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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1999
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NO. 1-4766
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GATEWAY ENERGY CORPORATION
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
DELAWARE 44-0651207
(State or other IRS Employer
jurisdiction of Identification
incorporation or Number)
organization)
</TABLE>
500 DALLAS STREET, SUITE 2615, HOUSTON, TX 77002
(Address and Zip Code of principal executive offices)
(713) 336-0844
(Issuer's telephone number)
------------------------
Securities registered under Section 12(b) of the Exchange Act:
<TABLE>
<CAPTION>
TITLE OF EACH NAME OF EACH EXCHANGE ON WHICH
CLASS REGISTERED
<S> <C>
None None
</TABLE>
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.25 PAR VALUE
(Title of Class)
------------------------
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes _X_ No __
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
Issuer's revenues for the most recent fiscal year ended February 28, 1999,
were $7,734,598.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and ask prices of such stock, as of April 30, 1999 was $4,048,787. The
number of shares outstanding of the issuer's common equity, as of April 30,
1999, was 15,242,494.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated by reference into the indicated parts
of this Annual Report to the extent specified in such parts:
Part III of this Annual Report incorporates by reference information in the
Proxy Statement for the Annual Meeting of Stockholders of Gateway Energy
Corporation to be held on July 22, 1999.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
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To Our Stockholders:
Because Gateway is a company with publicly traded stock, we must annually file
this Form 10-KSB with the Securities and Exchange Commission ("SEC"). It is our
principal annual disclosure document. It contains an overall discussion about
our business, our financial condition and financial prospects and our annual
audited financial statements.
Item 1 contains the general description of our current business and
properties. Item 2 describes our properties, including our lease arrangements
for our executive offices. Item 3 describes any significant legal proceedings in
which we were involved. Item 4 shows the matters submitted to the common and
preferred stockholders and the results of the voting. Item 5 contains a two-year
report on the high and low quarterly stock prices of our Common Stock.
Item 6 is a discussion about our results of operations. We are required to
compare the most recent fiscal year results for February 28, 1999 with the
results of a year ago and to do a similar comparison of the results for February
28, 1998 compared with the prior year. In this way, you are provided with a
three-year overview of what occurred financially within your Company. The
discussion also includes our liquidity, or basically how much cash we have and
where we will get the cash needed to operate in the near term. Finally, we
discuss certain factors which may affect the future of your Company and you are
encouraged to read those carefully.
The audited financial statements are contained in Item 7 along with the
report from our auditors, Grant Thornton LLP.
Item 13 describes important documents relating to the Company and where
copies of those may be found. The last part of the form contains the signatures.
The SEC requires that this Form 10-KSB be signed by an executive officer and a
majority of the Board of Directors of your Company.
2
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PART I
ITEM 1. BUSINESS
GENERAL
Gateway Energy Corporation (the "Company"), a Delaware corporation, was
incorporated in 1960 and entered its current business in 1992. The Company's
common stock is traded in the over-the-counter market on the bulletin board
section under the symbol GNRG. The Company's principal executive offices are
located at 500 Dallas Street, Suite 2615, Houston, Texas 77002, and its
telephone number is (713) 336-0844. Gateway conducts all of its business through
its wholly owned subsidiary companies, Gateway Pipeline Company, Gateway
Offshore Pipeline Company, Gateway Energy Marketing Company, Fort Cobb Fuel
Authority, L.L.C. and Gateway Processing Company, except for a small amount of
activity in its two remaining joint ventures and one partnership.
In the following discussion, "Mcf" refers to thousand cubic feet of natural
gas; "Bbl" refers to barrel, or approximately 42 U.S. gallons; "Btu" refers to
British thermal unit, a common measure of the energy content of natural gas;
"MMBtu" refers to millions of British thermal units.
DESCRIPTION OF BUSINESS
The Company owns and operates natural gas gathering, transportation and
distribution systems and related facilities in Texas, Oklahoma and Louisiana,
and offshore in state and federal waters of the Gulf of Mexico. These systems
include approximately 900 miles of pipeline ranging in size from 2" to 20" with
a combined daily throughput capacity of approximately 500 million cubic feet.
The Company gathers natural gas from producing properties owned by others and
transports that gas to primary transmission pipelines. In some cases, the
Company assumes title along with possession of the gas and markets the gas to a
transmission company or directly to end users, including agricultural,
residential, industrial and commercial users, under "back-to-back" purchase and
sale contracts designed to minimize commodity risk. Otherwise the Company
transports the gas for a fee, ranging from $0.01 to $0.28 per MMBtu. Sometimes
the Company owns and sells natural gas liquids from a portion of the gas
streams, an additional source of revenue. In fiscal 1999, approximately 54% of
the Company's gross operating margin was generated under purchase and sale
contracts and approximately 39% of the gross operating margin was generated by
fee-based contracts.
During fiscal year 1999 the Company acquired Abtech Resources, Inc.
("Abtech"), and its license on a patented process that efficiently rejects
nitrogen from natural gas streams. The Company, through Gateway Processing
Company, intends to exploit this niche by owning and operating gas treating
plants and related facilities, and by acquiring working interests in high
nitrogen natural gas reserves where necessary to assist in creating demand for
the Company's treating services. See additional information on the acquisition
of Abtech in Note C to Consolidated Financial Statements.
The Company significantly changed its operating and management philosophy
two years ago, and changed its management structure to reflect those changes
during fiscal year 1998. Prior to fiscal year 1998, the Company had owned gas
gathering and pipeline properties through joint ventures that were typically
managed and operated by the Company's joint venture partners. That form of
ownership and management was designed to minimize corporate expenses and utilize
the industry experience of others. Because such arrangements did not provide the
Company with sufficient control over asset performance and cash flow, and
because that type of structure restricted its ability to use its properties as
collateral for conventional financing, the Company dissolved all significant
joint venture relationships beginning in September 1997. Also in September 1997,
the Company sold its limited partnership interest in Castex Energy 1995 LP
("Castex"), a partnership which owned interests in producing properties in
Louisiana, together with some other minor gas producing properties, for an
aggregate $3.5 million.
Because a significant portion of the Company's operating margin is generated
under contracts which have a stated fee per unit of production (Mcf, MMBtu, or
Bbl) gathered or transported, or is generated
3
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under back-to-back purchase and sales contracts, the Company's operating margin
is relatively insensitive to the commodity prices of natural gas and oil. The
primary impact on the Company of the level of gas and oil commodity prices is
their impact on drilling activities. High prices tend to generate cash flow and
thus enthusiasm for producers to accelerate drilling; low prices tend to have
the opposite effect.
BUSINESS GROWTH STRATEGY
The Company's growth strategy is to increase earnings and cash flows through
the enhancement of existing systems and facilities, to construct or acquire
additional pipelines, plants and facilities and to expand its marketing efforts.
The Company also intends to exploit the license that it owns to process high-
nitrogen natural gas as a result of its acquisition of Abtech.
During fiscal year 1999 the Company enhanced its existing systems by
rehabilitating pipelines and facilities to preserve strategic throughput
capabilities, by being responsive to the needs of producers and customers and
aggressively marketing the Company's services, by continuing to provide reliable
service at reasonable cost and thereby attracting additional business, and by
controlling the Company's operating costs.
Through its marketing efforts, given a current throughput volume at
approximately 10% of the Company's maximum daily throughput capacity, the
Company believes that it will be able to solicit a significant amount of new
marketing and transportation business. Should the future price of natural gas at
any time motivate significant exploration and exploitation drilling, the Company
would benefit further from its presence in proven productive areas, both onshore
and offshore in the Gulf Coast region.
Successful implementation of the Company's growth strategy will depend on
maintaining an upward trend in earnings and cash flow, and in part on its
ability to secure relatively lower cost conventional financing. With a
debt-to-total capitalization ratio of approximately 10%, and with aggressively
managed cash flows, the Company expects to be able to secure conventional growth
capital financing at a lower cost than that to which it has previously had
access. The Company is actively analyzing its inventory of projects, and intends
to focus its efforts on those with the maximum potential to provide growth
capital and return to shareholders. Funds from operations, combined with
borrowed capital, will be invested in the acquisition or construction of
additional income producing assets.
DISSOLUTION OF JOINT VENTURES
In September 1997, the Company entered into a Settlement Agreement with
Shoreham Pipeline Company ("Shoreham") to dissolve all of the joint ventures
between the Company and Shoreham and to settle litigation between the parties.
The Settlement Agreement provided for, and the Company received $540,000 in
cash, a promissory note for $2,160,000 and Shoreham's minority interest in
certain joint ventures in exchange for the Company's interest in other joint
ventures. The note was without collateral and was due in twenty-four monthly
installments beginning December 1, 1997. Shoreham was to complete the final
accounting for all the joint ventures for June, July and August 1997 and make
cash distributions as appropriate.
The Company performed an audit of the final cash distributions from Shoreham
in April 1998 and believed that cash distributions to the Company for June, July
and August 1997 were substantially understated. The Company initiated legal
proceedings to collect the remaining distributions to which it was entitled.
Shoreham counterclaimed for monetary damages for certain matters also associated
with the Settlement Agreement. Beginning July 1, 1998, Shoreham ceased making
the scheduled payments required under the note.
During October and November 1998 the companies entered into mediation to
settle their disputes and avoid costly litigation. On November 24, 1998, the
Company and Shoreham reached an agreement under which the Company received, in
exchange for the previous note: (i) cash of $725,000; (ii) a note from Shoreham
for $400,000, collateralized with certain properties currently owned by
Shoreham, and;
4
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(iii) the release of a net profits interest in the Company's Shipwreck system.
The Company began receiving payments toward this note during January 1999.
As a result of the dissolution of the joint ventures, the Company hired
management and support staff to manage the business, and moved its corporate
headquarters from Omaha, Nebraska to Houston, Texas. The change in strategy
added significant general and administrative costs during fiscal year 1999,
reflecting costs of additional personnel, office rent and telecommunications,
legal fees and other office costs. However, the Company expects to continue to
improve the profitability of its current properties and is actively seeking to
acquire or invest in new properties. See the discussion of Business Growth
Strategy.
In February 1998, the Company acquired the minority interest in Fort Cobb
Fuel Authority, L.L.C. ("Fort Cobb"), Caddo Gas Gathering Joint Venture and
WestOK Gas Marketing Joint Venture and cancelled the existing management
contracts which would have been in effect until November 1999. Thus, as of
February 28, 1999 and 1998, the Company owned, managed and operated all but two
minor systems.
MAJOR CUSTOMERS AND SUPPLIERS
The Company purchases natural gas from numerous producers and suppliers, and
during fiscal year 1999 three major oil and gas companies supplied 43%, 15% and
13% of its total gas purchased. In 1999, one customer with sales exceeding 10%
is a gas gathering customer, the other is an industrial customer. Gross sales as
a percentage of total revenue to these customers for the past two fiscal years
are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Owens Corning Fiberglas Corporation................................... 17% 11%
Dart Container Corporation............................................ 12% 9%
Tennessee Gas Pipeline Company........................................ -- 21%
</TABLE>
Although these sales constitute a significant portion of total revenues,
they do not represent a significant portion of net operating margin because of
back-to-back purchase contracts to supply these major customers. The Company
believes that a loss of a major supplier or customer could be readily replaced
and would not have a material adverse effect on its financial statements.
COMPETITION
The natural gas industry is highly competitive. The Company competes against
other companies in the gathering, transporting, and marketing business for gas
supplies and for customers. Competition for gas supplies is primarily based on
the availability of transportation facilities, service and satisfactory price.
In marketing, there are numerous competitors, including intrastate and
interstate pipelines, major producers, and local and national gatherers,
brokers, and marketers. Most competitors have capital resources greater than the
Company and control greater supplies of gas. Competition for marketing customers
is primarily based on reliability and the price of delivered gas.
REGULATION
The transportation, sale, and marketing of natural gas in interstate
commerce are subject to extensive regulation under the Natural Gas Act ("NGA"),
the Natural Gas Policy Act of 1978 ("NGPA"), and other rules and regulations
promulgated by the Federal Energy Regulatory Commission ("FERC"). The Company
believes that the gathering, transportation and distribution activities of the
Company are intrastate in nature and not subject to FERC's jurisdiction. The
properties are, however, subject to regulation by various state agencies.
Fort Cobb is a local distribution company subject to the regulations of the
Oklahoma Corporation Commission ("OCC"). The OCC regulates the prices to the
customer based on the cost of investment, operating and maintenance expense,
cost of purchased gas and rates of return. Fort Cobb's rates to
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customers were last approved by OCC in 1993; Fort Cobb has not filed for an
increase in rates since that time. The OCC also regulates construction and
safety of the distribution system.
ENVIRONMENTAL AND SAFETY CONCERNS
The Company's operations are subject to environmental risks normally
incident to the operation and construction of pipelines, plants, and other
facilities for gathering, processing, treating, transporting and distributing
natural gas. In most instances, the regulatory requirements relate to the
discharge of substances into the environment and include controls such as water
and air pollution control measures. Environmental laws and regulations may
require the acquisition of a permit before certain activities may be conducted.
Further, these laws and regulations may limit or prohibit activities on certain
lands lying within wilderness areas, wetlands, areas providing habitat for
certain species, or other protected areas. The properties are also subject to
other federal, state, and local laws covering the handling, storage, or
discharge of materials used by the joint ventures, or otherwise relating to
protection of the environment, safety, and health.
Management believes the Company has obtained, and is in current compliance
with, all necessary and material permits and that its operations are in
substantial compliance with applicable material governmental regulations.
EMPLOYEES
As of February 28, 1999, the Company had 22 full-time employees.
ITEM 2. DESCRIPTION OF PROPERTY
ONSHORE PROPERTIES
The Company owns 14 operating systems in Texas, Louisiana and Oklahoma. The
systems generally gather and transport natural gas under back-to-back purchase
and sales arrangements or for a fee per unit of production transported ("Fee");
however, one is a 14 mile delivery system which transports natural gas for sale
to industrial users in Ellis County, Texas. The Company also owns interests in 6
systems through two joint ventures located in Louisiana and Texas and a
partnership in Oklahoma which gather and transport natural gas under fee
arrangements.
The systems are properly maintained and are capable of transporting natural
gas under prescribed pressures. On February 28, 1999, the Company's onshore
systems were comprised of approximately 135 miles of 2" to 10" pipelines and
related compressors, meters, regulators, valves and equipment.
OFFSHORE PROPERTIES
Gateway Offshore Pipeline Company owns pipelines, a related 140' X 70'
operating platform, and an onshore terminal facility (the "Crystal Beach"
facility) that services producers primarily in Texas offshore waters and
Galveston Bay. These systems and related facilities are in shallow water and
provide the Company the capacity to separate and dehydrate gas in large volumes
and to transport the natural gas and condensate to various markets. The
Company's offshore systems consist of approximately 140 miles of 4" to 20"
diameter pipelines and related equipment which transport natural gas and
condensate primarily under fee-based contracts.
FORT COBB PROPERTIES
Fort Cobb is a local distribution company serving approximately 2,600 rural
and residential customers in Caddo and Washita counties in Oklahoma. Fort Cobb
owns and operates approximately 600 miles of 1" to 4" pipeline and related
meters, regulators, valves, rights-of-way and easements, all normally associated
with distribution systems.
6
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SYSTEM CAPACITY
The capacity of a pipeline is primarily a function of its diameter and
length and its inlet and outlet pressures. Based upon normal operating
pressures, the Company's systems have a daily throughput capacity of over
500,000 Mcf per day which significantly exceeds the current daily throughput of
approximately 50,000 Mcf per day.
The onshore terminal facility referred to above has a storage capacity of
approximately 40,000 Bbls and, with minor modifications, has a throughput
capacity of 5,000 Bbls of condensate per day. Additional tankage and related
facilities could be added on adjacent land owned by the Company.
CORPORATE PROPERTY
In addition to the operating properties described above, the Company leases
office space and owns certain office equipment in its corporate office located
at 500 Dallas Street, Suite 2615, Houston, Texas 77002.
ITEM 3. LEGAL PROCEEDINGS
On September 23, 1994, an action was filed in District Court of Milam
County, Texas entitled STANLEY ROSENTHAL V. SHOREHAM PIPELINE COMPANY. Mr.
Rosenthal alleged that he had an agreement with Shoreham Pipeline to provide
natural gas from a gas gathering system known as the Rockdale System. Shoreham
Pipeline and the Company acquired the Rockdale System on October 1, 1994 through
a joint venture managed and operated by Shoreham Pipeline. Mr. Rosenthal alleged
that Shoreham Pipeline failed to provide natural gas to him causing alleged
damage to him. Mr. Rosenthal alleged fraud, negligent misrepresentation, breach
of contract, unlawful discrimination and violations of the Texas Deceptive Trade
Practices Act.
In August 1996, Mr. Rosenthal joined the Company as a defendant. Company
management and its counsel believed that a contract did not exist between
Rosenthal and Shoreham Pipeline and consequently Mr. Rosenthal could not have
been damaged in the manner which he alleged. Nonetheless, on May 20, 1999
following a trial on the issues, the jury in the action awarded actual damages
to Mr. Rosenthal in the amount of $1,656,072 and exemplary damages and damages
under the Texas Deceptive Trade Practices Act which when tripled represent
$1,500,000 against each of Shoreham Pipeline and the Company. Counsel for the
Company expects the court to enter judgment on the jury verdict on June 17,
1999.
Under the terms of the conveyance of the Rockdale System between Shoreham
Pipeline and the Company, the Company believes it is entitled to indemnification
from Shoreham Pipeline for the total amount of damages assessed against the
Company. It is not known at this time whether Shoreham Pipeline has sufficient
assets to pay such indemnification. The Company and its counsel also believe
that numerous errors occurred during the trial providing substantial grounds for
appeal to the Texas Court of Appeals. The Company intends to vigorously pursue
the appeal and any remand of the action for retrial. The Company cannot predict
at this time what exposure it may ultimately have as a result of the judgment.
From time to time the Company is involved in litigation concerning its
properties and operations. Management does not deem that any other current
litigation will have a material effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is traded on the over-the-counter market in the
bulletin board section under the symbol GNRG. The closing bid prices shown
reflect inter-dealer prices without retail mark-up, mark-down, or commissions
and may not represent actual transactions.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
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<S> <C> <C>
May 31, 1998................................................................. $ 1.33 $ 0.63
August 31, 1998.............................................................. 0.68 0.44
November 30, 1998............................................................ 0.56 0.31
February 28, 1999............................................................ 0.44 0.38
<CAPTION>
QUARTER ENDED HIGH LOW
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<S> <C> <C>
May 31, 1997................................................................. $ 1.00 $ 0.50
August 31, 1997.............................................................. 0.69 0.50
November 30, 1997............................................................ 0.81 0.50
February 28, 1998............................................................ 0.58 0.44
</TABLE>
HOLDERS
As of February 28, 1999, there were approximately 3,500 shareholders of the
Company's Common Stock.
DIVIDENDS
There have been no dividends declared on the Company's Common Stock during
the last two fiscal years. The Company does not intend to pay dividends on its
common stock in the near future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following management's discussion and analysis contains trend analysis
and other forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Actual results could differ materially from those
projected in the forward-looking statements throughout this document as a result
of the risk factors set forth below in the section entitled "Factors Affecting
Future Results" and elsewhere in this document.
RESULTS OF OPERATIONS
GENERAL
The Company evaluates each of its activities based on the operating margin
it produces. The Company defines operating margin as revenues, less the cost of
purchased gas and operating and maintenance expenses. Management reviews and
evaluates the operations of three main segments--onshore operations, offshore
operations and Fort Cobb operations.
TOTAL OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28,
------------------------------------------
<S> <C> <C> <C>
1999 1998 1997
------------ ------------- -------------
Revenues................................................... $ 7,650,797 $ 10,680,700 $ 18,136,900
Operating margins.......................................... 1,671,526 1,364,800 3,189,300
Depreciation............................................... 748,076 743,200 995,500
</TABLE>
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Operating margins for the current fiscal year increased $0.3 million
compared to last fiscal year. Onshore operations, offshore operations and Fort
Cobb operations contributed $0.3 million, $0.3 million and $0.4 million of the
increase, respectively, partially offset by a decline of $0.7 million due to
fiscal 1998 dissolution of the Shoreham joint ventures. These segments are
discussed individually below in greater detail. During fiscal year 1999 the
Company spent $908,743 to maintain or rehabilitate pipeline systems and
facilities both onshore and offshore. Of that amount $311,062 was charged to
expense in the period incurred, and $597,681 was capitalized. The Company is
actively evaluating additional opportunities that would significantly increase
cash flows for relatively little capital investment.
During fiscal year 1999, much management attention was given to finalizing
dissolution of the Company's joint ventures with its former joint venture
partner, Shoreham Pipeline Company ("Shoreham"), which began during fiscal year
1998 and is discussed below. During October and November 1998 the companies
entered into mediation to settle their disputes and avoid costly litigation. On
November 24, 1998, the Company and Shoreham reached an agreement under which the
Company received: (i) cash of $725,000; (ii) a note from Shoreham for $400,000,
collateralized with certain properties currently owned by Shoreham, and; (iii)
the release of a net profits interest in the Company's Shipwreck system.
During fiscal year 1998, effective September 9, 1997, the Company entered
into a Settlement Agreement with Shoreham to dissolve all of the joint ventures
between the Company and Shoreham and to settle litigation between the parties.
Under the Agreement the Company transferred its interest in six operating joint
ventures to Shoreham in exchange for $2.7 million and Shoreham's interest in
nine joint venture properties with an approximate fair value of $450,000. During
fiscal year 1998, these sold properties contributed a net operating margin of
$0.7 million, compared to $2.0 million during the prior fiscal year. The Company
also acquired Shoreham's 20% minority interest in Gateway Offshore Pipeline
Company (formerly Shoreham Gathering Company) and transferred an offshore
pipeline system to Shoreham as part of the settlement. The Company received
$540,000 in cash, and accepted a note for the remaining balance due from
Shoreham. The Company recognized a gain on the transaction of $0.2 million. The
disputes between the companies continued into fiscal year 1999 and are discussed
above.
In February 1998, the Company acquired the outstanding 1% minority interest
in Fort Cobb, Caddo Gas Gathering Joint Venture and WestOK Marketing Joint
Venture for an aggregate $169,500, which included $125,600 for the termination
of certain management agreements with a third-party management company.
ONSHORE OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28,
----------------------------------------
<S> <C> <C> <C>
1999 1998 1997
------------ ------------ ------------
Revenues...................................................... $ 4,826,931 $ 5,814,395 $ 6,725,734
Operating margins............................................. 970,994 630,202 1,000,488
Depreciation.................................................. 463,347 425,448 485,767
</TABLE>
Fiscal year 1999 onshore operations improved over the prior year, in spite
of the prior year inclusion of the operations of the sold properties. Operating
margins increased $0.3 million, or 54%, over the prior year. The Company
operated its properties for the full year fiscal 1999 with in-house operations
management, instead of relying on joint venture partners and consultants. It has
begun out-sourcing the compression on its systems, and has realized cost savings
from compressors being properly maintained, and throughput increases as
compressors are appropriately sized for each application.
By adding strategic pipeline interconnects, the Company has positioned
itself to take better advantage of swings in market prices for natural gas, and
also to realize lower gas transportation expenses. The resulting layered supply
options have given the Company negotiating strength in contract renewals, and
better enabled it to manage unpredictable demand of some of its customers. By
aggregating supplies and marketing larger packages of natural gas, the Company
has enhanced the prices it receives.
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Fiscal year 1998 onshore operating margins declined $0.4 million compared to
the prior year due to the dissolution of the Company's joint ventures with
Shoreham Pipeline Company in September 1997 already discussed above. During
fiscal year 1997, operations were conducted by the Company's joint venture
partner, or by contract field and management employees. Declines in oil and gas
gathering operations on several systems also contributed to the decline.
OFFSHORE OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28,
--------------------------------
<S> <C> <C> <C>
1999 1998 1997
--------- ---------- ---------
Revenues.............................................................. 697,547 35,715 104,029
Operating margins..................................................... 171,606 (173,533) (32,156)
Depreciation.......................................................... 122,656 70,562 45,159
</TABLE>
Fiscal year 1999 was very active for the Company's offshore segment, as the
Company expended $0.2 million to rehabilitate the Shipwreck platform and several
smaller strategic assets. The Company placed the Crystal Beach facility,
acquired during the prior year, more fully into operation and secured two
transportation agreements with unaffiliated producers. Revenues increased $0.7
million and yielded a net operating margin of $0.2 million. The Company
continues to evaluate potential projects in the Gulf of Mexico, both in Texas
and federal waters.
Fiscal year 1998 was a year of preparation for the offshore operations. The
Company invested $0.4 million in the Crystal Beach facility and spent
significant dollars remediating some of its pipeline assets.
FORT COBB OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28,
----------------------------------
<S> <C> <C> <C>
1999 1998 1997
---------- ---------- ----------
Revenues......................................................... 2,126,319 1,558,890 1,468,892
Operating margins................................................ 528,926 177,684 153,533
Depreciation..................................................... 162,073 133,880 119,270
</TABLE>
Going forward, Fort Cobb will strive to expand its customer base by building
on its record of excellent customer service at competitive prices. Fort Cobb
receives its supply of natural gas from any of three major intra-state pipeline
companies, allowing it to purchase gas at competitive prices and ensuring
deliverability.
Fort Cobb's fiscal year 1999 performance was its best in several years.
These changes coincide with several significant management changes made at the
utility, and reflect positively on the new management philosophy and direction
of Fort Cobb. Additionally, the weather in its service area was favorable to
both the irrigation and crop-drying seasons, and additional business was
solicited from new hog farms in the area. Operating margins increased $0.4
million, or 198% over the prior year. On average for the year, Fort Cobb's
agricultural service represented 71% of its business, and residential service
another 23%. Fort Cobb also services commercial and industrial customers, and
all of its business is seasonal.
Fiscal year 1998 operating margins increased 16% over the prior year,
primarily due to a 10% increase in volumes delivered, principally to
agricultural customers. Such a fluctuation results from variations in the
weather of the service area during the irrigation and crop drying seasons, and
is considered in the range of normal by management. The revenue increase noted
above was partially offset by an increase in operating expenses.
OTHER OPERATIONS
The Company, through its wholly owned subsidiary, Gateway Processing
Company, acquired Abtech Resources, Inc. during the fiscal year 1999 for cash
and stock, and as a result owns a license to a patented
10
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process to reject nitrogen from streams of natural gas. Several projects that
employ the patented technology are currently being evaluated for their
investment potential.
During fiscal 1999, Gateway Processing Company participated as a
non-operating working interest owner in the drilling of two natural gas wells.
Each of the two wells was expected to yield high-nitrogen natural gas reserves
and employ the Company's licensed nitrogen rejection process to meet pipeline
specifications. Both wells were uneconomic and were abandoned. The accompanying
consolidated statement of operations for the current fiscal year includes an
impairment charge against earnings of $0.2 million reflecting the abandonment of
these projects.
OPERATIONS SUPPORT
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28,
----------------------------------
<S> <C> <C> <C>
1999 1998 1997
---------- ---------- ----------
General and administrative....................................... 2,868,704 2,037,400 1,670,800
Interest income.................................................. 173,080 197,731 68,702
Interest expense................................................. (331,494) (776,200) (425,600)
Other income (expense)........................................... 73,492 829,469 125,298
</TABLE>
General and administrative expense for fiscal year 1999 increased $0.8
million over the prior fiscal year, due primarily to costs related to the
Shoreham settlement and to the Company's move of its corporate offices to
Houston, TX. The current year total, exclusive of the Shoreham and relocation
costs, is representative of the Company's expected annual general and
administrative expense. However, the Company expects to continue to improve the
profitability of its current properties and is actively seeking to acquire or
invest in new properties.
The Company recognized bad debt expense, legal fees and related costs of the
settlement with Shoreham totaling $0.6 million during the current fiscal year.
As a result of the dissolution of the joint ventures, the Company hired
management and support staff who manage its operations in place of the joint
venture partner or contract management companies. This change in strategy added
significant general and administrative costs, reflecting costs of additional
personnel, office rent and telecommunications, legal fees and other office
costs. Such costs were considered essential to equipping the Company with the
appropriate depth of operating and management experience required to implement
the growth strategy.
During the third quarter of fiscal 1999 the Company moved its corporate
headquarters to Houston, Texas and maintained both the Houston and Omaha offices
and staff for the entire third quarter in order to provide a smooth transition.
Accordingly, fiscal year 1999 includes $0.2 million of nonrecurring costs
related to this move, which includes costs of maintaining both offices, employee
severance and other moving costs.
General and administrative expense for fiscal year 1998 increased $0.5
million over the prior fiscal year primarily due to $0.2 million of additional
salaries and employment related costs, and $0.1 million of costs to terminate
management agreements related to Fort Cobb and Caddo Gas Gathering assets. Also
included were consulting and legal costs incurred to effect the separation from
Shoreham.
Interest income for all years presented fluctuates directly with the average
certificate of deposit balance, and the balance of the interest bearing notes
receivable from Shoreham. Interest income increased in fiscal 1998 over the
prior year due to the investment of proceeds from the sale of the Company's
limited partnership interest in September 1997 and the note received in the
Shoreham transaction.
Interest expense for the current fiscal year declined significantly compared
to last year, due to last year's debt conversion costs of $0.3 million, and a
lower average outstanding debt balance than in the prior year. Apart from last
year's debt conversion costs, fiscal 1998 interest expense was in line with such
amounts for fiscal 1997.
Fiscal year 1998 other income included a half year of the Company's equity
in the net earnings of Castex Energy 1995 L.P. ("Castex"), totaling $0.4
million. The Company sold its interest in Castex effective
11
<PAGE>
September 9, 1997. Other income for fiscal year 1998 also included $0.4 million
of gain on the sale of various properties, $0.2 million of which came from the
sale of Castex, plus other minor gas producing properties.
LIQUIDITY AND CAPITAL RESOURCES
Going forward, the Company's strategy is to maximize the potential of
currently owned properties and to acquire properties that meet its economic
performance hurdles. Acquisition capital is expected to come from strategic
alliances with other companies, from traditional bank credit facilities or from
operations. The Company has an inventory of projects that it may be successful
financing, and will use the resulting cash flows to service anticipated debt and
to collateralize additional acquisition or expansion borrowings. Cash flows from
at least one meaningful acquisition are expected to begin during fiscal 2000.
The Company has in place an operating line of credit agreement with a bank
that provides for borrowings of up to $0.5 million. As of February 28, 1999,
there were no amounts outstanding under the agreement. The Company believes that
the aggregate working capital available under the credit agreement, from
available funds, and cash flows from operations will be sufficient to fund its
operating and maintenance capital requirements for the foreseeable future.
Effective March 1, 1997, the corporation completed a recapitalization which
resulted in: (i) a 1-for-25 reverse stock split of the common stock of the
Company and a decrease of the authorized common stock of the Company from 75.0
million shares to 17.5 million shares; (ii) an exchange transaction under which
preferred stock was converted into common stock, subordinated notes and common
stock purchase warrants. This recapitalization relieved the Company of the
burden of cumulative preferred stock dividends of $2.2 million per year, while
it increased interest expense by $0.1 million per year.
Natural gas prices as represented by the NYMEX Henry Hub index averaged
$1.95 in fiscal 1999 compared to $2.36 in the prior year. The natural gas
industry is generally optimistic about long term prospects based on expected
demand, the cost of developing prospects and the sales price of natural gas. The
Company's operating margins are not significantly affected by the price of
natural gas since gas gathering is generally based on a fee arrangement.
However, long-term depression of prices can affect exploration and development
and result in lower or delayed volumes available for transportation.
FACTORS AFFECTING FUTURE RESULTS
As discussed in Item 1, the Company completed a recapitalization which
converted its previously existing preferred stocks into subordinated notes,
common stock and common stock warrants. The recapitalization reduced the cash
requirements for preferred dividends from approximately $2.2 million annually to
$0.1 million for interest. One of the principal objectives of the
recapitalization was to facilitate access to reasonably priced capital to enable
the Company to build enhanced stockholder value through the execution of certain
strategies. These strategies include, among other things: (i) focusing on
gathering, processing, transporting and marketing of natural gas; (ii) expanding
the Company's asset base in core geographic areas; (iii) developing a niche that
will create demand for our services; and (iv) acquiring or constructing
properties in one or more new core areas.
The Company must provide services to its customers, primarily producers, at
a competitive price. Therefore, in order to be successful the Company must
contain its costs in line with industry competitors. The Company's access to
reasonably priced long-term capital will have a significant effect on its
ability to acquire additional properties which will increase operating margins
to enable us to spread our fixed overhead costs over a larger asset base. The
Company believes that the recapitalization and retaining experienced operating
management will allow the Company to access capital and find properties which
can provide attractive returns. However, there can be no assurance that the
Company will be successful in this endeavor.
The Company's ability to generate long-term value for the common stockholder
is dependent upon the successful acquisition of additional assets which
compliment the Company's core business at costs which provide for reasonable
returns. There are many companies participating in the midstream segment of the
natural gas industry, many with resources greater than the Company. Greater
competition for profitable
12
<PAGE>
operations can increase prices and make it more difficult to acquire assets at
reasonable multiples of cash flow.
The Company believes that it will be able to compete in this environment and
will be able to find attractive investments which compliment its existing
properties; however, it is not possible to predict competition or the effect
this will have on the Company's operations.
The Company's operations are also significantly affected by factors which
are outside the control of the Company. Gas gathering and processing is
dependent on throughput volume. Throughput on the Company's systems is dependent
on natural gas production which is significantly affected by natural gas prices
as prices affect the willingness of producers to invest the required capital to
obtain geological and geophysical information, to drill development or
exploratory wells, and to rework or maximize production on existing wells.
Natural gas prices have recently stabilized at levels which should provide
adequate incentive to producers; however, there is no assurance that such prices
will remain at current levels, and that producers will continue to react
positively to the current prices.
The Company's revenues, particularly in its retail operations, are also
affected by weather. Much of the retail demand is for crop irrigation and
drying. Favorable precipitation in the growing season and hot, dry weather in
the fall can significantly reduce demand for natural gas.
YEAR 2000 ISSUES
The "year 2000 issue" is the result of computer programs being written using
two digits, rather than four digits, to identify the year in a date field.
Computers or software which cannot properly distinguish dates subsequent to
December 31, 1999 may malfunction and thereby interrupt product deliveries,
transaction or invoice processing, or other similar normal business activities.
The Company is addressing the Year 2000 issue aggressively. The Company's
program includes a systems inventory (with particular emphasis on systems that
may be date sensitive), a readiness assessment, and component conversion and
testing. Finally, the Company has queried its trade partners to determine if
outside exposure exists and is making contingency plans.
All software programs in use by Gateway have been tested, and are largely
but not completely compliant. Replacement software is currently being installed
and tested. All of our hardware is now Year 2000 ready, and remaining systems
are expected to be fully compliant by September 30, 1999. There can be no
assurances that all of the Company's customers and vendors will be adequately
prepared; however, the Company believes that the financial impact on its
operations of the "Year 2000 issue" will not be significant.
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants........................... 16
Consolidated Balance Sheets as of February 28, 1999 and 1998................. 17
Consolidated Statements of Operations for the years ended February 28, 1999
and February 28, 1998....................................................... 18
Consolidated Statement of Stockholders' Equity for the years ended February
28, 1999 and February 28, 1998.............................................. 19
Consolidated Statements of Cash Flows for the years ended February 28, 1999
and February 28, 1998....................................................... 20
Notes to Consolidated Financial Statements................................... 21
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
13
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Gateway Energy Corporation Proxy
Statement for Annual Meeting of Stockholders to be held July 22, 1999, under the
captions ELECTION OF DIRECTORS, LIST OF CURRENT EXECUTIVE OFFICERS OF THE
COMPANY, and COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference from the Gateway Energy Corporation Proxy
Statement for Annual Meeting of Stockholders to be held July 22, 1999, under the
caption EXECUTIVE COMPENSATION.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Gateway Energy Corporation Proxy
Statement for Annual Meeting of Stockholders to be held July 22, 1999, under the
captions SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and
ADDITIONAL INFORMATION CONCERNING BOARD OF DIRECTORS.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Gateway Energy Corporation Proxy
Statement for Annual Meeting of Stockholders to be held July 22, 1999, under the
caption CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following index sets forth the documents and schedules filed with this
annual report on Form 10-KSB.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ------- -------------------------------------------------------------------------------------------
<C> <S>
3(a) Restated Certificate of Incorporation dated May 26, 1999.
3(b) Bylaws, as amended through May 26, 1999.
4(a) Form of the Common Stock Certificate.
10(a)(1) 1994 Incentive and Non-Qualified Stock Option Plan; incorporated by reference to Exhibit
10(a) to Form 10-KSB for the year ended February 28, 1997.
10(a)(2) 1998 Stock Option Plan.
10(a)(3) 1998 Outside Directors' Stock Option Plan.
10(b)(1) Memorandum of Understanding dated March 17, 1997 re: Michael T. Fadden employment.
10(b)(2) Employment Agreement dated July 1, 1996 with Donald L. Anderson; incorporated by reference
to Exhibit 10(b) to Form 10-KSB for the year ended February 28, 1997.
10(c) Executive Compensation Plan approved November 19, 1997.
10(d) Houston Office Lease dated January 20, 1998 with Trizec Allen Center Limited Partnership.
10(e) Agreement and Plan of Merger dated May 1, 1998 with Abtech Resources, Inc.
11 Statement Regarding Computation of Earnings Per Share.
21 Subsidiaries.
27 Financial Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K None
14
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GATEWAY ENERGY CORPORATION
(Registrant)
By: /s/ M. T. FADDEN
-----------------------------------------
M. T. Fadden
CHAIRMAN & CEO
By: /s/ S. D. HEFLIN
-----------------------------------------
S. D. Heflin
CFO AND TREASURER
Date: May 28, 1999
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ MICHAEL T. FADDEN
- ------------------------------ Director May 28, 1999
Michael T. Fadden
/s/ DONALD L. ANDERSON
- ------------------------------ Director May 28, 1999
Donald L. Anderson
/s/ JOHN B. EWING
- ------------------------------ Director May 28, 1999
John B. Ewing
/s/ NEIL A. FORTKAMP
- ------------------------------ Director May 28, 1999
Neil A. Fortkamp
/s/ NEIL A. FORTKAMP
- ------------------------------ Director May 28, 1999
Neil A. Fortkamp
/s/ EARL P. HOFFMAN
- ------------------------------ Director May 28, 1999
Earl P. Hoffman
/s/ CHARLES A. HOLTGRAVES
- ------------------------------ Director May 28, 1999
Charles A. Holtgraves
/s/ L. J. HORBACH
- ------------------------------ Director May 28, 1999
L. J. Horbach
/s/ GARY A. MCCONNELL
- ------------------------------ Director May 28, 1999
Gary A. McConnell
/s/ NIC PILGER
- ------------------------------ Director May 28, 1999
Nic Pilger
/s/ ABE YEDDIS
- ------------------------------ Director May 28, 1999
Abe Yeddis
15
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Gateway Energy Corporation
We have audited the accompanying consolidated balance sheets of Gateway
Energy Corporation (a Delaware corporation) and subsidiaries as of February 28,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gateway Energy
Corporation and subsidiaries as of February 28, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Houston, Texas
April 23, 1999, except for Note T,
for which such date is May 25, 1999
16
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28,
-----------------------------
1999 1998
-------------- -------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........................................................ $ 223,693 $ 439,800
Certificates of deposit.......................................................... 928,200 2,750,000
Trade accounts receivable........................................................ 840,530 906,800
Notes receivable--current portion................................................ 90,632 1,370,900
Inventories...................................................................... 78,312 121,700
Prepaid expenses and other assets................................................ 160,794 311,200
-------------- -------------
Total current assets........................................................... 2,322,161 5,900,400
Property and Equipment, at cost
Gas gathering, processing and transportation..................................... 9,814,180 9,425,200
Office furniture and other equipment............................................. 710,563 539,100
-------------- -------------
10,524,743 9,964,300
Less accumulated depreciation and amortization..................................... 2,542,259 1,858,800
-------------- -------------
7,982,484 8,105,500
Other Assets
Notes receivable, less current portion........................................... 294,833 868,600
Equity investment in partnership................................................. 296,606 326,300
Other............................................................................ 368,026 185,200
-------------- -------------
959,465 1,380,100
-------------- -------------
$ 11,264,110 $ 15,386,000
-------------- -------------
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable................................................................. $ 562,379 $ 1,057,300
Accrued expenses and other liabilities........................................... 128,236 243,700
Notes payable.................................................................... -- 915,300
Current maturities of long-term debt............................................. 116,368 671,200
-------------- -------------
Total current liabilities...................................................... 806,983 2,887,500
Long-term debt, less current maturities............................................ 1,072,626 1,184,500
Stockholders' Equity
Common stock--$0.25 par value; 17,500,000 shares authorized; 15,242,494 and
14,457,400 shares issued and outstanding in 1999 and 1998, respectively........ 3,810,624 3,614,400
Additional paid-in capital....................................................... 15,963,860 15,896,500
Accumulated deficit.............................................................. (10,389,983) (8,196,900)
-------------- -------------
9,384,501 11,314,000
-------------- -------------
$ 11,264,110 $ 15,386,000
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Operating revenues
Natural gas sales................................................................ $ 6,339,694 $ 9,736,600
Transportation and processing.................................................... 1,161,450 930,500
Other............................................................................ 149,653 13,600
------------- -------------
7,650,797 10,680,700
Operating costs and expenses
Cost of natural gas purchased.................................................... 4,693,043 7,213,000
Operation and maintenance........................................................ 1,286,228 2,102,900
Depreciation and amortization.................................................... 748,076 743,200
Impairment of long-lived assets.................................................. 236,707 --
General and administrative....................................................... 2,868,704 2,037,400
------------- -------------
9,832,758 12,096,500
------------- -------------
Operating loss................................................................. (2,181,961) (1,415,800)
Other income (expense)
Interest income.................................................................. 173,080 222,300
Interest expense and debt conversion costs....................................... (331,494) (776,200)
Equity in earnings of partnership................................................ 83,801 406,900
Gain on disposal of assets....................................................... 8,000 398,000
Other income (expense), net...................................................... 65,491 --
------------- -------------
(1,122) 251,000
------------- -------------
Loss before income taxes........................................................... (2,183,083) (1,164,800)
Income taxes....................................................................... 10,000 12,000
------------- -------------
Net loss........................................................................... $ (2,193,083) $ (1,176,800)
------------- -------------
------------- -------------
Basic and diluted loss per share................................................... $ (0.14) $ (0.08)
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
PREFERRED ---------------------- PAID-IN ACCUMULATED
STOCK SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 1, 1997.......................... $ 9,400 1,929,800 $ 482,500 $12,334,900 $(7,018,400 ) $ 5,808,400
Preferred stock conversions to common stock....... (9,400) 12,372,900 3,093,200 3,301,500 -- 6,385,300
Recapitalization costs............................ -- 10,000 2,500 (342,400) -- (339,900)
Net loss.......................................... -- -- -- -- (1,176,800 ) (1,176,800)
Conversion of promissory note..................... -- 120,000 30,000 20,000 -- 50,000
Purchase and retirement of common stock........... -- (1,300) (300) -- (1,700 ) (2,000)
Issuance of warrants and options to non-
employees........................................ -- -- -- 132,200 -- 132,200
Issuance of stock for dividends................... -- 26,000 6,500 45,500 -- 52,000
Debt conversion costs............................. -- -- -- 404,800 -- 404,800
--------- ---------- ---------- ----------- ------------ -----------
Balance at February 28, 1998...................... -- 14,457,400 3,614,400 15,896,500 (8,196,900 ) 11,314,000
Net loss.......................................... (2,193,083 ) (2,193,083)
Acquisition of Abtech Resources, Inc.............. -- 285,061 71,265 96,921 -- 168,186
Director compensation under stock award Plans..... -- 48,000 12,000 18,000 -- 30,000
Stock options issued to non-employee Directors.... -- -- -- 10,960 -- 10,960
Conversion of convertible debt.................... -- 460,000 115,000 (52,500) -- 62,500
Retirement of common stock........................ -- (7,967) (2,041) (6,021) -- (8,062)
--------- ---------- ---------- ----------- ------------ -----------
Balance at February 28, 1999...................... $ -- 15,242,494 $3,810,624 $15,963,860 $(10,389,983) $ 9,384,501
--------- ---------- ---------- ----------- ------------ -----------
--------- ---------- ---------- ----------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of this statement.
