisitions projected to be made at the
beginning of 1999 and 2000. February 28, 1997 amounts include actual results
for the nine months ended November 30, 1996, plus the revenues and expenses
estimated for the three months ending February 28, 1997. The following
assumptions form the basis of the projections:
1) Operating Revenues. The increase in revenues, except for
acquisitions, is due primarily to:
A) Revenues from Castex Energy 1995, L.P. as based on daily volumes
of approximately 7,200 MMBtu in 1998, 7,100 MMBtu in 1999 and
6,400 MMBtu in 2000. The initial increase in volumes is due to
continued development and drilling of partnership prospects.
Prices are expected to remain constant at $2.25 per MMBtu.
B) Weather in Caddo County Oklahoma, the area served by Fort Cobb
Irrigation and Fuel Authority, is forecasted to be normal over
the next three years. To be conservative, average annual retail
sales are estimated to be 80% of the ten year average retail
sales for the year. The average retail sales price is estimated
to be $5.20 per MMBtu, with a gas purchase cost of $2.30 per
MMBtu.
C) The Fort Cobb utility transmission system is also used as a
gathering system by Caddo Gas. It is the Company's plan to
continue to connect wells on this system and increase the volumes
available for resale. The Company expects to expand its markets
in the area through the connection of industrial users or
acquisition of small surrounding utilities. Currently,
production into the Caddo Gas system averages approximately 1,500
MMBtu per day. Volumes per day are projected to increase to
2,000 MMBtu in 1998, 3,000 MMBtu in 1999 and 3,250 MMBtu in 2000.
Gas sales price is estimated to be $2.30 throughout the period.
The Company believes that the low pressure nature of the Caddo
Gas gathering system will attract producers and that there are
sufficient natural gas reserves in the area to meet these
projections.
2) Total Operating Expenses. Margins on natural gas transported are
expected to remain relatively constant throughout the periods. Other operating
expenses are expected to decline in 1998 reflecting the elimination of legal
fees in 1997 associated with a joint venture gas purchase contract and
efficiencies resulting from the Company's more
14
<PAGE>
intense supervision of the joint venture managers and operators. Increases in
1999 and 2000 are the result of the acquisitions forecasted for those years as
described below.
General and administrative expenses are forecast to decrease by $305,000 in
1998. This savings results from the termination of Houston employees,
reductions in audit and legal fees and reductions in other costs associated with
office expenses. It is expected that travel and related costs will also
decrease in 1998. General and administrative expenses are expected to increase
20% in 1999 and 2000 reflecting increased Company management and operation of
joint venture properties and the acquisitions projected in 1999 and 2000.
(3) Acquisitions. The projected statements include acquisitions to be
made at the beginning of fiscal 1999 and 2000. A summary of those acquisitions
is shown below.
1999 2000
---- ----
Property Cost $5,000,000 $8,000,000
Total Revenue 1,328,000 13,607,000
Operating income before
depreciation, interest
and taxes 1,108,000 1,773,000
Financed by:
Equity 2,500,000 4,000,000
Debt 2,500,000 4,000,000
Return on Equity 20% 20%
It is difficult to predict the exact nature of the acquisitions. Some
gathering systems generate revenue exclusively from a tariff from volumes
transported. Other gathering systems buy gas from producers and transport and
resell the gas thereby making a profit on the margins in the "back to back" gas
purchases and sales contracts and in certain cases, profit from processing the
acquired gas. Generally the projections assume that the 1999 acquisition relies
on tariff revenue and the 2000 acquisition relies on purchase and resale.
4) Debt Service. Debt service cash expenditures reflect the principal
and interest of all debt financing utilized by the Company including the Castex
Energy 1995 L.P. bank credit line, the Subordinated Debt issued in the
Recapitalization, 2-year notes issued by GPC, and other miscellaneous
obligations of the Company. Debt service in 1999 and 2000 also includes the
requirements of the debt financing utilized to acquire the properties as
described above.
5) Capital Expenditures. Capital expenditures include drilling and
development costs incurred by Castex Energy 1995, L.P. which are funded from
funds generated from the partnership operations. Capital expenditures also
include $300,000, $400,000 and $400,000 for the years 1998, 1999 and 2000,
respectively, to improve and enhance the Company's currently owned properties.
15
<PAGE>
If the Company is successful in achieving the results in the accompanying
forecasted statements, management believes it will have a positive impact on the
trading price of the Company's Common Stock. Although management can make no
guarantees, expressed or implied, as to the future trading price of its Common
Stock, the Common Stock might be expected to trade at a multiple of 5 to 8 times
operating income before depreciation, interest, and taxes, reflecting a
valuation range that is typical for companies in this industry segment.
16
<PAGE>
GATEWAY ENERGY CORPORATION
PROJECTED STATEMENTS OF CASH GENERATED BEFORE WORKING CAPITAL CHANGES
FOR EACH OF THE FISCAL YEARS IN THE PERIOD ENDING FEBRUARY 29, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $22,779,600 $24,785,200 $26,874,800 $38,561,300
Less Operating Expenses:
Cost of Gas 12,008,600 13,518,900 14,133,000 24,506,530
Operating Expenses 3,758,100 3,518,800 3,585,000 3,534,000
General & Administrative 1,956,800 1,651,000 1,981,000 2,370,000
------------ ------------ ------------ ------------
Total operating expenses 17,723,500 18,688,700 19,699,000 30,410,530
------------ ------------ ------------ ------------
Operating Income before
Depreciation, Interest
& Taxes 5,056,100 6,096,500 7,175,800 8,150,770
Cash Requirements:
Preferred Stock Dividends 1,316,500 0 0 0
Debt Service 3,568,900 4,781,000 5,489,500 5,986,100
Capital Expenditures 569,200 944,000 900,000 700,000
Income Taxes 25,000 225,000 425,000 650,000
------------ ------------ ------------ ------------
Total Other Deductions 5,479,600 5,950,000 6,814,500 7,336,100
------------ ------------ ------------ ------------
Cash Generated Before
Working Capital Changes $ (423,500) $ 146,500 $ 361,300 $ 814,670
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See notes to Projected Statements on pages 13 through 15.
17
<PAGE>
MECHANICS OF REDEMPTION AND CONVERSION
The procedures for the mandatory redemption and mandatory conversion are
set forth below:
Upon receipt of the affirmative vote of a majority of the shares
outstanding of each class of Preferred Stock approving the Recapitalization, the
Company will mail written notice ("Notice") of such vote and a form ("Election
Form") to each holder of Preferred Stock. The Notice and Election Form will be
sent by first class mail to the Preferred Stockholder's address shown on the
stock books of the Company. The Election Form will provide each holder with two
options. First, the holder can elect to convert all or any portion of his or
her Preferred Stock into Common Stock of the Company at the conversion rate set
forth in the current Certificate of Designation. Alternatively, the holder can
elect to receive the Recapitalization Securities as set forth in the Amended and
Restated Certificate of Designation. Each holder will be required, within 14
days from the mailing of said Notice, to return the Election Form and his or her
Preferred Stock certificate(s) to the Company. Receipt of the Election Form and
Preferred Stock certificate(s) will serve as notice to the Company of the
holder's election to convert all or any portion of his or her Preferred Stock to
Common Stock at the conversion rate set forth in the current Certificate of
Designation, or of his or her election to receive the Recapitalization
Securities.
In the event a holder does not return his or her Election Form and
Preferred Stock certificate(s) within the 14 day period, the Company shall
automatically redeem and convert the holder's Preferred Stock pursuant to the
respective Amended and Restated Certificate of Designation, on the 25th day
following the mailing of the Notice and Election Form. Such redemption and
conversion, to the extent permitted by applicable law, shall be deemed to have
been effective ("Effective Date") at the close of business on the 25th day
following the mailing of the Notice and Election Form to all Preferred
Stockholders.
Upon the Effective Date, the Company will cause to be issued to the former
Preferred Stockholders, certificates representing the Common Stock, Warrant
Certificates representing the Warrants and promissory notes representing the
Subordinated Debt, to all Preferred Stockholders electing to participate in the
Recapitalization.