19
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities
Net loss............................................................................. $(2,193,083) $(1,176,800)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity in undistributed earnings of partnerships................................... 3,254 (290,000)
Depreciation, depletion and amortization........................................... 748,076 743,200
Gain on disposal of assets......................................................... (8,000) (398,000)
Impairment of long-lived assets.................................................... 236,707 --
Noncash expenses, net.............................................................. 632,206 516,200
Other.............................................................................. 12,223 19,800
Net change in cash and cash equivalents resulting from changes in:
Trade accounts receivable........................................................ 66,270 1,927,900
Inventories...................................................................... 43,388 (66,500)
Prepaid expenses and other current assets........................................ 67,455 73,200
Accounts payable................................................................. (494,921) (1,299,700)
Accrued expenses and other liabilities........................................... (115,464) (56,300)
----------- -----------
Net cash used in operating activities.......................................... (1,001,889) (7,000)
----------- -----------
----------- -----------
Cash flows from investing activities
Capital expenditures................................................................. (804,177) (819,800)
Proceeds from sale of property and partnership interests............................. -- 3,423,300
(Increase) decrease in certificates of deposit....................................... 1,821,800 (2,750,000)
Acquisitions of businesses........................................................... (57,850) (40,800)
Collection of notes receivable....................................................... 1,385,882 270,500
Other................................................................................ -- (12,500)
----------- -----------
Net cash provided by investing activities............................................ 2,345,655 70,700
----------- -----------
Cash flows from financing activities
Decrease in restricted and escrowed cash............................................. -- 2,100
Proceeds from borrowings............................................................. 1,267,674 2,672,000
Payments on borrowings............................................................... (2,879,971) (2,608,700)
Proceeds from issuance of common stock............................................... 52,424 --
Other................................................................................ -- (18,800)
----------- -----------
Net cash provided by (used in) financing activities.................................. (1,559,873) 46,600
----------- -----------
Net change in cash and cash equivalents................................................ (216,107) 110,300
Cash and cash equivalents at beginning of year......................................... 439,800 329,500
----------- -----------
Cash and cash equivalents at end of year............................................... $ 223,693 $ 439,800
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
1. PRINCIPLES OF CONSOLIDATION AND NATURE OF BUSINESS
The consolidated financial statements include the accounts of Gateway Energy
Corporation and its wholly owned subsidiary companies, Gateway Pipeline Company
("GPC"), Gateway Offshore Pipeline Company, Gateway Energy Marketing Company,
Fort Cobb Fuel Authority, L.L.C. and Gateway Processing Company, plus a small
amount of activity in its two remaining joint ventures and one partnership.
Based on its ownership, the Company proportionally consolidates its joint
venture interests, and accounts for its partnership interest on the equity
method. All significant intercompany transactions have been eliminated in
consolidation.
The Company owns and operates natural gas gathering, transportation and
distribution systems and related facilities in Texas, Oklahoma and Louisiana,
and offshore in state and federal waters of the Gulf of Mexico. The Company also
operates a natural gas distribution company in Oklahoma.
2. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, plus capitalized interest costs on
major pipeline projects during their construction period. Additions and
improvements that add to the productive capacity or extend the useful life of an
asset are capitalized. Expenditures for maintenance and repairs are charged to
expense as incurred. Depreciation is provided using the straight-line method
over estimated useful lives ranging from 6 to 30 years for pipeline systems, gas
plant and processing equipment, and from 2 to 10 years for office furniture and
other equipment. Upon disposition or retirement of pipeline components or gas
plant components, any gain or loss is charged or credited to accumulated
depreciation. When entire pipeline systems, gas plants or other property and
equipment are retired or sold, any resulting gain or loss is credited to or
charged against operations.
The Company accounts for its investment in oil and gas producing activities
using the full cost method of accounting. Under this method of accounting, all
costs, including indirect costs related to exploration and development
activities, are capitalized as oil and gas property costs. These costs, and
estimated future development costs, are accumulated in a single cost center and
are amortized on an equivalent unit-of-production basis using total estimated
proved oil and gas reserves. No gains or losses are recognized on the sale or
disposition of oil and gas reserves, except for sales which include a
significant portion of the total remaining reserves. The Company's net
investment in oil and gas properties is subject to a ceiling limitation
calculation that is based on the present value of future net revenues from
estimated production of oil and gas reserves valued at current prices. Costs in
excess of the ceiling limitation are charged to expense.
The Company's primary intangible asset, its license for a patented process
to remove nitrogen from streams of natural gas, is being amortized to expense
over the average 17-year life of the underlying patents.
Impairment losses are recognized for long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows are
not sufficient to recover the assets' carrying value. The amount of impairment
is measured by comparing the fair value of the asset to its carrying amount. See
discussion at Note H.
21
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
3. CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with original maturities
of three months or less to be cash equivalents.
4. INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been included in the financial statements
or income tax returns. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial statement and tax
bases of assets and liabilities as measured by the enacted tax rates expected to
apply when these differences reverse. Deferred tax assets are reduced by a
valuation allowance when it is more likely than not that they will not be
realized. Deferred tax expense is the result of changes in deferred tax assets
and liabilities.
5. STOCK-BASED COMPENSATION
Compensation for stock-based awards to employees is measured using the
intrinsic method. This method recognizes compensation when the fair value of the
underlying common stock exceeds the exercise price of the instrument.
6. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings or loss by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing net earnings or loss by the weighted
average number of shares outstanding, after giving effect to potentially
dilutive common share equivalents outstanding during the period. Potentially
dilutive common share equivalents are not included in the computation of diluted
earnings per share if they are anti-dilutive. For 1999 and 1998, the diluted
loss per common share is the same as basic since the effect of potentially
dilutive common shares arising from convertible debt and outstanding stock
options and warrants was anti-dilutive.
The weighted average number of common shares outstanding used in the
computation of basic and diluted earnings per share for 1999 and 1998 were
14,841,630 and 14,318,900, respectively.
7. REVERSE STOCK SPLIT
All references in the consolidated financial statements referring to common
shares, options and warrants, and loss per common share amounts have been
adjusted to give retroactive effect to a one for twenty-five reverse split
effected on March 4, 1997, to holders of record on that date.
8. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
22
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--RECAPITALIZATION
Effective March 1, 1997, the Company's preferred stockholders approved the
restructuring of all nine series of its preferred stock. As part of the
restructuring the Company's common stockholders authorized a one for twenty-five
reverse split and a reduction of authorized common shares from 75,000,000 to
17,500,000 (collectively the "Recapitalization").
The significant components of the Recapitalization, together with the
applicable accounting effects, are as follows:
- Pursuant to elections by the Series G preferred stockholders, the Company
exchanged $7,769,800 stated value of the Series G mandatory redeemable
preferred stock plus accrued dividends of $505,200 for $585,900 of 10%
subordinated notes, 5,866,500 shares of common stock and 29,700 common
stock purchase warrants and cancelled all Series G preferred stock.
- The Company exchanged the Series O preferred stock held by Pipeline
Capital, Inc. ("PCI") for 214,000 shares of common stock and cancelled the
promissory note of $298,700 due to the Company from PCI.
- Pursuant to elections by all other preferred stockholders, the Company
exchanged $9,961,500 stated value of Series A (GPC), B, J, K, L, M, & N
preferred stock plus accrued dividends of $403,400, for $585,800 of 10%
subordinated notes, 6,292,400 shares of common stock and 32,300 common
stock purchase warrants and cancelled all preferred stock of these series.
The subordinated notes are dated March 1, 1997, with an interest rate of
10%, payable quarterly. Annual equal principal payments begin on March 1, 2000,
and continue through March 1, 2004. The aggregate subordinated notes had a
.0436% interest in the cash distributions and liquidation proceeds of Castex LP
after recovery of the Company's investment and the payment of any related income
taxes. Payments totaling $20,000 were paid to holders of the subordinated notes
in June 1998, representing their interest in the net after-tax proceeds from the
sale of Castex.
NOTE C--ACQUISITIONS AND DIVESTITURES
All acquisitions have been accounted for as purchases; operations of the
companies and businesses acquired or disposed have been included in the
accompanying consolidated financial statements from their respective dates of
acquisition or through their respective dates of disposal.
FISCAL YEAR 1999
The Company, through its wholly owned subsidiary, Gateway Processing
Company, acquired Abtech Resources, Inc. ("Abtech") effective July 1, 1998 for
$44,000 cash and 285,061 shares of common stock. The majority of Abtech's
outstanding stock was owned by the Company's current chief executive officer.
The acquisition was accounted for as a purchase and the purchase price was
allocated to Abtech's principal asset, a License Agreement between Abtech and a
company which owns a patented process for rejecting nitrogen from streams of
natural gas. The License Agreement gives the Company the exclusive right to
utilize this rejection process for conventional natural gas in the Permian Basin
and for all coalbed methane or landfill gas in the continental United States.
The Company is required to pay a license fee upon volumes processed through
each unit so long as there are any unexpired patents covering the rejection
technology. The Company must have installed or have commitments to install
processing units with a stated minimum capacity as of December 31, 2002, to
23
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C--ACQUISITIONS AND DIVESTITURES (CONTINUED)
maintain the exclusive rights to the process. Several projects that employ the
patented technology are currently being evaluated for their investment
potential.
Had the acquisition of Abtech been effective as of March 1, 1998, the effect
on the Company's revenues and net loss for fiscal year 1999 would not have been
material.
FISCAL YEAR 1998
In September 1997, the Company sold its limited partnership interest in
Castex and other oil and gas producing properties for $3,152,000 in cash and a
note receivable of $350,000 that was paid in full in April 1998. These assets
had been classified as of February 28, 1997 as Assets Held For Sale. The
transaction resulted in a gain of $180,100 which is reflected as gain on
disposal of assets in the accompanying statement of operations.
In September 1997, the Company entered into a Settlement Agreement with
Shoreham Pipeline Company ("Shoreham"), a former joint venture partner, to
dissolve all of the joint ventures between the Company and Shoreham and to
settle litigation between the parties. Under the Agreement the Company
transferred its interest in six operating joint ventures to Shoreham in exchange
for $2,700,000 and Shoreham's interest in nine joint venture properties with an
approximate fair value of $450,000. The Company also acquired Shoreham's 20%
minority interest in Gateway Offshore Pipeline Company (formerly Shoreham
Gathering Company) and transferred an offshore pipeline system to Shoreham as
part of the settlement. Of the $2,700,000, $540,000 was paid at closing. The
remaining balance was a note receivable of $2,160,000 which was payable in 24
equal monthly payments beginning December 1, 1997, with interest at 9% per
annum. The note was without collateral. The Company recognized a gain on the
transaction of $220,300, net of closing costs and legal fees. The net gain is
reflected in gain (loss) on disposal of assets in the accompanying statement of
operations for the fiscal year ended February 28, 1998. Shoreham was to complete
the final accounting for all the joint ventures for June, July and August 1997
and make cash distributions as appropriate.
The Company performed an audit of the final cash distributions from Shoreham
in April 1998 and believed that cash distributions to the Company for June, July
and August 1997 were substantially understated. The Company initiated legal
proceedings to collect the remaining distributions to which it was entitled.
Shoreham counterclaimed for monetary damages for certain matters also associated
with the Settlement Agreement. Beginning July 1, 1998, Shoreham ceased making
the scheduled payments required under the note.
During October and November 1998 the companies entered into mediation to
settle their disputes and avoid costly litigation. On November 24, 1998, the
Company and Shoreham reached an agreement under which the Company received, in
exchange for the prior note: (i) cash of $725,000; (ii) a note from Shoreham for
$400,000 collateralized with certain properties currently owned by Shoreham,
and; (iii) the release of a net profits interest in the Company's Shipwreck
system. The Company began receiving payments toward this note during January
1999.
General and administrative expenses for the fiscal year ended February 28,
1999 include $466,470 of charges for the write-off of amounts receivable from
Shoreham, plus related legal fees for the period of $80,140. Interest expense
for the period includes $34,451 for the write-off of interest income previously
recognized on the Shoreham note receivable.
24
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C--ACQUISITIONS AND DIVESTITURES (CONTINUED)
In January 1998, the Company reached an agreement to purchase the 1%
minority interest of Fort Cobb, Caddo Gas Gathering Joint Venture and WestOK
Marketing Joint Venture and terminate certain management agreements which would
have expired October 31, 1999. The Company paid a total of $169,500, which
included the minority interest plus $125,600 for the termination of agreements
with a third-party management company. The termination cost has been included in
general and administrative expense in the accompanying statement of operations
for the fiscal year ended February 28, 1998.
PRO FORMA
The following unaudited pro forma consolidated results of operations for the
year ended February 28, 1998 assume that the fiscal 1998 transactions discussed
occurred at the beginning of that year:
<TABLE>
<CAPTION>
PRO FORMA
------------
<S> <C>
Revenues........................................................................ $ 7,409,000
Net loss........................................................................ (2,353,400)
Basic and fully diluted loss per share.......................................... (0.16)
</TABLE>
NOTE D--JOINT VENTURE OPERATIONS
During fiscal year 1998, the Company participated in 17 natural gas
gathering, processing or delivery joint ventures. All but one of the joint
ventures were operated by the Company's joint venture partners. Management fees
to the joint venture partners were a base fee plus a percentage of qualifying
expenditures or a percentage of net operating income, as defined. The joint
venture agreements contained provisions for increased income participation by
the Company until specified payout levels were attained. The agreements had
terms of one to ten years, with provision for earlier termination, along with
buy-sell agreements in the event of termination. Fees paid to the joint venture
partners were approximately $135,000 in 1998. As described in Note C, the
Company dissolved 15 joint ventures with Shoreham in September 1997. As of
February 28, 1999 and 1998, the Company was involved in two remaining joint
venture arrangements with approximately $0.9 million of total net property and
equipment included in the accompanying consolidated balance sheets.
NOTE E--NOTES PAYABLE
The Company had no outstanding current notes payable as of February 28,
1999. Notes payable as of February 28, 1998 consist of the following:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Operating line of credit.......................................................... $ 338,000
Note payable to bank.............................................................. 550,000
Other............................................................................. 27,300
----------
$ 915,300
----------
----------
</TABLE>
The Company's current operating line of credit agreement provides for
maximum available borrowings of $0.5 million through February 2000. Interest is
payable monthly at 6.0% per annum and principal is due on demand, or if no
demand is made, at maturity. The line is collateralized by the Company's
25
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E--NOTES PAYABLE (CONTINUED)
certificate of deposit. As of February 28, 1999, the Company had no balance
outstanding under the credit agreement.
As of February 28, 1998, the Company had a note payable to a bank for
$550,000, due March 3, 1998 with interest at 6.7%. The note was collateralized
by the Company's certificate of deposit. This note was repaid in full in March
1998.
NOTE F--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Subordinated notes.......................................... $1,033,284 $1,005,600
Promissory notes............................................ -- 595,500
Note payable to Pipeline Capital, Inc. ("PCI").............. 155,710 254,600
---------- ----------
1,188,994 1,855,700
Less current maturities..................................... 116,368 671,200
---------- ----------
$1,072,626 $1,184,500
---------- ----------
---------- ----------
</TABLE>
SUBORDINATED NOTES
In connection with the Recapitalization discussed in Note B, the Company
issued subordinated promissory notes with a face amount of $1,171,700. The
stated interest rate is 10% payable quarterly with equal annual principal
payments beginning on March 1, 2000 and continuing through March 1, 2004. The
Company calculated the fair market value of the notes to be $978,000 at March 1,
1997 and recorded the difference between fair value and the face amount as
discount on subordinated notes. The discount is being amortized to interest
expense using the interest method over the term of the subordinated notes. Such
charge to interest expense was $27,671 and $27,700 for the years ended February
28, 1999 and 1998, respectively. As a result, the effective interest rate of the
subordinated notes is 15%.
The subordinated notes had an aggregate 4.36% interest in the proceeds of
the sale of Castex after deducting the Company's investment in the limited
partnership and taxes payable on any gain on disposal. The Company paid the
subordinated noteholders $20,000 in June 1998 as a result of the September 1997
sale of its interest in Castex.
PROMISSORY NOTES
During fiscal 1997, GPC issued $759,000 of convertible promissory notes,
proceeds of which were used to repay bridge loans in connection with the
purchase of Venture Resources, Inc. ("Venture"). The promissory notes were
without collateral and bore interest at the rate of 10% per annum payable
monthly. The principal sum of the promissory notes was due two years from the
date of issuance. In fiscal 1998, the Company redeemed $214,000 of these
convertible promissory notes at stated value plus accrued interest. The balance
of the notes were redeemed during fiscal 1999 as discussed below.
26
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--LONG-TERM DEBT (CONTINUED)
The original conversion privileges of the Venture promissory notes allowed
noteholders to convert at any time into common stock of the Company at a
pre-reverse stock split price of $0.40 per share. The promissory notes did not
contain the customary anti-dilution language to effect a change in the
conversion price in the case of stock splits, stock dividends or other
capitalization changes. As a result, in August 1997, certain noteholders
tendered their promissory notes for conversion at $0.40 per share. In lieu of
conversion, the Company and the noteholders agreed at that time to: (i) a one
year extension on the notes; and (ii) a thirty-day window for conversion in the
event the Company called the promissory notes as consideration for the
noteholders not converting their notes.
As a result of this agreement, the Company recorded debt conversion costs
and a credit to paid-in capital of $306,800 which represents the difference in
the market price of the Company's common stock on the date of the agreement and
the conversion price of $0.40, multiplied by the number of shares issued upon
conversion. Such conversion costs are reflected in interest expense and
conversion costs in the accompanying statement of operations.
The Company and the Noteholders disagreed as to the proper conversion price
per share after giving effect to the one for twenty-five reverse split. In the
opinion of Company's management and Board of Directors, the proper conversion
price for the Venture promissory notes was $10.00 per share, after giving effect
to the one for twenty-five reverse stock split.
In October 1998, the Company and the noteholders reached an agreement
whereby the Company exchanged outstanding convertible promissory notes, with
principal and accrued interest through October 15, 1998 totaling $600,474, for
cash of $537,974 and 460,000 shares of common stock. In addition, certain
noteholders agreed to cancel a Subscription Agreement with attached Stock
Purchase Rights and to reduce warrants issued to the noteholders from 200,000 to
40,000. This exchange had no impact on the statement of operations for fiscal
1999.
In July 1996, the Company issued promissory notes to stockholders totaling
$150,000. At the time of issuance 18,000 shares of common stock and warrants to
purchase 36,000 shares of the Company's common stock at $3.00 per share were
issued in full consideration for interest and commitment fees in connection with
the notes. All principal payments were due July 25, 1998. As collateral for the
notes, the Company pledged all of its ownership interests in three joint
ventures. The notes were convertible to common stock at any time prior to July
25, 1998, at the rate of $5.00 per common share. The holders of the notes also
agreed to guarantee the Operating Line of Credit in the aggregate amount of
$150,000.
In March, 1997, H & F Investments, a partnership comprised of two executive
officers of the Company acquired one of the promissory notes for $50,000 and
substituted their guarantee for $50,000 for the Operating Line of Credit. The
Company subsequently repaid the promissory note in November 1997.
In September 1997, a noteholder of a $50,000 promissory note and the Company
agreed to amend the conversion price included in the original promissory note to
$.4167 per share as consideration for the effect of the Recapitalization on the
convertible promissory note. The noteholder elected to convert the note into
120,000 shares of the Company's common stock. The amendment of the original
promissory note resulted in conversion costs of $28,000, equal to the difference
in the market price of the Company's common stock and the conversion price on
the date of the amendment multiplied by the 120,000 shares issued at conversion.
Such conversion cost is reflected in interest expense in the accompanying
statement of operations for the fiscal year ended February 28, 1998.
27
<PAGE>
GATEWAY ENERGY CORPORATION AND SUSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--LONG-TERM DEBT (CONTINUED)
As a result of the effects of the Recapitalization on the convertible
promissory notes, the Company and the noteholders of the remaining $50,000 of
promissory notes agreed in December 1997 to amend the original promissory notes
as follows:
- The conversion price was changed to $0.25 per share.
- The Company issued attached Stock Purchase Rights to acquire 50,000
additional common shares at $0.25 per share.
- The Company issued detachable warrants to purchase 200,000 additional
shares of common stock at a price of $0.53 per share, the market price on
the amendment date.
- The maturity date was extended to July 25, 2002, although the holders may
exercise the conversion rights or exercise the Stock Purchase Rights or
Warrants anytime after July 25, 1998.
- In addition, the Company issued a subscription agreement allowing the
noteholders to purchase $50,000 non-interest bearing convertible
promissory notes due July 25, 2002. The notes were convertible at $0.25
per common share and include attached Stock Purchase Rights to acquire
50,000 additional shares at $0.25 per share. The subscription agreement
expired July 25, 1998.
The above amendments resulted in conversion costs to the Company of $125,600
which were amortized to interest expense through July 1998, the earliest
exercise date. During the years ended February 28, 1999 and 1998, $78,500 and
$47,100, respectively, has been charged to interest expense and included in the
accompanying statements of operations.
NOTE PAYABLE TO PCI
In April 1996, the Company issued a promissory note for $200,000 in payment
of investment advisory and financing services. The note was without collateral,
bore interest at the rate of 9% per annum and was payable in twenty-four equal
monthly installments of $9,100 commencing April 1, 1996. The note was fully paid
in February 1998.
AGGREGATE FUTURE MATURITIES
Aggregate future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
2000.............................................................. $ 116,368
2001.............................................................. 273,670
2002.............................................................. 234,328
2003.............................................................. 234,328
2004.............................................................. 234,328
Thereafter........................................................ 234,328
</TABLE>
NOTE G--SPONSORSHIP AGREEMENT
The Company had an agreement with PCI, whereby PCI was to raise funds for
the Company through private placements and public offerings of the Company's
securities. In May 1996, the Company and PCI terminated their relationship and
entered into a Settlement Agreement under the terms of which: (i) PCI executed a
promissory note payable to the Company for $279,000 plus annual interest at 7%,
representing
28
<PAGE>
GATEWAY ENERGY CORPORATION AND SUSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G--SPONSORSHIP AGREEMENT (CONTINUED)
all advances to PCI through that date; (ii) the Company repurchased 56.25 shares
of Series C preferred stock owned by PCI in exchange for a note for $480,000,
payable $10,000 per month for the period from July 1, 1996 through June 1, 2000,
and; (iii) the Company issued one share of Series O preferred stock to PCI,
which was convertible into common shares and gave PCI certain other rights.
Effective March 1, 1997, in connection with the recapitalization discussed in
Note B, PCI exchanged its share of Series O preferred stock for 214,000 shares
of the Company's common stock and canceled the promissory note of $298,700 due
to the Company from PCI.
NOTE H--IMPAIRMENT EXPENSE
During fiscal 1999, Gateway Processing Company participated as a
non-operating working interest owner in the drilling of two natural gas wells.
Each of the two wells was expected to yield high-nitrogen natural gas reserves
and employ the Company's licensed nitrogen rejection process to meet pipeline
specifications. Both wells were uneconomic and were abandoned. The accompanying
consolidated statement of operations for the current fiscal year includes an
impairment charge against earnings of $206,497 reflecting the abandonment of
these projects.
Additionally, during fiscal 1999, Gateway Pipeline Company abandoned several
minor pipeline systems and recognized an aggregate impairment charge against
earnings of $30,210.
NOTE I--INCOME TAXES
The provision for income taxes for the years ended February 28, 1999 and
1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Current................................................................. $ 10,000 $ 12,000
Benefit of tax net operating loss carryforwards......................... -- --
--------- ---------
Total................................................................... $ 10,000 $ 12,000
--------- ---------
--------- ---------
</TABLE>
The differences between income taxes computed using the average statutory
federal income tax rates of 34% and the provision for income taxes for the years
ended February 28, 1999 and 1998 follow:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Taxes at statutory rate............................................. $ (742,000) $ (396,000)
State income taxes, net of federal tax benefit...................... 8,000 3,000
Increase in valuation allowance..................................... 688,000 172,000
Goodwill amortization and other nondeductible expenses.............. 39,000 228,000
Other............................................................... 17,000 5,000
----------- -----------
$ 10,000 $ 12,000
----------- -----------
----------- -----------
</TABLE>
29
<PAGE>
GATEWAY ENERGY CORPORATION AND SUSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I--INCOME TAXES (CONTINUED)
The tax effects of the temporary differences that give rise to deferred tax
assets and liabilities as of February 28, 1999 and 1998 follow:
<TABLE>
<CAPTION>
FEBRUARY 28,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................ $ 1,303,000 $ 618,000
Property and equipment.......................................... 365,000 257,000
Other........................................................... 31,000 136,000
------------ -----------
1,699,000 1,011,000
Valuation allowance............................................... (1,699,000) (1,011,000)
------------ -----------
$ -- $ --
------------ -----------
------------ -----------
</TABLE>
The valuation allowance increased $688,000 in fiscal year 1999 and decreased
$265,000 in 1998. The changes in both years result primarily from the increase
in, or expiration of, net operating loss carryforwards.
At February 28, 1999, the Company had approximately $3,832,000 federal net
operating loss carryforwards which may be applied against future taxable income
and which expire from 2000 through 2018.
NOTE J--STOCK-BASED BENEFIT PLANS
The Company has stock option plans and several agreements under which key
employees have been granted incentive and nonqualified stock options or warrants
to purchase the Company's common stock. Generally, the options are exercisable
within three years of the date of grant and expire ten years after the date of
grant. All options or warrants issued have exercise prices of not less than 100%
of the fair market value on date of grant.
The following table is a summary of stock option activity and related
information:
<TABLE>
<CAPTION>
1999 1998
---------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ----------------- --------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.... 324,938 $ 0.94 14,188 $ 6.06
Granted............................. 110,000 0.39 310,750 0.72
Forfeited........................... (14,188) 5.78 -- --
--------- ---------
Outstanding at end of year.......... 420,750 0.63 324,938 $ 0.94
--------- ---------
--------- ---------
Options available for grant at end
of year........................... 490,000 7,000
--------- ---------
--------- ---------
</TABLE>
30
<PAGE>
GATEWAY ENERGY CORPORATION AND SUSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--STOCK-BASED BENEFIT PLANS (CONTINUED)
The following table summarizes information about options outstanding at
February 28, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
REMAINING ------------------------------
RANGE OF NUMBER CONTRACTUAL WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING LIFE(YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------ ----------- ------------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$0.34 to 0.69 370,750 8.89 $ 0.56 204,083 $ 0.66
1.19 50,000 8.05 1.19 50,000 1.19
----------- -----------
$0.34 to 1.19 420,750 8.79 0.63 254,083 0.76
----------- -----------
----------- -----------
</TABLE>
The fair value of the Company's stock-based awards to employees was
estimated using a Black-Scholes option pricing model. The Black-Scholes model
was developed for use in estimating the fair value of traded options which have
no vesting restrictions and are fully transferable. In addition, the Black-
Scholes model requires the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock-based awards have
characteristics significantly different from those traded options, and because
changes in the subjective input can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock-based awards to
employees. The fair value of the Company's stock-based awards was estimated
assuming no expected dividends and the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Expected life in years....................................................... 8.0 8.1
Expected stock price volatility.............................................. 75% 88%
Risk-free interest rate...................................................... 5.65% 5.80%
Average fair value per option................................................ $ 0.30 $ 0.56
</TABLE>
For pro forma purposes, the estimated value of the Company's stock-based
awards to employees is amortized over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Net loss--as reported........................................... $ (2,193,083) $ (1,176,800)
Net loss--pro forma............................................. (2,198,283) (1,353,500)
Basic and diluted net loss per share--as reported............... (0.14) (0.08)
Basic and diluted net loss per share--pro forma................. (0.14) (0.09)
</TABLE>
NOTE K--OTHER EMPLOYEE BENEFIT PLAN
Effective September 1, 1998, the Houston employees of the Company entered
into an employee leasing agreement with Administaff, Inc. ("Administaff"). The
employees of Fort Cobb also entered into an agreement with Administaff effective
January 1, 1999. As part of the benefits package offered by Administaff, all
eligible employees were offered enrollment in the Administaff 401(k) plan.
Matching contributions for non-highly compensated employees began in January
1999, and matching contributions for highly compensated employees began March
31, 1999. The Company believes it is in compliance with ERISA and other laws
which would govern the plan. Contributions to the Gateway 401(k) plan were
discontinued in July 1998. The Company has requested a ruling from the IRS on
the former Gateway plan
31
<PAGE>
GATEWAY ENERGY CORPORATION AND SUSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K--OTHER EMPLOYEE BENEFIT PLAN (CONTINUED)
qualification status in order to allow employees to rollover investment balances
into the new Administaff plan.
Total Company contributions to both plans were $6,350 and $9,300 for the
fiscal years ended February 28, 1999 and 1998, respectively.
NOTE L--LEASES
The Company leases office space in Omaha, Nebraska and Houston, Texas under
lease agreements expiring in August 1999, and January 2003, respectively. The
lease in Houston is secured by a Letter of Credit issued by the Company in favor
of the lessor in the amount of $84,264. The Letter of Credit is collateralized
by the Company's short-term investment.
The Company also has various month-to-month equipment operating leases. Rent
expense from all leases totaled approximately $114,061 and $332,000 during 1999
and 1998 respectively.
The following is a schedule by year of future minimum annual rental payments
under noncancelable operating leases at February 28, 1999:
<TABLE>
<CAPTION>
YEAR
- ----------------------------------------------------------------------------------
<S> <C>
2000.............................................................................. $ 196,778
2001.............................................................................. 195,635
2002.............................................................................. 125,450
2003.............................................................................. 115,165
2004.............................................................................. 10,335
Later years....................................................................... --
----------
$ 643,363
----------
----------
</TABLE>
NOTE M--COMMITMENTS AND CONTINGENCIES
The Company is contingently obligated under a note agreement entered into in
conjunction with its acquisition of a pipeline system. The contingent amount is
payable on or before April 15, 2004. The amount that the Company ultimately pays
will be calculated using a formula in the note agreement, and will depend upon
achievement of certain asset performance goals. No amounts have been paid or
accrued for this obligation as of February 28, 1999.
The Company and its subsidiaries are parties to litigation and claims
arising in the normal course of business. Management, after consultation with
legal counsel, believes that the liabilities, if any, arising from such
litigation and claims, will not be material to the consolidated financial
statements. See Note T.
NOTE N--SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $184,559 and $256,000 in fiscal 1999 and 1998,
respectively. Cash paid for state taxes, including franchise taxes, was $44,928
and $84,400 in fiscal 1999 and 1998, respectively.
32
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE N--SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
NONCASH INVESTING AND FINANCING ACTIVITIES
See Note F for a discussion of the Company's convertible promissory notes.
In October 1998, the Company and the noteholders reached an agreement whereby
the Company exchanged outstanding convertible promissory notes, with principal
and accrued interest through October 15, 1998 totaling $600,474, for cash of
$537,974 and 460,000 shares of common stock. In addition, certain noteholders
agreed to cancel a Subscription Agreement with attached Stock Purchase Rights
and to reduce warrants issued to the noteholders from 200,000 to 40,000. This
exchange had no impact on the statement of operations for fiscal 1999.
During fiscal year 1998, the Company exchanged all of its outstanding
preferred stock (except Series C) with a stated value of $17,731,300 plus
accrued dividends of $908,600 for 12,158,900 shares of common stock, $1,171,700
of subordinated notes and 62,000 common stock purchase warrants. The Company
also exchanged its Series C preferred stock issued to PCI for 214,000 shares of
common stock and cancelled the promissory note of $298,700 due to the Company.
The Company issued 10,000 shares of common stock in connection with certain
costs of the Recapitalization. In addition, 26,000 shares of common stock were
issued as payment for accrued dividends of $52,000.
As described in Note C, during 1998, the Company sold its limited
partnership interest in Castex and its oil and gas properties for $3,502,000. In
connection with the sale, the Company accepted a note from the buyer for
$350,000. The Company also entered into a settlement agreement with Shoreham
whereby it transferred its interest in six operating joint ventures to Shoreham
in return for a $2,160,000 note receivable, $540,000 in cash, interest in nine
joint venture properties valued at $450,300 and Shoreham's 20% ownership in
Gateway Offshore Pipeline Company ("Offshore"). Offshore's ownership of an
offshore pipeline system was transferred to Shoreham as part of the settlement.
During 1998, the Company converted a $50,000 promissory note into 120,000
shares of the Company's common stock.
NOTE O--FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS, CERTIFICATE OF DEPOSIT AND NOTES RECEIVABLE: The
carrying amounts of cash and cash equivalents, certificates of deposit and notes
receivable approximate fair value because of the relatively short maturity or
recent issuance of those instruments.
NOTES PAYABLE: The estimated fair values of notes payable are based on the
borrowing rates currently available to the Company for bank loans with similar
terms and average maturities.
LONG-TERM DEBT: The fair values of the Company's long-term debt are
estimated using discounted cash flow analyses based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
MANDATORY REDEEMABLE PREFERRED STOCK: The estimated fair values of
mandatory redeemable preferred stock approximated their carrying values due to
adjustments required as part of the Recapitalization described in Note B. The
fair values were based on the estimated fair values of common stock, warrants
and subordinated notes issued in connection with the Recapitalization.
33
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O--FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
FEBRUARY 28, 1999 FEBRUARY 28, 1998
----------------------------- -----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT OF FAIR VALUE OF AMOUNT OF FAIR VALUE OF
ASSETS ASSETS ASSETS ASSETS
(LIABILITIES) (LIABILITIES) (LIABILITIES) (LIABILITIES)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............. $ 223,693 $ 223,693 $ 439,800 $ 439,800
Certificates of deposit............... 928,200 928,200 2,750,000 2,750,000
Notes receivable...................... 385,465 385,465 2,239,500 2,239,500
Financial liabilities:
Notes payable......................... -- -- (915,300) (915,300)
Long term debt........................ (1,188,994) (1,170,140) (1,855,700) (1,851,900)
</TABLE>
NOTE P--SEGMENTS, MAJOR CUSTOMERS AND CONCENTRATIONS
The company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, in fiscal 1999 and has accordingly presented
additional information about its operations for the current year. Information
for fiscal 1998 has been restated from its original presentation to conform to
the fiscal 1999 presentation. All of the Company's operations are in the
domestic U.S. and in Texas and federal waters in the Gulf of Mexico.
The Company's management reviews and evaluates the operations separately of
three main segments--Onshore Operations, Offshore Operations and Fort Cobb
Operations. Each segment is an aggregation of operations subject to similar
economic and regulatory conditions such that they are likely to have similar
long-term prospects for financial performance. Onshore operations include
natural gas gathering and transportation activities in Texas, Oklahoma and
Louisiana. Offshore Operations include natural gas gathering, transportation and
processing activities in the Gulf of Mexico in Texas and federal waters. The
principal markets for both of these segments are comprised of large intrastate
pipeline companies. Fort Cobb Operations are comprised of a local natural gas
distribution company in Oklahoma. This segment supplies natural gas to
approximately 2,600 customers, principally for irrigation and crop drying fuel
for farming cooperatives, and residential fuel.
The accounting policies of the reportable segments are the same as those
described in Note A to the Consolidated Financial Statements. The Company
evaluates the segments based on operating margins, defined as revenues less cost
of purchased gas and operating and maintenance expenses. Such amounts are before
general and administrative expense, interest income or expense or income taxes.
Inter-segment sales are eliminated.
34
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE P--SEGMENTS, MAJOR CUSTOMERS AND CONCENTRATIONS (CONTINUED)
Summarized financial information of the Company's reportable segments is
presented below, for fiscal years ended February 28:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ONSHORE OPERATIONS
Revenues.................................................................... 4,826,931 5,814,395
Operating margin............................................................ 970,994 630,202
Depreciation and amortization............................................... 463,347 425,448
Total assets................................................................ 6,554,339 5,905,397
OFFSHORE OPERATIONS
Revenues.................................................................... 697,547 35,715
Operating margin............................................................ 171,606 (173,533)
Depreciation and amortization............................................... 122,656 70,562
Total assets................................................................ 1,979,969 1,311,295
FORT COBB OPERATIONS
Revenues.................................................................... 2,126,319 1,558,890
Operating margin............................................................ 528,926 177,684
Depreciation and amortization............................................... 162,073 133,880
Total assets................................................................ 2,729,802 2,974,258
SOLD OPERATIONS
Revenues.................................................................... -- 3,271,700
Operating margin............................................................ -- 730,447
Depreciation and amortization............................................... -- 113,310
Total assets................................................................ -- 5,195,050
TOTAL
Revenues.................................................................... 7,650,797 10,680,700
Operating margin............................................................ 1,671,526 1,364,800
Depreciation and amortization............................................... 748,076 743,200
Total assets................................................................ 11,264,110 15,386,000
</TABLE>
The disclosure related to sold operations includes joint ventures sold to
Shoreham and the Company's equity in the operations of Castex. See additional
discussion of the operations sold at Note C to the Consolidated Financial
Statements.
The following table sets forth the Company's major customers and their
percent of total revenue:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Owens Corning Fiberglas Corporation............................................. 17% 11%
Dart Container Corporation...................................................... 12% 9%
Tennessee Gas Pipeline Company.................................................. -- 21%
</TABLE>
The Company's natural gas pipeline operations have a concentration of
customers in the natural gas transmission, distribution and petrochemical
industries. These concentrations of customers may impact the Company's overall
exposure to credit risk, either positively or negatively, in that the customers
may be
35
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE P--SEGMENTS, MAJOR CUSTOMERS AND CONCENTRATIONS (CONTINUED)
similarly affected by the changes in economic or other conditions. The Company's
accounts receivable are generally not collateralized.
The Company has three certificates of deposit with a financial institution
totaling $928,200. The balances are insured by the Federal Deposit Insurance
Corporation up to $284,264. The Company has collateralized certain loans at this
financial institution with these time deposits. The Company believes it is not
exposed to any significant credit risk. The Company also has a collateralized
note receivable from its former joint venture partner totaling $385,465 at
February 28, 1999. All payments are current and the Company expects no future
collection problems.
NOTE Q--NON-EMPLOYEE COMMON STOCK OPTIONS AND WARRANTS
In fiscal 1999, the Company cancelled 200,000 common stock warrants at $0.53
and reissued 40,000 warrants at $0.53 in connection with the settlement with the
convertible promissory noteholders discussed in Note F. Additionally, it issued
20,000 options at $0.625 to non-employee directors. The balance outstanding at
Feburary 28, 1999 includes 201,176 warrants at $3.00 that expired on March 1,
1999.
During fiscal 1998, the Company issued common stock warrants in connection
with various debt issuances and for services provided. The warrants entitled the
holders to purchase shares of the Company's common stock at prices ranging from
$2.50 to $11.25 per share and were exercisable at various dates through April
2000. In conjunction with the Recapitalization, the exercise price for
substantially all warrants outstanding at March 1, 1997 was modified to $3.00
per share. Warrants with expiration dates prior to March 1, 1999, were extended
to that date.
In fiscal 1998, the Company issued 150,000 common stock warrants at $1.25 to
its investment adviser in connection with services related to the
Recapitalization, 200,000 common stock warrants at $0.53 to certain noteholders
in connection with the resolution of disagreements regarding the original terms
of promissory notes issued in 1997, 62,000 common stock warrants at $3.00 to
various preferred stock shareholders, and 40,000 common stock options at $0.53
to non-employee directors. The Company valued these warrants and options using
the Black-Sholes model with the following weighted average assumptions:
risk-free interest rate of 5.8%, expected average life of approximately four
years and expected stock price volatility of 88%, and recorded the value of such
options and warrants as recapitalization costs, interest expense or general and
administrative expenses.
The following is a summary of the status of the Company's non-employee
options and warrants for fiscal 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------------------------------- -----------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS/WARRANTS EXERCISE PRICE OPTIONS/WARRANTS EXERCISE PRICE
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.......... 660,800 $ 1.71 208,800 $ 6.32
Issued.................................... 20,000 0.63 452,000 0.87
Cancelled................................. (200,461) 0.55 (208,800) 6.32
Reissued.................................. 40,000 0.53 208,800 3.00
-------- --------
Outstanding at end of year................ 520,339 2.02 660,800 1.71
-------- --------
-------- --------
</TABLE>
36
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE Q--NON-EMPLOYEE COMMON STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about options and warrants
outstanding at February 28, 1999:
<TABLE>
<CAPTION>
OPTIONS/WARRANTS OUTSTANDING AND EXERCISABLE
------------------------------------------------------
NUMBER WEIGHTED AVERAGE
OUTSTANDING REMAINING
AND CONTRACTUAL WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES EXERCISABLE LIFE (YEARS) EXERCISE PRICE
- ----------------------------------------------------------- -------------- ------------------- -----------------
<S> <C> <C> <C>
$0.53 to 0.63.............................................. 100,000 6.68 $ 0.56
1.19 to 1.25.............................................. 151,188 5.69 1.25
3.00...................................................... 269,151 0.72 3.00
-------
$0.53 to 3.00.............................................. 520,339 3.31 2.02
-------
-------
</TABLE>
NOTE R--FOURTH QUARTER ADJUSTMENTS
Aggregate year end adjustments recorded in the fourth quarter reduced net
earnings by approximately $236,707, and included $206,497 of impairment of oil
and gas assets, and $30,210 of impairment of certain pipeline assets. See Note
H.
NOTE S--INVESTMENT IN CASTEX LP
The following presents summarized financial information of Castex LP carried
at equity in fiscal 1998. The Company sold its equity investment in September
1997; accordingly, 1998 operating financial information is for the six months
ended August 1997.
<TABLE>
<CAPTION>
1998
------------
<S> <C>
Condensed Statement of Operations:
Operating revenue............................................................... $ 5,209,400
Operating profit................................................................ 1,863,200
Net earnings.................................................................... 611,900
</TABLE>
The Company's equity in earnings of Castex was $307,200 in 1998, and is
included in equity in earnings of partnerships in the consolidated statements of
operations.
The Company's equity investment in Castex constituted substantially all of
the Company's oil and gas operations in fiscal 1998; accordingly, 1998 oil and
gas disclosures relate only to the Company's equity in Castex through the date
of sale of its equity investment. The Company's equity in costs incurred in oil
and gas producing activities by Castex LP was approximately $7,854,000 for 1998.
NOTE T--SUBSEQUENT EVENT
On September 23, 1994, an action was filed in District Court of Milam
County, Texas entitled STANLEY ROSENTHAL V. SHOREHAM PIPELINE COMPANY. Mr.
Rosenthal alleged that he had an agreement with Shoreham Pipeline to provide
natural gas from a gas gathering system known as the Rockdale System. Shoreham
Pipeline and the Company acquired the Rockdale System on October 1, 1994 through
a joint venture managed and operated by Shoreham Pipeline. Mr. Rosenthal alleged
that Shoreham Pipeline failed to provide natural gas to him causing alleged
damage to him. Mr. Rosenthal alleged fraud, negligent
37
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE T--SUBSEQUENT EVENT (CONTINUED)
misrepresentation, breach of contract, unlawful discrimination and violations of
the Texas Deceptive Trade Practices Act.
In August 1996, Mr. Rosenthal joined the Company as a defendant. Company
management and its counsel believed that a contract did not exist between
Rosenthal and Shoreham Pipeline and consequently Mr. Rosenthal could not have
been damaged in the manner which he alleged. Nonetheless, on May 20, 1999
following a trial on the issues, the jury in the action awarded actual damages
to Mr. Rosenthal in the amount of $1,656,072 and exemplary damages and damages
under the Texas Deceptive Trade Practices Act which when tripled represent
$1,500,000 against each of Shoreham Pipeline and the Company. Counsel for the
Company expects the court to enter judgment on the jury verdict on June 17,
1999.
Under the terms of the conveyance of the Rockdale System between Shoreham
Pipeline and the Company, the Company believes it is entitled to indemnification
from Shoreham Pipeline for the total amount of damages assessed against the
Company. It is not known at this time whether Shoreham Pipeline has sufficient
assets to pay such indemnification. The Company and its counsel also believe
that numerous errors occurred during the trial providing substantial grounds for
appeal to the Texas Court of Appeals. The Company intends to vigorously pursue
the appeal and any remand of the action for retrial. The Company cannot predict
at this time what exposure it may ultimately have as a result of the judgment.
38
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
GATEWAY ENERGY CORPORATION
ADOPTED MAY 26, 1999
Pursuant to Section 245 of the Delaware General Corporation Law, the Board
of Directors of Gateway Energy Corporation hereby restates the Certificate of
Incorporation of the Corporation as heretofore amended and supplemented through
the date hereof. This Restated Certificate of Incorporation does not further
amend, in any respect, the Certificate of Incorporation as otherwise amended or
supplemented. There is no discrepancy between the provisions of prior
amendments or supplements and the provisions of this Restated Certificate of
Incorporation.
FIRST. The name of the corporation is GATEWAY ENERGY CORPORATION.
SECOND. Its principal office in the State of Delaware is located at No.
100 West Tenth Street, in the City of Wilmington, County of New Castle. The
name and address of its resident agent is The Corporation Trust Company, No. 100
West Tenth Street, Wilmington, Delaware.
THIRD. The nature of the business, or objects or purposes to be
transacted, promoted or carried on are:
(a) To buy, sell, manufacture, produce, design, improve, develop,
fabricate, import, export and otherwise merchandise or deal in and
with sporting, athletic and recreational goods, wares, products and
merchandise of every character and description.
(b) To buy, sell, manufacture, produce, design, improve, develop,
fabricate, import, export, and otherwise merchandise or deal in and
with luggage, cameras, projectors, film, photographic supplies and
other equipment, jewelry, toys, games, clothing, commercial
appliances, equipment, accessories, parts, supplies, goods, wares,
products, merchandise and any and all other personal property of every
kind, character and description.
(c) To store, warehouse, repair, care for and otherwise service articles
of every character and description handled or dealt in by the
corporation.
<PAGE>
(d) To purchase or otherwise acquire, lease, establish, take over,
develop, equip, maintain, operate, service, manage and sell
departments, mercantile establishments, branch offices, buying
offices, warehouses, depots and every other facility of every
character and description whatever incident or convenient to any such
object.
(e) To acquire, by purchase or otherwise, and to preserve, protect,
improve and develop, in furtherance of any object of its business,
real and personal property of every kind and the appurtenances and
perquisites thereof, including buildings, structures and improvements
of every character and description, concessions, franchise rights,
leases, leasehold interests and estates and easements or license
rights pertaining thereto, and equipment, trade or removable fixtures,
and other things incident or convenient to the conduct of any such
business.
(f) To subscribe for, underwrite, purchase, become interested in, receive,
sell, negotiate, exchange, transfer, assign, mortgage, pledge, turn to
account, realize upon, invest and reinvest in, hold for investment,
own and to otherwise acquire or dispose of, and generally to trade and
deal in, securities of every kind, character and description, issued
or created by, or secured upon property of, individuals, associations
and corporation; and to acquire or become interested in any such
securities by original subscription, underwriting, purchase,
participation in syndicates or otherwise, and irrespective of whether
or not such securities be fully paid or subject to further payments;
to make payment thereon as called for or in advance of call or
otherwise, and to underwrite or subscribe or contract for the same,
conditionally or otherwise, either with a view to investment or resale
or for any other lawful purpose. The term "securities", wherever used
herein, shall consistent with the context, and without limiting the
generality of the foregoing, include shares of stock, voting trust
certificates in respect of share of capital stock, scrip, bonds,
coupons, mortgages, debentures, warrants, rights, notes, acceptances,
drafts, trust receipts, bills of exchange, commercial paper,
certificates of evidence or indebtedness, certificates of interest,
and all other similar negotiable or transferrable instruments, chooses
in action and interest in, certificates of, and receipts evidencing
any interest or title in or in respect of, any such securities. The
phrase "associations and corporations", wherever used herein, shall,
consistent with the contest and without limiting the generality of the
foregoing, include partnerships, firms, companies, syndicates, trusts,
business trusts, trustees, receivers, joint stock companies,
governments and political
-2-
<PAGE>
and municipal subdivisions thereof, whether domestic or foreign,
associations and corporations (whether public, municipal or
private) of every kind, character and description, and all other
combinations, organizations and entities, of every kind, character
and description.
(g) To do any and all acts and things permitted by law for the
preservation, protection, improvement and enhancement in value of any
and all such securities; to aid, by loan, subsidy, guaranty or
otherwise, those issuing, creating or responsible for any such
securities; and while the owner thereof, to exercise all the rights,
powers and privileges of ownership, including the right to vote
thereon and to consent and otherwise act with respect thereto with
power and authority to transfer the same to one or more persons, firms
or corporations, subject to voting trusts or other agreements, placing
in them the voting power thereof.
(h) To guarantee the payment of dividends on any shares of stock, and to
become surety in respect of, endorse or otherwise guarantee or become
liable for the payment of the principal or interest on any other
securities, issued or created by other associations and corporation,
or by any individual, in the securities, business, financing or
welfare whereof the corporation shall have any interest of any nature
or with which it shall have business dealings; and to become surety
for or to guarantee the carrying out and performance of any and all
contracts, leases, obligations and undertakings of any and all such
individuals, associations and corporations.
(i) To incorporate, organize, reorganize and finance, and to aid and
assist financially or otherwise, and to manage and supervise the
property, affairs, business or operations and associations and
corporations of all kinds, and to underwrite, purchase and subscribe
for the shares of stock and other securities thereof; to act as
employee, agent, manager, and to otherwise represent, any corporation,
association or individual, and to carry on the business thereof; and
to dissolve, wind up, liquidate, merge or consolidate any such
association or corporation, or to cause the same to be dissolved,
wound up, liquidated, merged or consolidated; and to investigate,
examine, audit and report on the books, standing prospects, business,
affairs and condition of any individual, corporation or association,
and generally on any assets, property or rights; and to do any of such
purposes into effect.
-3-
<PAGE>
(j) To buy, purchase, lease, rent, or otherwise acquire, own, hold,
manage, develop, improve, use, operate, preserve and sell, lease,
mortgage, or otherwise deal in and turn to account real estate and any
and all interests or assets in or appertaining thereto; also any and
all buildings, structures or improvements constituting part of or
situated on or used in connection with any such real estate; and in
general, in any manner lawfully permitted, to acquire, own, hold,
operate, develop, explore, prospect and to obtain the function thereof
and therefrom; and to deal in, rent, divide, develop, partition or
otherwise improve, use and dispose of lands, leaseholds and any and
all interest, tangible or intangible, in lands, real estate and
leaseholds; to erect, construct, alter, remodel, manage, develop,
operate, move, decorate and otherwise deal with structures situated on
or to be situated on any such land, real estate and leasehold; and in
general to carry on the business of a real estate company in any
lawful manner without limitation as to description or amount.
(k) To buy, sell, import, export, distribute, license, lease, rent,
exchange, service, repair, rebuild, use, install, design, manufacture,
fabricate, produce, develop, assemble, contract for the design or
manufacture of assembly or installation of, mortgage, pledge or
otherwise encumber, assign, transfer or otherwise dispose of, and
otherwise deal in and with, in whole or in part, goods, wares,
merchandise and all other personal property, whether tangible or
intangible, of every nature, kind and character whatsoever.
(l) To engage in, carry on and conduct research, experiments,
investigations, analyses, studies and laboratory work, and to acquire,
establish, own, operate, maintain and dispose of laboratories and
other similar facilities and all necessary equipment connected
therewith incident or convenient to the conduct of any such object.
(m) To buy, sell, discount, exchange and otherwise deal with in and with
notes, accounts and bills receivable and other commercial paper of any
kind secured in whole or in part by chattel mortgages, conditional
sale contracts or other liens or rights upon, affecting or in any
manner relating to any business which this corporation is authorized
to conduct.
(n) To acquire and take over as a going concern or otherwise and
thereafter to carry on or liquidate, in whole or in part, the rights,
assets, property, good will and business of any person, firm,
association, business trust or corporation engaged in any business
-4-
<PAGE>
which this corporation is authorized to conduct, by purchase thereof
or in exchange for shares of stock, bonds, debentures or other
securities of this corporation or by any combination of such means,
and to receive the same subject to or in connection therewith to
assume or otherwise provide for any part of all of the liabilities of
the owner(s) thereof.
(o) To apply for, purchase or otherwise acquire, and to develop, improve,
take or grant licenses in respect of, and hold, own, use, manufacture
under and in any other manner turn to account, in furtherance of any
object of its business, and all inventions and processes including
improvements and modifications thereof, any and all letters patent
including rights connected therewith or appertaining thereto, any and
all trademarks, trade names, trade symbols and other indications of
origin or ownership and any and all copyrights and private franchise
rights.
(p) To finance and promote the financing of its business and to issue,
buy, own, sell, pledge, hypothecate and control securities of every
character in connection therewith.
(q) To loan to any person, firm or corporation any of its surplus funds,
either with or without security.
(r) To borrow or raise moneys for any of the purposes of the
corporation and, from time to time, without limit as to amount to
draw, make, accept, endorse, execute and issue promissory notes,
drafts, bills of exchange, warrants, bonds, debentures and other
negotiable or non-negotiable instruments and evidences of
indebtedness, and to secure the payment of any thereof and of the
interest thereon by mortgage upon or pledge, conveyance or
assignment in trust of the whole or any part of the property of the
corporation, whether at the time owned or thereafter acquired, and
to sell, pledge or otherwise dispose of such bonds and other
obligations of the corporation for its corporate purposes.
(s) To elect such officers and engage such employees and agents as the
business of the corporation shall require and to enter into contracts
of employment with such officers, employees and agents to extend for
such period(s) of time as the directors shall deem proper not limited
by and even extending beyond their term of the office for any period
of years and at such rates of competition as they shall deem suitable.
-5-
<PAGE>
(t) To issue or deliver, in exchange for any property, business or
securities which it is authorized to acquire, its own securities of
any kind, and to make payment therefor in any other lawful means of
payment whatsoever.
(u) To purchase, hold, sell and transfer the shares of its own capital
stock; provided it shall not use its funds or property for the
purchase of its own shares of capital stock when such use would cause
any impairment of its capital except as otherwise permitted by law,
and provided further that shares of its own capital stock belonging to
it shall not be voted upon directly or indirectly.
(v) To have one or more offices, to carry on all or any of its operations
and business and without restrictions or limit as to amount to
purchase or otherwise acquire, hold, own, mortgage, sell, convey or
otherwise dispose of real and personal property of every class and
description in any of the states, districts, territories or colonies
of the United States, and in any and all foreign countries, subject to
the laws of such state, district, territory, colony or country.
(w) To enter into, perform and carry out contracts and do all other acts
or things necessary, incidental, convenient or auxiliary to any or all
of the objects of its business herein set forth or calculated directly
or indirectly to promote the interests of the corporation, to enhance
the value of or render profitable any of its property or rights.
(x) To exercise any or all of the power hereinbefore set forth, without
restriction or limit as to amount, either as principal, agent,
contractor, trustee or otherwise, either alone or in company with
others, and either in its own or any trade name, in the State of
Delaware or in any or all other states, districts, territories,
colonies and dependencies of the United States, and in any or all
foreign countries.
(y) In general, to have and exercise all the powers conferred by or
available under the laws of Delaware upon corporations formed under
the General Corporation Law of the State of Delaware, and to do any or
all of the things hereinbefore set forth to the same extent as natural
persons might or could do.
The objects and purposes specified in the foregoing clauses shall, except
where otherwise expressed, be in nowise limited or restricted by reference to,
or inference from, the terms of any other clause in this Certificate of
Incorporation,
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but the objects and purposes specified in each of the foregoing clauses of
this article shall be regarded as independent objects and purposes.
FOURTH: The total aggregate number of shares which the Company shall have
authority to issue is seventeen million five hundred and ten thousand
(17,510,000) shares designed as follows: (i) seventeen million five hundred
thousand (17,500,000) shares of Common Stock, par value $.25 per share; and (ii)
ten thousand (10,000) shares of Preferred Stock, par value $1.00 per share,
which shares of Preferred Stock may be issued in series, all with such rights,
privileges, restrictions and preferences as the Board of Directors may authorize
from time to time.
FIFTH: The minimum amount of capital with which the corporation will
commence business is One Thousand Dollars ($1,000.00).
SIXTH: [Section SIXTH of the original certificate of incorporation which
named the incorporators, has been omitted].
SEVENTH: The corporation is to have perpetual existence.
EIGHTH: The private property of the stockholders shall not be subject to
the payment of corporate debts to any extent whatever.
NINTH: In furtherance and not in limitation of the power conferred by
statute, the Board of Directors is expressly authorized:
To make, alter or appeal the Bylaw of the corporation.
To authorize and cause to be executed mortgages and liens upon
the real and personal property of the corporation.
To set apart out of any of the funds of the corporation available
for dividends a reserve or reserves for any proper purpose and to
abolish any such reserve in the manner in which it was created.
By resolution passed by a majority of the whole Board, to
designate one or more committees, each committee to consist of
two or more of the directors of the corporation, which, to the
extent provided in the resolution or the Bylaws of the
corporation, shall have and may exercise the powers of the Board
of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the
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corporation to be affixed to all papers which may require it.
Such committee or committees shall have such name or names as
may be stated in the Bylaws of the corporation or as may be
determined from time to time by resolution adopted by the
Board of Directors.
When and as authorized by the affirmative vote of the holders of a majority
of the stock issued and outstanding having voting power given at the
stockholders' meeting duly called for that purpose, or when authorized by the
written consent of the holders of a majority of the voting stock issued and
outstanding, to sell, lease or exchange all of the property and assets of the
corporation, including its good will and its corporate franchises, upon such
terms and conditions and for such consideration, which may be in whole or in
part shares of stock in, and/or other securities of, any other corporation or
corporations, as its Board of Directors shall deem expedient and for the best
interests of the corporation.
TENTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this corporation under
the provision of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provision of Section 279 of title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summonsed in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may be,
and also on this corporation.
ELEVENTH: Meetings of stockholders may be held outside the State of
Delaware, if the Bylaws so provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the corporation. Elections of directors
need not be by ballot unless the Bylaws of the corporation shall so provide.
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TWELFTH: Except for the rights or conversion herein above reserved to the
holders of the Class B Common Stock, no holders of shares of stock in this
corporation, of whatever class, shall, by virtue thereof, have any pre-emptive
right to subscribe to any or all additional issues of stock of this corporation
of any or all classes now or hereafter authorized or to any warrant, obligation,
bond, note, debenture or other security of this corporation whether or not
convertible into the shares of the corporation.
THIRTEENTH: No contract or other transaction between this corporation
and any other firm, association or corporation shall be affected or invalidated
by reason of the fact that any of the directors or officers of this corporation
are interested in or are members, shareholders, directors or officers of such
other firm, association or corporation; and any director or officer of such
other firm association or corporation; and any director or officer of this
corporation may be a party to or may be interested in any contract or
transaction oft his corporation or in which this corporation is interested, and
no such contract shall be affected or invalidated thereby; and each and every
person who may become a director officer of this corporation is hereby relieved
from any liability that might otherwise exist from his contracting with this
corporation for the benefit of himself of any person, firm, association or
corporation in which he may be anywise interested.
FOURTEENTH: The corporation reserves the right to amend, alter, change
or repeal any provision contained in the Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, except as may otherwise be
provided herein, and all rights conferred upon stockholders herein are granted
subject to this reservation.
FIFTEENTH: No Director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty by such a Director as a Director. Notwithstanding the foregoing
sentence, a Director shall be liable to the extent provided by applicable law
(i) for any breach of the Director's duty of loyalty to the Corporation or its
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) pursuant to Section
174 of the General Corporation Law of Delaware; or (iv) for any transaction from
which such Directors derived an improper personal benefit. No amendment or
appeal of this Article Fifteenth shall apply to or have any effect on the
liability of any Director of the Corporation for or with respect to any acts or
omissions of such Director occurring prior to such amendment or repeal.
IN WITNESS WHEREOF, Gateway Energy Corporation has caused this Restated
Certificate of Incorporation to be executed by Michael T. Fadden, its President
and attested by Scott D. Heflin, its Secretary, this 26th day of May, 1999.
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GATEWAY ENERGY CORPORATION,
By:
-----------------------------------
Michael T. Fadden, President
ATTEST:
By:
----------------------------
Scott D. Heflin, Secretary
STATE OF TEXAS )
) ss.
COUNTY OF HARRIS )
The foregoing instrument was acknowledged before me this 26th day of May,
1999, by Michael T. Fadden, President and Scott D. Heflin, Secretary,
respectively of Gateway Energy Corporation.
-----------------------------------
Notary Public
[SEAL]
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GATEWAY ENERGY CORPORATION
BY-LAWS
(IN EFFECT AND CORRECT THROUGH MAY 26, 1999)
ARTICLE I - STOCKHOLDERS
SECTION 1. ANNUAL MEETING.
(1) An annual meeting of the stockholders, for the election of directors
to succeed those whose terms expire and for the transaction of such other
business as may properly come before the meeting, shall be held at such place,
on such date, and at such time as the Board of Directors shall each year fix,
which date shall be within thirteen (13) months of the last annual meeting of
stockholders.
(2) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (a) pursuant to the
Corporation's notice at meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the Corporation who was a stockholder of
record at the time of giving of the notice provided for in this By-Law, who is
entitled to vote at the meeting and who complied with the notice procedures set
forth in this By-Law.
(3) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of Subsection (2) of
this By-Law, the stockholder must have given timely notice in writing to the
Secretary of the Corporation and it must otherwise be a proper matter for
stockholder action. To be timely, a stockholder's notice must be delivered to
the Secretary at
<PAGE>
the principal executive offices of the Corporation not less than sixty (60)
days nor more than ninety (90) days prior to the first anniversary of the
preceding year's annual meeting; PROVIDED, HOWEVER, that in the event that
the date of the annual meeting is advanced by more than thirty (30) days or
delayed by more than sixty (60) days from such anniversary date, notice by
the stockholder to be timely must be so delivered not earlier than the
ninetieth (90th) day prior to such annual meeting and not later than the
close of business on the later of the sixtieth (60th) day prior to such
annual meeting or the tenth (10th) day following the day on which public
announcement of the date of such meeting is first made. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or reelection as a director all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected);
(b) as to any other business that the stockholder proposes to bring before
the meeting, a brief description of the business desired to be brought before
the meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the beneficial
owner, if any, on whose behalf the proposal is made; and (c) as to the
stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the Corporation's books, and
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of such beneficial owner and (ii) the class and number of shares of the
Corporation which are owned beneficially and of record by such stockholder
and such beneficial owner.
(4) Notwithstanding anything in the second sentence of Subsection (3) of
this By-Law to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation is increased and there is
no public announcement naming all of the nominees for director or specifying the
size of the increased Board of Directors made by the Corporation at least
seventy (70) days prior to the first anniversary of the preceding year's annual
meeting, a stockholder's notice required by this By-Law shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the Secretary at the principal executive
offices of the Corporation not later than the close of business on the tenth
(10th) day following the day on which such public announcement is first made by
the Corporation.
(5) Only such persons who are nominated in accordance with the procedures
set forth in these By-Laws shall be eligible to serve as directors and only such
business shall be conducted at an annual meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth in
these By-Laws. The chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made in accordance with the procedures set forth in these By-Laws
and, if any proposed nomination or business is not in compliance with
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these By-Laws, to declare that such defective proposed business or nomination
shall be disregarded.
(6) For purposes of these By-Laws, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or a comparable national news service or in a document publicly filed by
the Corporation with the Securities and Exchange Commission pursuant to Section
13, 14 or 15 (d) of the Exchange Act.
(7) Notwithstanding the foregoing provisions of this By-Law, a stockholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in this
By-Law. Nothing in this By-Law shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
SECTION 2. SPECIAL MEETINGS: NOTICE.
Special meetings of the stockholders, other than those required by statute,
may be called at any time by the Chairman of the Board, the President or by the
Board of Directors acting pursuant to a resolution adopted by a majority of the
Board of Directors . Notice of every special meeting, stating the time, place
and purpose, shall be given by mailing, postage prepaid, at least ten (10) but
not more than sixty (60) days before each such meeting, a copy of such notice
addressed to each stockholder of the Corporation at his post office address as
recorded on the books of the Corporation. The Chairman of the Board, the
President or the Board
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of Directors acting pursuant to a resolution adopted by a majority of the
Board of Directors may postpone or reschedule any previously scheduled
special meeting.
Only such business shall be conducted at a special meeting of stockholders
as shall have been brought before the meeting pursuant to the Corporation's
notice of meeting.
SECTION 3. NOTICE OF MEETINGS.
Written notice of the place, date, and time of all meetings of the
stockholders shall be given not less than ten (10) nor more than sixty (60) days
before the date on which the meeting is to be held, to each stockholder entitled
to vote at such meeting, except as otherwise provided herein or required by law
(meaning, here and hereinafter, as required from time to time by the Delaware
General Corporation Law or the Certificate of Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; PROVIDED,
HOWEVER, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date, and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
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SECTION 4. QUORUM.
At any meeting of the stockholders, the holders of a majority of all of the
shares of the stock entitled to vote at the meeting, present in person or by
proxy, shall constitute a quorum for all purposes, unless or except to the
extent that the presence of a larger number may be required by law. Where a
separate vote by a class or classes is required, a majority of the shares of
such class or classes present in person or represented by proxy shall constitute
a quorum entitled to take action with respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of the stock entitled to vote at the
meeting who are present in person by proxy may adjourn the meeting to another
place, date, or time.
SECTION 5. ORGANIZATION.
Such person as the Board of Directors may have designated or, in the
absence of such a person, the Chairman of the Board or, in his or her absence,
the President or, in his or her absence, such person as may be chosen by the
holders of a majority of the shares entitled to vote who are present, in person
or by proxy, shall call to order any meeting of the stockholders and act as
chairman of the meeting. In the absence of the Secretary of the Corporation,
the secretary of the meeting shall be the person the chairman appoints.
SECTION 6. CONDUCT OF BUSINESS.
The chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
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manner of voting conduct of discussion as seem to him or her in order. The
chairman shall have the power to adjourn the meeting to another place, date and
time. The date and time of the opening and closing of the polls for each matter
upon which the stockholders will vote at the meeting shall be announced at the
meeting.
SECTION 7. PROXIES AND VOTING.
At any meeting of the stockholders, every stockholder entitled to vote may
vote in person or by proxy authorized by an instrument in writing or by a
transmission permitted by law filed in accordance with the procedure established
for the meeting. Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to this Section may
be substituted or used in lieu of the original writing or transmission for any
and all purposes for which the original writing or transmission could be used,
provided that such copy, facsimile telecommunication or other reproduction shall
be a complete reproduction of the entire original writing or transmission.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; PROVIDED, HOWEVER, that upon
demand therefore by a stockholder entitled to vote or by his or her proxy, a
stock vote shall be taken. Every stock vote shall be taken by ballots, each of
which shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
The Corporation may, and to the extent required by law, shall, in advance
of any meeting of stockholders, appoint one or more inspectors to act at the
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meeting and make a written report thereof. The Corporation may designate one or
more persons as alternate inspectors to replace any inspector who fails to act.
If no inspector or alternate is able to act at a meeting of stockholders, the
person presiding at the meeting may, and to the extent required by law, shall,
appoint one or more inspectors to act at the meeting. Every vote taken by
ballots shall be counted by a duly appointed inspector or inspectors.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law, all other matters shall be determined by a
majority of the votes cast affirmatively or negatively.
SECTION 8. STOCK LIST.
A list of stockholders entitled to vote at any meeting of stockholders,
arranged in alphabetical order for each class of stock and showing the address
of each such stockholder and the number of shares registered in his or her name,
shall be open to the examination of any such stockholder, for any purpose
germane to the meeting, during ordinary business hours for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at the place where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
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SECTION 9. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING.
Any action required to be taken at any annual or special meeting of
stockholders of the Corporation, or any action which may be taken at any annual
or special meeting of the stockholders, may be taken without a meeting and
without a vote, if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted.
SECTION 10. VALIDITY OF CONSENTS.
Consents to corporate action shall be valid for a maximum of sixty (60)
days after the date of the earliest dated consent delivered to the Corporation
in the manner provided in Section 228(c) of the Delaware General Corporation
Law.
Within ten (10) business days after receipt of the earliest dated consent
delivered to the Corporation in the manner provided in Section 228(c) of the
Delaware General Corporation Law or the determination by the Board of Directors
that the Corporation should seek corporate action by written consent, as the
case may be, the Secretary shall, unless otherwise directed by the Board of
Directors, engage one or more inspectors to certify the results of the consent
action.
ARTICLE II - BOARD OF DIRECTORS
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SECTION 1. NUMBER, ELECTION AND TERM OF DIRECTORS.
Subject to the rights of the holders of any series of preferred stock to
elect directors under specified circumstances, the number of directors shall be
fixed from time to time exclusively by the Board of Directors pursuant to a
resolution adopted by a majority of the Board of Directors. In any case, the
number of directors of the Corporation shall not be more than eleven nor less
than five. Directors shall be elected at the Corporation's Annual Meeting and
shall hold office for a term expiring at the next succeeding Annual Meeting of
Stockholders.
SECTION 2. NEWLY CREATED DIRECTORSHIPS AND VACANCIES.
Subject to the rights of the holders of any series of preferred stock with
respect to such series of preferred stock, newly created directorships resulting
from any increase in the authorized number of directors or any vacancies on the
Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office or other cause shall, unless otherwise
provided by law or by resolution of the Board of Directors, be filled only by a
majority vote of the directors then in office, whether or not less than a
quorum, and directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders. No decrease in the authorized number of
directors shall shorten the term of any incumbent director.
SECTION 3. REGULAR MEETINGS.
Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
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established by the Board of Directors and publicized among all directors.
A notice of each regular meeting shall not be required.
SECTION 4. SPECIAL MEETINGS.
Special meetings of the Board of Directors may be called by the Chairman of
the Board, the President or by two or more directors then in office and shall be
held at such place, on such date, and at such time as they or he or she shall
fix. Notice of the place, date, and time of each such special meeting shall be
given each director by whom it is not waived by mailing written notice not less
than five (5) days before the meeting or by telephone or by telegraphing or
telexing or by facsimile transmission of the same not less than twenty-four (24)
hours before the meeting. Unless otherwise indicated in the notice thereof, any
and all business may be transacted at a special meeting.
SECTION 5. QUORUM.
At any meeting of the Board of Directors, a majority of the total number of
the whole Board shall constitute a quorum for all purposes. If a quorum shall
fail to attend any meeting, a majority of those present may adjourn the meeting
to another place, date, or time, without further notice or waiver thereof.
SECTION 6. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE.
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
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SECTION 7. CONDUCT OF BUSINESS.
At any meeting of the Board of Directors, business shall be transacted in
such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors
SECTION 8. POWERS.
The Board of Directors may, except as otherwise required by law, exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, including, without limiting the generality of the foregoing,
the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as
it may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(4) To remove any officer of the Corporation with or without cause,
and from time to time to devolve the powers and duties of any officer upon
any other person for the time being;
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(5) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and agents;
(6) To adopt from time to time such stock option, stock purchase,
bonus or other compensation plans for directors, officers, employees and
agents of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and,
(8) To adopt from time to time regulations, not inconsistent with
these By-Laws, for the management of the Corporation s business and
affairs.
SECTION 9. COMPENSATION OF DIRECTORS.
Unless otherwise restricted by the Corporation's Certificate of
Incorporation, the Board of Directors shall have the authority to fix the
compensation of the directors. The directors may be paid their expenses, if any,
of attendance at each meeting of the Board of Directors and may be paid a fixed
sum for attendance at each meeting of the Board of Directors or paid a stated
salary or paid other compensation as director. No such payment shall preclude
any director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
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ARTICLE III - COMMITTEES
SECTION 1. COMMITTEES OF THE BOARD OF DIRECTORS.
The Board of Directors, by a vote of a majority of the Board, may from time
to time designate committees of the Board, with such lawfully delegable powers
and duties as it thereby confers, to serve at the pleasure of the Board and
shall, for those committees and any others provided for herein, elect a director
or directors to serve as the member or members, designating, if it desires,
other directors as alternate members who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of
any member of any committee and any alternate member in his or her place, the
member or members of the committee present at the meeting and not disqualified
from voting, whether or not he or she or they constitute a quorum, may by
unanimous vote appoint another member of the Board of Directors to act at the
meeting in the place of the absent or disqualified member. Committees may
include an Executive Committee, Compensation Committee, Audit Committee and
Nominating Committee.
SECTION 2. CONDUCT OF BUSINESS
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third (1/3) of the members shall
constitute a quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum; and all
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matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members consent in
writing and the writing or writings are filed with the minutes of the
proceedings of such committee.
ARTICLE IV - OFFICERS
SECTION 1. GENERALLY.
The officers of the Corporation shall consist of a Chairman of the Board, a
President, one or more Vice Presidents, a Secretary, a Treasurer, an Assistant
Secretary and such other officers as may from time to time be appointed by the
Board of Directors. Officers shall be elected by the Board of Directors, which
shall consider that subject at its first meeting after every annual meeting of
stockholders. Each officer shall hold office until his or her successor is
elected and qualified or resignation or removal. Any number of offices may be
held by the same person. The salaries of officers elected by the Board of
Directors shall be fixed from time to time by the Board of Directors or by such
officers as may be designated by resolution of the Board.
SECTION 2. CHAIRMAN OF THE BOARD.
The Chairman of the Board shall keep in close touch with the administration
of the affairs of the Corporation and supervise its general policies. The
Chairman of the Board shall also exercise and perform such other powers and
duties as may be from time to time assigned to him or her by the Board of
Directors or prescribed by the By-Laws, including being the Chief Executive
Officer.
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SECTION 3. PRESIDENT.
Unless the Chairman of the Board is serving as Chief Executive Officer, the
President shall be the Chief Executive Officer of the Corporation. Subject to
the provisions of these By-Laws and to the direction of the Board of Directors,
he or she shall have the responsibility for the general management and control
of the business and affairs of the Corporation and shall perform all duties and
have all powers which are commonly incident to the office of chief executive or
which are delegated to him or her by the Board of Directors. He or she shall
have power to sign all contracts and other instruments of the Corporation which
are authorized and shall have general supervision and direction of all of the
other officers, employees and agents of the Corporation.
SECTION 4. VICE PRESIDENT.
Each Vice President shall have such powers and duties as may be delegated
to him or her by the Board of Directors. One (1) Vice President shall be
designated by the Board to perform the duties and exercise the powers of the
President in the event of the President s absence or disability.
SECTION 5. TREASURER.
The Treasurer shall have the responsibility for maintaining the financial
records of the Corporation. He or she shall make such disbursements of the funds
of the Corporation as are authorized and shall render from time to time an
account of all such transactions and of the financial condition of the
Corporation. The Treasurer shall also perform such other duties as the Board of
Directors may from time to time prescribe.
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SECTION 6. SECRETARY.
The Secretary shall issue all authorized notices for, and shall keep
minutes of, all meetings of the stockholders and the Board of Directors. He or
she shall have charge of the corporate books and shall perform such other duties
as the Board of Directors may from time to time prescribe.
SECTION 7. ASSISTANT SECRETARY.
In the absence or inability of the Secretary to act, the Assistant
Secretary may perform all of the duties and exercise all the powers of the
Secretary. The performance of any such duty shall be conclusive evidence of his
or her power to act. The Assistant Secretary shall also perform such other
duties as the Board of Directors, the Chairman of the Board or the President may
from time to time assign to him or her.
SECTION 8. DELEGATION OF AUTHORITY.
The Board of Directors may from time to time delegate the powers or duties
of any officer to any other officers or agents, notwithstanding any provision
hereof.
SECTION 9. REMOVAL.
Any officer of the Corporation may be removed at any time, with or without
cause, by the Board of Directors.
SECTION 10. ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS.
Unless otherwise directed by the Board of Directors, the Chairman of the
Board, the President or any officer of the Corporation authorized by the
Chairman of the Board or the President shall have power to vote and otherwise
act on behalf of the Corporation, in person or by proxy, at any meeting of
stockholders of or
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with respect to any action of stockholders of any other corporation in which
this Corporation may hold securities and otherwise to exercise any and all
rights and powers which this Corporation may possess by reason of its
ownership of securities in such other corporation.
ARTICLE V - STOCK
SECTION 1. CERTIFICATES OF STOCK.
Each stockholder shall be entitled to a certificate signed by, or in the
name of the Corporation by, the Chairman of the Board, the President or a Vice
President, and by the Secretary, the Treasurer or the Assistant Secretary,
certifying the number of shares owned by him or her. Any or all of the
signatures on the certificate may be by facsimile.
SECTION 2. TRANSFERS OF STOCK.
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these
By-Laws, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.
SECTION 3. RECORD DATE.
(1) The Board of Directors may fix a record date, which shall not be more
than sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for any other
action
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hereinafter described, as of which there shall be determined the stockholders
who are entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof; to receive payment of any dividend or other
distribution or allotment of any rights; or to exercise any rights with
respect to any change, conversion or exchange of stock or with respect to any
other lawful action; PROVIDED, HOWEVER, that if no record date is fixed by
the Board of Directors, the record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given or, if
notice is waived, at the close of business on the day next preceding the day
on which the meeting is held, and, for determining stockholders entitled to
receive payment of any dividend or other distribution or allotment of rights
or to exercise any rights of change, conversion or exchange of stock or for
any other purpose, the record date shall be at the close of business on the
day on which the Board of Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
PROVIDED, HOWEVER, that the Board of Directors may fix a new record date for the
adjourned meeting.
(2) In order that the Corporation may determine the stockholders entitled
to consent to corporate action in writing without a meeting, the Board of
Directors may fix a record date, which record date shall not precede, or be more
than ten (10) days after, the date upon which the resolution fixing the record
date is adopted by the Board of Directors. Any stockholder of record seeking to
have the
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stockholders authorize or take corporate action by written consent shall, by
written notice to the Secretary, request the Board of Directors to fix a
record date. The Board of Directors shall within ten (10) days after the date
on which such a request is delivered to, or mailed and received at, the
office of the Secretary at the principal executive offices of the
Corporation, adopt a resolution fixing the record date. If no record date has
been fixed by the Board of Directors within ten (10) days after the date on
which such a request is received, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board of Directors is required by law,
shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the Corporation by
delivery to its registered office in the State of Delaware, its principal
place of business or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded (the
"Custodian"). Delivery made to the Corporation s registered office,
principal place of business or the Custodian, shall be by hand or certified
or registered mail, return receipt requested. If no record date has been
fixed by the Board of Directors and prior action by the Board of Directors is
required by law, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting shall be at the
close of business on the date on which the Board of Directors adopts the
resolution taking such prior action.
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SECTION 4. LOST, STOLEN OR DESTROYED CERTIFICATES.
In the event of the loss, theft or destruction of any certificate of stock,
another may be issued in its place pursuant to such regulations as the Board of
Directors may establish concerning proof of such loss, theft or destruction and
concerning the giving of a satisfactory bond or bonds of indemnity.
SECTION 5. REGULATIONS.
The issue, transfer, conversion and registration of certificates of stock
shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI - NOTICES
SECTION 1. NOTICES.
Except as otherwise specifically provided herein or required by law, all
notices required to be given to any stockholder, director, officer, employee or
agent shall be in writing and may in every instance be effectively given by hand
delivery to the recipient thereof, by depositing such notice in the mails,
postage paid, recognized overnight delivery service or by sending such notice by
facsimile, receipt acknowledged, or by prepaid telegram or mailgram. Any such
notice shall be addressed to such stockholder, director, officer, employee or
agent at his or her last known address as the same appears on the books of the
Corporation. The time when such notice is received, if hand delivered, or
dispatched, if delivered through the mails or by telegram or mailgram, shall be
the time of the giving of the notice.
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<PAGE>
SECTION 2. WAIVERS.
A written waiver of any notice, signed by a stockholder, director, officer,
employee or agent, whether before or after the time of the event for which
notice is to be given, shall be deemed equivalent to the notice required to be
given to such stockholder, director, officer, employee or agent. Neither the
business nor the purpose of any meeting need be specified in such a waiver.
Attendance at any meeting shall constitute waiver of notice except attendance
for the sole purpose of objecting to the timeliness of notice.
ARTICLE VII - MISCELLANEOUS
SECTION 1. FACSIMILE SIGNATURES.
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these By-Laws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
SECTION 2. CORPORATE SEAL.
The Board of Directors may provide a suitable seal, containing the name of
the Corporation, which seal shall be in the charge of the Secretary. If and when
so directed by the Board of Directors or a committee thereof, duplicates of the
seal may be kept and used by the Treasurer and the Assistant Secretary.
SECTION 3. RELIANCE UPON BOOKS, REPORTS AND RECORDS.
Each director, each member of any committee designated by the Board of
Directors, and each officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account
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or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such director or committee member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.
SECTION 4. FISCAL YEAR.
The fiscal year of the Corporation shall, unless otherwise changed by the
Board of Directors, end on the last day of February in each year.
SECTION 5. TIME PERIODS.
In applying any provision of these By-Laws which requires that an act be
done or not be done a specified number of days prior to an event or that an act
be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded,
and the day of the event shall be included.
ARTICLE VIII - INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 1. RIGHT TO INDEMNIFICATION.
Each person who was or is made a party or is threatened to be made a party
to or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a director or an officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other
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enterprise, including service with respect to an employee benefit plan
(hereinafter and whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent) or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide
prior to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and
amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; PROVIDED, however, that, except as
provided in Section 3 of this ARTICLE VIII with respect to proceedings to
enforce rights to indemnification, the Corporation shall indemnify any such
indemnitee in connection with a proceeding (or part thereof) initiated by
such indemnitee only if such proceeding (or part thereof) was authorized by
the Board of Directors of the Corporation.
SECTION 2. RIGHT TO ADVANCEMENT OF EXPENSES.
The right to indemnification conferred in Section 1 of this ARTICLE VIII
shall include the right to be paid by the Corporation the expenses (including
attorneys' fees) incurred in defending any such proceeding in advance of its
final disposition (hereinafter an "advancement of expenses"); PROVIDED, HOWEVER,
that, if the Delaware General Corporation Law requires, an advancement of
expenses
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incurred by an indemnitee in his or her capacity as a director or officer
(and not in any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, service to an employee benefit
plan) shall be made only upon delivery to the Corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay
all amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal (hereinafter
a "final adjudication") that such indemnitee is not entitled to be
indemnified for such expenses under this Section 2 or otherwise. The rights
to indemnification and to the advancement of expenses conferred in Sections 1
and 2 of this ARTICLE VIII shall be contract rights and such rights shall
continue as to an indemnitee who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators.
SECTION 3. RIGHT OF INDEMNITEE TO BRING SUIT.
If a claim under Section 1 or 2 of this ARTICLE VIII is not paid in full by
the Corporation within sixty (60) days after a written claim has been received
by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty (20) days, the
indemnities may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in
any such suit, or in a suit brought by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
(i) any suit brought by the
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<PAGE>
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses)
it shall be a defense that, and (ii) in any suit brought by the Corporation
to recover an advancement of expenses pursuant to the terms of an
undertaking, the Corporation shall be entitled to recover such expenses upon
a final adjudication that, the indemnitee has not met any applicable standard
for indemnification set forth in the Delaware General Corporation Law.
Neither the failure of the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such suit that indemnification of the indemnitee
is proper in the circumstances because the indemnitee has met the applicable
standard of conduct set forth in the Delaware General Corporation Law, nor an
actual determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the indemnitee has not
met such applicable standard of conduct, shall create a presumption that the
indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any
suit brought by the indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or brought by the Corporation to recover
an advancement of expenses pursuant to the terms of an undertaking, the
burden of proving that the indemnitee is not entitled to be indemnified, or
to such advancement of expenses, under this ARTICLE VIII or otherwise shall
be on the Corporation.
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SECTION 4. NON-EXCLUSIVITY OF RIGHTS.
The rights to indemnification and to the advancement of expenses conferred
in this ARTICLE VIII shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, the Corporation's Certificate
of Incorporation or By-Laws, agreement, vote of stockholders or disinterested
directors or otherwise.
SECTION 5. INSURANCE.
The Corporation may maintain insurance, at its expense, to protect itself
and any director, officer, employee or agent of the Corporation or another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the Corporation would have the power
to indemnify such person against such expense, liability or loss under the
Delaware General Corporation Law.
SECTION 6. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION.
The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article VIII with respect to the indemnification and
advancement of expenses of directors and officers of the Corporation.
ARTICLE IX - AMENDMENTS
In furtherance and not in limitation of the powers conferred by law, the
Board of Directors is expressly authorized to adopt, amend or repeal these
By-Laws. Any adoption, amendment or repeal of these By-Laws by the Board of
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Directors shall require the approval of a majority of the Board of
Directors. The stockholders of the Corporation shall also have power to
adopt, amend or repeal these By-Laws; PROVIDED, HOWEVER, that, in addition to
any vote of the holders of any class or series of stock of the Corporation
required by law or by the Corporation's Certificate of Incorporation, the
affirmative vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the voting power of all of the then-outstanding shares of the
capital stock of the Corporation entitled to vote generally in the election
of directors, voting together as a single class, shall be required to adopt,
amend or repeal any provision of these By-Laws.
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SEE LEGEND ENDORSED ON REVERSE SIDE
GATEWAY ENERGY CORPORATION
THIS CERTIFICATE IS TRANSFERABLE IN THE CITY OF NEW YORK
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
08954 COMMON STOCK
CUSIP 367600 30 1
GE0000675 SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
0001200543
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF $.25 PAR VALUE OF
GATEWAY ENERGY CORPORATION
CERTIFICATE OF STOCK
Transferable on the books of the Corporation in person or by duly authorized
attorney ??? of this Certificate properly endorsed this Certificate is not
valid unless countersigned by the Transfer Agent and registered by the
Registrar. Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
MAY 13, 1997
08954000071 IM
/s/ Donald L. Anderson /s/ L. Horbach
SECRETARY PRESIDENT
????????????????????????
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAT
/s/ Illegible
AUTHORIZED SIGNATURE
GATEWAY ENERGY CORPORATION
CORPORATE SEAL
1983
DELAWARE
<PAGE>
GATEWAY ENERGY CORPORATION
1998
STOCK OPTION PLAN
1. NAME.
The name of this Plan is the Gateway Energy Corporation 1998 Stock Option
Plan.
2. DEFINITIONS.
For the purposes of the Plan, the following terms shall be defined as set
forth below:
(a) "Affiliate" means any partnership, corporation, firm, joint venture,
association, trust, limited liability company, unincorporated
organization or other entity (other than a Subsidiary) that, directly
or indirectly through one or more intermediaries, is controlled by the
Company, where the term "controlled by" means the possession, direct
or indirect, of the power to cause the direction of the management and
policies of such entity, whether through the ownership of voting
interests or voting securities, as the case may be, by contract or
otherwise.
(b) "Board" means the board of directors of the Company.
(c) "Cause" as applied to any Director, Officer or Employee means: (i) the
conviction of such individual for the commission of any felony; or
(ii) the commission by such individual of any crime involving moral
turpitude (e.g., larceny, embezzlement) which results in harm to the
business, reputation, prospects or financial condition of the Company,
any Subsidiary or Affiliate.
(d) "Chairman" means the individual appointed by the Board to serve as the
chairman of the Committee.
(e) "Code" means the Internal Revenue Code of 1986, as amended from time
to time and the Treasury regulations promulgated thereunder.
(f) "Committee" means the committee appointed by the Board to administer
the Plan as provided in Section 4(a).
(g) "Common Stock" means the Common Stock, $.25 par value per share, of
the Company or any security of the Company identified by the Committee
as having been issued in substitution or exchange therefor or in lieu
thereof.
(h) "Company" means Gateway Energy Corporation, a Delaware corporation.
<PAGE>
(i) "Director" means an individual who is now, or hereafter becomes, a
member of the Board or of the board of directors of any Subsidiary.
(j) "Employee" means an individual employed by the Company or a Subsidiary
whose wages are subject to the withholding of federal income tax under
Section 3401 of the Code.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor statute.
(l) "Fair Market Value" of a Share as of a specified date means the
average of the highest and lowest market prices of a Share as quoted
on the bulletin board on such date, or, if no trading of Common Stock
is reported for that day, the next preceding day on which trading was
reported. In the event the Common Stock is not then quoted on the
bulletin board, the Fair Market Value of a Share shall be determined
by reference to the principal market or exchange on which the Shares
are then traded.
(m) "ISO" means any stock option granted pursuant to the Plan that is
intended to be and is specifically designated as an "incentive stock
option" within the meaning of Section 422 of the Code.
(n) "NQSO" means any stock option granted pursuant to the provisions of
the Plan that is not an ISO.
(o) "Officer" means an individual elected or appointed by the Board or by
the board of directors of a Subsidiary or chosen in such other manner
as may be prescribed by the Bylaws of the Company or a Subsidiary, as
the case may be, to serve as such.
(p) "Option" means an ISO or a NQSO granted under the Plan.
(q) "Participant" means an individual who is granted an Option under the
Plan.
(r) "Plan" means this 1998 Stock Option Plan.
(s) "Rule 16b-3" means Rule 16b-3 promulgated by the Securities and
Exchange Commission under the Exchange Act, or any successor or
replacement rule adopted by the Securities and Exchange Commission.
(t) "Share" or "Stock" means one share of Common Stock, adjusted in
accordance with Section 10(b) of the Plan, if applicable.
(u) "Stock Option Agreement" means the written agreement between the
Company and the Participant that contains the terms and conditions
pertaining to an Option.
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(v) "Subsidiary" means any corporation of which the Company, directly or
indirectly, is the beneficial owner of fifty percent (50%) or more of
the total voting power of all classes of its stock having voting power
and which qualifies as a subsidiary corporation pursuant to Section
424(f) of the Code.