Fractional shares of Preferred Stock will be mandatorily converted and
redeemed on a pro rata basis. In calculating the number of shares of Common
Stock to be issued to Preferred Stockholders in the Recapitalization, the
Company will round any fractional share to the nearest whole share.
RECAPITALIZATION SUMMARY
The chart on the next page sets forth a summary of the Recapitalization as
it affects each series of Preferred Stock outstanding.
18
<PAGE>
GATEWAY ENERGY CORPORATION
JANUARY 24, 1997
RECAPITALIZATION SUMMARY
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES G SERIES J SERIES K
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
EXISTING PREFERRED STOCK $537,500 $1,650,000 $7,934,840 $747,500 $750,000
PLUS: ACCRUED DIVIDENDS 13,438 99,000 515,910 37,445 45,000
--------------------------------------------------------------------
TOTAL EXCHANGE BASIS $550,938 $1,749,000 $8,450,750 $784,945 $795,000
LESS: SUBORDINATED DEBT 190,813 643,500 3,134,406 284,120 292,500
--------------------------------------------------------------------
COMMON STOCK EXCH. BASIS $360,125 $1,105,500 $5,316,343 $500,825 $502,500
COMMON SHARES 112,980 331,236 2,026,273 148,393 152,273
WARRANT SHARES 10,750 33,000 156,697 14,950 15,000
SERIES L SERIES M SERIES N SERIES O
-------- -------- -------- --------
EXISTING PREFERRED STOCK $238,000 $437,500 $5,601,000 $693,000
PLUS: ACCRUED DIVIDENDS 14,280 26,250 168,030 0
-----------------------------------------------------
TOTAL EXCHANGE BASIS $252,280 $463,750 $5,769,030 $693,000
LESS: SUBORDINATED DEBT 92,820 170,625 2,016,360 0
-----------------------------------------------------
COMMON STOCK EXCH. BASIS $159,460 $293,125 $3,752,670 $693,000
COMMON SHARES 48,321 87,826 1,250,890 180,927
WARRANT SHARES 4,769 6,760 112,020 0
SERIES A SERIES B SERIES G SERIES J
-------- -------- -------- --------
PER $1,000 UNIT
- ---------------
EXISTING PREFERRED STOCK $1,000.00 $1,000.00 $1,000.00 $1,000.00
PLUS: ACCRUED DIVIDENDS $25.00 $60.00 $65.02 $50.09
--------- --------- --------- ---------
TOTAL EXCHANGE BASIS $1,025.00 $1,060.00 $1,065.02 $1,050.09
LESS: SUBORDINATED DEBT $355.00 $390.00 $395.02 $380.09
--------- --------- --------- ---------
COMMON STOCK EXCH. BASIS $670.00 $670.00 $670.00 $670.00
COMMON SHARES ISSUED 210.20 200.75 255.24 198.52
WARRANT SHARES 20.00 20.00 20.00 20.00
SERIES K SERIES L SERIES M SERIES N
-------- -------- -------- --------
EXISTING PREFERRED STOCK $1,000.00 $1,000.00 $1,000.00 $1,000.00
PLUS: ACCRUED DIVIDENDS $60.00 $60.00 $60.00 $30.00
--------- --------- --------- ---------
TOTAL EXCHANGE BASIS $1,060.00 $1,060.00 $1,060.00 $1,030.00
LESS: SUBORDINATED DEBT $390.00 $390.00 $390.00 $360.00
--------- --------- --------- ---------
COMMON STOCK EXCH. BASIS $670.00 $670.00 $670.00 $670.00
COMMON SHARES ISSUED 203.03 203.03 200.75 223.33
WARRANT SHARES 20.00 20.00 20.00 20.00
</TABLE>
19
<PAGE>
SERIES A PER SHARE
RECAPITALIZATION PROPOSAL
RECAPITALIZATION
SECURITY AMOUNT FEATURES
- ---------------- ------ --------
SUBORDINATED DEBT $355.00 - COUPON: 10% annually, with cash interest
payable quarterly. Market priced Common
Stock can be replaced for cash interest
payments.
- AMORTIZATION: Seven year maturity, with five
equal yearly principal payments beginning on
or about March 1, 2000.
- REDEMPTION: Callable at any time at the
option of the Company at par plus accrued
interest.
- SUBORDINATION: Subordinated to any senior
obligations of the Company.
- PAYMENT OF ACCRUED PREFERRED DIVIDEND: $25.00
represents the value of accrued but unpaid
dividends owed on each share of Preferred
Stock through February 28, 1997.
- POSSIBLE ADDITIONAL INTEREST: Each share of
Series A Preferred Stock is entitled to
receive .0014% of the Company's interest in
any cash distributions of Castex Energy 1995,
L.P. See "DESCRIPTION OF SECURITIES -
SUBORDINATED DEBT AND ADDITIONAL INTEREST
PROVISIONS".
COMMON SHARES 210.20 - DIVIDENDS: Holders shall be entitled to any
dividends when and if declared by the
Company's Board.
- VOTING RIGHTS: Same as existing Common
Stockholders.
20
<PAGE>
RECAPITALIZATION
SECURITY AMOUNT FEATURES
- ---------------- ------ --------
- REDEMPTION, LIQUIDATION, OTHER RIGHTS:
None.
WARRANTS 20 - EXERCISE PRICE: $3.00 per share.
- ANTI-DILUTION: Standard anti-dilution
provisions. See "DESCRIPTION OF
SECURITIES - COMMON STOCK PURCHASE
WARRANTS TO BE ISSUED IN THE
RECAPITALIZATION".
- TIME OF EXERCISE: Exercisable
immediately.
- EXPIRATION DATE: Five years from
Effective Date.
As part of the Recapitalization, holders of Series A Preferred Stock will
vote to amend their Certificate of Designation. As of January 24, 1997 there
were 537.50 shares of Series A Preferred Stock outstanding. Each holder of
Preferred Stock will receive a copy of their respective Amended and Restated
Certificate of Designation with this Information Statement. After the
Recapitalization there will be no Series A Preferred Stock outstanding.
Material changes proposed to the SERIES A CERTIFICATE OF DESIGNATION for
Gateway Pipeline Company, a wholly owned subsidiary of the Company, include the
following:
- DIVIDENDS: The 10% cumulative dividend and the participating rate of
3% based upon an earnings return to Gateway Pipeline Company from certain
natural gas properties shall cease to exist. Following the Recapitalization,
prior holders of Series A shall own Common Stock of the Company and be entitled
to dividends, if and when declared by the Board. The value of the dividends
which have accrued on the Series A through February 28, 1997 shall be added to
the face value of the Subordinated Debt received in the mandatory redemption.
- REDEMPTION: The Company has the ability to call the Preferred Stock
at any time after the second anniversary of issuance at a redemption price equal
to $1,000 per share. There will be no redemption provision applicable to the
Common Stock received in the Recapitalization.
21
<PAGE>
- LIQUIDATION PREFERENCE: The holders of Series A Preferred Stock have
a liquidation preference to receive, out of assets of the Company's subsidiary,
Gateway Pipeline Company, which are available for distribution to stockholders
and before any distribution of assets is made to Common Stockholders or Junior
Stockholders, the amount of $1,000 per share plus any accrued and unpaid
dividends. Following the Recapitalization, no such liquidation preference shall
exist.
- CONVERSION RIGHTS: Holders of Series A Preferred Stock have the
right, under the current Certificate of Designation, commencing on the second
anniversary from the date of issuance of their shares, to convert any or all
shares into the number of shares of Common Stock of the Company determined by
dividing $1,000 plus any accrued and unpaid dividends for each preferred share
to be converted by the then effective Conversion Price (currently defined as an
amount equal to 85% of the average bid price for the Company's Common Stock for
the ninety (90) days previous to conversion). After the Recapitalization, such
conversion rights shall cease to exist. The Company, however, will notify each
Preferred Stockholder of the vote on the Recapitalization and each Preferred
Stockholder will have fourteen (14) days to convert all or any portion of their
Preferred Stock to Common Stock at the rate currently described in the
Certificate of Designation as an alternative to receiving the Recapitalization
Securities.