(w) "Ten Percent Shareholder" means a Participant who prior to the grant
of an ISO owned, directly or indirectly within the meaning of Section
424(d) of the Code, ten percent (10%) or more of the total combined
voting power of all classes of stock of the Company, any Subsidiary or
any parent of the company (as defined in Section 425(e) of the Code).
3. PURPOSE.
The purpose of the Plan is to enable the Company to provide incentives,
which are linked directly to increases in shareholder value, to certain key
personnel in order that they will be encouraged to promote the financial success
and progress of the Company.
4. ADMINISTRATION.
(a) The Plan shall be administered by a Committee ("Committee") which
shall consist of two or more members, who shall be appointed by the
Board, any of whom may be removed by the Board with or without cause,
and in the absence of such appointment, the Board shall be the
Committee. Members shall be selected to permit the Plan to qualify
pursuant to the provisions of Rule 16b-3 and such other limitations as
the Board deems appropriate.
(b) The Committee shall recommend and the Board shall have full and final
authority, subject to the express provisions of the Plan, as follows:
(i) to grant Options, provided, however, that any Option
representing more than 30,000 Shares shall be valid and
enforceable only if such Option has been authorized, approved or
ratified (before or after the making of the Option) by the
Compensation Committee of the Company;
(ii) to determine (A) when Options may be granted and (B) to impose
such additional restrictions or conditions on the exercise of an
Option (including specifying vesting or performance requirements
or other criteria) as the Board may deem appropriate;
(iii) to interpret the Plan and to make all determinations necessary
or advisable for the administration of the Plan;
(iv) to prescribe, amend, and rescind rules and regulations relating
to the Plan, including rules with respect to the exercisability
and nonforfeitability of Options upon the termination of
employment of a Participant;
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(v) to determine the terms and provisions and any restrictions or
conditions (including specifying any performance or other
criteria, and imposing restrictions with respect to Shares
acquired upon exercise of an Option, which restrictions may
continue beyond the Participant's termination of employment) of
the written agreements by which all Options shall be evidenced
("Stock Option Agreements") which need not be identical and,
with the consent of the Participant, to modify any such Stock
Option Agreement at any time;
(vi) to accelerate the exercisability of, and to accelerate or waive
any or all of the restrictions and conditions applicable to, any
Option, or any group of Options for any reason; and
(vii) to impose such additional conditions, restrictions, and
limitations upon the grant, exercise or retention of Options as
are not inconsistent with the Plan and as the Committee and the
Board may, before or concurrently with the grant thereof, deem
appropriate.
(c) The Committee or Board shall maintain a journal in which a separate
account for each Participant shall be established. Whenever an Option
is granted to or exercised by a Participant, the Participant's account
shall be appropriately credited or debited. Appropriate adjustment
shall also be made in the journal with respect to each account in the
event of an adjustment pursuant to Section 10(b) of the Plan.
(d) The determination of the Board on all matters relating to the Plan or
any Stock Option Agreement shall be conclusive and final. No member
of the Committee or the Board shall be liable for any action or
determination made with respect to the Plan or any Option.
5. EFFECTIVE DATE AND TERM OF THE PLAN.
(a) EFFECTIVE DATE OF THE PLAN.
The Plan was adopted by the Board and became effective on May 28, 1998
subject to approval by the shareholders of the Company held within twelve
months following such date.
(b) TERM OF PLAN.
No Option shall be granted pursuant to the Plan on or after May 28, 2008
but Options theretofore granted may extend beyond the date.
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6. TYPE OF OPTIONS AND SHARES SUBJECT TO THE PLAN.
Options granted under the Plan may be either ISOs or NQSOs. Each Stock
Option Agreement shall specify whether the Option covered thereby is an ISO or a
NQSO.
The maximum aggregate number of Shares that may be issued under the Plan is
600,000 Shares. The limitation on the number of Shares which may be subject to
Options under the Plan shall be subject to adjustment as provided in Section
10(b) of the Plan.
If any Option granted under the Plan expires or is terminated for any
reason, any Shares as to which the Option has not been exercised shall again be
available for purchase under Options subsequently granted. At all times during
the term of the Plan, the Company shall reserve and keep available for issuance
such number of Shares as the Company is obligated to issue upon the exercise of
all then outstanding Options.
7. SOURCE OF SHARES ISSUED UNDER THE PLAN.
Common Stock issued under the Plan shall be treasury shares or authorized
and unissued Shares. No fractional Shares shall be issued under the Plan.
8. ELIGIBILITY.
The individuals eligible for the grant of Options under the Plan shall be:
(i) all Directors, Officers and Employees; and (ii) such individuals determined
by the Committee or the Board to be rendering substantial services as a
consultant or independent contractor to the Company or any Subsidiary or
Affiliate of the Company, as the Board shall determine from time to time in its
sole and absolute discretion; PROVIDED, HOWEVER, that only Employees of the
Company or any Subsidiary shall be eligible to receive ISOs. Any Participant
shall be eligible to be granted more than one Option hereunder.
9. OPTIONS.
(a) GRANT OF OPTIONS.
Subject to any applicable requirements of the Code and any regulations
issued thereunder, the date of the grant of an Option shall be the
date on which the Board determines to grant the Option.
(b) EXERCISE PRICE OF ISOS.
The exercise price of each Share subject to an ISO shall not be less
than the Fair Market Value of a Share on the date of grant of the ISO,
except that in the case of a grant of an ISO to a Participant who at
the time such ISO was granted was a Ten Percent Shareholder, the
exercise price shall not be less than 110% of the Fair Market Value of
a Share on the date of the grant of the ISO.
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(c) EXERCISE PRICE OF NQSOS.
The exercise price of each Share subject to a NQSO shall be
determined by the Board at the time of grant but will not be less
than eighty-five percent (85%) of the Fair Market Value of a Share
on the date of grant.
(d) EXERCISE PERIOD.
Each Option granted hereunder shall vest and become first exercisable
as determined by the Board.
(e) TERMS AND CONDITIONS.
All Options granted pursuant to the Plan shall be evidenced by a Stock
Option Agreement (which need not be the same for each Participant or
Option), approved by the Board which shall be subject to the following
express terms and conditions and the other terms and conditions as are
set forth in this Section 9, and to such other terms and conditions as
shall be determined by the Board in its sole and absolute discretion
which are not inconsistent with the terms of the Plan:
(i) the failure of an Option to vest for any reason whatsoever shall
cause the Option to expire and be of no further force or effect;
(ii) unless terminated earlier pursuant to Sections 9(i) or 11, the
term of any Option granted under the Plan shall be ten years
form the date of grant; PROVIDED, HOWEVER, that no ISO granted
to a Ten Percent Shareholder shall have a term of more than five
years from the date of grant;
(iii) in the case of an ISO, the aggregate Fair Market Value
(determined as of the time the ISO is granted) of Shares
exercisable for the first time by a Participant during any
calendar year (under the Plan and any other incentive stock
option plans of the Company, any Subsidiary or any parent of the
Company) (as defined in Section 424(e) of the Code) shall not
exceed $100,000;
(iv) ISOs shall not be transferable by the Participant otherwise than
by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the Participant only by him
or by his guardian or legal representative;
(v) no NQSOs or interest therein may be transferred, assigned,
pledged or hypothecated by the Participant during his lifetime
except as provided by Rule 16b-3 and the regulations promulgated
thereunder; and
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(vi) payment for the Shares to be received upon exercise of an Option
may be made in cash, in Shares (determined with reference to
their Fair Market Value on the date of exercise) or any
combination thereof.
(f) ADDITIONAL MEANS OF PAYMENT.
Any Stock Option Agreement may, in the sole and absolute discretion of
the Board, permit payment by any other form of legal consideration
consistent with applicable law and any rules and regulations relating
thereto, including, but not limited to, the execution and delivery of
a full recourse promissory note (bearing interest at a rate not less
than the prime rate announced as then being in effect by the Company's
principal lender and whose maturity date shall not extend beyond ten
years) by the Participant to the Company.
(g) EXERCISE.
The holder of an Option may exercise the same by filing with the
Corporate Secretary of the Company and the Chairman a written
election, in such form as the Board may determine, specifying the
number of Shares with respect to which such Option is being exercised,
and accompanied by payment in full of the exercise price for such
Shares. Notwithstanding the foregoing, the Board may specify a
reasonable minimum number of Shares that may be purchased on any
exercise of an Option, provided that such minimum number will not
prevent the holder from exercising the Option with respect to the full
number of Shares as to which the Option is then exercisable.
(h) WITHHOLDING TAXES.
Prior to issuance of the Shares upon exercise of an Option, the
Participant shall pay or make adequate provision for the payment of
any Federal, state, local or foreign withholding obligations of the
Company or any Subsidiary or Affiliate of the Company, if applicable.
In the event a Participant shall fail to make adequate provision for
the payment of such obligations, the Company shall have the right to
issue a stock certificate for an amount of Shares equal to the
difference obtained by subtracting: (i) the number of Shares, rounded
up for any fraction to the next whole number, that have a Fair Market
Value (as of the date of exercise) equal to such amount as is
sufficient to satisfy applicable federal, state or local withholding
obligations; from (ii) the number of Shares attributable to that
portion of the Option so exercise. The Company shall promptly remit,
or cause to be remitted, to the appropriate taxing authorities the
amount so withheld. In such cases, although the stock certificate
delivered to the Participant will be for a net number of Shares, such
Participant shall be considered, for tax purposes, to have received
the number of Shares equal to the full number of Shares to which the
Option had been exercised.
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(i) TERMINATION OF OPTIONS.
Options granted under the Plan shall be subject to the following
events of termination:
(i) in the event the employment of a Participant who is an Officer
or Employee is terminated for Cause, all unexercised Options
held by such Participant on the date of such termination of
employment (whether or not vested) will expire immediately; and
(ii) in the event a Participant is no longer a Director, an Officer
or Employee other than for the reasons set forth in Sections
9(i)(i) or 9(i)(ii), all Options which remain unvested at the
time the Participant is no longer a Director, Officer or
Employee, as the case may be, shall expire immediately, and all
Options which have vested prior to such time shall expire ninety
days thereafter unless by their terms they expire sooner.
10. RECAPITALIZATION.
(a) CORPORATE FLEXIBILITY.
The existence of the Plan and the Options granted hereunder shall not
affect or restrict in any way the right or power of the Board or the
shareholders of the Company, in their sole and absolute discretion, to
make, authorize or consummate any adjustment, recapitalization,
reorganization or other change in the Company's capital structure or
its business, any merger or consolidation of the Company, any issue of
bonds, debentures, Common Stock, preferred or prior preference stock
ahead of or affecting the Company's capital stock or the rights
thereof, the dissolution or liquidation of the Company or any sale or
transfer of all or any part of its assets or business, or any other
grant of rights, issuance of securities, transaction, corporate act or
proceeding and notwithstanding the fact that any such activity,
proceeding, action, transaction or other event may have, or be
expected to have, an impact (whether positive or negative) on the
value of any Option.
(b) ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
Except as otherwise provided in Section 11 and subject to any required
action by the shareholders of the Company, in the event of any change
in capitalization affecting the Common Stock of the Company, such as a
stock dividend, the Board shall make proportionate adjustments with
respect to: (i) the aggregate number of Shares available for issuance
under the Plan; (ii) the number of Shares available for any individual
Option; (iii) the number and exercise price of Shares subject to
outstanding Options; provided, however, that the number of Shares
subject to any Option shall always be a whole number; and (iv) such
other matters as shall be appropriate in light of the circumstances.
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11. CHANGE OF CONTROL.
In the event of a Change of Control (as defined below), unless otherwise
determined by the Committee a the time of grant or by amendment (with the
holder's consent) of such grant, all Options not vested on or prior to the
effective time of any such Change of Control shall immediately vest as of such
effective time. The Committee in its discretion may make provisions for the
assumption of outstanding Options, or the substitution for outstanding Options
of new incentive Options covering the stock of a successor corporation or a
parent or subsidiary thereof, with appropriate adjustments as to the number and
kind of shares and prices so as to prevent dilution or enlargement of rights.
A "Change of Control" will be deemed to occur on the date any of the
following events occur:
(a) any person or persons acting together which would constitute a "group"
for purpose of Section 13(d) of the Exchange Act (other than the
Company, any Subsidiary and any entity beneficially owned by any of
the foregoing) beneficially own (as defined in Rule 13d-3 under the
Exchange Act) without Board approval, directly or indirectly, a least
50% of the total voting power of the Company entitled to vote
generally in the election of the Board;
(b) either (i) the Current Directors (as hereinafter defined) cease for
any reason to constitute at least a majority of the members of the
Board (for the purposes, a "Current Director" means any member of the
Board as elected at the 1998 Annual Shareholders Meeting, and any
successor of a Current Director whose election, or nomination for
election by the Company's shareholders, was approved by at least a
majority of the Current Directors then on the Board) or (ii) at any
meeting of the shareholders of the Company called for the purpose of
electing directors, a majority of the persons nominated by the Board
for election as directors fail to be elected;
(c) the shareholders of the Company approve (i) a plan of complete
liquidation of the Company, or (ii) an agreement providing for the
merger or consolidation of the Company (A) in which the Company is not
the continuing or surviving corporation (other than consolidation or
merger with a wholly-owned subsidiary of the Company in which all
Shares outstanding immediately prior to the effectiveness thereof are
changed into or exchanged for the same consideration) or (B) pursuant
to which the Shares are converted into cash, securities or other
property, except a consolidation or merger of the Company in which the
holders of the Shares immediately prior to the consolidation or merger
have, directly or indirectly, at least a majority of the common stock
of the continuing or surviving corporation immediately after such
consolidation or merger or in which the Board immediately prior to the
merger or consolidation would, immediately after the merger or
consolidation, constitute a majority of the board of directors of the
continuing or surviving corporation; or
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(d) the shareholders of the Company approve an agreement (or agreements)
providing for the sale or other disposition (in one transaction or a
series of transactions) of all or substantially all of the assets of
the Company.
12. SECURITIES LAW REQUIREMENTS.
No Shares shall be issued under the Plan unless and until: (i) the Company
and the Participant have taken all actions required to register the Shares under
the Securities Act of 1933, as amended, or perfect an exemption from the
registration requirements thereof; (ii) any applicable requirement of any stock
exchange on which the Common Stock is listed has been satisfied; and (iii) any
other applicable provision of state or Federal law has been satisfied. The
Company shall be under no obligation to register the Shares under the Securities
Act of 1933, as amended, or to effect compliance with the registration or
qualification requirements of any state securities laws.
13. AMENDMENT AND TERMINATION.
(a) MODIFICATION TO THE PLAN.
The Board may, insofar as permitted by law, from time to time, with
respect to any Shares at the time not subject to Options, suspend or
terminate the Plan or revise or amend the Plan in any respect
whatsoever. However, unless the Board specifically otherwise
provides, any revision or amendment that would cause the Plan to fail
to comply with Rule 16b-3, Section 422 or 162(m) of the Code or any
other requirement of applicable law or regulation if such amendment
were not approved by the shareholders of the Company shall not be
effective unless and until such approval is obtained.
(b) RIGHTS OF PARTICIPANT.
No amendment, suspension or termination of the Plan that would
adversely affect the right of any Participant with respect to an
Option previously granted under the Plan will be effective without the
written consent of the affected Participant.
14. MISCELLANEOUS.
(a) SHAREHOLDERS' RIGHTS.
No Participant and no beneficiary or other person claiming under or
through such Participant shall acquire any rights as a shareholder of
the Company by virtue of such Participant having been granted an
Option under the Plan. No Participant and no beneficiary or other
person claiming under or through such Participant will have any right,
title or interest in or to any Shares, allocated or reserved under the
Plan or subject to any Option except as to Shares, if any, that have
been issued or transferred to such Participant. No adjustment shall
be made for dividends or distributions or
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other rights for which the record date is prior to the date of
exercise of an Option except as may be provided in the Stock
Option Agreement.
(b) OTHER COMPENSATION ARRANGEMENTS.
Nothing contained in the Plan shall prevent the Board from adopting
other compensation arrangements, subject to shareholder approval if
such approval is required. Such other arrangements may be either
generally applicable or applicable only in specific cases.
(c) TREATMENT OF PROCEEDS.
Proceeds realized from the exercise of Options under the Plan shall
constitute general funds of the Company.
(d) COSTS OF THE PLAN.
The costs and expenses of administering the Plan shall be borne by the
Company.
(e) NO RIGHT TO CONTINUE EMPLOYMENT OF SERVICES.
Nothing contained in the Plan or in any instrument executed pursuant
to the Plan will confer upon any Participant any right to continue to
render services to the Company, a Subsidiary or Affiliate; to continue
as a Director, an Officer or Employee; or affect the right of the
Company, a Subsidiary, the Board, the board of directors of a
Subsidiary, the shareholders of the Company or a Subsidiary, as
applicable, to terminate the directorship, office or employment, as
the case may be, or any Participant at any time with or without Cause
or with or without any other cause, reason or justification. The term
"Cause" as defined herein is included solely for the purposes of the
Plan and is not, and shall not be deemed to be: (i) a restriction on
the right of the Company or a Subsidiary, as the case may be, to
terminate any Officer or Employee for any reason whatsoever; or (ii) a
part of the employment relationship (whether oral or written, express
or implied) of any such individual.
(f) SEVERABILITY.
The provisions of the Plan shall be deemed severable and the validity
of unenforceability of any provisions shall not affect the validity or
enforceability of the other provisions hereof.
(g) BINDING EFFECT OF PLAN.
The Plan shall inure to the benefit of the Company, its successors and
assigns.
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(h) NO WAIVER OF BREACH.
No waiver by any party hereto at any time of any breach by another
party hereto of, or compliance with, any condition or provision of the
Plan to be performed by such other party shall be deemed a waiver of
the same, any similar or any dissimilar provisions of conditions at
the same or at any prior or subsequent time.
(i) GOVERNING LAW.
The Plan and all actions taken thereunder shall be enforced, governed
and construed by and interpreted under the laws of the State of
Nebraska applicable to contracts made and to be performed wholly
within such State without giving effect to the principles of conflicts
of laws thereof.
(j) HEADINGS.
The headings contained in the Plan are for reference purposes only and
shall not affect in any way the meaning or interpretation of the Plan.
15. EXECUTION.
To record the adoption of the Plan to read as set forth herein, the Company
has caused the Plan to be signed by its President and attested by it Secretary
on May 28, 1998.
GATEWAY ENERGY CORPORATION
By: /s/ Michael T. Fadden
-----------------------------
Michael T. Fadden, President
ATTEST:
By: /s/ Donald L. Anderson
-------------------------------
Donald L. Anderson, Secretary
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GATEWAY ENERGY CORPORATION
1998 OUTSIDE DIRECTORS
STOCK OPTION PLAN
1. NAME.
The name of this Plan is the Gateway Energy Corporation 1998 Outside
Directors Stock Option Plan.
2. DEFINITIONS.
For the purposes of the Plan, the following terms shall be defined as
set forth below:
(a) "Affiliate" means any partnership, corporation, firm, joint
venture, association, trust, limited liability company,
unincorporated organization or other entity (other than a
Subsidiary) that, directly or indirectly through one or more
intermediaries, is controlled by the Company, where the term
"controlled by" means the possession, direct or indirect, of the
power to cause the direction of the management and policies of
such entity, whether through the ownership of voting interests or
voting securities, as the case may be, by contract or otherwise.
(b) "Board" means the board of directors of the Company.
(c) "Chairman" means the individual appointed by the Board to serve
as the chairman of the Committee.
(d) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and the Treasury regulations promulgated
thereunder.
(e) "Committee" means the committee appointed by the Board to
administer the Plan as provided in Section 4(a).
(f) "Common Stock" means the common stock, $.25 par value per share,
of the Company or any security of the Company identified by the
Committee as having been issued in substitution or exchange
therefor or in lieu thereof.
(g) "Company" means Gateway Energy Corporation, a Delaware
corporation.
(h) "Employee" means an individual whose wages are subject to the
withholding of federal income tax under Section 3401 of the Code.
<PAGE>
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute.
(j) "Fair Market Value" of a Share as of a specified date means the
average of the highest and lowest market prices of a Share as
quoted on the bulletin board on such date, or, if no trading of
Common Stock is reported for that day, the next preceding day on
which trading was reported. In the event the Common Stock is not
then quoted on the bulletin board, the Fair Market Value of a
Share shall be determined by reference to the principal market or
exchange on which the Shares are then traded.
(k) "Non-Employee Director" means an individual who: (i) is now, or
hereafter becomes, a member of the Board; (ii) is neither an
Employee nor an Officer of the Company or of any Subsidiary or
Affiliate on the date of the grant of the NQSO; and (iii) has not
elected to decline to participate in the Plan pursuant to the
immediately succeeding sentence. A director otherwise eligible
to participate in the Plan may make an irrevocable, one-time
election, by written notice to the Corporate Secretary of the
Company and the Chairman within thirty days after his initial
election or appointment to the Board to decline to participate in
the Plan.
(l) "Non-qualified stock option" (otherwise designated as a NQSO)
means an option that is not qualified under Section 422 of the
Code.
(m) "Officer" means an individual elected or appointed by the Board
or by the board of directors of a Subsidiary, or chosen in such
other manner as may be prescribed by the by-laws of the Company
or a Subsidiary, as the case may be, to serve as such.
(n) "Participant" means a Non-Employee Director who is granted a NQSO
under the Plan.
(o) "Plan" means this 1998 Outside Directors Stock Option Plan.
(p) "Rule 16b-3" means Rule 16b-3 promulgated by the Securities and
Exchange Commission under the Exchange Act, or any successor or
replacement rule adopted by the Securities and Exchange
Commission.
(q) "Share" means one share of Common Stock, adjusted in accordance
with Section 9(b), if applicable.
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(r) "Stock Option Agreement" means the written agreement between the
Company and the Participant that contains the terms and
conditions pertaining to the NQSO.
(s) "Subsidiary" means any corporation or entity of which the
Company, directly or indirectly, is the beneficial owner of fifty
percent (50%) or more of the total voting power of all classes of
its stock having voting power, unless the Committee shall
determine that any such corporation or entity shall be excluded
hereunder from the definition of the term Subsidiary.
3. PURPOSE.
The purpose of the Plan is to enable the Company to provide incentives,
which are linked directly to increases in stockholder value, to Non-Employee
Directors in order that they will be encouraged to serve on the Board and exert
their best efforts on behalf of the Company.
4. ADMINISTRATION.
(a) COMPOSITION OF THE COMMITTEE.
The Plan shall be administered by a Committee appointed by the Board
consisting of no less than two individuals. Members of the Committee need not
be members of the Board, Officers or Employees of the Company. The Board may
from time to time remove members from, or add members to, the Committee.
Vacancies on the Committee, however caused, shall be filled by the Board. The
Board shall appoint one of the members of the Committee as Chairman.
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<PAGE>
(b) ACTIONS BY THE COMMITTEE.
The Committee shall hold meetings at such times and places as it may
determine. Acts approved by a majority of the members of the Committee present
at a meeting at which a quorum is present, or acts reduced to or approved in
writing by a majority of the members of the Committee, shall be the valid acts
of the Committee.
(c) POWERS OF THE COMMITTEE.
The Committee shall have the authority to administer the Plan in its
sole and absolute discretion; PROVIDED, HOWEVER, that the Committee shall have
no authority to grant NQSOs, to determine the number of Shares subject to NQSOs
or the price at which each Share covered by a NQSO may be purchased pursuant to
the Plan, all of which shall be automatic as described in Section 8. To this
end, the Committee is authorized to construe and interpret the Plan and to make
all other determinations necessary or advisable for the administration of the
Plan. Subject to the foregoing, any determination, decision or action of the
Committee in connection with the construction, interpretation, administration or
application of the Plan shall be final, conclusive and binding upon all
Participants and any person validly claiming under or through a Participant.
(d) LIABILITY OF COMMITTEE MEMBERS.
No member of the Board or the Committee will be liable for any action
or determination made in good faith by the Board or the Committee with respect
to the Plan or any grant or exercise of a NQSO thereunder.
(e) NQSO ACCOUNTS.
The Committee shall maintain a journal in which a separate account for
each Participant shall be established. Whenever NQSOs are granted to or
exercised by a Participant, the Participant's account shall be appropriately
credited or debited. Appropriate adjustment shall also be made in the journal
with respect to each account in the event of an adjustment pursuant to Section
9(b).
5. EFFECTIVE DATE AND TERM OF THE PLAN.
(a) EFFECTIVE DATE OF THE PLAN.
The Plan was adopted by the Board and became effective on May 28, 1998
(the "Effective Date") subject to approval by the stockholders of the Company at
a meeting duly called and held within twelve months following such date.
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(b) TERM OF PLAN.
No NQSO shall be granted pursuant to the Plan on or after May 28,
2008, but NQSOs theretofore granted may extend beyond that date.
6. SHARES SUBJECT TO THE PLAN.
The maximum aggregate number of Shares which may be subject to NQSOs
granted to Non-Employee Directors under the Plan shall be 60,000. The
limitation on the number of Shares which may be subject to NQSOs under the Plan
shall be subject to adjustment as provided in Section 9(b).
If any NQSO granted under the Plan expires or is terminated for any
reason without having been exercised in full, the Shares allocable to the
unexercised portion of such NQSO shall again become available for grant pursuant
to the Plan. At all times during the term of the Plan, the Company shall
reserve and keep available for issuance such number of Shares as the Company is
obligated to issue upon the exercise of all then outstanding NQSOs.
7. SOURCE OF SHARES ISSUED UNDER THE PLAN.
Common Stock issued under the Plan shall be authorized and unissued
Shares and/or Treasury Shares. No fractional Shares shall be issued under the
Plan.
8. NON-QUALIFIED STOCK OPTIONS.
(a) GRANT OF NQSOS.
On the next succeeding business day after the Effective Date, NQSOs to
purchase 10,000 Shares shall be granted automatically to each Non-Employee
Director. With respect to any Non-Employee Director who first becomes a member
of the Board after the Effective Date, NQSOs to purchase 10,000 Shares shall be
granted automatically on the next succeeding business day following his election
to the Board. The grant of a NQSO to purchase 10,000 Shares shall be a one-time
grant to each Non-Employee Director who serves as a member of the Board of the
Company. The provisions of this Section shall not be amended more than once
every six months, other than to comport with changes in the Code, the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or the rules
thereunder.
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(b) EXERCISE PRICE.
Each Share covered by a NQSO granted may be purchased at a purchase price
equal to the Fair Market Value of a Share on the date of the NQSO grant. The
provisions of this Section shall not be amended more than once every six months,
other than to comport with changes in the Code, ERISA, or the rules thereunder.
(c) TERMS AND CONDITIONS.
All NQSOs granted pursuant to the Plan shall be evidenced by a Stock
Option Agreement (which need not be the same for each Participant or NQSO),
approved by the Committee which shall be subject to the following express terms
and conditions and to the other terms and conditions specified in this Section
8, and to such other terms and conditions as shall be determined by the
Committee in its sole and absolute discretion which are not inconsistent with
the terms of the Plan:
(i) all NQSOs granted to a Participant shall vest and become first
exercisable immediately upon grant.
(ii) the failure of a NQSO to vest for any reason whatsoever shall
cause the NQSO to expire and be of no further force or effect;
(iii) unless terminated earlier pursuant to Section 8(e), the term of
each NQSO shall be ten years from the date of grant;
(iv) NQSOs shall not be transferable by the Participant otherwise
than by will or by the laws of descent and distribution, and
shall be exercisable during the lifetime of the participant only
by him or by his guardian or legal representative;
(v) no NQSO or interest therein may be transferred, assigned,
pledged or hypothecated by the Participant during his lifetime
except as provided by Rule 16b-3 and the regulations promulgated
thereunder; and
(vi) payment for the Shares to be received upon exercise of a NQSO
may be made in cash, in Shares (determined with reference to
their Fair Market Value on the date of exercise) or any
combination thereof.
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(d) EXERCISE.
The holder of a NQSO may exercise the same by filing with the
Corporate Secretary of the Company and the Chairman a written election, in such
form as the Committee may determine, specifying the number of Shares with
respect to which such NQSO is being exercised. Such notice shall be accompanied
by payment in full of the exercise price for such Shares. Notwithstanding the
foregoing, the Committee may specify a reasonable minimum number of Shares that
may be purchased on any exercise of an Option, provided that such minimum number
will not prevent the holder from exercising the Option with respect to the full
number of Shares as to which the Option is then exercisable.
(e) TERMINATION OF NQSOS.
NQSOs granted under the Plan shall be subject to the following events
of termination:
(i) in the event a Participant is removed from the Board for cause
(as contemplated by the Company's by-laws), all unexercised
NQSOs held by such Participant on the date of such removal
(whether or not vested) will expire immediately;
(ii) in the event a Participant is no longer a member of the Board,
other than by reason of removal for cause, all NQSOs which have
vested prior to such time shall expire twelve months thereafter
unless by their terms they expire sooner; and
(iii) in the event a Participant becomes an Officer or Employee of the
Company or a Subsidiary (whether or not such Participant remains
a member of the Board) all NQSOs which have vested prior to such
time shall expire twelve months thereafter unless by their terms
they expire sooner.
9. RECAPITALIZATION.
(a) CORPORATE FLEXIBILITY.
The existence of the Plan and the NQSOs granted hereunder shall not
affect or restrict in any way the right or power of the Board or the
stockholders of the Company, in their sole and absolute discretion, to make,
authorize or consummate any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of bonds, debentures, common stock,
preferred or prior preference stocks ahead of or affecting the Company's capital
stock or the rights thereof, the dissolution or liquidation of the Company or
any sale or transfer of all or any part of its assets or
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<PAGE>
business, or any other grant of rights, issuance of securities, transaction,
corporate act or proceeding and notwithstanding the fact that any such
activity, proceeding, action, transaction or other event may have, or be
expected to have, an impact (whether positive or negative) on the value of
any NQSO.
(b) ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
Except as otherwise provided in Section 10 below and subject to any
required action by the stockholders of the Company, in the event of any change
in capitalization affecting the Common Stock of the Company, such as a stock
dividend, stock split or recapitalization, the Committee shall make
proportionate adjustments with respect to: (i) the aggregate number of Shares
available for issuance under the Plan; (ii) the number of Shares subject to each
grant under the Plan; (iii) the number and exercise price of Shares subject to
outstanding NQSOs; and (iv) such other matters as shall be appropriate in light
of the circumstances; PROVIDED, HOWEVER, that the number of Shares subject to
any NQSO shall always be a whole number and that no such adjustment shall be
made if the adjustment would cause the Plan to fail to comply with the "formula
award" exception, as set forth in Rule 16b-3(c)(2)(ii) of the Exchange Act, for
grants of NQSOs to non-employee directors.
10. CHANGE OF CONTROL.
In the event of a Change of Control (as defined below), the Committee
in its discretion may make provisions for the assumption of outstanding Options,
or the substitution for outstanding Options of new incentive awards covering the
stock of a successor corporation or a parent or subsidiary thereof, with
appropriate adjustments as to the number and kind of shares and prices so as to
prevent dilution or enlargement of rights; provided, however, that no such
adjustment shall be made if the adjustment would cause the Plan to fail to
comply with the "formula award" exception, as set forth in Rule 16b-3(c)(2)(ii)
of the Exchange Act, for grants of NQSOs to non-employee directors.
A "Change of Control" will be deemed to occur on the date any of the
following events occur:
(a) any person or persons acting together which would constitute a
"group" for purpose of Section 13(d) of the Exchange Act (other than the
Company, any Subsidiary and any entity beneficially owned by any of the
foregoing), beneficially own (as defined in Rule 13d-3 under the Exchange Act)
without Board approval, directly or indirectly, at least 50% of the total voting
power of the Company entitled to vote generally in the election of the Board;
(b) the stockholders of the Company approve (i) a plan of complete
liquidation of the Company, or (ii) an agreement providing for the merger or
consolidation of the Company (A)
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in which the Company is not the continuing or surviving corporation (other
than consolidation or merger with a wholly owned subsidiary of the Company in
which all Shares outstanding immediately prior to the effectiveness thereof
are changed into or exchanged for the same consideration) or (B) pursuant to
which the Shares are converted into cash, securities or other property,
except a consolidation or merger of the Company in which the holders of the
Shares immediately prior to the consolidation or merger have, directly or
indirectly, at least a majority of the common stock of the continuing or
surviving corporation immediately after such consolidation or merger or in
which the Board immediately prior to the merger or consolidation would,
immediately after the merger or consolidation, constitute a majority of the
board of directors of the continuing or surviving corporation; or
(c) the stockholders of the Company approve an agreement (or
agreements) providing for the sale or other disposition (in one transaction or a
series of transactions) of all or substantially all of the assets of the
Company.
11. SECURITIES LAW REQUIREMENTS.
No Shares shall be issued under the Plan unless and until: (i) the
Company and the Participant have taken all actions required to register the
Shares under the Securities Act of 1933, as amended, or perfect an exemption
from the registration requirements thereof; or (ii) any other applicable
provision of state or federal law has been satisfied. The Company shall be
under no obligation to register the Shares under the Securities Act of 1933, as
amended, or to effect compliance with the registration or qualification
requirements of any state securities laws.
12. AMENDMENT AND TERMINATION.
(a) MODIFICATIONS TO THE PLAN.
The Board may, insofar as permitted by law, from time to time, with
respect to any Shares at the time not subject to NQSOs, suspend or terminate the
Plan or, subject to Sections 8(a) and 8(b), revise or amend the Plan in any
respect whatsoever. However, unless the Board specifically otherwise provides,
any revision or amendment that would cause the Plan to fail to comply with Rule
16b-3 or any other requirement of applicable law or regulation if such amendment
were not approved by the stockholders of the Company shall not be effective
unless and until such approval is obtained.
(b) RIGHTS OF PARTICIPANT.
No amendment, suspension or termination of the Plan that would
adversely affect the right of any Participant with respect to a NQSO previously
granted under the Plan will be effective without the written consent of the
affected Participant.
-9-
<PAGE>
13. MISCELLANEOUS.
(a) STOCKHOLDERS' RIGHTS.
No Participant and no beneficiary or other person claiming under or
through such Participant shall acquire any rights as a stockholder of the
Company by virtue of such Participant having been granted a NQSO under the Plan.
No Participant and no beneficiary or other person claiming under or through such
Participant will have any right, title or interest in or to any Shares,
allocated or reserved under the Plan or subject to any NQSO except as to Shares,
if any, that have been issued or transferred to such Participant. No adjustment
shall be made for dividends or distributions or other rights for which the
record date is prior to the date of exercise.
(b) OTHER COMPENSATION ARRANGEMENTS.
Nothing contained in the Plan shall prevent the Board from adopting
other compensation arrangements, subject to stockholder approval if such
approval is required. Such other arrangements may be either generally
applicable or applicable only in specific cases.
(c) TREATMENT OF PROCEEDS.
Proceeds realized from the exercise of NQSOs under the Plan shall
constitute general funds of the Company.
(d) COSTS OF THE PLAN.
The costs and expenses of administering the Plan shall be borne by the
Company.
(e) NO RIGHT TO CONTINUE AS DIRECTOR.
Nothing contained in the Plan or in any instrument executed pursuant
to the Plan will confer upon any Participant any right to continue as a member
of the Board or affect the right of the Company, the Board or the stockholders
of the Company to terminate the directorship of any Participant at any time with
or without cause.
(f) SEVERABILITY.
The provisions of the Plan shall be deemed severable and the validity
or unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
-10-
<PAGE>
(g) BINDING EFFECT OF PLAN.
The Plan shall inure to the benefit of the Company, its successors and
assigns.
(h) NO WAIVER OF BREACH.
No waiver by any party hereto at any time of any breach by another
party hereto of, or compliance with, any condition or provision of the Plan to
be performed by such other party shall be deemed a waiver of the same, any
similar or any dissimilar provisions of conditions at the same or at any prior
or subsequent time.
(i) GOVERNING LAW.
The Plan and all actions taken thereunder shall be enforced, governed
and construed by and interpreted under the laws of the State of Nebraska
applicable to contracts made and to be performed wholly within such State
without giving effect to the principles of conflict of laws thereof.
(j) HEADINGS.
The headings contained in the Plan are for reference purposes only and
shall not affect in any way the meaning or interpretation of the Plan.
14. EXECUTION.
To record the adoption of the Plan to read as set forth herein, the
Company has caused the Plan to be signed by its President and attested by its
Secretary on May 28, 1998.
GATEWAY ENERGY CORPORATION
By: /s/ Michael T. Fadden
--------------------------------
Michael T. Fadden, President
ATTEST:
By: /s/ Donald Anderson
-------------------------------
Donald Anderson, Secretary
-11-
<PAGE>
MEMORANDUM OF UNDERSTANDING
This Memorandum of Understanding is effective as of the 17th day of
March, 1997, between GATEWAY ENERGY CORPORATION ("Gateway") and ABTECH
RESOURCES, INC. ("Abtech") and is intended to memorialize the terms of an
arrangement by which MICHAEL T. FADDEN, ("Fadden"), as principal and owner of
Abtech, will provide management, operating, consulting, and other services to
Gateway.
1. RESPONSIBILITIES. Fadden's primary responsibilities to Gateway will
include the following:
a. Work with Gateway management to resolve management, operation,
and ownership issues of the Joint Ventures between Gateway and
Shoreham Pipeline Company (the "Shoreham Issues"); such resolution
may include, in whole or in part, sale or exchange of ownership
interests, or assumption of management and operations of the Joint
Ventures. Any resolution of the Shoreham Issues as set forth in
this paragraph, or otherwise, which is acceptable to Gateway
management will be considered "Closing of the Shoreham Issues";
Gateway will notify Fadden in writing when the Closing of the
Shoreham Issues occurs;
b. Work with Gateway management to locate, analyze, negotiate and
acquire gas gathering or gas processing assets;
c. Analyze all existing properties, review and evaluate the
operating managers and supervise their ongoing performance. To
ensure optimum performance of all assets, operations and operating
managers (to be mutually agreed upon by Gateway and Fadden) will
report directly to Fadden.
d. Design and implement a plan to allow Gateway to efficiently and
cost-effectively operate all properties;
e. Establish and enhance Gateway's capability to manage and operate
existing properties, and to analyze and acquire new properties.
f. Manage Gateway's Houston office in a cost-conscious manner; and
g. Perform such other responsibilities as are assigned to Fadden by
Gateway from time to time and agreed to by Gateway and Fadden.
<PAGE>
2. FEE. From the date this Memorandum of Understanding is entered into
by the parties, through thirty (30) days following the Closing of the Shoreham
Issues, Gateway will pay Abtech for Fadden's services the sum of $6,875.00
per month (or an appropriately prorated amount for any portion of a month).
Thirty (30) days following the Closing of the Shoreham Issues, provided
Fadden is then an officer of Gateway as set forth in paragraph 4 below,
Fadden's salary will be $10,000.00 per month (or an appropriately prorated
amount for any portion of a month).
As an inducement for Fadden to undertake and to fulfill the
responsibilities of this Memorandum of Understanding between Gateway and
Abtech, Gateway will issue directly to Fadden, warrants to purchase 50,000
shares of Gateway Common Stock, effective with the date of this Memorandum of
Understanding. The exercise price will be the market price on the effective
date of issue, and will be exercisable at any time during the ten (10) year
period beginning with the date of issue.
3. EXPENSES. Gateway will reimburse Abtech monthly for all reasonable
out of pocket expenses incurred for Gateway activities. Gateway will pay
Advanced Extraction Technologies, Inc. directly for certain office equipment
and expenses as set forth in Attachment 1. An imprest fund in the amount of
$10,000 will be established at Bank One in Houston for payment of expense
accounts, phone bills and incidental expenses. Fadden will submit monthly
expense reports itemizing all expenses for which payment has been made during
the preceding thirty (30) day period, along with monthly bank statements for
the reimbursement account at Bank One.
4. OFFICER POSITION/STOCK WARRANTS. It is contemplated by the parties
that the Closing of the Shoreham Issues will take place within twelve (12)
months following the date this Memorandum of Understanding is entered into by
the parties. Immediately upon the Closing of the Shoreham Issues, Fadden will
consider the option of becoming Gateway's Chief Operating Officer ("COO"). If
Fadden accepts the option of becoming Gateway's COO within thirty (30) days
of the Closing of the Shoreham Issues, Fadden, upon becoming COO, will
receive Common Stock Purchase Warrants or Incentive Stock Options, (such
options containing terms and conditions customary for qualified stock
options), in an amount equal to one and one-half percent (1.5%) (such 1.5%
shall be determined after taking into consideration the warrants issued under
Paragraph 2 above) of the common equity of Gateway as of said Closing. Such
one and one-half percent (1.5%) will be determined after giving effect to the
convertible securities, warrants, and options outstanding as of said Closing.
The exercise price will be the market price on the date of issue. All
warrants or Incentive Stock Options issued to Fadden will be exercisable at
any time during the ten (10) year period beginning with the date of issue.
2
<PAGE>
If Fadden declines the option of becoming Gateway's COO within thirty
(30) days of the Closing of the Shoreham Issues, or if at any time prior to
said Closing gives any indication in writing that he will not become COO of
Gateway following the Closing, and if Fadden is not otherwise employed by
Gateway, the consulting arrangement memorialized in this Memorandum of
Understanding will terminate thirty (30) days after the Closing of the
Shoreham Issues. If the Closing of the Shoreham Issues does not occur within
twelve (12) months following the date of this Memorandum, as contemplated by
the parties, the parties agree that the terms of any further relationship
between Gateway and Abtech or Fadden will have to be renegotiated.
5. TIME COMMITMENT/GATEWAY OPTION. Fadden has advised Gateway that he
will have some additional time and travel requirements arising from his
presidency of Abtech, in which he has a significant time and monetary
interest. This will require no more than 10% to 15% of Fadden's time over the
next several months. Fadden has also advised Gateway that in consideration of
Gateway allowing him to spend this time and for Gateway's financial support of
the development of this project through general and administrative
expenditures, Gateway will have the right, but not the obligation, to take up
to fifty percent (50%) of Abtech's ownership interest, on the same basis as
Abtech, in any gas gathering or gas processing plant project ("Project") in
which Abtech elects to participate ("Gateway's Right to Participate");
provided, however, that Gateway's Right to Participate will be in effect only
if:
a. the Closing of the Shoreham Issues occurs during the next twelve
(12) months, as contemplated by the parties; and
b. the agreement to undertake the Project is executed during the
term of this Memorandum of Understanding or during the twelve (12)
month period following termination of this Memorandum of
Understanding; and
c. Fadden accepts the option of becoming COO as set forth above in
paragraph 4.
ABTECH RESOURCES, INC.
By: /s/ Michael T. Fadden
-------------------------------------
Michael T. Fadden
GATEWAY ENERGY CORPORATION
By: /s/ Larry J. Horbach
-------------------------------------
Larry J. Horbach
3
<PAGE>
GATEWAY ENERGY CORPORATION
EXECUTIVE COMPENSATION PLAN
FOR THE FISCAL YEAR ENDING FEBRUARY 28, 1999
This Executive Compensation Plan ("Plan") was approved by the Board of
Directors of Gateway Energy Corporation ("Gateway") on November 19, 1997. The
covered executives are to be determined by the Compensation Committee of the
Board of Directors. As of the date of the Plan, the Plan covers the Chief
Executive Officer, the Chief Operating Officer and the Chief Financial Officer.
The Plan has three components, base salary, short term incentive and long term
incentive.
BASE SALARY
The annual base salary for covered executives shall be recommended by
the Compensation Committee of the Board of Directors and approved annually
by a majority of the Board of Directors exclusive of any covered executives
serving as Directors.
SHORT TERM INCENTIVE
The Plan will include a short term incentive consisting of a cash
bonus. The Target Award, i.e., the bonus amount received if 100% of the
Incentive Goal (as defined below) is achieved, shall be equal to 55% of the
annual base salary of each executive. The actual bonus paid will be based
upon a comparison of the Incentive Actual to the Incentive Goal.
INCENTIVE ACTUAL. Covered executives will receive 30% of the
bonus if the Operating Margin portion of the Incentive Actual is
achieved and 70% of the bonus if the EBITDA portion of the Incentive
Actual is achieved. The Operating Margin and EBITDA shall be
determined annually based on the audited financial statements included
in Gateway's SEC Form 10-KSB. The Operating Margin shall be a dollar
amount equal to the total revenue less the cost of gas sold and
operating and maintenance expenses. EBITDA shall be a dollar amount
equal to total revenues less cost of gas sold, operating and
maintenance expenses and general and administrative expenses (not
including middle management and executive bonuses), and exclusive of
interest, taxes, depreciation and amortization.