22
<PAGE>
SERIES B AND M PER SHARE
RECAPITALIZATION PROPOSAL
RECAPITALIZATION
SECURITY AMOUNT FEATURES
- ---------------- ------ --------
SUBORDINATED DEBT $390.00 - COUPON: 10% annually, with cash interest
payable quarterly. Market priced Common
Stock can be replaced for cash interest
payments.
- AMORTIZATION: Seven year maturity, with five
equal yearly principal payments beginning on
or about March 1, 2000.
- REDEMPTION: Callable at any time at the
option of the Company at par plus accrued
interest.
- SUBORDINATION: Subordinated to any senior
obligations of the Company.
- PAYMENT OF ACCRUED PREFERRED DIVIDEND: $60.00
represents the value of accrued but unpaid
dividends owed on each share of Preferred
Stock through February 28, 1997.
- POSSIBLE ADDITIONAL INTEREST: Each share of
Series B & M Preferred Stock is entitled to
receive .0014% of the Company's interest in
any cash distributions of Castex Energy 1995,
L.P. See "DESCRIPTION OF SECURITIES -
SUBORDINATED DEBT AND ADDITIONAL INTEREST
PROVISIONS".
COMMON SHARES 200.75 - DIVIDENDS: Holders shall be entitled to any
dividends when and if declared by the
Company's Board.
- VOTING RIGHTS: Same as existing Common
Stockholders.
23
<PAGE>
RECAPITALIZATION
SECURITY AMOUNT FEATURES
- ---------------- ------ --------
- REDEMPTION, LIQUIDATION, OTHER RIGHTS: None.
WARRANTS 20 - EXERCISE PRICE: $3.00 per share.
- ANTI-DILUTION: Standard anti-dilution
provisions. See "DESCRIPTION OF SECURITIES -
COMMON STOCK PURCHASE WARRANTS TO BE ISSUED
IN THE RECAPITALIZATION".
- TIME OF EXERCISE: Exercisable immediately.
- EXPIRATION DATE: Five years from Effective
Date.
As part of the Recapitalization, holders of Series B and M Preferred Stock
will vote to amend their respective Certificate of Designation. As of January
24, 1997 there were 1,650 shares of Series B Preferred Stock and 437.50 shares
of Series M Preferred Stock outstanding. Each holder of Preferred Stock will
receive a copy of their respective Amended and Restated Certificate of
Designation with this Information Statement. After the Recapitalization, there
will be no Series B and M Preferred Stock outstanding.
Material changes proposed to the SERIES B CERTIFICATE OF DESIGNATION and
SERIES M CERTIFICATE OF DESIGNATION include the following:
- DIVIDENDS: The 12% cumulative dividend shall cease to exist.
Following the Recapitalization, prior holders of Series B Preferred Stock shall
own Common Stock and be entitled to dividends, if and when declared by the
Board. The value of dividends which have accrued on the Series B Preferred
Stock through February 28, 1997 shall be added to the face value of the
Subordinated Debt received in the mandatory redemption.
- REDEMPTION: The Company has the option at any time after the fourth
anniversary of the date of issuance to redeem any shares of the Series B
Preferred Stock at a redemption price of $1,000 per share plus any accrued and
unpaid dividends. There will be no redemption provision applicable to the
Common Stock received in the Recapitalization.
- LIQUIDATION PREFERENCE: The holders of Series B Preferred Stock have
a liquidation preference to receive, out of the assets of the Company available
for distribution to the Stockholders, but before any distribution of assets is
made to the Common Stockholders or Junior Stockholders, the amount of $1,000 per
share, plus an
24
<PAGE>
amount equal to all accrued and unpaid dividends. Following the
Recapitalization, no such liquidation preference shall exist.
- CONVERSION RIGHTS: Holders of the Series B Preferred Stock have the
right under the current Certificate of Designation, commencing on the second
anniversary from the date of issuance of the shares, to convert any or all
shares into the number of shares of Common Stock of the Company determined by
dividing $1,000 plus any accrued and unpaid dividends for each Preferred Share
to be converted by the then effective Conversion Price (currently Conversion
Price for Series B and Series M Preferred Stock is defined as an amount equal to
89% of the average bid price of the Common Stock for the ninety (90) days
previous to the conversion). After the Recapitalization, such conversion rights
shall cease to exist. The Company, however, will notify each Preferred
Stockholder of the vote on the Recapitalization and each Preferred Stockholder
will have fourteen (14) days to convert all or any portion of their Preferred
Stock to Common Stock at the rate currently described in the Certificate of
Designation as an alternative to receiving the Recapitalization Securities.
25
<PAGE>
SERIES G PER SHARE RECAPITALIZATION PROPOSAL
RECAPITALIZATION
SECURITY AMOUNT FEATURES
- ---------------- ------ --------
SUBORDINATED DEBT $395.02 - COUPON: 10% annually, with cash interest
payable quarterly. Market priced Common
Stock can be replaced for cash interest
payments.
- AMORTIZATION: Seven year maturity, with five
equal yearly principal payments beginning
on or about March 1, 2000.
- REDEMPTION: Callable at any time at the
option of the Company at par plus accrued
interest.
- SUBORDINATION: Subordinated to any senior
obligations of the Company.
- PAYMENT OF ACCRUED PREFERRED DIVIDEND:
$65.02 represents the value of accrued but
unpaid dividends owed on each share of the
Series G Preferred Stock through February 28,
1997.
- POSSIBLE ADDITIONAL INTEREST: Each share of
Series G Preferred Stock is entitled to
receive .0014% of the Company's interest in
any cash distributions received from Castex
Energy 1995, L.P. See "DESCRIPTION OF
SECURITIES - SUBORDINATED DEBT AND ADDITIONAL
INTEREST PROVISIONS".
26
<PAGE>
RECAPITALIZATION
SECURITY AMOUNT FEATURES
- ---------------- ------ --------
COMMON SHARES 255.24 - DIVIDENDS: Holders shall be entitled to any
dividends when and if declared by the
Company's Board.
- REDEMPTION, LIQUIDATION, OTHER RIGHTS: None.
WARRANTS 20 - EXERCISE PRICE: $3.00 per share.
- ANTI-DILUTION: Standard anti-dilution
provisions. See "DESCRIPTION OF SECURITIES -
COMMON STOCK PURCHASE WARRANTS TO BE ISSUED
IN THE RECAPITALIZATION".
- TIME OF EXERCISE: Exercisable immediately.
- EXPIRATION DATE: Five years from Effective
Date.
As part of the Recapitalization, holders of each class of Preferred Stock
will vote to amend their respective Certificate of Designation. As of January
24, 1997 there were 7,934.84 shares of Series G Preferred Stock outstanding.
Each holder of Preferred Stock will receive a copy of their respective Amended
and Restated Certificate of Designation with this Information Statement. After
the Recapitalization, there will be no Series G Preferred Stock outstanding.
Material changes proposed to the SERIES G CERTIFICATE OF DESIGNATION
include the following:
- RANK: Under the Amended and Restated Certificate of Designation, all
shares of Series G shall be redeemed, converted and retired on the Effective
Date. Holders of Series G shall receive, as partial consideration for the
conversion, Common Stock of the Company. Thus, as a Common Stockholder they
will no longer, with respect to dividend rights and rights on liquidation,
winding up or dissolution of the Company, rank prior to the Common Stock or on a
parity with other issued classes or series of the Company's Preferred Stock.
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<PAGE>
- SECURITY: The first security interest created in favor of the holders
of Series G Preferred Stock in the Operating Properties (as defined in the
current Certificate of Designation) shall cease to exist.
- DIVIDENDS: The 12% cumulative dividend (which accrues even if not
declared by the Board) shall cease to exist. Following the Recapitalization,
prior holders of Series G shall own Common Stock and be entitled to dividends,
if and when declared by the Board. The value of the dividends which have
accrued on the Series G Preferred Stock through February 28, 1997 shall be added
to the face value of the Subordinated Debt received in the mandatory redemption.