-1-
<PAGE>
INCENTIVE GOAL. The Incentive Goal for fiscal year 1999, for
purposes of comparison to the Incentive Actual, shall be the Operating
Margin ($5,000,000) and EBITDA ($2,745,000.00) set forth in the
forecasted statements of Gateway for fiscal year 1999 as approved by a
majority of the Board of Directors of Gateway exclusive of the covered
executives. The Operating Margin and EBITDA portions of the Incentive
Goal shall be deemed achieved if the Actual Operating Margin and the
Actual EBITDA, although less than those established for the Incentive
Goal, achieve an Operating Margin of $1,810,000.00 and an EBITDA of
$1,295,000 for the fourth quarter ending February 28, 1999.
THRESHOLDS. The following Thresholds shall apply to the
generation of a bonus:
- An Incentive Actual equal to 85% of the Incentive Goal shall
generate a bonus equal to 25% of the Target Award.
- An Incentive Actual equal to 100% of the Incentive Goal shall
generate a bonus equal to 100% of the Target Award.
- An Incentive Actual equal to 125% of the Incentive Goal shall
generate a bonus equal to 150% of the Target Award.
- An Incentive Actual equal to 150% of the Incentive Goal shall
generate a bonus equal to 200% of the Target Award.
There will be no proration of Thresholds. As an example, an
Incentive Actual of 115% will generate the same bonus as a 100%
Return.
PAYMENT OF BONUSES. The bonuses shall be paid annually within
ninety (90) days of the end of the fiscal year, although the
Compensation Committee, in its discretion, may advance bonuses after
the first six (6) months of the fiscal year if appropriate. If the
year end adjustment results in a negative balance, the negative
balance shall carry over and must be vested against any successive
bonus payments.
-2-
<PAGE>
OVERALL BONUS LIMITATION. Notwithstanding the achievement of any
Threshold, actual executive bonuses for any fiscal year may not exceed
25% of Gateway's net earnings, as shown on the Form 10-KSB before
executive bonuses are deducted, for that fiscal year.
LONG TERM INCENTIVE
The Plan shall also include a long term incentive portion comprised of
non-qualified stock options on Gateway common stock. The option "pool",
which pool includes options for both Middle Management and Executive
Management, shall be equal to two and 1/2 percent (2.5%) of the fully diluted
shares outstanding as of the Company's preceding fiscal year end. The
"initial option pool" shall consist of 150,000 shares, of which 30,000 shares
shall be allocated to the Middle Management Compensation Plan, and 120,000
shares allocated to the Executive Compensation Plan. On March 1, 1999 and
each March 1st thereafter, unless changed by a majority of the outside
directors, the pool shall be adjusted annually based on the fully diluted
shares outstanding as of the preceding fiscal year end so as to maintain the
pool at two and 1/2 percent (2.5%) of fully diluted shares less the
unexercised options previously granted under the Middle Management
Compensation Plan and the Executive Management Compensation Plan. The
allocation of the option pool shall be in the discretion of the Compensation
Committee.
-------------------------------------------
Chairman, Compensation Committee
Date:
------------------------------
-3-
<PAGE>
FIRST AMENDMENT OF OFFICE LEASE
This First Amendment of Office Lease ("First Amendment"), by and between
TRIZEC ALLEN CENTER LIMITED PARTNERSHIP, a Delaware limited partnership dba
TrizecHahn Allen Center Limited Partnership, ("Landlord"), and GATEWAY ENERGY
CORPORATION, a Delaware corporation, ("Tenant"), is dated the 29th of June,
1998.
W I T N E S S E T H:
WHEREAS, Landlord and Tenant heretofore entered into that certain Office
Lease dated January 20, 1998 (the "Original Lease"); and
WHEREAS, Landlord and Tenant wish to document certain changes which the
parties wish to make to the terms and conditions for the exercise of the
Expansion Premises described in Exhibit "G" of the Original Lease;
NOW, THEREFORE, for and in consideration of the mutual covenants contained
herein and in the Original Lease, Landlord and Tenant do hereby covenant and
agree that the Lease is amended as follows:
1. EXHIBIT "G" - MANDATORY EXPANSION. Exhibit "G" of the Original Lease
is modified in the following manner:
(a) The Expansion Premises described in Paragraph 1 of Exhibit "G"
are changed from the approximately 2,556 square feet of Rentable Area as shown
on Schedule 1 to Exhibit "G" attached to the Original Lease to the approximately
2,087 square feet of Rentable Area as shown on the revised Schedule 1 to Exhibit
"G" attached to this First Amendment.
(b) The Required Expansion Date designated in Paragraph 1 of
Exhibit "G" is changed from November 1, 1998 to January 1, 1999. At its option,
Tenant may elect to occupy the Expansion Premises on a date earlier than January
1, 1999.
(c) The Allowance of $5.00 per square foot of Rentable Area
described in Paragraph 4 of Exhibit "G" shall be changed to $20.00 per square
foot of Rentable Area.
(d) Paragraph 3 of Exhibit "G" is modified so that the first month
of Base Rental owing for the Expansion Premises shall be abated by Landlord.
(e) Paragraph 8 of Exhibit "G" is modified so that the deadline for
Tenant to cancel the Lease with respect to the Expansion Premises shall be
extended from August 31, 1998 to November 30, 1998. In addition, if Tenant
cancels the Lease with respect to the Expansion Premises, Tenant agrees to move
its front entry back eighteen inches (18") to provide for a formal front entry
of the Expansion Premises, and all such costs to move the front entry shall be
borne by Landlord.
Page 1
<PAGE>
2. DEFINED TERMS. Terms defined in the Original Lease and delineated
herein by initial capital letters shall have the same meaning ascribed thereto
in the Original Lease.
3. EFFECT OF FIRST AMENDMENT. Except as expressly amended by the
provisions hereof, the terms and conditions contained in the Original Lease
shall continue to govern the rights and obligations of the parties; and all
provisions and covenants in the Original Lease shall remain in full force and
effect as stated therein, except to the extent specifically modified by the
provisions of this First Amendment. This First Amendment and the Original Lease
shall be construed as one instrument known as the Lease.
4. LENDER APPROVAL. Tenant acknowledges and agrees that this First
Amendment is subject to the approval of Metropolitan Life Insurance Company and
Landlord agrees to notify Tenant of such approval within five (5) days following
Landlord's receipt thereof.
IN WITNESS HEREOF, Landlord and Tenant have executed this First Amendment
in multiple counterparts as of the day and year written above.
LANDLORD: TENANT:
TRIZEC ALLEN CENTER LIMITED GATEWAY ENERGY CORPORATION,
PARTNERSHIP, a Delaware limited a Delaware corporation
partnership dba TrizecHahn Allen Center
Limited Partnership
By: [ILLEGIBLE]
------------------------------
By: TRIZEC ALLEN CENTER, INC., Name: [ILLEGIBLE]
a Delaware corporation, its sole -----------------------------
general partner Title: President
----------------------------
By: /s/ Paul H. Layne
------------------------------
Paul H. Layne
Vice President and Assistant Secretary
By: /s/ David W. Clapp
------------------------------
David W. Clapp
Vice President
Page 2
<PAGE>
[ARCHITECTURAL PLAN]
<PAGE>
TRIZECHAHN OFFICE PROPERTIES INC.
Allen Center
1200 Smith Street
Suite 2600
Houston, Texas 77002
Tel 713 651 1515
Fax 713 951 0209
[LOGO]
April 24, 1998
Mr. Mike T. Fadden
Gateway Energy Corporation
500 Dallas, Suite 2615
Houston, Texas 77002
RE: OFFICE LEASE AGREEMENT, DATED JANUARY 20, 1998 ("LEASE"),
BETWEEN TRIZEC ALLEN CENTER LIMITED PARTNERSHIP, A DELAWARE
LIMITED PARTNERSHIP D/B/A/ A TRIZECHAHN ALLEN CENTER LIMITED
PARTNERSHIP ("LANDLORD") AND GATEWAY ENERGY CORPORATION
("TENANT") FOR SUITE NO. 2615 ("PREMISES") AT ONE ALLEN CENTER,
HOUSTON, TEXAS.
Dear Mr. Fadden:
Pursuant to the above-reference document, this letter is to confirm (i) the
Rentable Area of the Leased Premises, (ii) the Commencement Date of the term
of the Lease, and (iii) the actual monthly Base Rental due.
Now, therefore, Landlord and Tenant hereby agree and confirm that, (i) the
Rentable Area of the Leased Premises is approximately 3,981 square feet of
Rentable Area on the twenty-sixth (26th) floor, (ii) the Commencement Date of
the term of the Lease is April 9, 1998 and will expire on March 31, 2003
unless sooner terminated or extended pursuant to the terms of the lease, and
(iii) the actual Base Rental shall be the sum fo Five Thousand Nine Hundred
Seventy One and 50/100 Dollars ($5,971.50) per month.
Please acknowledge your acceptance of the Leased Premises and confirmation of
the above by signing in the space provided below and returning two executed
copies to my attention at the Building Office.
Sincerely,
/s/ Mary Beth Salas
---------------------------
Mary Beth Salas
Assistant Property Manager
One Allen Center
Agreed and accepted this 30 day of April 1998.
Gateway Energy Corporation
By: /s/ Michael T. Fadden
-------------------------------
Title: President
----------------------------
<PAGE>
OFFICE LEASE
AT
ONE ALLEN CENTER
BETWEEN
TRIZEC ALLEN CENTER LIMITED PARTNERSHIP (LANDLORD)
AND
GATEWAY ENERGY CORPORATION (TENANT)
DATED: JANUARY 20, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE ONE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
BASIC LEASE PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.01 BASIC LEASE PROVISIONS . . . . . . . . . . . . . . . . . . . . . . 1
1.02 ENUMERATION OF EXHIBITS. . . . . . . . . . . . . . . . . . . . . . 2
1.03 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE TWO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
PREMISES, TERM AND OTHER LEASE RIGHTS. . . . . . . . . . . . . . . . . . . . . 7
2.01 LEASE OF PREMISES. . . . . . . . . . . . . . . . . . . . . . . . . 7
2.02 TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.03 FAILURE TO GIVE POSSESSION . . . . . . . . . . . . . . . . . . . . 7
2.04 CONDITION OF PREMISES. . . . . . . . . . . . . . . . . . . . . . . 8
2.05 RENEWAL OPTION . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.06 MANDATORY EXPANSION. . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE THREE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
RENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE FOUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
RENT ADJUSTMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.01 RENT ADJUSTMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.02 PROCEDURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.03 BOOKS AND RECORDS. . . . . . . . . . . . . . . . . . . . . . . . .10
4.04 PARTIAL OCCUPANCY. . . . . . . . . . . . . . . . . . . . . . . . .11
ARTICLE FIVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
ARTICLE SIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
6.01 LANDLORD'S GENERAL SERVICES. . . . . . . . . . . . . . . . . . . .12
6.02 ELECTRICAL SERVICES. . . . . . . . . . . . . . . . . . . . . . . .13
6.03 ADDITIONAL AND AFTER-HOUR SERVICES . . . . . . . . . . . . . . . .14
6.04 TELEPHONE SERVICES . . . . . . . . . . . . . . . . . . . . . . . .14
6.05 DELAYS IN FURNISHING SERVICES. . . . . . . . . . . . . . . . . . .15
ARTICLE SEVEN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
POSSESSION, USE AND CONDITION OF PREMISES. . . . . . . . . . . . . . . . . . .16
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
7.01 POSSESSION AND USE OF PREMISES . . . . . . . . . . . . . . . . . .16
7.02 LANDLORD ACCESS TO PREMISES. . . . . . . . . . . . . . . . . . . .18
7.03 QUIET ENJOYMENT. . . . . . . . . . . . . . . . . . . . . . . . . .18
7.04 ENTRY CARDS. . . . . . . . . . . . . . . . . . . . . . . . . . . .19
ARTICLE EIGHT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
MAINTENANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
8.01 LANDLORD'S MAINTENANCE . . . . . . . . . . . . . . . . . . . . . .19
8.02 TENANT'S MAINTENANCE . . . . . . . . . . . . . . . . . . . . . . .20
ARTICLE NINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
ALTERATIONS AND IMPROVEMENTS . . . . . . . . . . . . . . . . . . . . . . . . .20
9.01 TENANT ALTERATIONS . . . . . . . . . . . . . . . . . . . . . . . .20
9.02 LIENS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
ARTICLE TEN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
ASSIGNMENT AND SUBLETTING. . . . . . . . . . . . . . . . . . . . . . . . . . .22
10.01 ASSIGNMENT AND SUBLETTING. . . . . . . . . . . . . . . . . . . . .22
10.02 RECAPTURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
10.03 EXCESS RENT. . . . . . . . . . . . . . . . . . . . . . . . . . . .24
10.04 TENANT LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . .24
10.05 ASSUMPTION AND ATTORNMENT. . . . . . . . . . . . . . . . . . . . .24
ARTICLE ELEVEN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
11.01 EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . .25
11.02 LANDLORD'S REMEDIES. . . . . . . . . . . . . . . . . . . . . . . .26
11.03 ATTORNEY'S FEES. . . . . . . . . . . . . . . . . . . . . . . . . .28
11.04 BANKRUPTCY . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
ARTICLE TWELVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
SURRENDER OF PREMISES. . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
12.01 IN GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
12.02 LANDLORD'S RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . .29
ARTICLE THIRTEEN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
HOLDING OVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
ARTICLE FOURTEEN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
DAMAGE BY FIRE OR OTHER CASUALTY . . . . . . . . . . . . . . . . . . . . . . .30
14.01 SUBSTANTIAL UNTENANTABILITY. . . . . . . . . . . . . . . . . . . .30
14.02 INSUBSTANTIAL UNTENANTABILITY. . . . . . . . . . . . . . . . . . .31
14.03 RENT ABATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . .31
</TABLE>
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<TABLE>
<CAPTION>
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----
<S> <C>
ARTICLE FIFTEEN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
EMINENT DOMAIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
15.01 TAKING OF WHOLE OR SUBSTANTIAL PART. . . . . . . . . . . . . . . .32
15.02 TAKING OF PART . . . . . . . . . . . . . . . . . . . . . . . . . .32
15.03 COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . .32
ARTICLE SIXTEEN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
INSURANCE . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
16.01 TENANT'S INSURANCE . . . . . . . . . . . . . . . . . . . . . . . .33
16.02 FORM OF POLICIES . . . . . . . . . . . . . . . . . . . . . . . . .33
16.03 LANDLORD'S INSURANCE . . . . . . . . . . . . . . . . . . . . . . .33
16.04 WAIVER OF SUBROGATION. . . . . . . . . . . . . . . . . . . . . . .34
16.05 NOTICE OF CASUALTY . . . . . . . . . . . . . . . . . . . . . . . .35
ARTICLE SEVENTEEN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
WAIVER OF CLAIMS AND INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . .35
17.01 WAIVER OF CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . .35
17.02 INDEMNITY BY TENANT. . . . . . . . . . . . . . . . . . . . . . . .36
ARTICLE EIGHTEEN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
RULES AND REGULATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
18.01 RULES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
18.02 ENFORCEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . .37
ARTICLE NINETEEN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
LANDLORD'S RESERVED RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . .37
19.01 RESERVED RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . .37
ARTICLE TWENTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
ESTOPPEL CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
20.01 IN GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
20.02 ENFORCEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . .38
ARTICLE TWENTY-ONE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
RELOCATION OF TENANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
ARTICLE TWENTY-TWO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
REAL ESTATE BROKERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
</TABLE>
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<TABLE>
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<S> <C>
ARTICLE TWENTY-THREE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
MORTGAGEE PROTECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
23.01 SUBORDINATION AND ATTORNMENT . . . . . . . . . . . . . . . . . . .39
23.02 MORTGAGEE PROTECTION . . . . . . . . . . . . . . . . . . . . . . .40
ARTICLE TWENTY-FOUR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
NOTICES . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
ARTICLE TWENTY-FIVE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
25.01 LATE CHARGES . . . . . . . . . . . . . . . . . . . . . . . . . . .42
25.02 WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . .42
25.03 DEFAULT UNDER OTHER LEASE. . . . . . . . . . . . . . . . . . . . .42
25.04 OPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
25.05 TENANT AUTHORITY . . . . . . . . . . . . . . . . . . . . . . . . .42
25.06 MODIFICATION OF LEASE FOR BENEFIT OF MORTGAGEE . . . . . . . . . .43
25.07 EXCULPATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .43
25.08 ACCORD AND SATISFACTION. . . . . . . . . . . . . . . . . . . . . .43
25.09 LANDLORD'S OBLIGATIONS ON SALE OF BUILDING . . . . . . . . . . . .43
25.10 BINDING EFFECT . . . . . . . . . . . . . . . . . . . . . . . . . .43
25.11 CAPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
25.12 APPLICABLE LAW . . . . . . . . . . . . . . . . . . . . . . . . . .44
25.13 ABANDONMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . .44
25.14 LANDLORD'S RIGHT TO PERFORM TENANT'S DUTIES. . . . . . . . . . . .44
25.15 TEXAS DECEPTIVE TRADE PRACTICES ACT INAPPLICABLE . . . . . . . . .44
25.16 LETTER OF CREDIT . . . . . . . . . . . . . . . . . . . . . . . . .45
25.17 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . .45
25.18 NOTICE OF INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . .45
</TABLE>
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<PAGE>
OFFICE LEASE
ARTICLE ONE
BASIC LEASE PROVISIONS
1.01 BASIC LEASE PROVISIONS - In the event of any conflict between these
Basic Lease Provisions and any other Lease provision, such other Lease
provision shall control.
(1) BUILDING AND ADDRESS: One Allen Center, 500 Dallas Street,
Houston, Texas 77002.
(2) LANDLORD: Trizec Allen Center Limited Partnership, a Delaware
limited partnership d/b/a TrizecHahn Allen Center Limited
Partnership.
(3) TENANT: Gateway Energy Corporation, a Delaware corporation
(4) DATE OF LEASE: JANUARY 20, 1998.
(5) LENGTH OF LEASE TERM: Sixty (60) months.
(6) PROJECTED COMMENCEMENT DATE: April 1, 1998.
(7) PROJECTED EXPIRATION DATE: March 31, 2003.
(8) BASE RENT:
<TABLE>
<CAPTION>
PERIOD FROM/TO MONTHLY ANNUALLY RATE/SF OF RENTABLE AREA
------------- ------- -------- ------------------------
<S> <C> <C> <C>
Months 1-60 $5,971.50 $71,658.00 $18.00
</TABLE>
(9) PREMISES: Suite No. 2615.
3,981 SQUARE FEET OF RENTABLE AREA (approximate)
3,296 SQUARE FEET OF USABLE AREA (approximate)
(10) SECURITY DEPOSIT: $11,943.00
(11) TENANT'S USE OF PREMISES: General office use.
<PAGE>
1.02 ENUMERATION OF EXHIBITS
The exhibits and riders set forth below and attached to this Lease are
incorporated in this Lease by this reference:
EXHIBIT A Legal Description of Land
EXHIBIT B Plan of Premises
EXHIBIT C Workletter Agreement
EXHIBIT D Rules and Regulations
EXHIBIT E Parking
EXHIBIT F Renewal Option
EXHIBIT G Mandatory Expansion
EXHIBIT H Janitorial Specifications
1.03 DEFINITIONS
For purposes hereof, the following terms shall have the following meanings:
AFFILIATE: Any corporation or other business entity which is currently owned or
controlled by, owns or controls, or is under common ownership or control with
Tenant.
ALLOWANCE: "Allowance" shall mean an amount equal to the product of $20.00
times the number of square feet of Rentable Area of the Premises.
BUILDING: The "Building" shall mean the office building located upon the Land.
COMMENCEMENT DATE: The date specified in Section 1.01(6) as the Projected
Commencement Date, unless changed by operation of Article Two.
COMMON AREAS: All areas of the Real Property made available by Landlord from
time to time for the general common use or benefit of the tenants of the
Building, and their employees and invitees, or the public, as such areas
currently exist and as they may be changed from time to time.
DECORATION: Tenant Alterations which do not require a building permit and which
do not involve any of the structural elements of the Building, or any of the
Building's systems, including, without limitation, its electrical, mechanical,
plumbing and security and life/safety systems.
DEFAULT RATE: The maximum interest rate permitted by law.
ENVIRONMENTAL LAWS: Any Law governing the use, storage, disposal or generation
of any Hazardous Material, including without limitation, the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended and
the Resource Conservation and Recovery Act of 1976, as amended.
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<PAGE>
EXPENSE STOP: The sum of the Operating Expenses (as grossed up in Section 4.04)
and Taxes (as defined in this Lease) per square foot of Rentable Area in the
Building for the calendar year 1998.
EXPIRATION DATE: The date specified in Section 1.01(7) unless changed by
operation of Article Two.
FORCE MAJEURE: Any accident, casualty, act of God, war or civil commotion,
strike or labor troubles, or any cause whatsoever beyond the reasonable control
of Landlord, including, but not limited to, energy shortages or governmental
preemption in connection with a national emergency, or by reason of government
laws or any rule, order or regulation of any department or subdivision thereof
or any governmental agency, or by reason of the conditions of supply and demand
which have been or are affected by war or other emergency.
HAZARDOUS MATERIAL: Such substances, material and wastes which are or become
regulated under any Environmental Law; or which are classified as hazardous or
toxic under any Environmental Law; and explosives and firearms, radioactive
material, asbestos, and polychlorinated byphenyls.
INDEMNITEES: Collectively, Landlord, any Mortgagee or ground lessor of the
Property, the property manager and the leasing manager for the Property and
their respective directors, officers, agents and employees.
INITIAL IMPROVEMENTS: "Initial Improvements", when used herein, shall mean
those improvements or remodeling to the Premises, if any, which Landlord and/or
Tenant shall agree to provide according to the Workletter attached hereto as
EXHIBIT C.
LAND: The parcels of real estate on which the Building is located, as more
particularly described in EXHIBIT A attached hereto.
LAWS: All laws, ordinances, rules, regulations and other requirements adopted
by any governmental body, or agency or department having jurisdiction over the
Property, the Premises or Tenant's activities at the Premises and any covenants,
conditions or restrictions of record which affect the Property.
LEASE: This instrument and all exhibits and riders attached hereto, as may be
amended from time to time.
LEASE YEAR: The twelve (12) month period beginning on the first day of the
first month following the Commencement Date (unless the Commencement Date is the
first day of a calendar month in which case beginning on the Commencement Date),
and each subsequent twelve (12) month, or shorter, period until the Expiration
Date.
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<PAGE>
MONTHLY BASE RENT: The monthly rent specified in Section 1.01(8).
MORTGAGEE: Any holder of a mortgage, deed of trust or other security instrument
encumbering the Property.
NATIONAL HOLIDAYS: New Year's Day, President's Day, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day and any other holiday
recognized by tenants occupying at least fifty percent (50%) of the Rentable
Area of the Building.
OPERATING EXPENSES: Operating Expenses shall mean all direct and indirect costs
and expenses in each calendar year of operating, maintaining, repairing,
managing and owning the Property plus a portion of all such operating expenses
reasonably allocable to the Project, plus Taxes. Operating Expenses shall not
include the cost of capital improvements, depreciation, interest, lease
commissions, and principal payments on mortgage and other non-operating debts of
Landlord. Operating Expenses shall, however, include the amortization of
capital improvements which are primarily for the purpose of reducing Operating
Expenses, or which are required by governmental authorities. "Exterior Common
Areas" shall mean that portion of the Property (and other tracts of real
property comprising the multi-building project in the event the Building is
located in such a project) which are not located within the Building (or other
building in a multi-building project) and which are provided and maintained for
the common use and benefit of Landlord and tenants of the Building (or
multi-building project) generally and the employees, invitees and licensees of
Landlord and such tenants; including without limitation, all parking areas
(enclosed or otherwise, including, without limitation, the Building Garage, the
Allen Center Parking Garage and the Metropolitan Parking Garage) and all
streets, sidewalks, walkways, pedestrian tunnels and landscaped areas contained
within the Project.
PREMISES: The space located in the Building, described in Section 1.01(9) and
depicted on EXHIBIT B attached hereto.
PROJECT: The Allen Center project located on the tracts of land described on
EXHIBIT A, together with that certain elevated pedestrian walkway between the
Building known as Three Allen Center and the Allen Center Parking Garage
("Skywalk") and the pedestrian tunnel between the Building and the Hyatt Regency
Hotel ("One Allen Tunnel"), less (i) the Building, (ii) the building known as
Two Allen Center, (iii) the building known as Three Allen Center, (iv) the Allen
Center Parking Garage, and (v) the Metropolitan Parking Garage, but including
such other improvements and amenities as may from time to time exist within the
land described on EXHIBIT A. Any such improvements and/or amenities may be
modified, altered or eliminated by Landlord and the other owners of property in
the Project in their sole discretion without incurring any liability to Tenant
or any other person or entity. Tenant acknowledges that Landlord has advised
that portions of the Project are not owned by Landlord.
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<PAGE>
PROPERTY: The Building, the Land, any other improvements located on the Land,
including, without limitation, any parking structures and the personal property,
fixtures, machinery, equipment, systems and apparatus located in or used in
conjunction with any of the foregoing.
REAL PROPERTY: The Property excluding any personal property.
RENT: Collectively, Monthly Base Rent, Rent Adjustments and all other charges,
payments, late fees or other amounts required to be paid by Tenant under this
Lease.
RENTABLE AREA OF THE BUILDING: 993,238 square feet, consisting of 929,278
square feet of office space and 63,960 square feet of retail space (located on
the concourse and street levels of the Building). Landlord acknowledges and
agrees that Tenant shall only be required to pay its proportionate share of
Operating Expenses with respect to office space in the Building as provided in
Section 4.01 below.
RENTABLE AREA OF THE PREMISES: The amount of square footage set forth in
Section 1.01(9), which represents the sum of (i) the "Usable Area" within the
Premises (i.e., the gross area enclosed by the surface of the exterior glass
walls, the mid-point of any walls separating portions of the Premises from those
of adjacent tenants, the slab penetration line of all walls separating the
Premises from Service Areas and the corridor side of walls separating the
Premises from Common Areas) plus (ii) a pro rata part of the Common Areas within
the Building, such proration to be based upon the ratio of the Usable Area
within the Premises to the total Usable Area within the Building existing as of
the date of this Lease, including the area encompassed by any columns or other
structural elements which provide support to the Premises and/or the Building.
Rentable Area shall not include any Service Areas. The estimates of Rentable
Area within the Premises and in the Building may be revised at Landlord's
election if Landlord's architect determines such estimate to be inaccurate in
any material degree after examination of the final "as built" drawings of the
Premises and the Building, and the Base Rent shall be adjusted accordingly,
based upon the rate per square foot of Rentable Area specified in Section
1.01(8) hereof.
RENT ADJUSTMENT: Any amounts owed by Tenant for payment of Operating Expenses.
The Rent Adjustments shall be determined and paid as provided in Article Four.
SECURITY DEPOSIT: The funds specified in Section 1.01(10), if any, deposited by
Tenant with Landlord as security for Tenant's performance of its obligations
under this Lease.
SERVICE AREAS: "Service Areas" shall mean those areas within the outside walls
used for building stairs, elevator shafts, flues, vents, stacks, pipe shafts and
other vertical penetrations (but shall not include any such areas for the
exclusive use of a particular tenant).
SHELL IMPROVEMENTS: "Shell Improvements" shall mean (i) lay-in acoustical
ceiling grid and (ii) existing central air conditioning and heating ducts and
diffusers. All Shell Improvements will be provided "AS-IS," in their then
current condition and placement as of the date of delivery of the Premises to
Tenant.
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<PAGE>
SUBSTANTIALLY COMPLETE: The completion of the Initial Improvements, except for
minor insubstantial details of construction, decoration or mechanical
adjustments which remain to be done.
TAXES: All federal, state and local governmental taxes, assessments and
charges of every kind or nature, whether general, special, ordinary or
extraordinary, which Landlord shall pay or become obligated to pay because of
or in connection with the ownership, leasing, management, control or
operation of the Property or any of its components, or any personal property
used in connection therewith, which shall also include any rental or similar
taxes levied in lieu of or in addition to general real and/or personal
property taxes. For purposes hereof, Taxes for any year shall be Taxes which
are assessed or become a lien during such year, whether or not such taxes are
billed and payable in a subsequent calendar year. There shall be included in
Taxes for any year the amount of all fees, costs and expenses (including
reasonable attorneys' fees) paid by Landlord during such year in seeking or
obtaining any refund or reduction of Taxes. Taxes for any year shall be
reduced by the net amount of any tax refund received by Landlord attributable
to such year. If a special assessment payable in installments is levied
against any part of the Property, Taxes for any year shall include only the
installment of such assessment and any interest payable or paid during such
year. Taxes shall not include any federal or state inheritance, general
income, gift or estate taxes, except that if a change occurs in the method of
taxation resulting in whole or in part in the substitution of any such taxes,
or any other assessment, for any Taxes as above defined, such substituted
taxes or assessments shall be included in the Taxes.
TENANT ALTERATIONS: Any alterations, improvements, additions, installations or
construction in or to the Premises or any Building systems serving the Premises
pursuant to Section 9.01, excluding Initial Improvements.
TENANT DELAY: Any event or occurrence caused by Tenant which delays the
completion of the Initial Improvements, as described in the Workletter.
TERM: The term of this Lease commencing on the Commencement Date and expiring
on the Expiration Date.
TERMINATION DATE: The Expiration Date or such earlier date as this Lease
terminates or Tenant's right to possession of the Premises terminates.
WORK: The construction or installation of improvements to the Premises, as more
specifically described in the Workletter attached hereto as EXHIBIT C.
WORKLETTER: The Agreement regarding the manner of completion of the Initial
Improvements, attached hereto as EXHIBIT C.
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<PAGE>
ARTICLE TWO
PREMISES, TERM AND OTHER LEASE RIGHTS
2.01 LEASE OF PREMISES
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord
the Premises for the Term and upon the conditions provided in this Lease. In
the event Landlord delivers possession of the Premises to Tenant prior to the
Commencement Date, Tenant shall be subject to all of the terms, covenants, and
conditions of this Lease (except with respect to the payment of Rent) as of the
date of such possession.
2.02 TERM
(a) The Commencement Date shall be the date determined as follows:
(i) If the Initial Improvements are Substantially Complete on
or before the Projected Commencement Date then on the
date which is the earlier to occur of:
(x) the Projected Commencement Date; or
(y) the date Tenant first occupies all or part of the
Premises for the conduct of business; or
(ii) If the Initial Improvements are not Substantially Complete
by the Projected Commencement Date, then on the date on
which the Initial Improvements are Substantially Complete.
(b) Within thirty (30) days following the occurrence of the
Commencement Date, Landlord, through its property manager, and
Tenant shall enter into an agreement confirming the Commencement
Date and the Expiration Date. If Tenant fails to enter into such
agreement, then the Commencement Date and the Expiration Date
shall be the dates designated by Landlord in such agreement.
2.03 FAILURE TO GIVE POSSESSION
If the Landlord shall be unable to give possession of the Premises on
the Projected Commencement Date by reason of the following: (a) the Building has
not been sufficiently completed to make the Premises ready for occupancy, (b)
the Initial Improvements are not Substantially Complete, (c) the holding over or
retention of possession of any tenant, tenants or occupants, or (d) for any
other reason, then Landlord shall not be subject to any liability for the
failure to give possession on said date. Under such circumstances the rent
reserved and covenanted to be paid herein shall not commence until the Premises
are made available to Tenant by Landlord,
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<PAGE>
and no such failure to give possession on the Projected Commencement Date
shall affect the validity of this Lease or the obligations of the Tenant
hereunder. At the option of Landlord, to be exercised within thirty (30)
days of the delayed delivery of possession to Tenant, the Lease shall be
amended so that the term shall be extended by the period of time possession
is delayed. The said Premises shall be deemed to be ready for Tenant's
occupancy in the event the Initial Improvements are Substantially Complete,
or if the delay in the availability of the Premises for occupancy shall be
due to any Tenant Delay and/or default on the part of Tenant and/or its
subtenant or subtenants. In the event of any dispute as to whether the
Initial Improvements are Substantially Complete, the decision of Landlord's
architect shall be final and binding on the parties.
2.04 CONDITION OF PREMISES
Tenant shall notify Landlord in writing within thirty (30) days after
the later of (a) Substantial Completion of the Initial Improvements, or (b) when
Tenant takes possession of the Premises, of any defects in the Premises claimed
by Tenant or in the materials or workmanship furnished by Landlord in completing
the Initial Improvements. Except for defects stated in such notice, Tenant
shall be conclusively deemed to have accepted the Premises "AS IS" and "WITH ALL
FAULTS" in the condition existing on the date Tenant first takes possession, and
to have waived all claims relating to the condition of the Premises. Landlord
shall proceed diligently to correct the defects stated in such notice unless
Landlord disputes the existence of any such defects. In the event of any
dispute as to the existence of any such defects, the decision of Landlord's
architect shall be final and binding on the parties. No agreement of Landlord
to alter, remodel, decorate, clean or improve the Premises or the Building and
no representation regarding the condition of the Premises or the Building has
been made by or on behalf of Landlord to Tenant, except as may be specifically
stated in this Lease or in the Workletter.
2.05 RENEWAL OPTION
Tenant shall have the option to renew the Term of this Lease in
accordance with the terms and conditions of EXHIBIT F attached hereto and made a
part hereof for all purposes.
2.06 MANDATORY EXPANSION
Tenant shall lease additional space on Floor 26 of the Building in
accordance with the terms and conditions of EXHIBIT G attached hereto and made a
part hereof for all purposes.
ARTICLE THREE
RENT
Tenant agrees to pay to Landlord at the property management office
specified in Article 24, or to such other persons, or at such other places
designated by Landlord, without any prior demand therefor in immediately
available funds and without any deduction whatsoever, Rent, including,
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<PAGE>
without limitation, Monthly Base Rent and Rent Adjustments in accordance with
Article Four, during the Term. Monthly Base Rent shall be paid monthly in
advance on the first day of each month of the Term, except that the first
installment of Monthly Base Rent shall be paid by Tenant to Landlord
concurrently with Tenant's execution of this Lease. Monthly Base Rent shall
be prorated for partial months within the Term. Unpaid Rent shall bear
interest at the Default Rate from the date due until paid. Tenant's covenant
to pay Rent shall be independent of every other covenant in this Lease.
ARTICLE FOUR
RENT ADJUSTMENT
4.01 RENT ADJUSTMENT
The Base Rent payable hereunder shall be adjusted ("Rent Adjustment")
from time to time in accordance with this Article Four:
Tenant's Base Rent is based, in part, upon the estimate that annual
Operating Expenses will be equal to the Expense Stop. During the Term, Tenant
shall pay as a Rent Adjustment hereunder an amount (per each square foot of
Rentable Area within the Premises) equal to the excess ("Excess") from time to
time of Operating Expenses per square foot of Rentable Area of office space in
the Building over the Expense Stop. Landlord may collect such additional Base
Rent in arrears on a yearly basis. Landlord shall also have the option to make
a good faith estimate of the Excess from time to time for each upcoming calendar
year (or remainder thereof, if applicable) and, upon thirty (30) days' written
notice to Tenant, may require the monthly payment of Base Rent to be adjusted in
accordance with such estimate. Any amounts paid based on any such estimate
shall be subject to adjustment pursuant to Section 4.02 below when Operating
Expenses are available for such calendar year.
4.02 PROCEDURE
The following additional provisions shall apply to Rent Adjustments per
Section 4.01:
(a) By April 1 of each calendar year during Tenant's occupancy, or as
soon thereafter as practical, Landlord shall furnish to Tenant a statement
("Landlord's Statement") of Landlord's Operating Expenses for the previous
calendar year (audited with respect to Landlord's Statement for 1998). If for
any calendar year additional Base Rent was collected for the prior year, as a
result of Landlord's estimate of Operating Expenses, in excess of the additional
Base Rent due during such prior year, then Landlord shall refund to Tenant any
over payment (or at Landlord's option, apply such amount against rentals due
hereunder). Likewise, Tenant shall pay to Landlord, on demand, any underpayment
with respect to the prior year. In no event shall Operating Expenses per square
foot of Rentable Area within the Building be deemed to be less than the Expense
Stop, it being the intent of Landlord and Tenant that Tenant shall at all times
be responsible for the payment of, and
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shall pay, not less than the amount of Base Rent for the applicable period
(before adjustment) specified in this Lease.
(b) In the event that the Term commences on a day other than January
1 or terminates on a day other than December 31, the Excess for that part of the
first (1st) calendar year or last calendar year during the Term shall be
determined as follows:
(i) The Expense Stop shall be prorated based upon the number
of months in such partial calendar year. With respect to any partial
calendar month occurring during such partial calendar year, the Expense
Stop shall also be prorated based upon the number of days in that
partial calendar month.
(ii) The Excess, if any, for the applicable partial calendar
year shall then be the amount by which (x) actual Operating Expenses per
square foot of Rentable Area in the Building for such calendar year,
prorated based upon the number of months and days in the applicable
partial calendar year, exceed (y) the Expense Stop, as prorated pursuant
to the provisions of this Subsection 4.02(b).
(iii) With respect to a proration for the first (1st) calendar
year and in the event that Landlord's estimate of the Operating Expenses
to be incurred during such partial calendar year exceeds the Expense
Stop, as prorated pursuant to the provisions of this Subsection 4.02(b),
Landlord may, upon thirty (30) days' prior written notice to Tenant,
require the Monthly Base Rent occurring during such partial calendar
year to be adjusted in accordance with such estimate.
4.03 BOOKS AND RECORDS
Landlord shall maintain books and records showing Operating Expenses
in accordance with sound accounting and management practices, consistently
applied. The Tenant or its representative (which representative shall be a
certified public accountant licensed to do business in the State of Texas)
shall have the right, for a period of thirty (30) days following the date
upon which Landlord's Statement is delivered to Tenant, to examine the
Landlord's books and records with respect to the items in the foregoing
statement of Operating Expenses during normal business hours, upon written
notice, delivered at least ten (10) business days in advance. No contingency
fee-based audits shall be permitted. If Tenant does not object in writing to
Landlord's Statement within sixty (60) days of Tenant's receipt thereof,
specifying the nature of the item in dispute and the reasons therefor, then
Landlord's Statement shall be considered final and accepted by Tenant. Any
amount due to the Landlord as shown on Landlord's Statement, whether or not
disputed by Tenant as provided herein shall be paid by Tenant when due as
provided above, without prejudice to any such written exception.
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4.04 PARTIAL OCCUPANCY
Notwithstanding any language in the Lease or in this Article Four
seemingly to the contrary, Landlord may at Landlord's sole election, determine
and estimate Operating Expenses for any calendar year within the Term by
increasing the variable components of Operating Expenses to the amount which
Landlord projects would have been incurred had the Building been occupied to the
extent of one hundred percent (100%) of the Rentable Area therein during all of
the applicable calendar year. In such event, the term "Operating Expenses", as
used in this Article Four and in the Lease, shall include (a) the actual
Operating Expenses incurred during any portion of such calendar year in which
the Building is occupied to the extent of one hundred percent (100%) of the
Rentable Area therein, plus (b) the Operating Expenses which would have been
incurred had the Building been occupied to the extent of one hundred percent
(100%) of the Rentable Area therein; and Landlord shall have the option of
making such estimate in advance for any upcoming calendar year.
ARTICLE FIVE
SECURITY DEPOSIT
Tenant, concurrently with the execution of this Lease, shall pay to
Landlord the Security Deposit. The Security Deposit may be applied by Landlord
to cure any default of Tenant under this Lease, and upon notice by Landlord of
such application, Tenant shall replenish the Security Deposit in full by paying
to Landlord within ten (10) days of demand the amount so applied. Landlord
shall not pay any interest on the Security Deposit. The Security Deposit shall
not be deemed an advance payment of Rent, nor a measure of damages for any
default by Tenant under this Lease, nor shall it be a bar or defense of any
action which Landlord may at any time commence against Tenant. In the absence
of evidence satisfactory to Landlord of an assignment of the right to receive
the Security Deposit or the remaining balance thereof, Landlord may return the
Security Deposit to the original Tenant, regardless of one or more assignments
of this Lease. Upon the transfer of Landlord's interest under this Lease,
Landlord's obligation to Tenant with respect to the security deposit shall
terminate upon assumption of such obligation by the transferee.
If Tenant shall fully and faithfully comply with all the terms,
provisions, covenants, and conditions of this Lease, the Security Deposit, or
any balance thereof, shall be returned to Tenant after the following:
(a) the expiration of the Term of this Lease;
(b) the removal of Tenant and its property from the Premises;
(c) the surrender of the Premises by Tenant to Landlord in accordance
with this Lease; and
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(d) the payment by Tenant of any outstanding Rent, including, without
limitation, all Rent Adjustments due pursuant to the Lease as
computed by Landlord.
ARTICLE SIX
SERVICES
6.01 LANDLORD'S GENERAL SERVICES
So long as the Lease is in full force and effect and Tenant has paid all
Rent then due, Landlord shall furnish the following services:
(a) heat and air-conditioning in the Premises, Monday through Friday
from 7:00 a.m. to 7:00 p.m., Saturday, from 7:00 a.m. to 1:00
p.m., excluding National Holidays, as necessary in Landlord's
reasonable judgment for the comfortable occupancy of the Premises
under normal business operations, subject to compliance with all
applicable voluntary and mandatory regulations and laws;
(b) tempered and cold water for use in lavatories in common with
other tenants from the regular supply of the Building;
(c) customary cleaning and janitorial services in the Premises five
(5) days per week, excluding National Holidays in accordance with
Landlord's Building standard janitorial specifications attached
hereto as EXHIBIT H (as may be supplemented from time to time by
Landlord);
(d) washing of the outside windows in the Premises weather permitting
at intervals determined by Landlord;
(e) automatic passenger elevator service in common with other tenants
of the Building and freight elevator service subject to
reasonable scheduling by Landlord and payment of Landlord's
standard charges;
(f) all Building Grade fluorescent bulb replacement in the Premises
necessary to maintain the lighting provided as a part of the
Shell Improvements and fluorescent and incandescent bulb
replacement in the Common Areas and Service Areas; and
(g) routine maintenance and electric lighting service for all Common
Areas and Service Areas of the Building in the manner and to the
extent deemed by Landlord to be standard.
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6.02 ELECTRICAL SERVICES
Tenant's use of electrical services furnished by Landlord shall be
subject to the following:
(a) Landlord will provide the necessary facilities to supply (i) two
(2) watts per square foot of Usable Area within the Premises, at
277 volts, for Tenant's fluorescent lighting and (ii) four and
one-half (4.5) watts per square foot of Usable Area within the
Premises, at 120 volts, for Tenant's receptacle/equipment loads
(excluding Tenant's dedicated circuits). Collectively, Tenant's
lighting and receptacle/ equipment shall not have an electrical
design load greater than an average of six and one-half (6.5)
watts per square foot of Usable Area within the Premises
("Standard Building Capacity"). The electrical costs component
of Operating Expenses is calculated on the basis of the Standard
Building Capacity. Any electrical usage in the Premises in
excess of .34 kilowatt hours per square foot of Usable Area in
the Premises per month shall be considered to be in excess of
Standard Building Capacity and shall be separately metered and
billed to Tenant on a monthly basis. Notwithstanding the above,
high voltage power used for Building standard lighting will not
be metered unless the Building standard allowance for lighting
(defined as one (1) 2x4 parabolic lighting fixture for each
eighty (80) square feet of Usable Area within the Premises) is
exceeded.
(b) The electrical facilities in the Building available for Tenant's
use are (i) 277/480 volts, 3 phase, for large equipment loads and
fluorescent lighting; and (ii) 120/208 volts, 3 phase, for small
equipment loads and incandescent lighting. Tenant shall notify
Landlord, in writing, of any equipment that has a rated
electrical load greater than 500 watts and/or that requires a
service voltage other than 120 volts, and Landlord's written
approval shall be required with respect to the installation of
any such high electrical consumption equipment in the Premises.
(c) Tenant shall pay for all costs of meters, submeters, wiring,
risers, transformers, electrical panels, air conditioning and
other items required by Landlord, in Landlord's discretion, to
accommodate Tenant's design loads and capacities that exceed
Standard Building Capacity, including, without limitation, the
installation and maintenance thereof. Notwithstanding the
foregoing, Landlord may refuse to install and withhold consent
for Tenant's installation of any wiring, risers, transformers,
electrical panels, or air conditioning if, in Landlord's sole
judgment, the same are not necessary or would cause damage or
injury to the Building or the Premises or cause or create a
dangerous or hazardous condition or entail excessive or
unreasonable alterations or repairs to the Building or the
Premises, or would interfere with or create or constitute a
disturbance to other tenants or occupants of the Building. In no
event shall Landlord incur any liability for Landlord's refusal
to install, or withholding of consent for Tenant's installation
of, any such electrical facility or equipment.
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(d) Tenant shall pay to Landlord, upon demand, the cost of the
consumption of electrical service in excess of the Standard
Building Capacity at rates determined by Landlord which shall be
in accordance with any applicable laws.
(e) Landlord may, at its option, upon not less than thirty (30) days'
prior written notice to Tenant, discontinue the availability of
such extraordinary electrical service. If Landlord gives any
such notice, Tenant will contract directly with the applicable
public utility for the supplying of such electrical service to
the Premises.
6.03 ADDITIONAL AND AFTER-HOUR SERVICES
At Tenant's request, Landlord shall furnish additional quantities of any
of the services or utilities specified in Section 6.01, if Landlord can
reasonably do so, on the terms set forth herein. Tenant may order after-hours
HVAC service instantaneously by a coded entry over a touch-tone phone. The
charge for after-hours HVAC service is currently $25.00 per handler per hour
(subject to change from time to time based on Landlord's costs therefor) and
shall be billed to Tenant monthly. For other services or utilities requested by
Tenant and furnished by Landlord, Tenant shall pay to Landlord as a charge
therefor Landlord's prevailing rates for such services and utilities. If Tenant
shall fail to make any such payment, Landlord may, upon notice to Tenant and in
addition to Landlord's other remedies under this Lease, discontinue any or all
of such additional services.
6.04 TELEPHONE SERVICES
All telegraph, telephone, and electric connections which Tenant may
desire shall be first approved by Landlord in writing, before the same are
installed, and the location of all wires and the work in connection therewith
shall be performed by contractors approved by Landlord and shall be subject to
the direction of Landlord. Landlord reserves the right to designate and control
the entity or entities providing telephone or other communication cable
installation, repair and maintenance in the Building and to restrict and control
access to telephone cabinets. In the event Landlord designates a particular
vendor or vendors to provide such cable installation, repair and maintenance for
the Building, Tenant agrees to abide by and participate in such program. Tenant
shall be responsible for and shall pay all costs incurred in connection with the
installation of telephone cables and related wiring in the Premises, including,
without limitation, any hook-up, access and maintenance fees related to the
installation of such wires and cables in the Premises and the commencement of
service therein, and the maintenance thereafter of such wire and cables; and
there shall be included in Operating Expenses for the Building all installation,
hook-up or maintenance costs incurred by Landlord in connection with telephone
cables and related wiring in the Building which are not allocable to any
individual users of such service but are allocable to the Building generally.
If Tenant fails to maintain all telephone cables and related wiring in the
Premises and such failure affects or interferes with the operation or
maintenance of any other telephone cables or related wiring in the Building,
Landlord or any vendor hired by Landlord may enter into and upon the Premises
forthwith and perform such repairs, restorations or alterations as Landlord
deems necessary in order to eliminate any such interference (and Landlord may
recover from Tenant all of
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Landlord's costs in connection therewith). Upon the Termination Date, Tenant
agrees to remove all telephone cables and related wiring installed by Tenant
for and during Tenant's occupancy, which Landlord shall request Tenant to
remove. Tenant agrees that neither Landlord nor any of its agents or
employees shall be liable to Tenant, or any of Tenant's employees, agents,
customers or invitees or anyone claiming through, by or under Tenant, for any
damages, injuries, losses, expenses, claims or causes of action because of
any interruption, diminution, delay or discontinuance at any time for any
reason in the furnishing of any telephone service to the Premises and the
Building.
6.05 DELAYS IN FURNISHING SERVICES
Tenant agrees that Landlord shall not be liable to Tenant for damages or
otherwise, for any failure to furnish, or a delay in furnishing, any service
when such failure or delay is occasioned, in whole or in part, by repairs,
improvements or mechanical breakdowns by the act or default of Tenant or other
parties or by an event of Force Majeure. No interruption or malfunction of any
utility service shall constitute an eviction or disturbance of Tenant's use or
possession of the Premises or a breach by Landlord of any of Landlord's
obligations hereunder or render Landlord liable or responsible to Tenant for any
loss or damage which Tenant may sustain or incur if either the quantity or
character of any utility service is changed or is no longer available to or is
no longer suitable for Tenant's requirements or entitle Tenant to be relieved
from any of Tenant's obligations hereunder, including, without limitation, the
obligation to pay Rent, or grant Tenant any right to set-off, abatement, or
recoupment. Notwithstanding any other provision in this Lease seemingly to the
contrary, at any time when Landlord is making such facilities for such utility
services available to the Premises, Landlord may, at Landlord's option, upon not
less than thirty (30) days' prior written notice to Tenant, discontinue the
availability of any such utility service. If Landlord gives any such notice of
discontinuance, Landlord shall make all the necessary arrangements with the
public utility service supplying the utility to the area in which the Building
is located with respect to obtaining such utility service to the Premises; but
Tenant will contract directly with such public utility service for the supplying
of such utility services to the Premises. Failure to any extent to make
available, or any slowdown, stoppage, or interruption of, the specified utility
services resulting from any cause, including, without limitation, Landlord's
compliance with any voluntary or similar governmental or business guidelines now
or hereafter published or any requirements now or hereafter established by any
governmental agency, board, or bureau having jurisdiction over the operation of
the Building shall not render Landlord liable in any respect for damages to
either persons, property, or business, nor be construed as an eviction of Tenant
or work an abatement of Rent, nor relieve Tenant of Tenant's obligations for
fulfillment of any covenant or agreement hereof. Should any equipment or
machinery furnished by Landlord break down or for any cause cease to function
properly, Landlord shall use reasonable diligence to repair same promptly, but
Tenant shall have no claim for abatement of Rent or damages on account of any
interruption of service occasioned thereby or resulting therefrom.
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ARTICLE SEVEN
POSSESSION, USE AND CONDITION OF PREMISES
7.01 POSSESSION AND USE OF PREMISES
(a) Tenant shall be entitled to possession of the Premises on the
Commencement Date. Tenant shall occupy and use the Premises only
for the uses specified in Section 1.01(11) to conduct Tenant's
business. Tenant shall not occupy or use the Premises (or permit
the use or occupancy of the Premises) for any purpose or in any
manner which: (i) is unlawful or in violation of any Law or
Environmental Law; (ii) may be dangerous to persons or property
or which may increase the cost of, or invalidate, any policy of
insurance carried on the Building or covering its operations;
(iii) is contrary to or prohibited by the terms and conditions of
this Lease or the rules of the Building set forth in Article
Eighteen; or (iv) would tend to create or constitute a nuisance.
(b) Tenant and Landlord shall each comply with all Environmental Laws
concerning the proper storage, handling and disposal of any
Hazardous Material with respect to the Property. Tenant shall
not generate, store, handle or dispose of any Hazardous Material
in, on, or about the Property without the prior written consent
of Landlord. In the event that Tenant is notified of any
investigation or violation of any Environmental Law arising from
Tenant's activities at the Premises, Tenant shall immediately
deliver to Landlord a copy of such notice. In such event or in
the event Landlord reasonably believes that a violation of
Environmental Law exists, Landlord may conduct such tests and
studies relating to compliance by Tenant with Environmental Laws
or the alleged presence of Hazardous Materials upon the Premises
as Landlord deems desirable, all of which shall be completed at
Tenant's expense. Landlord's inspection and testing rights are
for Landlord's own protection only, and Landlord has not, and
shall not be deemed to have assumed any responsibility to Tenant
or any other party for compliance with Environmental Laws, as a
result of the exercise, or non-exercise of such rights. Tenant
shall indemnify, defend, protect and hold harmless the
Indemnitees from any and all loss, claim, expense, liability and
cost (including attorneys' fees) arising out of or in any way
related to the presence of any Hazardous Material introduced to
the Premises during the Term by any party other than Landlord. If
any Hazardous Material is released, discharged or disposed of on
or about the Property and such release, discharge or disposal is
not caused by Tenant or other occupants of the Premises, or their
employees, agents or contractors, such release, discharge or
disposal shall be deemed casualty damage under Article Fourteen
to the extent that the Premises are affected thereby; in such
case, Landlord and Tenant shall have the obligations and rights
respecting such casualty damage provided under such Article.
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(c) Landlord and Tenant acknowledge that the Americans With
Disabilities Act of 1990 (42 U.S.C. Section 12101 et seq.) and
regulations and guidelines promulgated thereunder, as all of the
same may be amended and supplemented from time to time
(collectively referred to herein as the "ADA") establish
requirements for business operations, accessibility and barrier
removal, and that such requirements may or may not apply to the
Premises and the Building depending on, among other things: (i)
whether Tenant's business is deemed a "public accommodation" or
"commercial facility", (ii) whether such requirements are
"readily achievable", and (iii) whether a given alteration
affects a "primary function area" or triggers "path of travel"
requirements.
The parties hereby agree that: (i) Landlord shall be
responsible for implementing ADA Title III compliance in the
Common Areas as part of Operating Expenses, except as provided
below, (ii) Tenant shall be responsible for ADA Title III
compliance in the Premises, including any leasehold improvements
or other work to be performed in the Premises under or in
connection with this Lease, (iii) Landlord may perform, or
require that Tenant perform, and Tenant shall be responsible for
the cost of, ADA Title III "path of travel" requirements
triggered by alterations in the Premises, and (iv) Landlord may
perform, or require Tenant to perform, and Tenant shall be
responsible for the cost of, ADA Title III compliance in the
Common Areas necessitated by the Building being deemed to be a
"public accommodation" instead of a "commercial facility" as a
result of Tenant's use of the Premises. Tenant shall be solely
responsible for requirements under Title I of the ADA relating to
Tenant's employees.
(d) Landlord and Tenant acknowledge that the Texas Architectural
Barriers Act, Art. 9102, Tex. Civ. Stat. Ann. (1994), and
regulations and guidelines promulgated thereunder, as all of the
same may be amended and supplemented from time to time
(collectively referred to herein as "TABA") establish
requirements for accessibility and barrier removal. The parties
hereby agree that: (i) Tenant shall be responsible for
compliance with TABA, including, without limitation, submission
(through the Property manager) of required plans and documents to
the State of Texas for approval of accessibility design features,
in connection with the work set forth in the Workletter attached
hereto, if any, and any other construction or alterations to the
Premises during the Term, except that Landlord agrees to be
responsible for such compliance in connection with any work done
by Landlord pursuant to Section 8.01 hereof; and (ii) Landlord
shall be responsible for compliance with TABA, including, without
limitation, submission of required plans and documents to the
State of Texas for approval of accessibility design features, in
connection with construction or alterations to the Common Areas,
except that Tenant agrees to be responsible for such compliance
in connection with any such work which may be necessitated solely
as a result of Tenant's use of the Premises.
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7.02 LANDLORD ACCESS TO PREMISES
(a) Tenant shall permit Landlord to erect, use and maintain pipes,
ducts, wiring and conduits in and through the Premises, so long
as Tenant's use, layout or design of the Premises is not
materially affected or altered. Landlord or Landlord's agents
shall have the right to enter upon the Premises in the event of
an emergency, or to inspect the Premises, to perform janitorial
and other services, to conduct safety and other testing in the
Premises and to make such repairs, alterations, improvements or
additions to the Premises or the Building as Landlord may deem
necessary or desirable. Janitorial and cleaning services shall
be performed after normal business hours. Any entry or work by
Landlord may be during normal business hours and Landlord may use
reasonable efforts to ensure that any entry or work shall not
materially interfere with Tenant's occupancy of the Premises,
however, any such interference shall not be a default by
Landlord.
(b) If Tenant is not personally present to permit an entry into the
Premises when for any reason an entry therein shall be necessary
or permissible, Landlord (or Landlord's agents), after attempting
to notify Tenant (unless Landlord believes an emergency situation
exists), may enter the Premises without rendering Landlord or its
agents liable therefor (if during such entry Landlord or
Landlord's agent shall afford reasonable care to Tenant's
property), and without relieving Tenant of any obligations under
this Lease.
(c) Landlord may enter the Premises for the purpose of conducting
such inspections, tests and studies as Landlord may deem
desirable or necessary to confirm Tenant's compliance with all
Laws and Environmental Laws or for other purposes necessary in
Landlord's reasonable judgment to ensure the sound condition of
the Building and the systems serving the Building. Landlord's
rights under this Section 7.02(c) are for Landlord's own
protection only, and Landlord has not, and shall not be deemed to
have assumed any responsibility to Tenant or any other party for
compliance with Laws or Environmental Laws, as a result of the
exercise or non-exercise of such rights.
(d) Landlord may do any of the foregoing, or undertake any of the
inspection or work described in the preceding paragraphs without
such action constituting an actual or constructive eviction of
Tenant, in whole or in part, or giving rise to an abatement of
Rent by reason of loss or interruption of business of the Tenant,
or otherwise.
7.03 QUIET ENJOYMENT
Landlord covenants that so long as Tenant is in compliance with the
covenants and conditions set forth in this Lease, Tenant shall have the right to
quiet enjoyment of the Premises
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without hindrance or interference from Landlord or those claiming through
Landlord, and subject to the rights of any Mortgagee.
7.04 ENTRY CARDS
Landlord shall provide limited access to the Building before and after
normal business hours in the form of special limited access entry cards ("Entry
Cards") for Tenant and its employees. An Entry Card shall not automatically
qualify Tenant or any of its employees for an access card to the "Parking
Garage" as defined in and pursuant to the terms of EXHIBIT E. Landlord agrees
to provide Tenant with up to, but not in excess of, eight (8) Entry Cards for a
non-refundable deposit of $10.00 per card. However, Tenant shall pay Landlord
for any additional or replacement cards, in such amount as Landlord shall, from
time to time, determine. The current cost required for a replacement card and
an additional card is $10.00 per card. Landlord shall be entitled to cancel (by
computer entry) any lost or stolen cards of which it becomes aware. Tenant
shall promptly notify Landlord of any lost or stolen cards. Landlord shall have
no liability to Tenant, its employees, agents, invitees, or licensees for losses
due to theft or burglary, or for damages committed by unauthorized persons on
the Premises; and neither shall Landlord be required to insure against any such
losses. Tenant shall cooperate fully in Landlord's efforts to maintain security
in the Building and shall follow all regulations promulgated by Landlord with
respect thereto. Tenant further agrees to surrender all Entry Cards in its
possession upon the expiration or earlier termination of this Lease.
ARTICLE EIGHT
MAINTENANCE
8.01 LANDLORD'S MAINTENANCE
Subject to the provisions of Article Fourteen, Landlord shall maintain
and make necessary repairs to the foundations, roofs, exterior walls, and the
structural elements of the Building, the electrical, plumbing, heating,
ventilation and air-conditioning systems of the Building and the public
corridors, washrooms and lobby of the Building, except that: (a) Landlord shall
not be responsible for the maintenance or repair of any floor or wall coverings
in the Premises or any of such systems which are located within the Premises and
are supplemental or special to the Building's standard systems; and (b) the cost
of performing any of said maintenance or repairs whether to the Premises or to
the Building caused by the negligence of Tenant, its employees, agents,
servants, licensees, subtenants, contractors or invitees, shall be paid by
Tenant. Landlord shall not be liable to Tenant for any expense, injury, loss or
damage resulting from work done in the Building or upon the Property, or the use
of, any adjacent or nearby building, land, street, or alley.
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8.02 TENANT'S MAINTENANCE
Subject to the provisions of Article Fourteen, Tenant, at its expense,
shall keep and maintain the Premises and all Tenant Alterations in good order,
condition and repair and in accordance with all Laws and Environmental Laws.
Tenant shall not permit waste and shall promptly and adequately repair all
damages to the Premises and replace or repair all damaged or broken glass in the
interior of the Premises, fixtures or appurtenances. Any repairs or maintenance
shall be completed with materials of similar quality to the original materials,
all such work to be completed under the supervision of Landlord. Any such
repairs or maintenance shall be performed only by contractors or mechanics
approved by Landlord, which approval shall not be unreasonably withheld, and
whose work will not cause or threaten to cause disharmony or interference with
Landlord or other tenants in the Building and their respective agents and
contractors performing work in or about the Building. If Tenant fails to
perform any of its obligations set forth in this Section 8.02, Landlord may, in
its sole discretion and upon twenty-four (24) hours prior notice to Tenant
(except without notice in the case of emergencies), perform the same, and Tenant
shall pay to Landlord any costs or expenses incurred by Landlord upon demand.
ARTICLE NINE
ALTERATIONS AND IMPROVEMENTS
9.01 TENANT ALTERATIONS
The following provisions shall apply to the completion of any Tenant
Alterations:
(a) Tenant shall not, except as provided herein, without the prior
written consent of Landlord, which consent shall not be
unreasonably withheld, make or cause to be made any Tenant
Alterations in or to the Premises or any Building systems serving
the Premises. Prior to making any Tenant Alterations, Tenant
shall give Landlord ten (10) days' prior written notice (or such
earlier notice as would be necessary pursuant to applicable law)
to permit Landlord sufficient time to post appropriate notices of
non-responsibility. Subject to all other requirements of this
Article Nine, Tenant may undertake Decoration work without
Landlord's prior written consent. Tenant shall furnish Landlord
with the names and addresses of all contractors and
subcontractors and copies of all contracts. All Tenant
Alterations shall be completed at such time and in such manner as
Landlord may from time to time designate, and only by contractors
or mechanics approved by Landlord, which approval shall not be
unreasonably withheld, and whose work will not cause or threaten
to cause disharmony or interference with Landlord or other
tenants in the Building and their respective agents and
contractors performing work in or about the Building. Landlord
may further condition its consent upon Tenant furnishing to
Landlord and Landlord approving prior to the commencement of any
work or delivery of materials to the Premises related to the
Tenant Alterations such of the following as specified by
Landlord: architectural plans and specifications, opinions from
engineers
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reasonably acceptable to Landlord stating that the Tenant
Alterations will not in any way adversely affect the Building's
systems, including, without limitation, the mechanical, heating,
plumbing, security, ventilating, air-conditioning, electrical,
and the fire and life safety systems in the Building, necessary
permits and licenses, certificates of insurance, and such other
documents in such form reasonably requested by Landlord.
Landlord may, in the exercise of reasonable judgment, request
that Tenant provide Landlord with appropriate evidence of
Tenant's ability to complete and pay for the completion of the
Tenant Alterations such as a performance bond or letter of
credit. Upon completion of the Tenant Alterations, Tenant shall
deliver to Landlord an as-built mylar and digitized (if
available) set of plans and specifications for the Tenant
Alterations.
(b) Tenant shall pay the cost of all Tenant Alterations and the cost
of decorating the Premises and any work to the Building
occasioned thereby. In connection with completion of any Tenant
Alterations, Tenant shall pay Landlord a construction fee at
Landlord's then standard rate. Upon completion of Tenant
Alterations, Tenant shall furnish Landlord with contractors'
affidavits and full and final waivers of lien and receipted bills
covering all labor and materials expended and used in connection
therewith and such other documentation reasonably requested by
Landlord or Mortgagee.
(c) Tenant agrees to complete all Tenant Alterations (i) in
accordance with all Laws, Environmental Laws, all requirements of
applicable insurance companies and in accordance with Landlord's
standard construction rules and regulations, and (ii) in a good
and workmanlike manner with the use of good grades of materials.
Tenant shall notify Landlord immediately if Tenant receives any
notice of violation of any Law in connection with completion of
any Tenant Alterations and shall immediately take such steps as
are necessary to remedy such violation. In no event shall such
supervision or right to supervise by Landlord nor shall any
approvals given by Landlord under this Lease constitute any
warranty by Landlord to Tenant of the adequacy of the design,
workmanship or quality of such work or materials for Tenant's
intended use or of compliance with the requirements of
Section 9.01(c)(i) and (ii) above or impose any liability upon
Landlord in connection with the performance of such work.
(d) All Tenant Alterations whether installed by Landlord or Tenant,
shall without compensation or credit to Tenant, become part of
the Premises and the property of Landlord at the time of their
installation and shall remain in the Premises, unless pursuant to
Article Twelve, Tenant may remove them or is required to remove
them at Landlord's request.
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9.02 LIENS
Tenant shall not permit any lien or claim for lien of any mechanic,
laborer or supplier or any other lien to be filed against the Building, the
Land, the Premises, or any part thereof arising out of work performed, or
alleged to have been performed by, or at the direction of, or on behalf of
Tenant. If any such lien or claim for lien is filed, Tenant shall within ten
(10) days of receiving notice of such lien or claim (a) have such lien or claim
for lien released of record or (b) deliver to Landlord a bond in form, content,
amount, and issued by surety, satisfactory to Landlord, indemnifying,
protecting, defending and holding harmless the Indemnitees against all costs and
liabilities resulting from such lien or claim for lien and the foreclosure or
attempted foreclosure thereof. If Tenant fails to take any of the above
actions, Landlord, without investigating the validity of such lien or claim for
lien, may pay or discharge the same and Tenant shall, as payment of additional
Rent hereunder, reimburse Landlord upon demand for the amount so paid by
Landlord, including Landlord's expenses and attorneys' fees.
ARTICLE TEN
ASSIGNMENT AND SUBLETTING
10.01 ASSIGNMENT AND SUBLETTING
(a) Without the prior written consent of Landlord (such consent not
to be unreasonably withheld), Tenant may not sublease, assign,
mortgage, pledge, hypothecate or otherwise transfer or permit the
transfer of this Lease or the encumbering of Tenant's interest
therein in whole or in part, by operation of law or otherwise or
permit the use or occupancy of the Premises, or any part thereof,
by anyone other than Tenant. If Tenant desires to enter into any
sublease of the Premises or assignment of this Lease, Tenant
shall deliver written notice thereof to Landlord ("Tenant's
Notice"), together with the identity of the proposed subtenant or
assignee and the proposed principal terms thereof and financial
and other information sufficient for Landlord to make an informed
judgment with respect to such proposed subtenant or assignee at
least thirty (30) days prior to the commencement date of the term
of the proposed sublease or assignment. If Tenant proposes to
sublease less than all of the Rentable Area of the Premises, the
space proposed to be sublet and the space retained by Tenant must
each be a marketable unit as reasonably determined by Landlord
and otherwise in compliance with all Laws. Landlord shall notify
Tenant in writing of its approval or disapproval of the proposed
sublease or assignment or its decision to exercise its rights
under Section 10.02 within fifteen (15) days after receipt of
Tenant's Notice (and all required information). In no event may
Tenant sublease any portion of the Premises or assign the Lease
to any other tenant of the Building, of Two Allen Center or of
Three Allen Center (unless Landlord is unable to accommodate such
tenant's space requirements within ninety (90) days of the
effective date of the proposed assignment or subletting). Tenant
shall submit for Landlord's approval
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(which approval shall not be unreasonably withheld) any
advertising which Tenant or its agents intend to use with respect
to the space proposed to be sublet.
(b) In making its determination of whether to consent to any proposed
sublease or assignment, Landlord may take into consideration the
business reputation and credit-worthiness of the proposed
subtenant or assignee; the intended use of the Premises by the
proposed subtenant or assignee; the nature of the business
conducted by such subtenant or assignee and whether such business
would be deleterious to the reputation of the Building or
Landlord or would violate the provisions of any other leases of
tenants of the Building; the estimated pedestrian and vehicular
traffic in the Premises and to the Building which would be
generated by the proposed subtenant or assignee; whether the
proposed assignee or subtenant is a department, representative or
agency of any governmental body, foreign or domestic; whether the
proposed assignee or subtenant is an existing tenant in the
Building, in Two Allen Center or in Three Allen Center or is a
bona fide prospective tenant of Landlord in the Building, as
demonstrated by a written proposal dated within ninety (90) days
prior to the date of Tenant's request for approval; and any other
factors which Landlord shall deem relevant. In no event shall
Landlord be obligated to consider a consent to any proposed (i)
sublease of the Premises or assignment of the Lease if a Default
then exists under the Lease, or a fact or condition exists, which
but for the giving of notice or the passage of time would
constitute a Default, or (ii) assignment of the Lease which would
assign less than the entire Premises.
(c) If Landlord chooses not to recapture the space proposed to be
subleased or assigned as provided in Section 10.02, Landlord
shall not unreasonably withhold its consent to a subletting or
assignment under this Section 10.01. Any approved sublease or
assignment shall be expressly subject to the terms and conditions
of this Lease. Any such subtenant or assignee shall execute such
documents as Landlord may reasonably require to evidence such
subtenant or assignee's assumption of such obligations and
liabilities. Tenant shall deliver to Landlord a copy of all
agreements executed by Tenant and the proposed subtenant and
assignee with respect to the Premises. Landlord's approval of a
sublease or assignment shall not constitute a waiver of Tenant's
obligation to obtain Landlord's consent to further assignments or
subleases.
(d) For purposes of this Article Ten, an assignment shall be deemed
to include a change in the majority control of Tenant, resulting
from any transfer, sale or assignment of shares of stock of
Tenant occurring by operation of law or otherwise if Tenant is a
corporation whose shares of stock are not traded publicly. If
Tenant is a partnership, any change in the partners of Tenant
shall be deemed to be an assignment.
(e) Notwithstanding anything to the contrary contained in this
Article Ten, Tenant shall have the right, without the prior
written consent of Landlord, to sublease the Premises, or to
assign this Lease to an Affiliate.
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10.02 RECAPTURE
Except as provided in Section 10.01(e) Landlord shall have the option to
exclude from the Premises covered by this Lease ("recapture"), the space
proposed to be sublet or subject to the assignment, effective as of the proposed
commencement date of such sublease or assignment. If Landlord elects to
recapture, Tenant shall surrender possession of the space proposed to be
subleased or subject to the assignment to Landlord on the effective date of
recapture of such space from the Premises such date being the Termination Date
for such space. Effective as of the date of recapture of any portion of the
Premises pursuant to this section, the Monthly Base Rent, Rentable Area of the
Premises and Tenant's Rent Adjustment shall be adjusted accordingly.
10.03 EXCESS RENT
Tenant shall pay Landlord on the first day of each month during the term
of the sublease or assignment, fifty percent (50%) of the amount by which the
sum of all rent and other consideration (direct or indirect) due from the
subtenant or assignee for such month exceeds: (a) that portion of the Monthly
Base Rent and Rent Adjustments due under this Lease for said month which is
allocable to the space sublet or assigned; and (b) the following costs and
expenses for the subletting or assignment of such space: (i) brokerage
commissions and attorneys' fees and expenses, (ii) advertising for subtenants or
assignees; (iii) the actual costs paid in making any improvements or
substitutions in the Premises required by any sublease or assignment; and (iv)
"free rent" periods, costs of any inducements or concessions given to subtenant
or assignee, moving costs, and other amounts in respect of such subtenant's or
assignee's other leases or occupancy arrangements. All such costs will be
amortized over the term of the sublease or assignment pursuant to sound
accounting principles.
10.04 TENANT LIABILITY
In the event of any sublease or assignment, whether or not with
Landlord's consent, Tenant shall not be released or discharged from any
liability, whether past, present or future, under this Lease, including any
liability arising from the exercise of any renewal or expansion option, except
to the extent expressly permitted by Landlord. If Landlord grants consent to
such sublease or assignment, Tenant shall pay all reasonable attorneys' fees and
expenses incurred by Landlord with respect to such assignment or sublease. In
addition, if Tenant has any options to extend the term of this Lease or to add
other space to the Premises, such options shall not be available to any
subtenant, or to any assignee (other than an Affiliate), directly or indirectly
without Landlord's express written consent.
10.05 ASSUMPTION AND ATTORNMENT
If Tenant shall assign this Lease as permitted herein, the assignee
shall expressly assume all of the obligations of Tenant hereunder in a written
instrument satisfactory to Landlord and furnished to Landlord not later than
fifteen (15) days prior to the effective date of the assignment. If Tenant
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shall sublease the Premises as permitted herein, Tenant shall, at Landlord's
option, within fifteen (15) days following any request by Landlord, obtain and
furnish to Landlord the written agreement of such subtenant to the effect that
the subtenant will attorn to Landlord and will pay all subrent directly to
Landlord.
ARTICLE ELEVEN
DEFAULT AND REMEDIES
11.01 EVENTS OF DEFAULT
The occurrence or existence of any one or more of the following shall
constitute a "Default" by Tenant under this Lease:
(a) Tenant fails to pay any installment or other payment of Rent
including without limitation Rent Adjustment Deposits or Rent
Adjustments when due, and Tenant's continued failure to pay same
within three (3) days following Tenant's receipt of Landlord's
written notice thereof;
(b) Tenant fails to observe or perform any of the other covenants,
conditions or provisions of this Lease or the Workletter and
fails to cure such default within fifteen (15) days after written
notice thereof to Tenant (unless the default involves a hazardous
condition, which shall be cured forthwith);
(c) The interest of Tenant in this Lease is levied upon under
execution or other legal process;
(d) A petition is filed by or against Tenant to declare Tenant
bankrupt or seeking a plan of reorganization or arrangement under
any Chapter of the Bankruptcy Act, or any amendment, replacement
or substitution therefor, or to delay payment of, reduce or
modify Tenant's debts, which in the case of an involuntary action
is not discharged within thirty (30) days;
(e) Tenant is declared insolvent by law or any assignment of Tenant's
property is made for the benefit of creditors;
(f) A receiver is appointed for Tenant or Tenant's property, which
appointment is not discharged within thirty (30) days;
(g) Any action taken by or against Tenant to reorganize or modify
Tenant's capital structure in a materially adverse way which in
the case of an involuntary action is not discharged within thirty
(30) days;
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(h) Upon the dissolution of Tenant; or
(i) Upon the third occurrence within any Lease Year that Tenant fails
to pay Rent when due or has breached a particular covenant of
this Lease (whether or not such failure or breach is thereafter
cured within any stated cure or grace period or statutory
period).
11.02 LANDLORD'S REMEDIES
(a) If a Default occurs, Landlord shall have the rights and remedies
hereinafter set forth, which shall be distinct and cumulative:
(i) Landlord may terminate this Lease by giving Tenant notice of
Landlord's election to do so, in which event, the term of this
Lease shall end and all of Tenant's rights and interests shall
expire on the date stated in such notice; (ii) Landlord may
terminate Tenant's right of possession of the Premises without
terminating this Lease by giving notice to Tenant that Tenant's
right of possession shall end on the date specified in such
notice; or (iii) Landlord may enforce the provisions of this
Lease and may enforce and protect the rights of the Landlord
hereunder by a suit or suits in equity or at law for the specific
performance of any covenant or agreement contained herein, or for
the enforcement of any other appropriate legal or equitable
remedy, including recovery of all monies due or to become due
from Tenant under any of the provisions of this Lease. All
Landlord remedies shall be cumulative and not exclusive.
(b) In the event that Landlord terminates the Lease, Landlord shall
be entitled to recover (i) the sum of all Rents and other
indebtedness accrued to the date of such termination, plus (ii)
the cost of recovering the Premises, (iii) the cost of reletting
the Premises, or portions thereof (including, without limitation,
brokerage commissions) and (iv) the cost of repairs, alterations,
improvements, additions and decorations to the Premises to the
extent Landlord deems reasonably necessary or desirable. [Items
(ii) through (iv) are herein defined as the "Recovery Costs."]
In addition, in the event that Tenant's Default constitutes a
material breach, Landlord shall be entitled to recover a sum
equal to the difference between (x) the total Base Rent due under
this Lease for the remainder of the Term and (y) the then fair
market rental value of the Premises during such period, both
discounted to present value at a rate determined by Landlord, in
its sole discretion ("Discounted Future Rent").
(c) In the event Landlord proceeds pursuant to subparagraph (a)(ii)
above, Landlord shall be entitled to recover (i) the sum of all
Rents and other indebtedness accrued to the date of such
termination of Tenant's possession, plus (ii) the Recovery Costs
(as defined above). Landlord may, but shall not be obligated to
(except as may be required by law), relet the Premises, or any
part thereof for the account of Tenant, for such rent and term
and upon such terms and conditions as are reasonably acceptable
to Landlord. For purposes of such reletting, Landlord is
authorized to decorate,
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repair, alter and improve the Premises to the extent
reasonably necessary or desirable. If the Premises are relet
and the consideration realized therefrom after payment of all
Landlord's Reletting Expenses, is insufficient to satisfy the
payment when due of Rent reserved under this Lease for any
monthly period, then Tenant shall pay Landlord upon demand any
such deficiency monthly ("Rental Deficiency"). If such
consideration is greater than the amount necessary to pay the
full amount of the Rent, the full amount of such excess shall
be retained by Landlord and shall in no event be payable to
Tenant. Tenant agrees that Landlord may file suit to recover
any sums due to Landlord hereunder from time to time and that
such suit or recovery of any amount due Landlord hereunder
shall not be any defense to any subsequent action brought for
any amount not theretofore reduced to judgment in favor of
Landlord. Notwithstanding any such reletting without
termination, Landlord may at any time thereafter elect to
terminate this Lease for such previous Default. In the
alternative (but only in the event that Tenant's Default
constitutes a material breach), Landlord may elect to
terminate Tenant's right to occupy the Premises and to
immediately recover as damages, in lieu of the Rental
Deficiency, a sum equal to the Discounted Future Rent (as
defined above).
(d) In the event a Default occurs, Landlord may, at Landlord's
option, enter into the Premises, remove Tenant's property,
fixtures, furnishings, signs and other evidences of tenancy, and
take and hold such property; provided, however, that such entry
and possession shall not terminate this Lease or release Tenant,
in whole or in part, from Tenant's obligation to pay the Rent
reserved hereunder for the full Term or from any other obligation
of Tenant under this Lease. Any and all property which may be
removed from the Premises by Landlord pursuant to the authority
of the Lease or law, to which Tenant is or may be entitled, may
be handled, removed or stored by Landlord at the risk, cost and
expense of Tenant, and Landlord shall in no event be responsible
for the value, preservation or safekeeping thereof. Tenant shall
pay Landlord, upon demand, any and all expenses incurred in such
removal and all storage charges against such property so long as
the same shall be in the Landlord's possession or under the
Landlord's control. Any such property of Tenant not retaken from
storage by Tenant within thirty (30) days after the Termination
Date, shall be conclusively presumed to have been conveyed by
Tenant to Landlord under this Lease as a bill of sale without
further payment or credit by Landlord to Tenant.
(e) If Landlord terminates this Lease or Tenant's right to possession
(without terminating the Lease), Landlord shall use objectively
reasonable efforts to mitigate Landlord's damages by re-letting
the Premises following Tenant's vacancy thereof (but in doing so,
Tenant agrees that Landlord shall not be required to give
preference to re-letting the Premises prior to leasing other
space that Landlord has available, i.e., any prospective tenant's
space requirements will dictate Landlord's leasing activities).
Tenant shall bear the burden of proof to demonstrate that
Landlord has mitigated or failed to mitigate Landlord's damages.
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11.03 ATTORNEY'S FEES
Tenant shall pay upon demand, all costs and expenses, including
reasonable attorneys' fees, incurred by Landlord in enforcing the Tenant's
performance of its obligations under this Lease, or resulting from Tenant's
Default, or incurred by Landlord in any litigation, negotiation or transaction
in which Tenant causes Landlord, without Landlord's fault, to become involved or
concerned.
11.04 BANKRUPTCY
The following provisions shall apply in the event of the bankruptcy or
insolvency of Tenant:
(a) In connection with any proceeding under Chapter 7 of the
Bankruptcy Code where the trustee of Tenant elects to assume this
Lease for the purposes of assigning it, such election or
assignment, may only be made upon compliance with the provisions
of (b) and (c) below, which conditions Landlord and Tenant
acknowledge to be commercially reasonable. In the event the
trustee elects to reject this Lease then Landlord shall
immediately be entitled to possession of the Premises without
further obligation to Tenant or the trustee.
(b) Any election to assume this Lease under Chapter 11 or 13 of the
Bankruptcy Code by Tenant as debtor-in-possession or by Tenant's
trustee (the "Electing Party") must provide for:
The Electing Party to cure or provide to Landlord adequate
assurance that it will cure all monetary defaults under
this Lease within fifteen (15) days from the date of
assumption and it will cure all nonmonetary defaults under
this Lease within thirty (30) days from the date of
assumption. Landlord and Tenant acknowledge such
condition to be commercially reasonable.
(c) If the Electing Party has assumed this Lease or elects to assign
Tenant's interest under this Lease to any other person, such
interest may be assigned only if the intended assignee has
provided adequate assurance of future performance (as herein
defined), of all of the obligations imposed on Tenant under this
Lease. For the purposes hereof, "adequate assurance of future
performance" means that Landlord has ascertained that each of the
following conditions has been satisfied:
(i) The assignee has submitted a current financial statement,
certified by its chief financial officer, which shows a
net worth and working capital in amounts sufficient to
assure the future performance by the assignee of Tenant's
obligations under this Lease; and
(ii) Landlord has obtained consents or waivers from any third
parties which may be required under a lease, mortgage,
financing arrangement, or other
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agreement by which Landlord is bound, to enable Landlord
to permit such assignment.
(d) Landlord's acceptance of rent or any other payment from any
trustee, receiver, assignee, person, or other entity will not be
deemed to have waived, or waive, the requirement of Landlord's
consent, Landlord's right to terminate this Lease for any
transfer of Tenant's interest under this Lease without such
consent, or Landlord's claim for any amount of Rent due from
Tenant.
ARTICLE TWELVE
SURRENDER OF PREMISES
12.01 IN GENERAL
Upon the Termination Date, Tenant shall surrender and vacate the
Premises immediately and deliver possession thereof to Landlord in a clean, good
and tenantable condition, ordinary wear and tear, and damage caused by Landlord
excepted. Tenant shall deliver to Landlord all keys to the Premises. Tenant
shall be entitled to remove from the Premises all movable personal property of
Tenant, Tenant's trade fixtures and such Tenant Alterations which at the time of
their installation Landlord and Tenant agreed may be removed by Tenant. Tenant
shall also remove such other Tenant Alterations as required by Landlord,
including, but not limited to, any Tenant Alterations containing Hazardous
Materials. Tenant immediately shall repair all damage resulting from removal of
any of Tenant's property, furnishings or Tenant Alterations, shall close all
floor, ceiling and roof openings and shall restore the Premises to a tenantable
condition as reasonably determined by Landlord. If any of the Tenant
Alterations which were installed by Tenant involved the lowering of ceilings,
raising of floors or the installation of specialized wall or floor coverings or
lights, then Tenant shall also be obligated to return such surfaces to their
condition prior to the commencement of this Lease. Tenant shall also be
required to close any staircases or other openings between floors. In the event
possession of the Premises is not delivered to Landlord when required hereunder,
or if Tenant shall fail to remove those items described above, Landlord may, at
Tenant's expense, remove any of such property therefrom without any liability to
Landlord and undertake, at Tenant's expense such restoration work as Landlord
deems necessary or advisable.
12.02 LANDLORD'S RIGHTS
All property which may be removed from the Premises by Landlord shall be
conclusively presumed to have been abandoned by Tenant and Landlord may deal
with such property as provided in Section 11.02(d). Tenant shall also reimburse
Landlord for all costs and expenses incurred by Landlord in removing any of
Tenant Alterations and in restoring the Premises to the condition required by
this Lease at the Termination Date.
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ARTICLE THIRTEEN
HOLDING OVER
Tenant shall pay Landlord the greater of (a) double the monthly Rent
payable for the month immediately preceding the holding over (including
increases for Rent Adjustments which Landlord may reasonably estimate) or, (b)
double the fair market rental value of the Premises as reasonably determined by
Landlord for each month or portion thereof that Tenant retains possession of the
Premises, or any portion thereof, after the Termination Date (without reduction
for any partial month that Tenant retains possession). Tenant shall also pay
all damages sustained and losses incurred by Landlord by reason of such
retention of possession. The provisions of this Article shall not constitute a
waiver by Landlord of any re-entry rights of Landlord and Tenant's continued
occupancy of the Premises shall be as a tenancy in sufferance. If Tenant
retains possession of the Premises, or any part thereof for thirty (30) days
after the Termination Date then at the sole option of Landlord expressed by
written notice to Tenant, but not otherwise, such holding over shall constitute
a renewal of this Lease for a period of one (1) year on the same terms and
conditions (including those with respect to the payment of Rent) as provided in
this Lease, except that the Monthly Base Rent for such period shall be equal to
the greater of (i) 150% of the Monthly Base Rent payable during the month
preceding the Termination Date, or (ii) 150% of the monthly base rent then being
quoted by Landlord for similar space in the Building, and except for any
Landlord concessions, including, without limitation, any tenant improvement
allowance or any other allowance.
ARTICLE FOURTEEN
DAMAGE BY FIRE OR OTHER CASUALTY
14.01 SUBSTANTIAL UNTENANTABILITY
(a) If any fire or other casualty (whether insured or uninsured)
renders all or a substantial portion of the Premises or the
Building untenantable, Landlord shall, with reasonable promptness
after the occurrence of such damage, estimate the length of time
that will be required to Substantially Complete the repair and
restoration and shall by notice advise Tenant of such estimate
("Landlord's Notice"). If Landlord estimates that the amount of
time required to Substantially Complete such repair and
restoration will exceed one hundred eighty (180) days from the
date such damage occurred, then Landlord, or Tenant if all or a
substantial portion of the Premises is rendered untenantable,
shall have the right to terminate this Lease as of the date of
such damage upon giving written notice to the other at any time
within twenty (20) days after delivery of Landlord's Notice,
provided that if Landlord so chooses, Landlord's Notice may also
constitute such notice of termination.
(b) Unless this Lease is terminated as provided in the preceding
subparagraph, Landlord shall proceed with reasonable promptness
to repair and restore the Premises to its condition as existed
prior to such casualty, subject to reasonable delays for
insurance
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adjustments and Force Majeure delays, and also subject to zoning
laws and building codes then in effect. Landlord shall have no
liability to Tenant, and Tenant shall not be entitled to
terminate this Lease if such repairs and restoration are not in
fact completed within the time period estimated by Landlord so
long as Landlord shall proceed with reasonable diligence to
complete such repairs and restoration.
(c) Tenant acknowledges that Landlord shall be entitled to the full
proceeds of any insurance coverage, whether carried by Landlord
or Tenant, for damages to the Premises, except for those proceeds
of Tenant's insurance of its own personal property and equipment
which would be removable by Tenant at the Termination Date. All
such insurance proceeds shall be payable to Landlord whether or
not the Premises are to be repaired and restored.
(d) Notwithstanding anything to the contrary herein set forth: (i)
Landlord shall have no duty pursuant to this Section to repair or
restore any portion of any Tenant Alterations or to expend for
any repair or restoration of the Premises or Building amounts in
excess of insurance proceeds paid to Landlord and available for
repair or restoration; and (ii) Tenant shall not have the right
to terminate this Lease pursuant to this Section if any damage or
destruction was caused by the act or neglect of Tenant, its agent
or employees.
(e) Any repair or restoration of the Premises performed by Tenant
shall be in accordance with the provisions of Article Nine
hereof.
14.02 INSUBSTANTIAL UNTENANTABILITY
If the Premises or the Building is damaged by a casualty but neither is
rendered substantially untenantable, then Landlord shall proceed to repair and
restore the Building or the Premises other than Tenant Alterations, with
reasonable promptness, unless such damage is to the Premises and occurs during
the last six (6) months of the Term, in which event either Tenant or Landlord
shall have the right to terminate this Lease as of the date of such casualty by
giving written notice thereof to the other within twenty (20) days after the
date of such casualty.
14.03 RENT ABATEMENT
Except for the gross negligence or willful act of Tenant or its agents,
employees, contractors or invitees, if all or any part of the Premises are
rendered untenantable by fire or other casualty and this Lease is not
terminated, Monthly Base Rent and Rent Adjustments shall abate for that part of
the Premises which is untenantable on a per diem basis from the date of the
casualty until Landlord has Substantially Completed the repair and restoration
work in the Premises which it is required to perform, provided, that as a result
of such casualty, Tenant does not occupy the portion of the Premises which is
untenantable during such period. For purposes of this Article 14 the Premises
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shall be considered "untenantable" if they are not reasonably usable for the
conduct of Tenant's business.
ARTICLE FIFTEEN
EMINENT DOMAIN
15.01 TAKING OF WHOLE OR SUBSTANTIAL PART
In the event the whole or any substantial part of the Building or of the
Premises is taken or condemned by any competent authority for any public use or
purpose (including a deed given in lieu of condemnation) and is thereby rendered
untenantable, this Lease shall terminate as of the date title vests in such
authority, and Monthly Base Rent and Rent Adjustments shall be apportioned as of
the Termination Date. Notwithstanding anything to the contrary herein set
forth, in the event the taking is temporary (for less than the remaining term of
the Lease), Landlord may elect either (a) to terminate this Lease or (b) permit
Tenant to receive the entire award attributable to the Premises in which case
Tenant shall continue to pay Rent and this Lease shall not terminate.