- REDEMPTION: Currently the holders of Series G Preferred Stock are
entitled to have the Company redeem their stock on the second and third
anniversaries following the date of issuance for $1,000 per share plus accrued
and unpaid dividends. In addition, the Company is currently required to redeem
all outstanding Series G Preferred Stock commencing on the fourth anniversary
date from issuance for $1,000 plus any accrued and unpaid dividends. The
Company can extend said redemption date up to 72 months following the date of
issuance but is required to pay $1,050 per share, plus accrued and unpaid
dividends, for any shares redeemed at an extended redemption date of 60 months,
and $1,100 plus accrued and unpaid dividends, for any shares redeemed at an
extended redemption date of 72 months. There will be no redemption provisions
applicable to the Common Stock received in the Recapitalization.
- LIQUIDATION PREFERENCE: The holders of Series G Preferred Stock
currently have a liquidation preference to receive, out of assets from the sale
or disposition of the Operating Properties, and to the extent of any deficit,
out of the assets of the Company available for distribution to Stockholders, the
amount of $1,000 plus accrued and unpaid dividends. Following the
Recapitalization, no such liquidation preference shall exist.
- CONVERSION RIGHTS: The holders of Series G Preferred Stock,
commencing on the second anniversary from the date of issuance of their shares,
have the right to convert any and all shares of Preferred Stock into a number of
shares of Common Stock determined by dividing $1,000 plus any accrued and unpaid
dividends by the then effective Conversion Price (currently Conversion Price is
defined as an amount equal to 70% of the average bid price of the Company's
Common Stock for the ninety (90) days prior to the conversion). After the
Recapitalization, such conversion rights shall cease to exist. The Company,
however, will notify each Preferred Stockholder of the vote on the
Recapitalization and each Preferred Stockholder will have 14 days to convert all
or any portion of their Preferred Stock to Common Stock at the rate currently
described in the Certificate of Designation, as an alternative to receiving the
Recapitalization Securities.
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<PAGE>
SERIES J PER SHARE
RECAPITALIZATION PROPOSAL
RECAPITALIZATION
SECURITY AMOUNT FEATURES
- ---------------- ------ --------
SUBORDINATED DEBT $380.09 - COUPON: 10% annually, with cash interest
payable quarterly. Market priced Common
Stock can be replaced for cash interest
payments.
- AMORTIZATION: Seven year maturity, with five
equal yearly principal payments beginning on
or about March 1, 2000.
- REDEMPTION: Callable at any time at the
option of the Company at par plus accrued
interest.
- SUBORDINATION: Subordinated to any senior
obligations of the Company.
- PAYMENT OF ACCRUED PREFERRED DIVIDEND: $50.09
represents the value of accrued but unpaid
dividends owed on each share of Preferred
Stock through February 28, 1997.
- POSSIBLE ADDITIONAL INTEREST: Each share of
Series J Preferred Stock is entitled to
receive .0014% of the Company's interest in
any cash distributions of Castex Energy 1995,
L.P. See "DESCRIPTION OF SECURITIES -
SUBORDINATED DEBT AND ADDITIONAL INTEREST
PROVISIONS".
COMMON SHARES 198.52 - DIVIDENDS: Holders shall be entitled to any
dividends when and if declared by the
Company's Board.
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<PAGE>
RECAPITALIZATION
SECURITY AMOUNT FEATURES
- ---------------- ------ --------
- VOTING RIGHTS: Same as existing Common
Stockholders.
- REDEMPTION, LIQUIDATION, OTHER RIGHTS: None.
WARRANTS 20 - EXERCISE PRICE: $3.00 per share.
- ANTI-DILUTION: Standard anti-dilution
provisions. See "DESCRIPTION OF SECURITIES -
COMMON STOCK PURCHASE WARRANTS TO BE ISSUED
IN THE RECAPITALIZATION".
- TIME OF EXERCISE: Exercisable immediately.
- EXPIRATION DATE: Five years from Effective
Date.
As part of the Recapitalization, holders of Series J Preferred Stock will
vote to amend their Certificate of Designation. As of January 24, 1997, there
were 747.50 shares of Series J Preferred Stock outstanding. Each holder of
Series J Preferred Stock will receive a copy of their Amended and Restated
Certificate of Designation with this Information Statement. After the
Recapitalization, there will be no shares of Series J Preferred Stock
outstanding.
Material changes proposed to the SERIES J CERTIFICATE OF DESIGNATION
include the following:
- DIVIDENDS: The 10% cumulative dividend and the participating rate of
up to 5% based on the Company's share of earnings from specified joint venture
properties shall cease to exist. Following the Recapitalization, prior holders
of Series J shall own Common Stock of the Company and be entitled to dividends,
if and when declared by the Board. The value of the dividends which have
accrued on the Series J Preferred Stock through February 28, 1997 shall be added
to the face value of the Subordinated Debt received in the mandatory redemption.
- REDEMPTION: The Company has the option at any time after the fourth
anniversary of the date of issuance to redeem the shares of Series J Preferred
Stock at the redemption price of $1,000 per share plus accrued and unpaid
dividends. There will be no redemption provision applicable to the Common Stock
received in the Recapitalization.
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<PAGE>
- LIQUIDATION PREFERENCE: The holders of Series J Preferred Stock have
a liquidation preference to receive, out of assets of the Company available for
distribution to stockholders, and before any distribution of assets is made to
Common Stockholders or Junior Stockholders, the amount of $1,000 per share plus
any accrued and unpaid dividends. Following the Recapitalization, no such
liquidation preference shall exist.
- CONVERSION: Holders of Series J Preferred Stock have the right under
the current Certificate of Designation, commencing on the second anniversary
from the date of issuance of the shares, to convert any or all of their shares
into a number of shares of Common Stock of the Company determined by dividing
$1,000 plus any accrued and unpaid dividends by the then effective Conversion
Price (currently Conversion Price is defined as an amount equal to 90% of the
average bid price of the Company's Common Stock for the ninety (90) days
previous to the conversion). After the Recapitalization, such conversion rights
shall cease to exist. The Company, however, will notify each Preferred
Stockholder of the vote on the Recapitalization and each Preferred Stockholder
will have fourteen (14) days to convert all or any portion of their Preferred
Stock to Common Stock at the rate currently described in the Certificate of
Designation as an alternative to receiving the Recapitalization Securities.
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<PAGE>
SERIES K AND L PER SHARE
RECAPITALIZATION PROPOSAL
RECAPITALIZATION
SECURITY AMOUNT FEATURES
- ---------------- ------ --------
SUBORDINATED DEBT $390.00 - COUPON: 10% annually, with cash interest
payable quarterly. Market priced Common
Stock can be replaced for cash interest
payments.
- AMORTIZATION: Seven year maturity, with five
equal yearly principal payments beginning on
or about March 1, 2000.
- REDEMPTION: Callable at any time at the
option of the Company at par plus accrued
interest.
- SUBORDINATION: Subordinated to any senior
obligations of the Company.
- PAYMENT OF ACCRUED PREFERRED DIVIDEND: $60.00
represents the value of accrued but unpaid
dividends owed on each share of Preferred
Stock through February 28, 1997.
- POSSIBLE ADDITIONAL INTEREST: Each share of
Series K and L Preferred Stock is entitled to
receive .0014% of the Company's interest in
any cash distributions of Castex Energy 1995,
L.P. See "DESCRIPTION OF SECURITIES -
SUBORDINATED DEBT AND ADDITIONAL INTEREST
PROVISIONS".
COMMON SHARES 203.03 - DIVIDENDS: Holders shall be entitled to any
dividends when and if declared by the
Company's Board.
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<PAGE>
RECAPITALIZATION
SECURITY AMOUNT FEATURES
- ---------------- ------ --------
- VOTING RIGHTS: Same as existing Common
Stockholders.
- REDEMPTION, LIQUIDATION, OTHER RIGHTS: None.
WARRANTS 20 - EXERCISE PRICE: $3.00 per share.
- ANTI-DILUTION: Standard anti-dilution
provisions. See "DESCRIPTION OF SECURITIES -
COMMON STOCK PURCHASE WARRANTS TO BE ISSUED
IN THE RECAPITALIZATION".
- TIME OF EXERCISE: Exercisable immediately.
- EXPIRATION DATE: Five years from Effective
Date.
As part of the Recapitalization, holders of Series K and L Preferred Stock
will vote to amend their respective Certificate of Designation. As of January
24, 1997 there were 750 shares of Series K Preferred Stock and 238 shares of
Series L Preferred Stock outstanding. Each holder of Preferred Stock will
receive a copy of their respective Amended and Restated Certificate of
Designation, with this Information Statement. After the Recapitalization, there
will be no Series K and L Preferred Stock outstanding.
Material changes proposed to the SERIES K AND L CERTIFICATES OF DESIGNATION
include the following:
- DIVIDENDS: The 12% cumulative dividend shall cease to exist.
Following the Recapitalization, prior holders of Series K and L Preferred Stock
shall own Common Stock and be entitled to dividends, if and when declared by the
Board. The value of dividends which have accrued on the Series K and L
Preferred Stock through February 28, 1997 shall be added to the face value of
the Subordinated Debt received in the mandatory redemption.
- REDEMPTION: The Company has the option at any time after the fourth
anniversary of the date of issuance of the Series K and L Preferred Stock to
redeem such shares at the redemption price of $1,000 per share plus any accrued
and unpaid dividends. There will be no redemption provision applicable to the
Common Stock received in the Recapitalization.
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<PAGE>
- LIQUIDATION PREFERENCE: The holders of Series K and L Preferred Stock
have a liquidation preference to receive, out of the assets of the Company
available for distribution to Stockholders, but before any distribution of
assets is made to the Common Stockholders or Junior Stockholders, the amount of
$1,000 per share, plus an amount equal to all accrued and unpaid dividends
thereon to date. Following the Recapitalization, no such liquidation preference
shall exist.
- CONVERSION RIGHTS: Holders of Series K and L have the right,
commencing on the second anniversary from the date of issuance of the shares, to
convert any or all shares into the number of shares of Common Stock of the
Company determined by dividing $1,000 plus any accrued and unpaid dividends for
each preferred share to be converted by the then effective Conversion Price
(currently Conversion Price is defined for Series K and L as an amount equal to
88% of the average bid price of the Company's Common Stock for the ninety (90)
days previous to the conversion). After the Recapitalization, such conversion
rights shall cease to exist. The Company, however, will notify each Preferred
Stockholder of the vote on the Recapitalization and each Preferred Stockholder
will have fourteen (14) days to convert all or any portion of their Preferred
Stock to Common Stock at the rate currently described in the Certificate of
Designation as an alternative to receiving the Recapitalization Securities.
34
<PAGE>
SERIES N PER SHARE RECAPITALIZATION PROPOSAL
RECAPITALIZATION
SECURITY AMOUNT FEATURES
- ---------------- ------ --------
SUBORDINATED DEBT $360.00 - COUPON: 10% annually, with cash interest
payable quarterly. Market priced Common
Stock can be replaced for cash interest
payments.
- AMORTIZATION: Seven year maturity, with five
equal yearly principal payments beginning on
or about March 1, 2000.
- REDEMPTION: Callable at any time at the
option of the Company at par plus accrued
interest.
- SUBORDINATION: Subordinated to any senior
obligations of the Company.
- PAYMENT OF ACCRUED PREFERRED DIVIDEND: $30.00
represents the value of accrued but unpaid
dividends owed on each share of Series N
Preferred Stock through February 28, 1997.
- POSSIBLE ADDITIONAL INTEREST: Each share of
Series N Preferred Stock is entitled to
receive .0014% of the Company's interest in
any cash distributions of Castex Energy 1995,
L.P. See "DESCRIPTION OF SECURITIES -
SUBORDINATED DEBT AND ADDITIONAL INTEREST
PROVISIONS".
COMMON SHARES 223.33 - DIVIDENDS: Holders shall be entitled to any
dividends when and if declared by the
Company's Board.
35
<PAGE>
RECAPITALIZATION
SECURITY AMOUNT FEATURES
- ---------------- ------ --------
- VOTING RIGHTS: Same as existing Common
Stockholders.
- REDEMPTION, LIQUIDATION, OTHER RIGHTS: None.
WARRANTS 20 - EXERCISE PRICE: $3.00 per share.
- ANTI-DILUTION: Standard anti-dilution
provisions. See "DESCRIPTION OF SECURITIES -
COMMON STOCK PURCHASE WARRANTS TO BE ISSUED
IN THE RECAPITALIZATION".
- TIME OF EXERCISE: Exercisable immediately.
- EXPIRATION DATE: Five years from Effective
Date.
As part of the Recapitalization, holders of each class of Preferred Stock
will vote to amend their respective Certificate of Designation. As of January
24, 1997 there were 5,601 shares of Series N Preferred Stock outstanding. Each
holder of Preferred Stock will receive a copy of their respective Amended and
Restated Certificate of Designation with this Information Statement. After the
Recapitalization, there will be no shares of Series N Preferred Stock
outstanding.
Material changes proposed to the SERIES N CERTIFICATE OF DESIGNATION
include the following:
- RANK: Under the Amended and Restated Certificate of Designation, all
shares of Series N Preferred Stock shall be redeemed, converted and retired on
the Effective Date. Holders of Series N shall receive, as partial
consideration for the conversion, Common Stock of the Company. Thus, as a
Common Stockholder they will no longer, with respect to dividend rights and
rights on liquidation, winding up or dissolution of the Company, rank prior to
the Common Stock or on a parity with other issued classes or series of the
Company's Preferred Stock.
- DIVIDENDS: The 12% cumulative dividend (which accrues even if not
declared by the Board) shall cease to exist. Following the Recapitalization,
prior holders of Series N Preferred Stock shall own Common Stock and be entitled
to dividends, if and when declared by the Board. The value of dividends which
have accrued on the Series
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<PAGE>
N Preferred Stock through February 28, 1997 shall be added to the face value of
the Subordinated Debt received in the mandatory redemption.
- REDEMPTION: The Corporation has the ability to call the stock thirty
(30) days after the second anniversary of issuance of any shares of the Series N
Preferred Stock at a redemption price equal to $1,000 per share plus accrued and
unpaid dividends. There will be no redemption provision applicable to the
Common Stock received in the Recapitalization.
- LIQUIDATION PREFERENCE: The holders of Series N Preferred Stock have
a liquidation preference to receive, out of the assets of the Company available
for distribution to Stockholders, but before any distribution of assets is made
to the Common Stockholders or Junior Stockholders, the amount of $1,000 per
share, plus an amount equal to all accrued and unpaid dividends thereon to date.
Following the Recapitalization, no such liquidation preference shall exist.
- CONVERSION RIGHTS: Holders of Series N Preferred Stock have the right
under the current Certificate of Designation, commencing on the second
anniversary from the date of issuance of their shares, to convert any or all of
their shares into a number of shares of Common Stock of the Company determined
by dividing $1,000 plus any accrued and unpaid dividends by the then effective
Conversion Price (currently the Conversion Price is an amount equal to 80% of
the average bid price of the Company's Common Stock for the ninety (90) days
prior to conversion). After the Recapitalization, such conversion rights shall
cease to exist. The Company, however, will notify each Preferred Stockholder of
the vote on the Recapitalization and each Preferred Stockholder will have 14
days to convert all or any portion of their Preferred Stock into Common Stock at
the rate currently described in the Certificate of Designation as an alternative
to receiving the Recapitalization Securities.
37
<PAGE>
SERIES O RECAPITALIZATION PROPOSAL(1)
RECAPITALIZATION
SECURITY AMOUNT FEATURES
- ---------------- ------ --------
COMMON SHARES 180,927 - DIVIDENDS: Holders shall be entitled to any
dividends when and if declared by the
Company's Board.
- VOTING RIGHTS: Same as existing Common
Stockholders.
- REDEMPTION, LIQUIDATION, OTHER RIGHTS: None.
(1) See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" for further discussion
on the terms of the Series O Exchange Proposal.