15.02 TAKING OF PART
In the event a part of the Building or the Premises is taken or
condemned by any competent authority (or a deed is delivered in lieu of
condemnation) and this Lease is not terminated, the Lease shall be amended to
reduce or increase, as the case may be, the Monthly Base Rent and Tenant's Rent
Adjustment to reflect the Rentable Area of the Premises or Building, as the case
may be, remaining after any such taking or condemnation. Landlord, upon receipt
and to the extent of the award in condemnation (or proceeds of sale) shall make
necessary repairs and restorations to the Premises (exclusive of Tenant
Alterations) and to the Building to the extent necessary to constitute the
portion of the Building not so taken or condemned as a complete architectural
and economically efficient unit. Notwithstanding the foregoing, if as a result
of any taking, or a governmental order that the grade of any street or alley
adjacent to the Building is to be changed and such taking or change of grade
makes it necessary or desirable to substantially remodel or restore the Building
or prevents the economical operation of the Building, Landlord shall have the
right to terminate this Lease upon ninety (90) days' prior written notice to
Tenant.
15.03 COMPENSATION
Landlord shall be entitled to receive the entire award (or sale
proceeds) from any such taking, condemnation or sale without any payment to
Tenant, and Tenant hereby assigns to Landlord Tenant's interest, if any, in such
award; provided, however, Tenant shall have the right separately to pursue
against the condemning authority a separate award in respect of the loss, if
any, to Tenant Alterations paid for by Tenant without any credit or allowance
from Landlord so long as there is no diminution of Landlord's award as a result.
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ARTICLE SIXTEEN
INSURANCE
16.01 TENANT'S INSURANCE
Tenant, at Tenant's expense, agrees to maintain in force, with a company
or companies acceptable to Landlord, during the Term: (a) Commercial General
Liability Insurance on a primary basis and without any right of contribution
from any insurance carried by Landlord covering the Premises on an occurrence
basis against all claims for personal injury, bodily injury, death and property
damage, including contractual liability covering the indemnification provisions
in this Lease. Such insurance shall be for such limits that are reasonably
required by Landlord from time to time but not less than a combined single limit
of Five Million and No/100 Dollars ($5,000,000.00); (b) Workers' Compensation
and Employers' Liability Insurance for an amount of not less than One Million
and No/100 Dollars ($1,000,000.00), both in accordance with the laws of The
State of Texas; (c) "All Risks" property insurance in an amount adequate to
cover the full replacement cost of all equipment, installations, fixtures and
contents of the Premises in the event of loss and any such policy shall contain
a provision requiring the insurance carriers to waive their rights of
subrogation against Landlord; (d) in the event a motor vehicle is to be used by
Tenant in connection with its business operation from the Premises,
Comprehensive Automobile Liability Insurance coverage with limits of not less
than Three Million and No/100 Dollars ($3,000,000.00) combined single limit
coverage against bodily injury liability and property damage liability arising
out of the use by or on behalf of Tenant, its agents and employees in connection
with this Lease, of any owned, non-owned or hired motor vehicles; and (e) such
other insurance or coverages as Landlord reasonably requires.
16.02 FORM OF POLICIES
Each policy referred to in 16.01 shall satisfy the following
requirements. Each policy shall (a) name Landlord and the Indemnitees as
additional insureds, (b) be issued by one or more responsible insurance
companies licensed to do business in Texas reasonably satisfactory to Landlord,
(c) where applicable, provide for deductible amounts satisfactory to Landlord
and not permit co-insurance, (d) shall provide that such insurance may not be
canceled or amended without thirty (30) days' prior written notice to the
Landlord, and (e) shall provide that the policy shall not be invalidated should
the insured waive in writing prior to a loss, any or all rights of recovery
against any other party for losses covered by such policies. Tenant shall
deliver to Landlord, certificates of insurance and at Landlord's request, copies
of all policies and renewals thereof to be maintained by Tenant hereunder, not
less than ten (10) days prior to the Commencement Date and not less than ten
(10) days prior to the expiration date of each policy.
16.03 LANDLORD'S INSURANCE
Landlord agrees to purchase and keep in full force and effect during the
Term hereof, including any extensions or renewals thereof, insurance under
policies issued by insurers of
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recognized responsibility, qualified to do business in Texas on the Building
in amounts not less than the greater of eighty (80%) percent of the then full
replacement cost (without depreciation) of the Building (above foundations)
or an amount sufficient to prevent Landlord from becoming a co-insurer under
the terms of the applicable policies, against fire and such other risks as
may be included in standard forms of all risk coverage insurance reasonably
available from time to time. Landlord agrees to maintain in force during the
Term, Commercial General Liability Insurance covering the Building on an
occurrence basis against all claims for personal injury, bodily injury, death
and property damage. Such insurance shall be for a combined single limit of
Five Million and No/100 Dollars ($5,000,000.00). Neither Landlord's
obligation to carry such insurance nor the carrying of such insurance shall
be deemed to be an indemnity by Landlord with respect to any claim,
liability, loss, cost or expense due, in whole or in part, to Tenant's
negligent acts or omissions or willful misconduct.
16.04 WAIVER OF SUBROGATION
(a) Landlord agrees that, if obtainable at no, or minimal, additional
cost, and so long as the same is permitted under the laws of
Texas, it will include in its "All Risks" policies appropriate
clauses pursuant to which the insurance companies (i) waive all
right of subrogation against Tenant with respect to losses
payable under such policies and/or (ii) agree that such policies
shall not be invalidated should the insured waive in writing
prior to a loss any or all right of recovery against any party
for losses covered by such policies.
(b) Tenant agrees to include, if obtainable at no, or minimal,
additional cost, and so long as the same is permitted under the
laws of Texas, in its "All Risks" insurance policy or policies on
its furniture, furnishings, fixtures and other property removable
by Tenant under the provisions of its lease of space in the
Building, appropriate clauses pursuant to which the insurance
company or companies (i) waive the right of subrogation against
Landlord and/or any tenant of space in the Building with respect
to losses payable under such policy or policies and/or (ii) agree
that such policy or policies shall not be invalidated should the
insured waive in writing prior to a loss any or all right of
recovery against any party for losses covered by such policy or
policies. If Tenant is unable to obtain in such policy or
policies either of the clauses described in the preceding
sentence, Tenant shall, if legally possible and without
necessitating a change in insurance carriers, have Landlord named
in such policy or policies as an additional insured. If Landlord
shall be named as an additional insured in accordance with the
foregoing, Landlord agrees to endorse promptly to the order of
Tenant, without recourse, any check, draft, or order for the
payment of money representing the proceeds of any such policy or
representing any other payment growing out of or connected with
said policies, and Landlord does hereby irrevocably waive any and
all rights in and to such proceeds and payments.
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(c) Provided that Landlord's right of full recovery under its policy
or policies aforesaid is not adversely affected or prejudiced
thereby, Landlord hereby waives any and all right of recovery
which it might otherwise have against Tenant, its servants,
agents and employees, for loss or damage occurring to the
Building and the fixtures, appurtenances and equipment therein,
to the extent the same is covered by Landlord's insurance,
notwithstanding that such loss or damage may result from the
negligence or fault of Tenant, its servants, agents or employees.
Provided that Tenant's right of full recovery under its aforesaid
policy or policies is not adversely affected or prejudiced
thereby, Tenant hereby waives any and all right of recovery
which it might otherwise have against Landlord, its servants, and
employees and against every other tenant in the Building who
shall have executed a similar waiver as set forth in this Section
16.04(c) for loss or damage to Tenant's furniture, furnishings,
fixtures and other property removable by Tenant under the
provisions hereof to the extent that same is covered or coverable
by Tenant's insurance required under this Lease, notwithstanding
that such loss or damage may result from the negligence or fault
of Landlord, its servants, agents or employees, or such other
tenant and the servants, agents or employees thereof.
(d) Landlord and Tenant hereby agree to advise the other promptly if
the clauses to be included in their respective insurance policies
pursuant to subparagraphs (a) and (b) above cannot be obtained on
the terms hereinbefore provided and thereafter to furnish the
other with a certificate of insurance or copy of such policies
showing the naming of the other as an additional insured, as
aforesaid. Landlord and Tenant hereby also agree to notify the
other promptly of any cancellation or change of the terms of any
such policy which would affect such clauses or naming. All such
policies which name both Landlord and Tenant as additional
insureds shall, to the extent obtainable, contain agreements by
the insurers to the effect that no act or omission of any
additional insured will invalidate the policy as to the other
additional insureds.
16.05 NOTICE OF CASUALTY
Tenant shall give Landlord notice in case of a fire or accident in the
Premises promptly after Tenant is aware of such event.
ARTICLE SEVENTEEN
WAIVER OF CLAIMS AND INDEMNITY
17.01 WAIVER OF CLAIMS
To the extent permitted by law, Tenant releases the Indemnitees from,
and waives all claims for, damage to person or property sustained by the
Tenant or any occupant of the Building or
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Premises resulting directly or indirectly from any existing or future
condition, defect, matter or thing in and about the Property or the Premises
or any part of either or any equipment or appurtenance therein, or resulting
from any accident in or about the Property, or resulting directly or
indirectly from any act or neglect of any tenant or occupant of the Building
or of any other person, including Landlord's agents and servants, except
where resulting from the willful and wrongful act of any of the Indemnitees.
Tenant hereby waives any consequential damages, compensation or claims for
inconvenience or loss of business, rents, or profits as a result of such
injury or damage. If any such damage, whether to the Premises or to any part
of the Property or any part thereof, or whether to Landlord or to other
tenants in the Building, results from any act or neglect of Tenant, its
employees, servants, agents, contractors, invitees and customers, Tenant
shall be liable therefor and Landlord may, at Landlord's option, repair such
damage and Tenant shall, upon demand by Landlord, as payment of additional
Rent hereunder, reimburse Landlord within ten (10) days of demand for the
total cost of such repairs, which are in excess of amounts, if any, paid to
Landlord under insurance covering such damages. Tenant shall not be liable
for any damage caused by its acts or neglect if Landlord or a tenant has
recovered the full amount of the damage from proceeds of insurance policies
and the insurance company has waived its right of subrogation against Tenant.
17.02 INDEMNITY BY TENANT
To the extent permitted by law, Tenant agrees to indemnify, protect,
defend and hold the Indemnitees harmless against any and all actions, claims,
demands, costs and expenses, including reasonable attorney's fees and expenses
for the defense thereof, arising from Tenant's occupancy of the Premises, from
the undertaking of any Tenant Alterations or repairs to the Premises, from the
conduct of Tenant's business on the Premises, or from any breach or default on
the part of Tenant in the performance of any covenant or agreement on the part
of Tenant to be performed pursuant to the terms of this Lease, or from any
willful or negligent act of Tenant, its agents, contractors, servants,
employees, customers or invitees, in or about the Premises, but only to the
extent of Landlord's liability, if any, in excess of amounts, if any, which is
paid to Landlord under insurance covering such claims or liabilities. In case
of any action or proceeding brought against the Indemnitees by reason of any
such claim, upon notice from Landlord, Tenant covenants to defend such action or
proceeding by counsel reasonably satisfactory to Landlord.
ARTICLE EIGHTEEN
RULES AND REGULATIONS
18.01 RULES
Tenant agrees for itself and for its subtenants, employees, agents, and
invitees to comply with the rules and regulations listed on EXHIBIT D attached
hereto and with all reasonable modifications and additions thereto which
Landlord may make from time to time.
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18.02 ENFORCEMENT
Nothing in this Lease shall be construed to impose upon the Landlord
any duty or obligation to enforce the rules and regulations as set forth on
EXHIBIT D or as hereafter adopted, or the terms, covenants or conditions of
any other lease as against any other tenant, and the Landlord shall not be
liable to the Tenant for violation of the same by any other tenant, its
servants, employees, agents, visitors or licensees. Landlord shall use
reasonable efforts to enforce the rules and regulations of the Building in a
uniform and non-discriminatory manner. Tenant shall pay to Landlord all
damages caused by Tenant's failure to comply with the provisions of this
Article Eighteen and shall also pay to Landlord as additional Rent an amount
equal to any increase in insurance premiums caused by such failure to comply.
ARTICLE NINETEEN
LANDLORD'S RESERVED RIGHTS
19.01 RESERVED RIGHTS
Landlord shall have the following rights exercisable without notice to
Tenant and without liability to Tenant for damage or injury to persons, property
or business and without being deemed an eviction or disturbance of Tenant's use
or possession of the Premises or giving rise to any claim for setoff or
abatement of Rent: (a) To change the Building's name or street address upon
thirty (30) days' prior written notice to Tenant; (b) To install, affix and
maintain all signs on the exterior and/or interior of the Building; (c) To
designate and/or approve prior to installation, all types of signs, window
shades, blinds, drapes, awnings or other similar items, and all internal
lighting that may be visible from the exterior of the Premises; (d) upon
reasonable notice to Tenant, to display the Premises to prospective tenants at
reasonable hours during the last nine (9) months of the Term; (e) To grant to
any party the exclusive right to conduct any business or render any service in
or to the Building, provided such exclusive right shall not operate to prohibit
Tenant from using the Premises for the purpose permitted hereunder; (f) To
change the arrangement and/or location of entrances or passageways, doors and
doorways, corridors, elevators, stairs, washrooms or public portions of the
Building, and to close entrances, doors, corridors, elevators or other
facilities, provided that such action shall not materially and adversely
interfere with Tenant's access to the Premises or the Building; (g) to have
access for Landlord and other tenants of the Building to any mail chutes and
boxes located in or on the Premises as required by any applicable rules of the
United States Post Office; and (h) To close the Building after normal business
hours, except that Tenant and its employees and invitees shall be entitled to
admission at all times, under such regulations as Landlord prescribes for
security purposes.
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ARTICLE TWENTY
ESTOPPEL CERTIFICATE
20.01 IN GENERAL
Within fifteen (15) days after request therefor by Landlord, Mortgagee
or any prospective mortgagee or owner, Tenant agrees as directed in such request
to execute an Estoppel Certificate in recordable form, binding upon Tenant,
certifying (a) that this Lease is unmodified and in full force and effect (or if
there have been modifications, a description of such modifications and that this
Lease as modified is in full force and effect); (b) the dates to which Rent has
been paid; (c) that Tenant is in the possession of the Premises if that is the
case; (d) that Landlord is not in default under this Lease, or, if Tenant
believes Landlord is in default, the nature thereof in detail; (e) that Tenant
has no off-sets or defenses to the performance of its obligations under this
Lease (or if Tenant believes there are any off-sets or defenses, a full and
complete explanation thereof); (f) that the Premises have been completed in
accordance with the terms and provisions hereof or the Workletter, that Tenant
has accepted the Premises and the condition thereof and of all improvements
thereto and has no claims against Landlord or any other party with respect
thereto; (g) that if an assignment of rents or leases has been served upon the
Tenant by a Mortgagee, Tenant will acknowledge receipt thereof and agree to be
bound by the provisions thereof; (h) that Tenant will give to the Mortgagee
copies of all notices required or permitted to be given by Tenant to Landlord;
and (i) to any other information reasonably requested.
20.02 ENFORCEMENT
In the event that Tenant fails to deliver an Estoppel Certificate, then
such failure shall be a Default for which there shall be no cure or grace
period. In addition to any other remedy available to Landlord, Landlord may
impose a penalty equal to $500.00 for each day that Tenant fails to deliver an
Estoppel Certificate and Tenant shall be deemed to have irrevocably appointed
Landlord as Tenant's attorney-in-fact to execute and deliver such Estoppel
Certificate.
ARTICLE TWENTY-ONE
RELOCATION OF TENANT
At any time after January 1, 1999, Landlord may substitute for the
Premises, other premises in the Building, in One Allen Center or in Three Allen
Center (the "New Premises"), in which event the New Premises shall be deemed to
be the Premises for all purposes under this Lease, provided that (a) the New
Premises shall be substantially similar to the Premises in area and
configuration (provided that no increase in area shall result in an increase in
Tenant's Monthly Base Rent payments); (b) the New Premises must be a contiguous
block of space and be served by the same elevator bank; (c) if Tenant is then
occupying the Premises, Landlord shall pay the actual and reasonable expenses of
physically moving Tenant, and moving, installing and, if necessary,
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repairing, Tenant's furniture, fixtures, equipment and personal property to
the New Premises including, without limitation, telephone switch, computer
cabling and signage costs, as well as the cost of replacing in-stock
stationery and business cards and any other direct out-of-pocket, reasonable
costs necessitated by Tenant's relocation to the New Premises; (d) Landlord
shall give Tenant not less than ninety (90) days' prior written notice of
such substitution; and (e) Landlord, at its expense, shall improve the New
Premises with improvements (in quantity and quality of materials)
substantially similar to those in the Premises at the time of such
substitution, if the Premises are then improved (including any Tenant
Alterations installed by Tenant within the Premises after the Commencement
Date(s)). Any such move shall be made after normal Building hours (I.E.,
evenings and weekends) so as to minimize the interference with the operation
of Tenant's business.
ARTICLE TWENTY-TWO
REAL ESTATE BROKERS
Tenant represents that, except for McDade, Smith, Gould & Company,
Tenant has not dealt with any real estate broker, sales person, or finder in
connection with this Lease, and no such person initiated or participated in the
negotiation of this Lease, or showed the Premises to Tenant. Tenant hereby
agrees to indemnify, protect, defend and hold Landlord and the Indemnitees,
harmless from and against any and all liabilities and claims for commissions and
fees arising out of a breach of the foregoing representation. Landlord shall be
responsible for the payment of all commissions to all brokers specified in this
Article 22.
ARTICLE TWENTY-THREE
MORTGAGEE PROTECTION
23.01 SUBORDINATION AND ATTORNMENT
This Lease is and shall be expressly subject and subordinate at all
times to (a) any ground or underlying lease of the Real Property, now or
hereafter existing, and all amendments, renewals and modifications to any such
lease, and (b) the lien of any first mortgage or trust deed now or hereafter
encumbering fee title to the Real Property and/or the leasehold estate under any
such lease, unless such ground lease or ground lessor, or mortgage or Mortgagee,
expressly provides or elects that the Lease shall be superior to such lease or
mortgage. If any such mortgage or trust deed is foreclosed, or if any such
lease is terminated, upon request of the Mortgagee or ground lessor, as the case
may be, Tenant will attorn to the purchaser at the foreclosure sale or to the
ground lessor under such lease, as the case may be, provided, however, that such
purchaser or ground lessor shall not be (i) bound by any payment of Rent for
more than one month in advance except payments in the nature of security for the
performance by Tenant of its obligations under this Lease; (ii) subject to any
offset, defense or damages arising out of a default of any obligations of any
preceding Landlord; or (iii) bound by any amendment or modification of this
Lease made without the written consent of the
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Mortgagee or ground lessor; or (iv) liable for any security deposits not
actually received in cash by such purchaser or ground lessor. This
subordination shall be self-operative and no further certificate or
instrument of subordination need be required by any such Mortgagee or ground
lessor. In confirmation of such subordination, however, Tenant shall execute
promptly any reasonable certificate or instrument that Landlord, Mortgagee or
ground lessor may request. Tenant hereby constitutes Landlord as Tenant's
attorney-in-fact to execute such certificate or instrument for and on behalf
of Tenant upon Tenant's failure to do so within fifteen (15) days of a
request to do so. Upon request by such successor in interest, Tenant shall
execute and deliver reasonable instruments confirming the attornment provided
for herein.
23.02 MORTGAGEE PROTECTION
Tenant agrees to give any Mortgagee or ground lessor, by registered or
certified mail, a copy of any notice of default served upon the Landlord by
Tenant, provided that prior to such notice Tenant has received notice (by way of
service on Tenant of a copy of an assignment of rents and leases, or otherwise)
of the address of such Mortgagee or ground lessor. Tenant further agrees that
if Landlord shall have failed to cure such default within the time provided for
in this Lease, then the Mortgagee or ground lessor shall have an additional
thirty (30) days after receipt of notice thereof within which to cure such
default or if such default cannot be cured within that time, then such
additional notice time as may be necessary, if, within such thirty (30) days,
any Mortgagee or ground lessor has commenced and is diligently pursuing the
remedies necessary to cure such default (including but not limited to
commencement of foreclosure proceedings or other proceedings to acquire
possession of the Real Property, if necessary to effect such cure). Such period
of time shall be extended by any period within which such Mortgagee or ground
lessor is prevented from commencing or pursuing such foreclosure proceedings or
other proceedings to acquire possession of the Real Property by reason of
Landlord's bankruptcy. Until the time allowed as aforesaid for Mortgagee or
ground lessor to cure such defaults has expired without cure, Tenant shall have
no right to, and shall not, terminate this Lease on account of default. This
Lease may not be modified or amended so as to reduce the rent or shorten the
term, or so as to adversely affect in any other respect to any material extent
the rights of the Landlord, nor shall this Lease be canceled or surrendered,
without the prior written consent, in each instance, of the ground lessor or the
Mortgagee.
ARTICLE TWENTY-FOUR
NOTICES
(a) All notices, demands or requests provided for or permitted to be
given pursuant to this Lease must be in writing and shall be
personally delivered, sent by Federal Express or other overnight
courier service, or mailed by first class, registered or
certified mail, return receipt requested, postage prepaid.
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(b) All notices, demands or requests to be sent pursuant to this
Lease shall be deemed to have been properly given or served by
delivering or sending the same in accordance with this Section,
addressed to the parties hereto at their respective addresses
listed below:
Notices to Landlord shall be addressed:
Trizec Allen Center Limited Partnership
Attn: Regional Vice President
1200 Smith Street, Suite 2600
Houston, Texas 77002
Notices to Tenant shall be addressed:
Gateway Energy Corporation
Attn: President
500 Dallas Street, Suite 2615
Houston, Texas 77002
(c) If notices, demands or requests are sent by registered or
certified mail, said notices, demands or requests shall be
effective upon being deposited in the United States mail.
However, the time period in which a response to any such notice,
demand or request must be given shall commence to run from the
date of receipt on the return receipt of the notice, demand or
request by the addressee thereof. Rejection or other refusal to
accept or the inability to deliver because of changed address of
which no notice was given shall be deemed to be receipt of
notice, demand or request sent. Notices may also be served by
personal service upon any officer, director or partner of
Landlord or Tenant or in the case of delivery by Federal Express
or other overnight courier service, notices shall be effective
upon acceptance of delivery by an employee, officer, director or
partner of Landlord or Tenant.
(d) By giving to the other party at least thirty (30) days' written
notice thereof, either party shall have the right from time to
time during the term of this Lease to change their respective
addresses for notices, statements, demands and requests, provided
such new address shall be within the United States of America.
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ARTICLE TWENTY-FIVE
MISCELLANEOUS
25.01 LATE CHARGES
All payments required hereunder (other than the Monthly Base Rent and
Rent Adjustments, which shall be due as hereinbefore provided) to Landlord shall
be paid within ten (10) days after Landlord's demand therefor. All such amounts
(including, without limitation Monthly Base Rent and Rent Adjustments) not paid
when due shall bear interest from the date due until the date paid at the
Default Rate in effect on the date such payment was due.
25.02 WAIVER OF JURY TRIAL
As a material inducement to Landlord to enter into this Lease, Tenant
hereby waives its right to a trial by jury of any issues relating to or arising
out of its obligations under this Lease or its occupancy of the Premises.
Tenant acknowledges that it has read and understood the foregoing provision.
25.03 DEFAULT UNDER OTHER LEASE
It shall be a Default under this Lease if Tenant or any affiliated
company under any other lease with Landlord for premises in the Building
defaults under such lease and as a result thereof such lease is terminated or
terminable.
25.04 OPTION
This Lease shall not become effective as a lease or otherwise until
executed and delivered by both Landlord and Tenant. The submission of the Lease
to Tenant does not constitute a reservation of or option for the Premises,
except that it shall constitute an irrevocable offer on the part of Tenant in
effect for fifteen (15) days to lease the Premises on the terms and conditions
herein contained.
25.05 TENANT AUTHORITY
Tenant represents and warrants to Landlord that it has full authority
and power to enter into and perform its obligations under this Lease, that the
person executing this Lease is fully empowered to do so, and that no consent or
authorization is necessary from any third party. Landlord may request that
Tenant provide Landlord evidence of Tenant's authority.
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25.06 MODIFICATION OF LEASE FOR BENEFIT OF MORTGAGEE
If Mortgagee of Landlord requires a modification of this Lease which
shall not result in any increased cost or expense to Tenant or in any other
substantial and adverse change in the rights and obligations of Tenant
hereunder, then Tenant agrees that the Lease may be so modified.
25.07 EXCULPATION
Tenant agrees, on its behalf and on behalf of its successors and
assigns, that any liability or obligation under this Lease shall only be
enforced against Landlord's equity interest in the Property and in no event
against any other assets of the Landlord, or Landlord's officers or directors.
25.08 ACCORD AND SATISFACTION
No payment by Tenant or receipt by Landlord of a lesser amount than any
installment or payment of Rent due shall be deemed to be other than on account
of the amount due, and no endorsement or statement on any check or any letter
accompanying any check or payment of Rent shall be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such installment or payment of Rent
or pursue any other remedies available to Landlord. No receipt of money by
Landlord from Tenant after the termination of this Lease or Tenant's right of
possession of the Premises shall reinstate, continue or extend the Term.
25.09 LANDLORD'S OBLIGATIONS ON SALE OF BUILDING
In the event of any sale or other transfer of the Building, Landlord
shall be entirely freed and relieved of all agreements and obligations of
Landlord hereunder accruing or to be performed after the date of such sale or
transfer, provided that all of Landlord's obligations hereunder are specifically
assumed by the buyer or transferee. The term "Landlord" as used in this Lease,
insofar as the performance of any covenants or obligations on the part of
Landlord under the Lease are concerned, shall mean only the owner of the
Building, or the entity with right of possession of the Building at the time in
question.
25.10 BINDING EFFECT
This Lease shall be binding upon and inure to the benefit of Landlord
and Tenant and their respective heirs, legal representatives, successors and
permitted assigns.
25.11 CAPTIONS
The Article and Section captions in this Lease are inserted only as a
matter of convenience and in no way define, limit, construe, or describe the
scope or intent of such Articles and Sections.
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25.12 APPLICABLE LAW
This Lease shall be construed in accordance with the laws of the State
of Texas. If any term, covenant or condition of this Lease or the application
thereof to any person or circumstance shall, to any extent, be invalid or
unenforceable, the remainder of this Lease, or the application of such term,
covenant or condition to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby and each
item, covenant or condition of this Lease shall be valid and be enforced to the
fullest extent permitted by law.
25.13 ABANDONMENT
In the event Tenant abandons the Premises but is otherwise in compliance
with all the terms, covenants and conditions of this Lease, Landlord shall (a)
have the right to enter into the Premises in order to show the space to
prospective tenants, (b) have the right to reduce the services provided to
Tenant pursuant to the terms of this Lease to such levels as Landlord reasonably
determines to be adequate services for an unoccupied premises and (c) during the
last six (6) months of the Term, have the right to prepare the Premises for
occupancy by another tenant upon the end of the Term.
25.14 LANDLORD'S RIGHT TO PERFORM TENANT'S DUTIES
If Tenant fails timely to perform any of its duties under this Lease or
the Workletter, Landlord shall have the right (but not the obligation), to
perform such duty on behalf and at the expense of Tenant without prior notice to
Tenant, and all sums expended or expenses incurred by Landlord in performing
such duty shall be deemed to be additional Rent under this Lease and shall be
due and payable upon demand by Landlord.
25.15 TEXAS DECEPTIVE TRADE PRACTICES ACT INAPPLICABLE
It is the intent of Landlord and Tenant that the provisions of the Texas
Deceptive Trade Practices-Consumer Protection Act, Subchapter E of Chapter 17 of
the Texas Business and Commerce Code (the "DTPA") be inapplicable to this Lease
and the transaction evidenced hereby. Accordingly, Tenant hereby represents and
warrants to Landlord as follows:
(a) The total consideration paid or to be paid by Tenant over the
term of this Lease exceeds $100,000.00.
(b) Tenant is represented by legal counsel of its own choice and
designation in connection with the transaction contemplated by
this Lease;
(c) Tenant's counsel was not directly or indirectly identified,
suggested or selected by Landlord or an agent of Landlord; and
-44-
<PAGE>
(d) Tenant is leasing the Premises for business or commercial
purposes, not for use as Tenant's residence.
25.16 LETTER OF CREDIT
Within five (5) business days after execution of this Lease, Tenant
shall provide to Landlord a letter of credit (the "Letter of Credit") in the
amount of $101,117.00 (the "Maximum Guaranteed Amount") drawn upon Intrust Bank,
4000 Somerset Drive, Prairie Village, Kansas 66208-0338. Such Letter of Credit
shall be in a form acceptable to Landlord and be subject to being drawn upon in
the event of the occurrence of a Default by Tenant in an amount not to exceed
the "Unamortized Capital Balance" at the time of such Default. The Unamortized
Capital Balance shall be calculated from time to time by fully amortizing the
Maximum Guaranteed Amount by 1/60 for each month during the initial sixty (60)
months of the Term that Tenant makes timely Monthly Base Rent payments to
Landlord. Tenant shall have the right to replace the Letter of Credit annually
prior to the expiration of the then current Letter of Credit in an amount equal
to the then remaining Unamortized Capital Balance. Any amounts drawn on the
Letter of Credit shall be applied by Landlord against any sums owing by Tenant
as a result of a Default, and any remainder thereafter shall be applied to sums
next due and owing to Landlord by Tenant under the Lease. If the Letter of
Credit is not delivered to Landlord within the time period provided for herein,
or if a replacement Letter of Credit is not delivered annually prior to the
expiration of the then effective Letter of Credit, as applicable, Landlord, at
its option, subject to five (5) business days prior written notice to Tenant,
may elect thereafter to cancel this Lease by delivering written notice thereof
to Tenant provided such notice is given to Tenant prior to Landlord's receipt of
the Letter of Credit or replacement Letter of Credit, as applicable. Landlord,
at Landlord's sole option, may elect to waive the requirements of this Section
25.16 and cancel the Letter of Credit following its review of Tenant's corporate
financial statements if the "Net Change in Cash & Cash Equivalents" entry
reflected on such financial statements indicates a positive cash flow balance
over no less than a thirty-six (36) consecutive month period.
25.17 ENTIRE AGREEMENT
No oral statements or prior written material not specifically
incorporated herein shall be of any force or effect. Tenant agrees that in
entering into and taking this Lease, it relies solely upon the representation
and agreements contained in this Lease and no others. This Lease, together with
all Exhibits and Addenda, if any, attached to this Lease, constitutes the whole
agreement of the parties and shall in no way be conditioned, modified or
supplemented except by a written agreement executed by both parties.
25.18 NOTICE OF INDEMNIFICATION
THE PARTIES TO THIS LEASE HEREBY ACKNOWLEDGE AND AGREE THAT THIS LEASE
(AND ATTACHED EXHIBITS) CONTAINS CERTAIN INDEMNIFICATION PROVISIONS.
-45-
<PAGE>
IN WITNESS WHEREOF, this Lease has been executed as of the date set
forth in Section 1.01(4) hereof.
"Landlord" "Tenant"
TRIZEC ALLEN CENTER LIMITED GATEWAY ENERGY CORPORATION,
PARTNERSHIP, a Delaware limited a Delaware corporation
partnership, d/b/a TrizecHahn
Allen Center Limited Partnership
By: [ILLEGIBLE]
------------------------------
By: Trizec Allen Center, Inc., Name: [ILLEGIBLE]
its general partner ----------------------------
Title: President
-----------------------------
By: /s/ Paul H. Layne
--------------------------------------
Paul H. Layne
Vice President and Assistant Secretary
By: /s/ David W. Clapp
--------------------------------------
David W. Clapp
Vice President
-46-
<PAGE>
EXHIBIT A
TO
OFFICE LEASE BETWEEN
TRIZEC ALLEN CENTER LIMITED PARTNERSHIP,
AS LANDLORD,
AND
GATEWAY ENERGY CORPORATION,
AS TENANT
LEGAL DESCRIPTION OF LAND
TRACT A - ONE ALLEN CENTER TRACT
Being a tract or parcel containing 82,212 square feet of land in the Obedience
Smith Survey, Abstract 696 and the John Austin Survey, Abstract 1, Harris
County, Texas and being a part of those certain tracts designated as "Tract 1, 2
and Tract 3" per the deed recorded in Volume 7769, Page 561 of the Harris County
Deed Records, and a part of certain street rights-of-way as closed by City
Council Motion No. 70-1288, passed April 15, 1970 and filed in Volume 8104, Page
1 of said Deed Records and being more particularly described by metes and bounds
as follows with all bearings and coordinates referenced to the Texas Coordinate
System, South Central Zone:
COMMENCING at City Rod 541 (X=3,151,055.22, Y=717,483.00) located in West Dallas
Avenue (80 feet wide) at its intersection with Bagby Street (92 feet wide);
THENCE, North 32DEG. 51'57" East, 355.14 feet along the City Reference Line
to a Copperweld Rod (X=3,151,247.92, Y=717,781.26) stamped "AC-1" marking the
reference line intersect with the centerline of Dallas Avenue (80 feet wide);
THENCE, South 57DEG. 08'03" East, 619.84 feet along the centerline of said
Dallas Avenue to a point North 57DEG. 08'03" West, 40.00 feet from the
centerline intersect of Smith Street (80 feet wide);
THENCE, South 32DEG. 51'57" West, 40.00 feet, at a right angle to said
centerline of Dallas Avenue to the POINT OF BEGINNING (X=3,151,746.76,
Y=717,411.34), said point also being the intersect of the southwesterly
right-of-way line of said Dallas Avenue and the northwesterly right-of-way of
said Smith Street;
THENCE, South 32DEG. 51'57" West, 221.00 feet along the northwesterly
right-of-way line of Smith Street to a point for most southerly corner;
THENCE, North 57DEG. 08'03" West, 372.00 feet to a point for most westerly
corner;
Page 1 of Exhibit A
<PAGE>
THENCE, North 32DEG. 51'57" East, 221.00 feet to a point on the southwesterly
right-of-way line of Dallas Avenue for most northerly corner;
THENCE, South 57DEG. 08'03" East 372.00 feet along said right-of-way line of
Dallas Avenue to the POINT OF BEGINNING, containing a computed area of 82,212
square feet of land.
TRACT B - TWO ALLEN CENTER TRACT
Being a tract or parcel of land containing 98,863 square feet in the
Obedience Smith Survey, Abstract 696, Harris County, Texas, and being all of
that certain tract of land conveyed to ALLEN CENTER CO. #2 by the deeds
recorded in the Harris County Official Public Records of Real Property
(H.C.O.P.R.R.P.), under File Number F 124311, Film Code 164-04-0839, File
Number F 124312, Film Code 164-04-0845 and File Number F 124313, Film Code
###-##-####. Said tract being more particularly described by metes and
bounds as follows, with all bearings and coordinates referenced to the Texas
Coordinate System, South Central Zone:
BEGINNING at the intersection (X=3,151,520.75, Y=717,061.57) of the northerly
right-of-way line of Polk Avenue (varying width) with the northwesterly
right-of-way line of Smith Street (80 feet wide);
THENCE, South 87DEG. 36'57" West, 203.28 feet along the northerly
right-of-way line of said Polk Avenue to a 5/8 inch iron rod set for the
beginning of a tangent curve to the right;
THENCE, 106.78 feet northwesterly along said tangent curve and said northerly
right-of-way line of Polk Avenue (Delta Angle = 13DEG. 21'05", Radius =
458.22 feet, Chord = North 85DEG. 42'30" West, 106.54 feet) to a point of
non-tangency;
THENCE, continuing along said northerly right-of-way line, North 63DEG.
33'06" West, 45.53 feet to a point for corner common to the herein described
tract and a 119,251 square foot tract described in exhibit "J" of the
document recorded in H.C.O.P.R.R.P., File Number F 792860, Film Code
###-##-####;
THENCE, along the boundary common to said tracts the following seven courses;
Departing said north right-of-way line, North 16DEG. 35'07" East, 15.00
feet to a 5/8-inch iron rod set for the beginning of a non-tangent curve
to the left;
143.43 feet easterly along said non-tangent curve to the left (Delta
Angle = 18DEG. 58'09", Radius = 433.22 feet, Chord = South 82DEG. 53'58"
East, 142.77 feet) to a 5/8-inch iron rod set for point of tangency;
Tangent to said curve, North 87DEG. 36'57" East, 10.28 feet to a 5/8-inch
iron rod set for corner;
Page 2 of Exhibit A
<PAGE>
North 57DEG. 08'03" West, 219.67 feet;
North 32DEG. 51'57" East, 196.42 feet;
South 57DEG. 08'03" East, 129.15 feet;
North 32DEG. 51'57" East, 90.00 feet to a point for corner in the
southwesterly line of ONE ALLEN CENTER 1.887 acre tract;
THENCE, South 57DEG. 08'03" East, 262.56 feet along the line common to said
1.887 acre tract and the tract herein described to the northwesterly
right-of-way line of said Smith Street;
THENCE, South 32DEG. 51'57" West, 195.45 feet along the northwesterly
right-of-way line of said Smith Street to the POINT OF BEGINNING, containing
a computed area of 98,863 square feet of land.
TRACT C - THREE ALLEN CENTER TRACT
BEING a tract or parcel of land containing 119,202 square feet out of the
John Austin Survey, Abstract No. 1, and the Obedience Smith Survey, Abstract
No. 696, Harris County, Texas, and being part of those certain tracts
designated as "Tract 1, 2, 3 and Tract 4" per the deed recorded in Volume
7769, Page 592, of Harris County Deed Records, and a part of certain street
rights-of-way as closed by City Council Motion No. 70-1288, passed April 15,
1970 and filed in Volume 8104, Page 1 of said Deed Records and being more
particularly described by metes and bounds as follows with all bearings and
coordinates referenced to the Texas Coordinate System, South Central Zone:
BEGINNING at the most northerly cut-back corner (X=3,150,861.30,
Y=717,454.95) at the intersection of the south right-of-way line of West
Dallas Avenue (80 feet wide) with the easterly right-of-way line of Clay
Avenue (100 feet wide);
THENCE, North 87DEG. 37' 33" East, a distance of 156.34 feet along the south
right-of-way line of said West Dallas Avenue to the beginning of a tangent
curve to the left;
THENCE, 135.53 feet northeasterly along the arc of said curve (Delta Angle =
54DEG. 45' 36", Radius = 141.81 feet, Chord = North 60DEG. 14' 45" East,
130.43 feet) to a point at the end of said curve in the southeasterly
right-of-way line of Bagby Street (varying width), said point also being a
point on a non-tangent curve to the left;
THENCE, 126.55 feet easterly along the southeasterly right-of-way line of
said Bagby Street and the arc of said curve (Delta Angle = 10DEG. 54' 11",
Radius = 665.00 feet, Chord = North 38DEG. 18' 56" East, 126.36 feet);
Page 3 of Exhibit A
<PAGE>
THENCE, South 32DEG. 51' 57" West, 172.98 feet;
THENCE, South 57DEG. 08' 03" East, 20.62 feet;
THENCE, North 77DEG. 51' 57" East, 45.24 feet;
THENCE, South 57DEG. 08' 03" East, 121.23 feet;
THENCE, North 32DEG. 51' 57" East, 27.13 feet;
THENCE, North 77DEG. 51' 57" East, 7.07 feet;
THENCE, South 57DEG. 08' 03" East, 126.44 feet;
THENCE, South 32DEG. 51' 57" West, 90.00 feet;
THENCE, North 57DEG. 08' 03" West, 129.15 feet;
THENCE, South 32DEG. 51' 57" West, 196.42 feet;
THENCE, South 57DEG. 08' 03" East, 219.67 feet;
THENCE, South 87DEG. 36' 57" West, 10.28 feet to the beginning of a tangent
curve to the right;
THENCE, 143.43 feet westerly along the arc of said curve (Delta Angle =
18DEG. 58' 09", Radius = 433.22 feet, Chord = North 82DEG. 53' 58" West,
142.77 feet);
THENCE, South 16DEG. 35' 07" West, 15.00 feet to an intersection with the
northeasterly right-of-way line of said Clay Avenue and a point on a
non-tangent curve to the right;
THENCE, 415.17 feet northwesterly along the northeasterly right-of-way line
of Clay Avenue and the arc of said curve (Delta Angle = 53DEG. 04' 18",
Radius = 448.22 feet, Chord = North 46DEG. 52' 45" West, 400.49 feet) to a
point of a compound curve to the right;
THENCE, 93.22 feet northwesterly along said northeasterly right-of-way line
of Clay Avenue and the arc of said curve (Delta Angle = 09DEG. 09' 01",
Radius = 583.72 feet, Chord = North 15DEG. 46' 05" West, 93.12 feet) to a
point on a cut-back to the right;
THENCE, North 38DEG. 27' 43" East, 13.08 feet along said cut-back to the
POINT OF BEGINNING, containing a computed area of 119,202 square feet of land.
Page 4 of Exhibit A
<PAGE>
TRACT D - METROPOLITAN GARAGE TRACT
All that certain tract of land out of the O. Smith Survey, A-696, Houston,
Harris County, Texas and being more particularly described by metes and
bounds as follows:
Commencing at the City of Houston Engineering Department Reference Rod No.
541 located in West Dallas at its intersection with Bagby Street, thence S
89DEG. 45'00" W passing the City of Houston Engineering Reference Rod No. 94
at 520.09' and continuing for a total distance of 732.26' to a point, thence
S 0DEG. 15'00" E -20.05' to a 5/8" iron rod located in the south right-of-way
line of West Dallas (based on a 90' width) at its intersection with the east
right-of-way line of Fuller Street, and being the POINT OF BEGINNING of the
herein described tract:
THENCE N 89DEG. 45'29" E - 247.30' along the south right-of-way line of said
West Dallas to a point for corner;
THENCE S 00DEG. 15' E - 557.76' to a 3/8" iron rod for corner;
THENCE S 89DEG. 45'07" W - 250.02' to a 3/8" iron rod for corner located in
the east right-of-way line of Fuller Street;
THENCE along the said east right-of-way line of Fuller Street the five
following courses and distances:
N 00DEG. 21'53" W - 100.04' to a point,
N 06DEG. 24'16" E - 30.20' to a point,
N 00DEG. 15' W - 200' to a point,
N 01DEG. 26'42" W - 27.76' to a point,
N 00DEG. 15' W - 200'
to the POINT OF BEGINNING and containing 138,131.8 square feet of land more or
less.
TRACT E - ALLEN CENTER PARKING GARAGE TRACT
Being a tract or parcel of land containing 179,624 square feet of land out of
the Obedience Smith Survey, Abstract 696, Harris County, Texas, and being a
part of those certain tracts designated as "Tract 4, 5 and Tract 8" per the
deed recorded in Volume 7769, Page 568 of the Harris County Deed Records, and
a part of certain street rights-of-way as closed by City Council Motion No.
70-1288, passed April 15, 1970 and filed in Volume 8104, Page 1 of said Deed
Records, and being more particularly described by metes and bounds as follows
with all bearings and coordinates referenced to the Texas Coordinate System,
South Central Zone:
Page 5 of Exhibit A
<PAGE>
BEGINNING at a point (X=3,150,750.60, Y=717,450.35) at the intersection of
the south right-of-way line of West Dallas Avenue (80 feet wide) with the
westerly right-of-way line of Clay Avenue (100 feet wide), said point also
being on a non-tangent curve to the left;
THENCE, 134.65 feet southeasterly along the westerly right-of-way line of
said Clay Avenue and the arc of said curve (Delta Angle = 11DEG. 17'02",
Radius = 683.72 feet, Chord = South 14DEG. 42'05" East, 134.44 feet) to a
point for the end of said curve and point of a compound curve to the left;
THENCE, 283.23 feet southeasterly, continuing along said westerly
right-of-way line of Clay Avenue and the arc of said curve (Delta Angle =
29DEG. 36'05", Radius = 548.22 feet, Chord = South 35DEG. 08'38" East, 280.09
feet) to the end of said curve and the most northerly corner of a cut-back to
the right at the intersection of said westerly right-of-way line of Clay
Avenue and the westerly right-of-way line of Shaw Street (60 feet wide):
THENCE, South 02DEG. 22'27" East, 9.77 feet along said cut-back and westerly
right-of-way line of Shaw Street to the beginning of a non-tangent curve to
the left;
THENCE, 219.99 feet southwesterly along the arc of said curve and said
westerly right-of-way line (Delta Angle = 30DEG. 44'32", Radius = 410.00
feet, Chord = South 13DEG. 14'49" West, 217.36 feet) to a point of tangency;
THENCE, South 02DEG. 07'27" East, 60.47 feet along said westerly right-of-way
line to the most northerly corner of a cut-back to the right;
THENCE, South 42DEG. 45'03" West, 14.17 feet along said cut-back and westerly
right-of-way line to a point at the intersection of said westerly
right-of-way line of Shaw Street and the north right-of-way line of Andrews
Street (60 feet wide);
THENCE, South 87DEG. 37'33" West, 255.65 feet along the north right-of-way
line of said Andrews Street to an angle point in said north right-of-way;
THENCE, South 85DEG. 38'14" West, 34.46 feet, continuing along the north
right-of-way line of said Andrews Street to a nail set in concrete for
southwest corner;
THENCE, North 02DEG. 22'27" West, 99.98 feet to an "X" cut in concrete for an
angle point;
THENCE, North 02DEG. 18'03" West, 557.64 feet to a point for northwest
corner, said point being on the south right-of-way line of said West Dallas
Avenue;
THENCE, North 87DEG. 37'33" East, 177.90 feet along the south right-of-way
line of said West Dallas Avenue to the POINT OF BEGINNING, containing a
computed area of 179,624 square feet of land.