As part of the Recapitalization, holders of each class of Preferred Stock
will vote to amend their respective Certificate of Designation. As of January
24, 1997 there was one share of Series O Preferred Stock outstanding. The
holder of Series O Preferred Stock will receive a copy of its Amended and
Restated Certificate of Designation with this Information Statement. If the
outstanding share is voted in favor of the Recapitalization, the sole
outstanding share of Series O Preferred Stock will be converted into Common
Stock of the Company. After the Recapitalization, there will be no Series O
Preferred Stock outstanding.
Material changes proposed to the SERIES O CERTIFICATE OF DESIGNATION
include the following:
- RANK: Under the Amended and Restated Certificate of Designation, the
sole share of Series O shall be converted into Common Stock and retired on the
Effective Date. Thus, as a Common Stockholder it will no longer, with respect
to dividend rights and rights on liquidation, winding up or dissolution of the
Company, rank prior to the Common Stock or on a parity with other issued classes
or series of the Company's Preferred Stock.
- REDEMPTION: Currently, the holder of the sole share of Series O
Preferred Stock is entitled, under certain circumstances, to have the Company
redeem the share of Series O Stock on July 1, 2000 for an amount equal to 10% of
the fair market value (as defined in the current Certificate of Designation) of
the Company. There will be no redemption provision applicable to the Common
Stock received in the Recapitalization.
- LIQUIDATION PREFERENCE: The holder of the Series O Preferred Stock
currently has a liquidation preference to receive a payment equal to 10% of the
38
<PAGE>
remaining assets of the Company, after payment of all debts and obligations of
the Company senior to the Series O Preferred Stock and any distributions
required to be made to the holders of the Series G Preferred Stock. Following
the Recapitalization, no such liquidation preference shall exist.
- SALE OF MAJORITY OWNERSHIP: Currently the holder of the Series O
Preferred Stock has the right upon merger of the Company, the sale of all or
substantially all of the assets of the Company, or the sale or exchange of the
majority or more of the outstanding Common Stock of the Company, to receive at
the holders option either cash equal to 10% of the value of the consideration
received for the total equity of the Company or 10% of the securities, cash and
other consideration actually paid by the acquiring party. Following the
Recapitalization, no such entitlement shall exist.
- DEDUCTION ON FAIR MARKET VALUE PAYMENT: Currently, the Company has
the right to deduct, in the event of any payment pursuant to the current
Certificate of Designation of 10% of the fair market value of the Company, any
and all amounts due and owing the Company by the holder of the Series O
Preferred Stock pursuant to a $278,728 promissory note of Pipeline Capital, Inc.
As part of the Recapitalization, the Company shall forgive this indebtedness and
this provision shall not be included in the Amended and Restated Certificate of
Designation.
- INCREASE IN PERCENTAGE PAYMENT: Currently, the holder of the Series O
Preferred Stock has the ability, pursuant to a provision in the $480,000
promissory note from the Company, upon the happening of certain events, to
increase payment of 10% of the fair market value to 20% of the fair market
value. This right was negotiated in lieu of collateral or other security which
was not available at the time the promissory note was executed. Following the
Recapitalization, management intends to seek a modification of the terms of this
note.
39
<PAGE>
MARKET INFORMATION
The Company's Common Stock is traded in the over-the-counter market on the
bulletin board section of NASDAQ. The closing bid prices shown reflect inter-
dealer prices without retail mark-up, mark-down or commissions and may not
represent actual transactions. The prices do not reflect the 1 for 25 reverse
stock split which will be effected on the Effective Date of the
Recapitalization.
QUARTER ENDING HIGH LOW
May 31, 1994 $.50 $.375
August 31, 1994 .50 .375
November 30, 1994 .9375 .48
February 28, 1995 .80 .50
QUARTER ENDING HIGH LOW
May 31, 1995 $.6875 $.4375
August 31, 1995 .75 .50
November 30, 1995 .625 .375
February 28, 1996 .50 .375
QUARTER ENDING HIGH LOW
May 31, 1996 $ .4375 $ .1875
August 31, 1996 .3125 .1563
November 30, 1996 .21875 .07813
December 1, 1996 -
January 15, 1997 .14063 .0700
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of management, the proposed exchange of Preferred Stock for
Common Stock, Subordinated Debt with the attached net profits interest in Castex
Energy 1995, L.P. and Common Stock Purchase Warrants, should qualify as a
recapitalization of stock under IRC Section 368(a)(1)(E). As such, a Preferred
Stockholder would recognize gain only if the fair market value of the newly
issued Common Stock, Subordinated Debt with net profits interest in Castex
Energy 1995 L.P. and Common Stock Purchase Warrants exceed the stockholder's tax
basis in the Preferred Stock transferred to the Company. Any gain recognized
would be limited to the fair market value of the Subordinated Debt with the
attached Castex Energy 1995 L.P. profits interest. Management believes it is
unlikely that the fair market value of the Recapitalization Securities to be
received by a Preferred Stockholder would exceed the tax basis in the stock
transferred to the Company, and in that event, no gain would be recognized.
However, management advises that each stockholder discuss the transaction
40
<PAGE>
with their tax advisor since the tax consequences may be dependent upon facts
and circumstances unique to a particular stockholder.
DESCRIPTION OF SECURITIES
GENERAL. Share amounts for Common Stock described below assume the 1 for
25 reverse stock split has been effected.
COMMON STOCK. The Company currently is authorized to issue up to
75,000,000 shares of Common Stock, par value $.01 per share. As an initial part
of the Recapitalization, the Common Stockholders approved effecting a 1 for 25
reverse stock split, increasing the par value to $.25 per share and reducing the
total authorized Common Stock to 10,000,000 shares on the Effective Date of the
Recapitalization. If the Recapitalization is effected and, assuming all
currently outstanding shares of Preferred Stock are mandatorily converted and
redeemed, the Company would have approximately 6,147,400 shares of Common Stock
outstanding on the Effective Date of the Recapitalization.
VOTING RIGHTS. Each holder of Common Stock is entitled to one vote for
each share held, including the election of directors.
PRE-EMPTIVE RIGHTS. The holders of Common Stock have no pre-emptive rights
to purchase or subscribe for any stock of the Company now or hereafter
authorized or for securities convertible into such stock.
LIQUIDATION. Upon liquidation, dissolution, or winding up of the Company,
the holders of the Common Stock are entitled to share ratably in all assets
available for distribution after payment of creditors and other debts and
liabilities.
DIVIDENDS. Each outstanding share of Common Stock is entitled to
participate equally in dividends if, when and as declared by the Board of
Directors.
REDEMPTION, SINKING FUND, AND CONVERSION. There are no redemption, sinking
fund, or conversion rights with respect to the shares of Common Stock.
NONASSESSABILITY. All shares of Common Stock currently outstanding are
validly issued, fully paid and nonassessable.
TRANSFER AGENT AND REGISTRAR. American Stock Transfer & Trust Co. is the
transfer agent and registrar for the Common Stock.
PREFERRED STOCK. Upon the completion of the Recapitalization, the Company
will have no outstanding Preferred Stock. The Company will have authority under
the Amended and Restated Certificate of Incorporation to issue 10,000 shares of
Preferred Stock with such rights and obligations as shall be determined from
time to time by the Board of Directors.
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<PAGE>
OPTIONS, WARRANTS AND OTHER CONVERTIBLE INSTRUMENTS. The Company currently
has options outstanding to purchase 13,000 shares of Common Stock under the
Company's 1994 Incentive and Non-Qualified Stock Option Plan, pursuant to which
7,000 shares still remain available for issuance. The outstanding options are
exercisable at $6.25 per share. The Company currently has outstanding warrants
to purchase 168,300 shares of Common Stock. Of these warrants, 500 shares were
issued to an officer of the Company and are exercisable at $4.00 per share and
the remainder were issued in connection with certain bridge loans and are
exercisable at $3.00 per share.
In July 1996, the Company issued two year convertible notes in the amount
of $739,200, the proceeds of which were used to repay other lending. The notes
are convertible into Common Stock at $3.75 per share.
COMMON STOCK PURCHASE WARRANTS TO BE ISSUED IN THE RECAPITALIZATION. If
the Recapitalization is effected and all currently outstanding Preferred Stock
is mandatorily converted and redeemed, the Company will issue Warrants to
purchase a total of 357,927 shares of Common Stock. The Warrants will be
exercisable at any time over a period of five years from the date of issuance at
$3.00 per share. The Warrants will contain standard anti-dilution provisions in
the event of stock splits, stock dividends, recapitalizations or the merger or
sale of assets of the Company where the Company is not the surviving or
controlling entity. Warrant holders may also surrender Common Stock and/or
Subordinated Debt in exercise of the Warrants.
SUBORDINATED DEBT. If the Recapitalization is effected and all of the
outstanding Preferred Stock is mandatorily converted and redeemed, the Company
will issue $6,825,200 principal amount of Subordinated Debt, including $919,400
relating to accrued and unpaid dividends on the preferred stock. The
Subordinated Debt will be issued in the form of promissory notes ("Notes") of
the Company. For each outstanding share of Preferred Stock, the Company will
issue $330 principal amount of Notes plus an additional amount representing
accrued but unpaid dividends on the Preferred Stock through February 28, 1997.
The Notes will have the following provisions:
INTEREST RATE. The Notes will bear interest at the rate of 10% per annum
with cash interest paid quarterly. The Company may pay interest with market
price Common Stock rather than cash.
TERM AND AMORTIZATION. The Notes will mature March 1, 2004. The principal
will be paid in five annual equal installments commencing March 1, 2000. The
notes will be callable at any time at the option of the Company at par value
plus accrued and unpaid interest.
SUBORDINATION. The Notes will be subordinated to all senior obligations of
the Company other than obligations to Common and any future Preferred
Stockholders.
ADDITIONAL INTEREST PROVISION. In addition to the 10% interest rates, the
Notes will contain an additional interest provision equal to .0014% per share of
Preferred Stock
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<PAGE>
redeemed, the calculation of which is determined by any operating cash
distributions from the Company's limited partnership interest in Castex Energy
1995, L.P. ("Castex L.P."). Castex L.P. is a Texas limited partnership engaged
in the ownership and development of producing oil and gas properties, all of
which are currently located in Louisiana. The Company owns approximately a 67%
interest in Castex L.P. The general partner is Castex Energy, Inc., a non
affiliated Texas corporation.
As of November 30, 1996, Castex L.P. had assets of approximately
$15,000,000 and for the nine months then ended had total revenues of
approximately $3,700,000 and net income of approximately $300,000. For such
period, it had cash flow, including depletion of approximately $1,900,000 and
partners' equity of approximately $2,800,000. Substantially all of the assets
and limited partnership interests are pledged to a bank to secure approximately
$11,700,000 of indebtedness of Castex L.P. Distributions of operating cash are
made at the discretion of the General Partner. Currently, Castex L.P. does not
distribute any of this cash flow to its partners; rather the partnership is
using such cash flow to reduce its bank debt and to reinvest in developing
properties. Although it is not possible predict with accuracy when the General
Partner of Castex L.P. may commence making cash distributions, some
distributions might be expected in approximately eighteen months. Additional
interest to be paid to the noteholder attributable to any operating cash
distributions received by the Company from Castex L.P. shall be paid quarterly.
The holders of the Notes shall be entitled to receive this additional interest,
if any, until the Notes are repaid in full. In addition, noteholders shall be
entitled to the following:
(a) UPON PREPAYMENT OF THE NOTES PRIOR TO MARCH 1, 2002. In the event
the Company prepays the principal and accrued interest on the Notes prior to
March 1, 2002, the Company shall transfer to an independent trustee a
contractual right to receive the total percentage amount of the operating cash
distributions from Castex L.P. relating to the principal amount of all Notes
then outstanding. The Company shall then deposit such percentage of operating
cash distributions directly with the independent trustee. The trustee shall
distribute quarterly any cash received to the persons who were noteholders of
record on the date the Notes were prepaid by the Company.
In the event of the liquidation of Castex L.P., the sale of the Company's
limited partnership interest in Castex L.P. or the sale of assets of the Company
after prepayment of the Notes prior to March 1, 2002, the Company will pay to
the independent trustee, for distribution to the noteholders of record as of the
date of prepayment of the Notes, the Partnership Gain (Partnership Gain shall
mean, as the context requires, .0014% multiplied by the total number of shares
of Preferred Stock redeemed and converted pursuant to the Recapitalization,
multiplied by either the appraisal amount, the cash received from the sale of
the Company's limited partnership interest in Castex L.P. or the amount
allocated to such interest in each event less the Company's basis in the limited
partnership interest and less federal and state income taxes applicable to the
gain).
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<PAGE>
(b) UPON PREPAYMENT AFTER MARCH 1, 2002 OR FINAL PAYMENT OF THE NOTES. If
the Company shall prepay the Notes after March 1, 2002, or shall pay the Notes
at maturity, and the Company still owns its limited partnership interest in
Castex L.P., the Company shall have such interest appraised and the Partnership
Gain calculated utilizing an independent and recognized oil and gas appraisal
firm. Each noteholder shall be entitled to receive a pro rata portion of
Partnership Gain based upon an amount equal to the number of shares of Preferred
Stock redeemed and converted by such noteholder pursuant to the
Recapitalization.
The Company may pay this Partnership Gain in cash or in Common Stock of the
Company. Such payments shall be made 180 days from the final payment on the
Notes.
(c) LIQUIDATION OF CASTEX L.P., SALE OF LIMITED PARTNERSHIP INTEREST OR
SALE OF THE COMPANY'S ASSETS. In the event of the liquidation of Castex L.P. or
the sale of the Company's limited partnership interest in Castex L.P., the
Company shall determine the Partnership Gain as described above. In the event
of the sale of assets of the Company, the Company shall require that the amount
payable with respect to its limited partnership interest in Castex L.P. be
separately identified and the Partnership Gain then computed as described above.
The payment of Partnership Gain to noteholders shall be made in cash or, at the
option of the Company, in the other consideration received by the Company
pursuant to the sale and in all events shall be paid within 90 days of the close
of the transaction.
The Company will not permit the encumbrance of that portion of operating
cash distributions segregated for the noteholders.
SECURITIES LAW IMPLICATIONS
The Company believes that the issuance of the Recapitalization Securities
pursuant to the Recapitalization is exempt from registration pursuant to Section
3(a)(9) of the Securities Act of 1933 and pursuant to provisions permitting
exchanges of securities with existing security holders under most state
securities laws. The securities received by the holders of the Preferred Stock
will not be registered and may only be resold under applicable exemptive
provisions of the Securities Act of 1933 including Rule 144.
GENERAL. Rule 144 provides a "safe harbor" exemption for the resale of
restricted securities held (and fully paid for) for a minimum of two years. A
person who has held Preferred Stock of the Company for a period of two years and
receives Common Stock in connection with the Recapitalization, may be able to
resell the Common Stock in the market, in "brokers' transactions", assuming the
Company is current in the filing of all of its required reports with the SEC and
the remainder of the Rule 144 requirements are met. The broker handling any
Rule 144 sale transaction will normally require some paperwork, including
representations from the seller. Brokers familiar with Rule 144 transactions
will normally provide such paperwork. The Rule states that a Form 144 is
required to be filed with the SEC at the time an order is placed with the
broker, if,
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<PAGE>
during any three month period, more than 500 shares of Common Stock are being
sold or the aggregate sale price is in excess of $10,000.
CURRENT SEC FILINGS. Basically, this requirement means that the Company is
not late or delinquent in the filing of its Forms 8-K, 10-QSB and 10-KSB.
TWO YEAR HOLDING PERIOD. It is the opinion of securities counsel for the
Company that the shares of Common Stock of the Company received upon the
conversion of the Preferred Stock will be deemed to be held for the length of
time the Preferred Stock has been held. In addition, if a person surrenders
Common Stock or Subordinated Debt to exercise the Warrants received, it is
further the opinion of securities counsel that the holding period for such newly
acquired Common Stock may be tacked onto the holding period for the Common Stock
or Subordinated Debt surrendered. This would mean that if a person received
Warrants in connection with a Recapitalization and immediately thereafter
surrendered a portion of his or her Subordinated Debt in exercise of the
Warrants, the Common Stock received would be deemed to have been held for the
time period the person had held the Preferred Stock. Although the holding
period rules will apply to the Warrants and Subordinated Debt, it is unlikely
that such securities may be able to be resold in normal market transactions
because no market for such securities exists and none is likely to develop.
AMOUNT OR VOLUME LIMITATION. Rule 144 provides that assuming the other
requirements of the Rule are met a person may sell, every three months, the
greater of 1% of the Company's outstanding Common Stock or the average weekly
reported volume of trading during the four calendar weeks preceding the date of
the sale and corresponding filing of Form 144. There are special limitations on
trusts and estate sales and persons are requested to contact counsel prior to a
Rule 144 sale. Also, if any persons are acting in concert in the sale of
securities, their sales must be aggregated for purposes of these amount and
volume limitations.
BROKERS' TRANSACTIONS. This requirement means that a person selling the
Common Stock may not solicit or arrange for or have the broker solicit or
arrange for the orders to buy the stock. The seller may also not make a payment
to anyone in connection with the sale of Common Stock other than the normal
brokers' commission.
THREE YEAR HOLDING PERIOD. Rule 144 also provides that a person who is not
an affiliate (basically an officer or director of Gateway) has not been a
affiliate during the preceding three months, and has held the Common Stock for
at least THREE years, may resell the Common Stock without compliance with any of
the Rule 144 restrictions discussed above.
This discussion of Rule 144 is for illustration purposes only. The
discussion does not constitute legal advice with respect to the sale of Company
securities. Any person desiring to utilize Rule 144 for a sale of Company
Common Stock should consult legal counsel.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of January 24, 1997 no person was known to the Company to be a
beneficial owner of more than five percent (5%) of the Company's voting Common
Stock. The first chart below sets forth the actual Common and Preferred Stock
ownership of the officers and directors of the Company. The second chart sets
forth the options owned by officers and directors. The third chart sets forth
the ownership of officers and directors Post Recapitalization, including the
amount of Subordinated Debt and number of Warrants received upon effectuation of
the Recapitalization. The charts were prepared assuming the 1 for 25 reverse
stock split was effected and that there would be 6,147,400 shares of Common
Stock outstanding after the Recapitalization.
Statement of Common and Preferred Stock Ownership
As of January 24, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
COMMON STOCK PREFERRED STOCK
- ---------------------------------------------------------------------------------------------------
Officer or Director # of Shares Percent of # of Shares of Percent
of Common Class Preferred Stock of Class
Stock
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles A. Holtgraves 54,543 3.0% Series B/25(2) 1.5%
Series M/100(2) 22.9%
- ---------------------------------------------------------------------------------------------------
Larry J. Horbach 24,605 1.4% 0 0
- ---------------------------------------------------------------------------------------------------
Donald L. Anderson 44,204(3) 2.4% Series O/1(4) 100%
- ---------------------------------------------------------------------------------------------------
John B. Ewing 5,760 (1) Series B/25 1.5%
- ---------------------------------------------------------------------------------------------------
Neil A. Fortkamp 1,500 (1) 0 0
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents less than 1% Common Stock ownership.
(2) The shares hereby disclosed are owned by the Holtgraves Family Limited
Partnership of which Charles A. Holtgraves is the General Partner.
(3) Donald Anderson owns 7,547 shares individually and personally and has
a one-third interest in the 36,657 shares held by Pipeline Capital,
Inc.
(4) The Company issued one share of Series O Preferred Stock to Pipeline
Capital, Inc. in connection with a Settlement and Purchase Agreement
described in the
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<PAGE>
Company's 10-KSB filed for the year February 29, 1996. Donald L. Anderson
is a one-third owner of Pipeline Capital, Inc.
The following table sets forth the value at December 31, 1996 of unexercised
options/SARs for officers of the Company:
- -------------------------------------------------------------------------------
Name Number of Securities Value (1) of unexercised in-
underlying unexercised the-money options/SARs
options/SARS at year-end (#) at year-end: ($)
exercisable/unexercisable exercisable/unexercisable
- -------------------------------------------------------------------------------
Larry J. Horbach 7,000/0 $0/0
- -------------------------------------------------------------------------------
Neil A. Fortkamp(2) 6,500/0 $0/0
(1) The value of unexercised, in-the-money options has been calculated by
determining the difference between the fair market value of the
Company's Common Stock on December 9, 1996, and the exercise price of
the options, multiplied by the number of options held.
(2) Includes warrants to purchase 500 shares of Company's Common Stock.
The following table sets forth the Post Recapitalization Ownership of officers
and directors with respect to Common Stock, Subordinated Debt, Warrants and
Options:
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Officer or Director Common Stock/ Subordinated Warrants Options
% of Class Debt
- -----------------------------------------------------------------------------
Charles A. 79,636/1.3% $48,750 3,000 0
Holtgraves(1)
- -----------------------------------------------------------------------------
Larry J. Horbach 24,604/.4% --- 0 7,000
- -----------------------------------------------------------------------------
Donald L. --- 0 0
Anderson(2) 225,131/3.7%
- -----------------------------------------------------------------------------
$9,750 500 0
John B. Ewing 10,779/.2%
- -----------------------------------------------------------------------------
--- 500 6,000
Neil A. Fortkamp 1,500/ - %
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
47
<PAGE>
(1) Charles A. Holtgraves holds 54,543 shares of Common Stock in his own
name. The Holtgraves Family Limited Partnership will receive 25,093
shares of Common Stock after the Recapitalization.
(2) Donald L. Anderson owns 7,547 shares individually. PCI, of which he
is a one-third owner, will own 217,584 shares after the
Recapitalization is effected.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into a Settlement and Purchase Agreement ("Agreement")
effective May 6, 1996 with Pipeline Capital, Inc. ("PCI"). Donald L. Anderson
is a stockholder of PCI and has a one-third interest in the capital and in all
profits and losses of PCI. In summary, the Agreement provides as follows:
- - The Company issued to PCI one share of its Series O Preferred Stock which
is non-voting and has no dividend rights. Upon the following described
events, the following payments will be made to PCI: (i) PCI is entitled to
receive 10% of the consideration paid in the event of a merger of the
Company, the sale of all, or substantially all of its assets or the sale or
exchange of a majority or more of the outstanding Common Stock; (ii) in
the event of liquidation and dissolution of the Company, after payment of
all debts senior to Series O, PCI shall receive a payment equal to 10% of
the remaining assets of the Company; and (iii) if neither event above has
occurred by July 1, 2000, PCI shall receive an amount equal to 10% of the
fair market value appraisal of the Company.
- - The Company repurchased the 56.3 shares of Series C Preferred Stock owned
by PCI, representing its right to receive the above referenced payments for
$480,000 represented by a promissory note requiring payments of $10,000 per
month commencing July 1, 1996 and ending June 1, 2000.
- - PCI executed a promissory note in the amount of $278,728 plus interest at
7% representing all advances to PCI to the date of the Agreement. All
principal and interest on this promissory note are to be offset against the
amounts which are payable to PCI upon a payment event described above.
The proposed Recapitalization provides that PCI shall exchange its one
share of Series O Preferred Stock for shares of Common Stock of the Company.
The actual number of shares to be issued will be determined based upon the
number of shares of Common Stock outstanding on January 24, 1997. The amount
will be such that the holders of Series O receive Common Stock equal to 10% of
the fully diluted shares outstanding on that date. Upon completion of the
Recapitalization, the holders of Series O Preferred Stock will hold Common Stock
equal to approximately 2.6% ownership of the Company. Although some of the
terms of the $480,000 promissory note may be adjusted in connection with the
Recapitalization, the promissory note will remain a legal obligation of the
Company following the Recapitalization and the Company will continue
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<PAGE>
to pay $10,000 per month to PCI as provided in the note. As part of the
Recapitalization, the Company will forgive the $278,728 promissory note from
PCI.
PCI shall receive no Subordinated Debt or Warrants in the Recapitalization.
Its sole consideration for giving up its contractual rights under the Agreement
will be the Common Stock it receives.
49