Page 6 of Exhibit A
<PAGE>
TRACT F - ANTIOCH PARK TRACT
A tract or parcel containing 27,402 square feet of land out of the
Obedience Smith Survey, Abstract 696, Harris County, Texas. Said tract also
being a portion of Lots 9 and 10 in Block 3, and Lots 4, 5, 6, 7 and 8 in
Block 2 of the Senechal Addition, a subdivision of record per the map
recorded in Volume M, Page 475 of the Harris County Deed Records, and
contains that portion of Frederick Street that is bounded on the north by
Clay Avenue (width varies) and is bounded on the south by Andrews Street (50
feet wide). The herein described tract is more particularly described as
follows, with all bearings and coordinates referenced to the Texas Coordinate
System, South Central Zone:
COMMENCING at a Copperweld Rod stamped "AC-5" (X=3,150,906.78, Y=716,037.50)
found at the intersection of the centerlines of Smith Street (80 feet wide)
and Pease Avenue (80 feet wide) from which City Survey Marker 5357-1606-C
(City Rod No. 52) bears South 57DEG. 08'01" East;
THENCE, North 32DEG. 51'57" East, 950.00 feet along the centerline of said
Smith Street;
THENCE, departing said centerline at a right angle, North 57DEG. 08'03" West,
89.73 feet to a 5/8-inch iron rod (X=3,151,346.89, Y=716,884.03) found for
the intersection of the southwesterly right-of-way line of Clay Avenue
(varying width) with the northwesterly right-of-way line of said Smith Street
(width varies at this point), said iron rod being a point on the line common
to Lots 8 and 9 in said Block 2 and the POINT OF BEGINNING;
THENCE, South 02DEG. 07'27" East, 61.20 feet along the northwesterly
right-of-way line of said Smith Street and the line common to said Lots 8 and
9 to a 5/8-inch iron rod found for the new northerly right-of-way line of
Andrews Street (50 feet wide);
THENCE South 87DEG. 37'33" West, 265.27 feet along the new northerly
right-of-way line of said Andrews Street to a 5/8-inch iron rod found on the
line common to Lots 9 and 8 in said Block 3;
THENCE, North 02DEG. 07'27" West, 95.63 feet along said common line to a
5/8-inch iron rod found at the corner common to Lots 2, 3, 8 and 9 in said
Block 3;
THENCE, North 87DEG. 27'29" East, 99.99 feet along the line common to Lots 9,
10, 2 and 1 in said Block 3 to a 5/8-inch iron rod found for the corner
common to said Lots 1 and 10 in the westerly right-of-way line of abandoned
Frederick street;
THENCE, North 87DEG. 52'33" East, 17.50 feet to the centerline of said
Frederick Street;
THENCE, North 02DEG. 07'27" West, 54.49 feet along said centerline to the
south right-of-way line of said Clay Avenue;
Page 7 of Exhibit A
<PAGE>
THENCE, South 65DEG. 48'22" Each, 40.34 feet along said southwesterly
right-of-way line of Clay Avenue to a 5/8-inch iron rod found for the
beginning of a tangent curve to the right;
THENCE, 81.46 feet southeasterly along the arc of said curve and
southwesterly right-of-way line (Radius = 538.22 feet, Delta = 8DEG. 40'19",
Chord = South 61DEG. 28'12" East, 81.38 feet) to a 5/8-inch iron rod found
for point of tangency;
THENCE, continuing along the southwesterly right-of-way line of said Clay
Avenue, South 57DEG. 08'03" East, 50.78 feet to the POINT OF BEGINNING,
containing a computed area of 27,402 square feet of land.
Page 8 of Exhibit A
<PAGE>
[ARCHITECTURAL PLAN]
<PAGE>
EXHIBIT B
TO
OFFICE LEASE BETWEEN
TRIZEC ALLEN CENTER LIMITED PARTNERSHIP,
AS LANDLORD,
AND
GATEWAY ENERGY CORPORATION,
AS TENANT
PLAN OF PREMISES
[TO COME]
<PAGE>
EXHIBIT C
TO
OFFICE LEASE BETWEEN
TRIZEC ALLEN CENTER LIMITED PARTNERSHIP,
AS LANDLORD,
AND
GATEWAY ENERGY CORPORATION,
AS TENANT
WORKLETTER
(LANDLORD DOES WORK--ALLOWANCE)
This Work Letter ("Work Letter") describes and specifies the rights and
obligations of Landlord and Tenant with respect to certain allowances granted to
Tenant hereunder and rights and responsibilities of Landlord and Tenant with
respect to the design, construction and payment for the completion of the
Initial Improvements within the Premises.
1. DEFINITIONS. Terms which are defined in the Lease shall have the
same meaning in this Work Letter. Additionally, as used in this Work Letter,
the following terms (when delineated with initial capital letters) shall have
the respective meaning indicated for each as follows:
(a) ALLOWANCE shall mean a sum not to exceed $20.00 per square
foot of Rentable Area within the initial 3,981 square feet comprising
the Premises (a maximum of $79,620.00).
(b) BASIC CONSTRUCTION OF THE BUILDING shall mean the
structure of the Building as built on the date of this Work Letter, the
Shell Improvements, and all other improvements, fixtures and facilities
constituting a part of the Project, as these exist on the date of this
Work Letter if the Building is complete, or as provided for in
Landlord's plans and specifications for the Building if prior to
completion.
(c) LANDLORD'S ARCHITECT shall mean the architect designated
by Landlord as its architect, from time to time, to perform the
functions of Landlord's Architect hereunder.
(d) PLANS AND SPECIFICATIONS shall mean collectively, the
plans, specifications and other information prepared or to be prepared
by Tenant's Architect and, where necessary, by Landlord's electrical,
mechanical and structural engineers, all at Tenant's expense, which
shall detail the Work required by Tenant in the Premises and which shall
be approved in writing by both Tenant and Landlord prior to the
commencement of such Work.
Page 1 of Exhibit C
<PAGE>
(e) TENANT'S ARCHITECT shall mean PDG Architects, who is an
architect licensed to practice in the State of Texas.
(f) WORK shall mean all materials and labor to be added to the
Basic Construction of the Building and the Shell Improvements in order
to complete the installation of the Initial Improvements within the
Premises for Tenant in accordance with the Plans and Specifications,
including, without limitation any modification to Basic Construction of
the Building or to the Shell Improvements, any structural modifications
to the Building, any electrical or plumbing work required to meet
Tenant's electrical and plumbing requirements, and any special air
conditioning work required to be performed in the Premises.
(g) COST OF THE WORK shall mean the cost of all materials and
labor to be added to the Basic Construction of the Building and the
Shell Improvements in order to complete the installation of the Initial
Improvements within the Premises in accordance with the Plans and
Specifications.
(h) LANDLORD'S COSTS shall mean the sum of (i) the cost of the
Shell Improvements and (ii) that portion of the Cost of the Work up to,
but not in excess of, the aggregate amount of the Allowance.
(i) TENANT'S COSTS shall mean that portion of the Cost of the
Work in excess of Landlord's Costs.
(j) CHANGE COSTS shall mean all costs or expenses attributable
to any change in the Plans and Specifications which, when added to other
costs and expenses incurred in completing the Work, exceed Landlord's
Costs, including, without limitation, (i) any cost caused by direction
of Tenant to omit any item of Work contained in the Plans and
Specifications, (ii) any additional architectural or engineering
services, (iii) any changes to materials in the process of fabrication,
(iv) the cancellation or modification of supply or fabricating
contracts, (v) the removal or alteration of any Work or any plans
completed or in process, or (vi) delays affecting the schedule of the
Work.
(k) WORKING DAYS shall mean all days of the week other than
Saturday, Sunday, and legal holidays.
2. PROCEDURE AND SCHEDULES FOR THE COMPLETION OF PLANS AND
SPECIFICATIONS. The Plans and Specifications shall be completed in accordance
with the following procedure and time schedules:
(a) DESIGN DRAWINGS. Within ten (10) Working Days from
execution of the Lease, Tenant shall submit to Landlord four (4) sets of
prints of design drawings, specifying the intended design, character and
finishing of the Initial Improvements within the Premises. Such package
shall include separate drawings for signs in accordance with Landord's
sign
Page 2 of Exhibit C
<PAGE>
criteria. The design drawings shall set forth the requirements of
Tenant with respect to the installation of the Initial Improvements
within the Premises, and such drawings shall include, without limiting
their scope, a Tenant approved space plan, architectural design of the
space, including office front, plans, elevations, sections, and
renderings indicating materials, color selections and finishes.
(i) After receipt of design drawings, Landlord shall
return to Tenant one set of prints of design drawings with
Landlord's suggested modifications and/or approval.
(ii) If design drawings are returned to Tenant with
comments, but not bearing approval of Landlord, the design
drawings shall be immediately revised by Tenant and resubmitted
to Landlord for approval within ten (10) Working Days of their
receipt by Tenant. Unless such action is taken, Tenant will be
deemed to have accepted and approved all of Landlord's comments
on the design drawings.
(b) COMPLETION OF PLANS AND SPECIFICATIONS. All Plans and
Specifications shall be prepared in strict compliance with applicable
Building standards and requirements as set forth in the Lease, this Work
Letter and otherwise, and shall also adhere to the design drawings
approved by Landlord. In order to assure the compatibility of Tenant's
electrical and mechanical systems and the compatibility of Tenant's
structural requirements with the existing Building and in order to
expedite the preparation of Tenant's electrical, mechanical and
structural drawings Tenant or Tenant's Architect shall deliver to
Landlord's Architect, not later than ten (10) Working Days from the date
of Landlord's approval of design drawings, a detailed plan setting forth
any and all electrical, mechanical and structural requirements, and
Landlord's Architect shall retain, at Tenant's expense, Landlord's
electrical, mechanical and structural engineers to prepare all necessary
electrical, mechanical and structural construction drawings which shall
be included as a part of the Plans and Specifications. All construction
documents and calculations prepared by Tenant's Architect shall be
submitted by Tenant, in the form of four (4) sets of blueline prints, to
Landlord for approval within ten (10) Working Days after the date of
receipt by Tenant of Landlord's approval of design drawings. If the
Plans and Specifications are returned to Tenant with comments, but not
bearing approval of Landlord, the Plans and Specifications shall be
immediately revised by Tenant and resubmitted to Landlord for approval
within ten (10) Working Days of their receipt by Tenant.
(i) The fees for Tenant's Architect and any consultants
or engineers retained by or on behalf of Tenant or Tenant's
Architect (including, but not limited to, the electrical,
mechanical and structural engineers required to be retained under
this paragraph) shall be paid by Tenant. Tenant shall also pay
for any preliminary drawings by Landlord's Architect for review
of the design drawings, the Plans and Specifications, and any
revisions to such documents, and the fees and expenses of
Landlord's Architect for inspection of the Work, as required by
Landlord.
Page 3 of Exhibit C
<PAGE>
(ii) Tenant shall have the sole responsibility for
compliance of the Plans and Specifications with all applicable
statutes, codes, ordinances and other regulations, and the
approval of the Plans and Specifications or calculations included
therein by Landlord shall not constitute an indication,
representation or certification by Landlord that such Plans and
Specifications or calculations are in compliance with said
statutes, codes, ordinances and other regulations. In instances
where several sets of requirements must be met, the requirements
of Landlord's insurance underwriter or the strictest applicable
requirements shall apply where not prohibited by applicable
codes.
(iii) Upon completion of the Initial Improvements, if so
required by Landlord, Tenant shall deliver to Landlord an
"as-built" set of Plans and Specifications for the Premises,
together with such other information required by Landlord to
place the information from the "as-built" Plans and
Specifications on to Landlord"s data base; the cost of providing
the "as-built" Plans and Specifications and other information,
together with Landlord's cost to place the information on to
Landlord's data base, shall be borne solely by Tenant.
3. PRICING. On or before the date which is ten (10) Working Days
after finalization of the Plans and Specifications, as evidenced by Landlord's
written approval thereof, Landlord shall notify Tenant in writing of the Cost of
the Work. The contract for the Work shall obligate the contractor to purchase
from Landlord all materials and supplies which are held in "stock" by Landlord
and which are required for the Work by the Plans and Specifications provided,
Landlord's pricing is comparable to the general market. Within ten (10) Working
Days after its receipt of Landlord's written notice identifying the Cost of the
Work, Tenant shall either approve such Cost of the Work in writing or cause the
Plans and Specifications to be revised and resubmitted to Landlord for Approval.
On or before the date which is ten (10) Working Days from Landlord's receipt of
such revised Plans and Specifications, Landlord shall either approve the revised
Plans and Specifications and give to Tenant a revised Cost of the Work or give
to Tenant Landlord's comments on such revised Plans and Specifications. If for
any reason Landlord and Tenant have not agreed in writing upon final Plans and
Specifications and/or the Tenant has not approved in writing the Cost of the
Work on or before the date which is sixty (60) Working Days from the date
hereof, then Landlord shall have the right to terminate the Lease and this Work
Letter, without further obligation.
4. PAYMENTS. Tenant may use a portion of the Allowance up to $2.00
per square foot of the Rentable Area of the Premises for the payment of fees and
expenses payable by Tenant under the terms of Paragraph 2(b)(i) of this Work
Letter Tenant shall pay the aggregate amount of Tenant's Costs to Landlord upon
demand. Landlord shall determine the percentage of the Cost of the Work which
is allocable to Landlord and the percentage of the Cost of the Work which is
allocable to Tenant. Landlord shall also revise its determination of such
percentages based on any changes in the Cost of the Work due to change orders
affecting the Plans and Specifications. Within ten (10) days after Tenant's
receipt of an invoice from Landlord which identifies that portion of the Cost of
the Work to be incurred, respectively, by Landlord and Tenant, Tenant shall pay
to Landlord the
Page 4 of Exhibit C
<PAGE>
percentage of the Cost of the Work allocable to Tenant, as Tenant's Costs, as
determined by Landlord from time to time. Landlord's obligation for payment
with respect to the Work shall not exceed the aggregate amount of Landlord's
Costs; and after Landlord has paid Landlord's Costs, Tenant shall thereafter
pay all Cost of the Work as and when invoiced to Tenant by Landlord,
including, without limitation, any Change Costs. The amounts payable to
Landlord hereunder shall constitute Rent due pursuant to the Lease, and
failure to make any such payment when due shall constitute a default under
the Lease, entitling Landlord to exercise any or all of its remedies
hereunder, as well as all remedies otherwise available to Landlord. Any cost
savings achieved after completion of the Work with respect to the initial
Premises shall be added to the Allowance to be provided to Tenant with
respect to Tenant's improvement of the Expansion Premises.
5. PERFORMANCE OF WORK AND DELAYS. Landlord shall cause the
Contractor to perform the Work in substantial accordance with the Plans and
Specifications. In that regard, Landlord shall perform as construction manager
for the construction of the Initial Improvements in accordance with the Plans
and Specifications; and the Cost of the Work shall include a management fee
payable to Landlord in the amount of five percent (5%) of the cost of the
materials and labor constituting the Work. If a delay shall occur in the
completion of the Work by Landlord as the probable result of (i) any failure to
furnish when due Tenant's design drawings, Tenant's electrical, mechanical
and/or structural requirements, Tenant's Plans and Specifications or any
revision to any such documents, (ii) any change by Tenant in any of the Plans
and Specifications, (iii) any state of facts which gives rise to a change
referred to in the definition of Change Costs or any changes resulting in a
Change Cost, (iv) the fact that materials to be incorporated into the Work which
are non-Building grade require a lead time (not due to Landlord default or
error) to obtain or construction time to perform, in excess of that required for
Work which is Building grade, as determined by Landlord, or (v) any other act or
omission of Tenant, its agents or employees, including any violation of the
provisions of the Lease or any delay in giving authorizations or approvals
pursuant to this Work Letter, then any such delay shall not justify any
extension of the Commencement Date of the Lease.
6. CHANGE ORDERS. All changes and modifications in the Work from
that contemplated in the Plans and Specifications, whether or not such change or
modification gives rise to a Change Cost, must be evidenced by a written Change
Order executed by both Landlord and Tenant. In that regard, Tenant shall submit
to Landlord such information as Landlord shall require with respect to any
Change Order requested by Tenant. After receipt of requested Change Order,
together with such information as Landlord shall require with respect thereto,
Landlord shall return to Tenant either the executed Change order, which will
evidence Landlord's approval thereof, or the Plans and Specifications with
respect thereto with Landlord's suggested modification.
7. PUNCHLIST. Within thirty (30) days after the Commencement Date,
Tenant shall give Landlord written notice specifying any details of
construction, decoration or mechanical adjustment which remain to be performed
by Landlord with respect to any Work; and except for the details contained in
such written notice from Tenant, all obligations of Landlord in regard to the
Work shall be deemed to have been satisfied. Landlord shall have the right to
enter the Premises to complete any such unfinished details, and entry by
Landlord, its agents, servants, employees or contractors
Page 5 of Exhibit C
<PAGE>
for such purpose shall not relieve Tenant of any of its obligations under the
Lease or impose any liability on Landlord or its agents, servants, employees
or contractors.
8. WHOLE AGREEMENT; NO ORAL MODIFICATION. This Work Letter embodies
all representations, warranties and agreements of Landlord and Tenant with
respect to the matter described herein, and this Work Letter may not be altered
or modified except by an agreement in writing signed by the parties.
9. PARAGRAPH HEADINGS. The paragraph headings contained in this
Work Letter are for convenient reference only and shall not in any way affect
the meaning or interpretation of such paragraphs.
10. NOTICES. All notices required or contemplated hereunder shall be
given to the parties in the manner specified for giving notices under the Lease.
11. BINDING EFFECT. This Work Letter shall be construed under the
laws of the State of Texas and shall be binding upon and shall inure to the
benefit of the parties hereto and their respective permitted successors and
assigns.
12. CONFLICT. In the event of conflict between this Work Letter and
any other exhibits or addenda to this Lease, this Work Letter shall prevail.
Page 6 of Exhibit C
<PAGE>
EXHIBIT D
TO
OFFICE LEASE BETWEEN
TRIZEC ALLEN CENTER LIMITED PARTNERSHIP,
AS LANDLORD,
AND
GATEWAY ENERGY CORPORATION,
AS TENANT
RULES AND REGULATIONS
1. Sidewalks, doorways, vestibules, halls, stairways, and similar
areas shall not be obstructed nor shall refuse, furniture, boxes or other items
be placed therein by Tenant or its officers, agents, servants, and employees, or
used for any purpose other than ingress and egress to and from the leased
premises, or for going from one part of the Building to another part of the
Building. Canvassing, soliciting and peddling in the Building are prohibited.
2. Plumbing fixtures and appliances shall be used only for the
purposes for which constructed, and no unsuitable material shall be placed
therein. Damages resulting from misuse of fixtures or appliances by Tenant, or
its employees, agents or contractors, shall be paid by Tenant.
3. No signs, directories, posters, advertisements, or notices shall
be painted or affixed on or to any of the windows or doors, or in corridors or
other parts of the Building, except in such color, size, and style, and in such
places, as shall be first approved in writing by Landlord in its discretion.
Building standard suite identification signs will be prepared by Landlord at
Tenant's expense. Landlord shall have the right to remove all unapproved signs
without notice to Tenant, at the expense of Tenant.
4. Tenants shall not do, or permit anything to be done in or about
the Building, or bring or keep anything therein, that will in any way increase
the rate of fire or other insurance on the Building, or on property kept therein
or otherwise increase the possibility of fire or other casualty. Electric
current shall not be used for cooking or heating without prior written
permission from Landlord.
5. Landlord shall have the power to prescribe the weight and
position of heavy equipment or objects which may over stress any portion of the
floor. All damage done to the Building by the improper placing of such heavy
items by Tenant, its employees, agents or contractors will be repaired at the
sole expense of Tenant.
Page 1 of Exhibit D
<PAGE>
6. Tenant shall notify the Building manager when safes or other
heavy equipment are to be taken on or out of the Building, and the moving shall
be done after written permission is obtained from Landlord on such conditions as
Landlord shall require.
7. Corridor doors, when not in use, shall be kept closed.
8. All deliveries must be made via the service entrance and service
elevator, when provided, during normal working hours. Landlord's written
approval must be obtained for any delivery after normal working hours.
9. Each tenant shall cooperate with Landlord's employees in keeping
its leased premises neat and clean. Nothing shall be swept or thrown into
corridors, halls, elevator shafts, stairways, or other public areas, nor shall
tenants place any trash receptacles in these areas.
10. Tenants shall not cause or permit any improper noises in the
Building, or allow any unpleasant odors to emanate from the leased premises, or
otherwise interfere, injure or annoy in any way other tenants, or persons having
business with them.
11. No animals shall be brought into or kept in or about the
Building, except guide dogs or similar support animals accompanying persons who
are physically disabled.
12. When conditions are such that Tenant must dispose of crates,
boxes, etc., it will be the responsibility of Tenant to dispose of same prior
to, or after the hours of 7:30 a.m. and 5:30 p.m., respectively.
13. No machinery of any kind, other than ordinary office machines
such as typewriters and calculators, shall be operated on the leased premises
without the prior written consent of Landlord, nor shall a tenant use or keep in
the Building any inflammable or explosive fluid or substance (including
Christmas trees and ornaments), or any illuminating materials, except candles.
No space heaters or fans shall be operated in the Building.
14. No bicycles, motorcycles or similar vehicles will be allowed in
the Building.
15. No nails, hooks, or screws shall be driven into or inserted in
any part of the Building except as approved by Landlord.
16. Landlord has the right to evacuate the Building in the event of
an emergency or catastrophe.
17. No food and/or beverages shall be distributed from Tenant's
office without the prior written approval of the Building manager. At any party
where alcoholic beverages are to be consumed on Building premises, Tenant is
required to have two (2) off-duty policemen attend such party.
Page 2 of Exhibit D
<PAGE>
18. No additional locks shall be placed upon any doors without the
prior written consent of Landlord. Two (2) keys per entry door shall be
furnished by Landlord, and the same shall be surrendered upon termination of
this Lease. Tenant shall then give Landlord or his agent an explanation of the
combination of all locks on doors or vaults. No duplicates of such keys shall
be made by Tenant. Additional keys shall be obtained only from Landlord, at a
fee to be determined by Landlord.
19. Tenants will not locate furnishings or cabinets adjacent to
mechanical or electrical access panels or over air conditioning outlets so as to
prevent operating personnel from servicing such units as routine or emergency
access may require. Cost of moving such furnishings for Landlord's access will
be for Tenant's account. The lighting and air conditioning equipment of the
Building will remain the exclusive charge of the Building designated personnel.
20. Tenant shall comply with parking rules and regulations as may be
posted or distributed from time to time.
21. No portion of the Building shall be used for the purpose of
lodging rooms.
22. Vending machines or dispensing machines of any kind will not be
placed in the leased premises by a tenant without prior written approval by
Landlord.
23. Prior written approval, which shall be at Landlord's sole
discretion, must be obtained for installation of window shades, blinds, drapes
or any other window treatment of any kind whatsoever. Landlord will control all
internal lighting that may be visible from the exterior of the Building and
shall have the right to change any lighting which has not been so approved by
Landlord, without notice to Tenant, at Tenant's expense.
24. No tenant shall make any changes or alterations to any portion of
the Building without Landlord's prior written approval, which may be given on
such conditions as Landlord may elect. All such work shall be done by Landlord
or by contractors and/or workmen approved by Landlord, working under Landlord's
supervision.
25. Tenant and its contractors shall provide Landlord with Material
Safety Data Sheets (MSDS) for all materials or substances being used or stored
in or about the Building. The MSDS will be provided PRIOR to bringing the
materials or substances into the Building.
26. The directory board of the Building will be provided for the
display of the name and location of tenants only. Tenant will be provided one
(1) line or strip on the Building directory board for every two thousand (2,000)
square feet of space. Any additional lines which Tenant shall desire to place
upon said directory board over and above this allowance must first be approved
by Landlord, and if so approved, a charge will be made therefor.
Page 3 of Exhibit D
<PAGE>
27. Tenants shall ensure that the doors of their leased premises are
closed and securely locked and must observe strict care and caution that all
water faucets, water apparatus and utilities are shut off before a tenant and
such tenant's employees leave the leased premises, so as to prevent waste or
damage. On multiple-tenancy floors, all tenants shall keep the door or doors to
the Building corridors closed at all times except for ingress and egress.
28. Tenants shall exercise reasonable precautions in the protection
of their personal property from loss or damage by keeping doors to unattended
area locked. Tenants shall also report any thefts or losses to the Building
manager as soon as reasonably possible after discovery and shall also notify the
Building manager of the presence of any persons whose conduct is suspicious or
causes a disturbance.
29. Firearms of any caliber or make are strictly prohibited from
being carried or stored in the Building. Requests for an exception to this
policy must be submitted in writing to Landlord prior to any introduction of a
firearm in the Building and must detail the reasons for the requested exception.
Any exception permitting a person to carry or store a firearm in the Building
must be in writing signed by Landlord and shall contain such conditions and
provisions as Landlord may specify in its sole discretion. Notwithstanding the
grant of any exception, Landlord shall retain the right to revoke such
permission at any time and for any reason, including without limitation, the
unsafe, rude, offensive, alarming or reckless display or carrying of the
firearms.
30. Landlord shall not be responsible to the tenants, their agents,
employees or invitees for any loss of money, jewelry or other personal property
from the leased premises or public areas or for any damages to any property
therein from any cause whatsoever whether such loss or damage occurs when an
area is locked against entry or not.
31. Movement in or out of the Building of furniture or office
equipment, or dispatch or receipt by tenants of any heavy equipment, bulky
material or merchandise which requires use of elevators or stairways, or
movement through the Building entrances or lobbies shall be restricted to such
hours as Landlord shall designate. All such movement shall be in a manner to be
agreed between the tenants and Landlord in advance. Such pre-arrangement shall
be initiated by the tenant. The time, method, and routing of movement and
limitations for safety or other concern which may prohibit any article,
equipment or other item from being brought into the Building shall be subject to
Landlord's discretion and control. Although Landlord or its personnel may
participate in or assist in the supervision of such movement, the tenant assumes
final responsibility for all risks as to damage to articles moved and injury to
persons or public engaged or not engaged in such movement, including equipment,
property and personnel of Landlord if damages or injured as a result of acts in
connection with carrying out this service for a tenant from time of entering the
property to completion of work. Landlord shall not be liable for acts of any
person engaged in, or any damage or loss to any of said property or persons
resulting from any act in connection with such service performed for a tenant.
Page 4 of Exhibit D
<PAGE>
32. Tenants shall not employ any person for the purpose of cleaning
other than the authorized cleaning and maintenance personnel for the Building
unless otherwise approved in writing by Landlord. To ensure orderly operation
of the Building, Landlord reserves the right to approve all concessionaires,
vending machine operators or other distributors of cold drinks, coffee, food or
other concessions, water, towels, or newspapers.
33. Tenants, their employees, guests and invitees may be called upon
to show suitable identification and/or sign a building register when entering or
leaving the Building at times other than normal Building operating hours. All
tenants shall cooperate fully with Building security personnel in complying with
such requirements.
34. Tenants shall not solicit from or circulate advertising material
among other tenants of the Building except the regular use of the U.S. mail
service. Tenants shall notify the Building manager or the Building security
personnel promptly if it comes to their attention that any unauthorized persons
are soliciting from or causing annoyance to tenants, their employees, guests or
invitees.
35. Landlord reserves the right to deny entrance to the Building or
remove any person or persons from the Building in any case where the conduct of
such person or persons involves a hazard or nuisance to any tenant of the
Building or to the public or in the event of fire or other emergency, riot,
civil commotion or similar disturbance involving risk to the Building, tenants
or the general public.
36. Landlord reserves the right to rescind any of these rules and
make such other and further rules and regulations as in its judgment shall from
time to time be necessary or advisable for the operation of the Building, which
rules shall be binding upon each tenant upon delivery to such tenant of notice
thereof in writing.
Page 5 of Exhibit D
<PAGE>
EXHIBIT E
TO
OFFICE LEASE BETWEEN
TRIZEC ALLEN CENTER LIMITED PARTNERSHIP,
AS LANDLORD,
AND
GATEWAY ENERGY CORPORATION,
AS TENANT
PARKING
This EXHIBIT E ("Parking Exhibit") describes and specifies Tenant's
non-exclusive right to use four (4) parking spaces (collectively, "Spaces")
located on such levels inside one or more of the Building's parking garages as
set forth on SCHEDULE 1 attached to this Parking Exhibit and incorporated herein
by reference, all upon the terms and conditions set forth below. The parking
garage beneath the Building shall be referred to as the "Building Garage." The
parking garage located at 300 Clay Street shall be referred to as the "Allen
Center Parking Garage." The parking garage located at 340 West Dallas Street
shall be referred to as the "Metropolitan Parking Garage." The Building Garage,
Allen Center Parking Garage and Metropolitan Parking Garage may be hereinafter
referred to individually and collectively as the "Parking Garage."
1. DEFINITIONS. The terms which are defined in the Lease shall
have the same meanings in this Parking Exhibit.
2. GRANT AND RENTAL FEE. Provided no event of default has occurred
and is continuing under the Lease, Tenant shall rent on a "must-take" basis the
Spaces during the entire Term at such monthly rates (together with any
applicable tax thereon) and subject to such terms, conditions, and regulations
as are, from time to time, promulgated by Landlord or the manager of the Parking
Garage, as applicable, and charged or applicable to patrons of the Parking
Garage for spaces similarly situated therein. In the event the Premises are
increased or decreased during the Term, the number of Spaces available to Tenant
shall likewise be increased or decreased so that the aggregate number of Spaces
to which Tenant is entitled shall equal one (1) unreserved Space for each one
thousand (1,000) square feet of Rentable Area within the Premises.
3. UNAVAILABILITY OF SPACES. If the Spaces are not available or
become unavailable to Tenant (due to causes beyond the reasonable control of
Landlord) during any portion of the Term of this Lease, Landlord shall make
available to Tenant alternate parking spaces located reasonably near the
Building until the Spaces are made available to Tenant.
Page 1 of Exhibit E
<PAGE>
4. RISK. All motor vehicles (including all contents thereof) shall
be parked in the Spaces at the sole risk of Tenant, its employees, agents,
invitees and licensees, it being expressly agreed and understood that Landlord
has no duty to insure any of said motor vehicles (including the contents
thereof), and that Landlord is not responsible for the protection and security
of such vehicles. Landlord shall have no liability whatsoever for any property
damage and/or personal injury which might occur as a result of or in connection
with the parking of said motor vehicles in any of the Spaces, and Tenant hereby
agrees to indemnify and hold Landlord harmless from and against any and all
costs, claims, expenses, and/or causes of action which Landlord may incur in
connection with or arising out of Tenant's use of the Spaces pursuant to this
Parking Exhibit.
5. NO BAILMENT. It is further agreed that this Parking Exhibit
shall not be deemed to create a bailment between the parties hereto, it being
expressly agreed and understood that the only relationship created between
Landlord and Tenant hereby is that of licensor and licensee, respectively.
6. RULES AND REGULATIONS. In its use of the Spaces, Tenant shall
follow all of the Rules and Regulations of the Building (attached to the Lease
as EXHIBIT D) applicable thereto, any rules and regulations promulgated by
Landlord or the manager of the Parking Garage, as applicable, as the same may be
amended from time to time. Upon the occurrence of any breach of such rules,
failure to make parking rental payments due hereunder or default by Tenant under
the Lease, Landlord shall be entitled to terminate this Parking Exhibit, in
which event Tenant's right to utilize the Spaces shall thereupon automatically
cease.
7. ACCESS. Landlord shall be entitled to utilize whatever access
device Landlord deems necessary (including but not limited to the issuance of
parking stickers or access cards), to assure that only those persons who have
contracted to use spaces in the Parking Garage are using the parking spaces
therein. Landlord currently limits access to the Parking Garage through the use
of a parking entry card system, the cards for which shall be provided by
Landlord. These cards are different from and do not entitle the holder thereof
to an after-hours entry card to the Building (pursuant to the terms of Section
7.04 of the Lease). Landlord agrees to provide to Tenant four (4) parking entry
cards. Tenant further agrees to surrender all parking entry cards in its
possession upon the expiration or earlier termination of this Lease. Landlord
shall be entitled to cancel any lost or stolen cards of which it becomes aware.
Tenant shall promptly notify Landlord of any lost or stolen cards. Tenant shall
pay Landlord for each additional card(s) or for each replacement card(s) for any
card(s) lost by or stolen from Tenant, in such amount as Landlord shall, from
time to time determine, the present charge for such lost or stolen cards being
$10.00 per card. Tenant acknowledges that the parking entry card may also be
the same as the master entry card used for access to the Building during other
than normal business hours, and to the extent the cards are the same, agrees
that the provisions of Section 7.04 of the Lease shall also be applicable and in
the event of a conflict with the provisions of this Parking Exhibit, the
provisions of Section 7.04 shall control. In the event Tenant, its agent or
employees wrongfully park in any of the Parking Garage's spaces, Landlord shall
be entitled and is hereby authorized to have any such vehicle towed away, at
Tenant's sole risk and expense, and Landlord is further authorized to impose
upon Tenant a penalty of $25.00 for each
Page 2 of Exhibit E
<PAGE>
such occurrence. Tenant hereby agrees to pay all amounts falling due
hereunder upon demand therefor, and the failure to pay any such amount shall
additionally be deemed an event of default hereunder and under the Lease,
entitling Landlord to all of its rights and remedies hereunder and thereunder.
Page 3 of Exhibit E
<PAGE>
SCHEDULE 1
TO
EXHIBIT E
TO
OFFICE LEASE BETWEEN
TRIZEC ALLEN CENTER LIMITED PARTNERSHIP,
AS LANDLORD,
AND
GATEWAY ENERGY CORPORATION,
AS TENANT
BUILDING GARAGE
ALLEN CENTER PARKING GARAGE OR METROPOLITAN PARKING GARAGE
RESERVED SPACES
<TABLE>
<CAPTION>
NO. OF SPACES CURRENT MONTHLY
------------- PRICE PER SPACE
---------------
<S> <C>
Allen Center Garage
0 $146.14 (including tax)
1 Metropolitan Parking Garage
$ 97.43 (including tax)
TOTAL RESERVED SPACES: 1
</TABLE>
UNRESERVED SPACES
<TABLE>
<CAPTION>
NO. OF SPACES CURRENT MONTHLY
------------- PRICE PER SPACE
---------------
<S> <C>
0 Building Garage
$200.26 (including tax)
0 Allen Center Garage
$ 97.43 (including tax)
3 Metropolitan Parking Garage
$ 81.19 (including tax)
TOTAL UNRESERVED SPACES: 3
</TABLE>
<PAGE>
EXHIBIT F
TO
OFFICE LEASE BETWEEN
TRIZEC ALLEN CENTER LIMITED PARTNERSHIP,
AS LANDLORD,
AND
GATEWAY ENERGY CORPORATION,
AS TENANT
RENEWAL OPTION
1. Tenant shall have an option (the "Renewal Option") to renew and
extend the term of this Lease for one additional period of five (5) years,
commencing on the day following the Expiration Date and expiring five (5) years
thereafter (the "Renewal Term"). The Renewal Option may only be exercised by
Tenant giving written notice thereof no more than twelve (12) months nor less
than nine (9) months prior to the Expiration Date. If Tenant fails to give
notice of exercise of the Renewal Option within such specified time period, the
Renewal Option shall be deemed waiver and of no further force and effect.
2. Tenant's right to extend this Lease as provided for herein can be
exercised only if, at the time of such exercise and upon the commencement of the
Renewal Term (a) no Event of Default then exists under this Lease, and (b)
Tenant is in possession of the entire Premises (unless Landlord, in its sole
discretion, elects to waive either such condition). If either of such
conditions are not satisfied or waived by Landlord, the Renewal Option shall be
terminated and of no further force and effect, any purported exercise thereof
shall be null and void, and this Lease shall terminate on the Expiration Date.
3. If Tenant shall exercise the Renewal Option (in accordance with
and subject to the provisions of this EXHIBIT F), all of the terms, covenants
and conditions provided in this Lease shall continue to apply during the Renewal
Term, except that (i) the Base Rental during the Renewal Term shall be the then
Prevailing Market Rate (as defined below) for the Premises, and (ii) any terms,
covenants and conditions that are expressly or by their nature inapplicable to
such renewal term (including, without limitation, this EXHIBIT F) shall be
deemed void and of no further force and effect. No assignee of this Lease
(other than an Affiliate) may exercise the Renewal Option. No subtenant of any
portion of the Premises shall have any rights hereunder whatsoever.
4. As used herein, the term "Prevailing Market Rate" means the
annual amount per square foot of Rentable Area within the Premises that a
willing tenant would pay and a willing landlord would accept in arm's length,
bona fide negotiations for a renewal of the Premises to be executed at the time
of determination and to commence at the beginning of the Renewal Term, as
Page 1 of Exhibit F
<PAGE>
determined by Landlord in good faith based upon comparable renewal transactions
made in the Building and in other Class "A" downtown Houston, Texas office
buildings located in the area immediately adjacent to the Building (including
Two Allen Center and Three Allen Center) within the previous twelve (12) months
(taking into consideration the location, quality, and age of the building, floor
level, extent of leasehold improvements (existing or to be provided), rental
abatements, lease takeovers/assumptions, moving expenses and other concessions,
term of lease, extent of services to be provided, distinction between "gross"
and "net" lease, base year or other amounts allowed for escalation purposes
(expense stop), other inducements such as parking spaces or club memberships),
the time the particular rental rate under consideration became or is to become
effective, or any other relevant term or condition. Within thirty (30) days
after receipt of Tenant's notice of exercise of the Renewal Option, Landlord
will notify Tenant in writing of its determination of the Prevailing Market Rate
for the Premises for the Renewal Term. If Tenant disagrees with Landlord's
determination, Tenant shall have a period of thirty (30) days after receipt of
Landlord's notice to withdraw its exercise of the Renewal Option by written
notice to Landlord, in which event the Renewal Option shall be terminated and of
no further force and effect and this Lease shall terminate upon the Expiration
Date. Failure by Tenant to withdraw its exercise of the Renewal Option within
such thirty (30) day period shall be deemed acceptance by Tenant of Landlord's
determination of the Prevailing Market Rate for the Renewal Term.
Page 2 of Exhibit F
<PAGE>
EXHIBIT G
TO
OFFICE LEASE BETWEEN
TRIZEC ALLEN CENTER LIMITED PARTNERSHIP,
AS LANDLORD,
AND
GATEWAY ENERGY CORPORATION,
AS TENANT
MANDATORY EXPANSION
1. As material consideration to Landlord to enter into this Lease,
Tenant has agreed to expand the initial Premises by leasing no less than 1,465
square feet (approximate) of Rentable Area being Suite 2610 located on Floor 26
of the Building (the "Expansion Premises") not later than November 1, 1998 (the
"Required Expansion Date"). If, prior to the Required Expansion Date, Carrigan,
Lapin, Landa & Wilde, L.L.P. cancels its expansion rights with respect to
approximately 1,091 square feet of Rentable Area contiguous to the Expansion
Premises, the Expansion Premises shall automatically be expanded to include such
additional space for a total of 2,556 square feet of Rentable Area which Tenant
must lease. The Rentable Area of the entire Expansion Premises leased by Tenant
hereunder shall be verified by both Landlord's architect and Tenant's architect
prior to Tenant's expansion.
2. Tenant will execute and return to Landlord an amendment to the
Lease adding the Expansion Premises or such other documentation as Landlord
shall reasonably require in order to confirm the leasing of the Expansion
Premises within thirty (30) days after Tenant's receipt of such documentation.
Tenant shall have the right to occupy the Expansion Premises prior to the
Required Expansion Date subject to all terms and conditions of the Lease other
than the payment of Rent, which shall not commence until the Required Expansion
Date. Tenant's lease of the Expansion Premises shall commence on the Required
Expansion Date and shall terminate on the Expiration Date.
3. The Base Rental for the Expansion Premises shall be $20.00 per
square feet of Rentable Area within the Expansion Premises per year. Tenant's
obligation to pay Rent with respect to the Expansion Premises shall commence,
and Tenant's proportionate share of Operating Expenses shall be increased based
on the Rentable Area of the Expansion Premises on the Required Expansion Date.
4. Tenant shall be entitled to an Allowance from Landlord of $5.00
per square foot of Rentable Area within the Expansion Premises for the
construction of leasehold improvements within the Expansion Premises in
accordance with the terms and conditions of the Workletter. Such
Page 1 of Exhibit G
<PAGE>
Allowance shall be funded by Landlord within thirty (30) days following the
later to occur of (i) Landlord's receipt of the final invoices and lien waivers
required by Paragraph 3 of the Workletter documenting the Work with respect to
the Expansion Premises or (ii) the Required Expansion Date. Landlord shall
apply that portion of the Allowance not utilized by Tenant, against Rent next
due from Tenant.
5. Upon request of Landlord at any time after the Required Expansion
Date, Tenant shall execute and deliver to Landlord a declaration (in a form
provided by Landlord) specifying (i) the Base Rental schedule for the Expansion
Premises, (ii) the Rentable Area of the Expansion Premises, and (iii) Tenant's
revised proportionate share of Operating Expenses with respect to the Expansion
Premises.
6. Tenant may improve the unoccupied portion of the Expansion
Premises simultaneously with the installation of Initial Improvements within the
initial Premises; however Rent shall not commence with respect to the Expansion
Premises until the Required Expansion Date.
7. Tenant shall rent on a "must-take" basis commencing on the
Required Expansion Date either two (2) or three (3) (depending on the size of
the Expansion Premises) unreserved parking spaces in the Metropolitan Parking
Garage in accordance with the terms and conditions of EXHIBIT E to the Lease.
8. Notwithstanding the foregoing, Tenant shall have the right to
cancel the Lease with respect to the Expansion Premises only by written notice
to Landlord delivered on or prior to August 31, 1998.
Page 2 of Exhibit G
<PAGE>
SCHEDULE 1 TO EXHIBIT G
ONE ALLEN CENTER
ARCHITECTURAL PLAN MANDATORY EXPANSION
HOUSTON, TEXAS SPACE
R=2,556
U=2,116
F=1.2078
[FLOOR PLAN]
<PAGE>
=============================================================================
AGREEMENT AND PLAN OF MERGER
By and Among
Gateway Energy Corporation
Gateway Processing Company
and
Abtech Resources, Inc.
DATED AS OF
JULY 1, 1998
=============================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I TERMS OF THE MERGER . . . . . . . . . . . . . . . . . . . . . . . .I-1
1.1 The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-1
1.2 Effective Time. . . . . . . . . . . . . . . . . . . . . . . . . . .I-1
1.3 Merger Consideration. . . . . . . . . . . . . . . . . . . . . . . .I-2
1.4 Surrender and Exchange of Shares; Payment of
Merger Consideration . . . . . . . . . . . . . . . . . . . . . . .I-2
1.5 Other Effects of Merger . . . . . . . . . . . . . . . . . . . . . .I-3
1.6 Private Offering. . . . . . . . . . . . . . . . . . . . . . . . . .I-3
1.7 Tax-Free Reorganization . . . . . . . . . . . . . . . . . . . . . .I-3
1.8 Additional Actions. . . . . . . . . . . . . . . . . . . . . . . . .I-3
ARTICLE II REPRESENTATIONS, WARRANTIES AND CERTAIN
COVENANTS OF ABTECH . . . . . . . . . . . . . . . . . . . . . . . .I-3
2.1 Organization and Good Standing. . . . . . . . . . . . . . . . . . .I-3
2.2 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . .I-4
2.3 Authorization; Binding Agreement. . . . . . . . . . . . . . . . . .I-4
2.4 Governmental Approvals. . . . . . . . . . . . . . . . . . . . . . .I-4
2.5 No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . .I-5
2.6 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-5
2.7 Abtech Financial Statements . . . . . . . . . . . . . . . . . . . .I-5
2.8 Absence of Certain Changes or Events. . . . . . . . . . . . . . . .I-6
2.9 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . .I-6
2.10 Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-6
2.11 Finders and Investment Bankers. . . . . . . . . . . . . . . . . . .I-6
2.12 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-6
2.13 Taxes and Returns . . . . . . . . . . . . . . . . . . . . . . . . .I-6
ARTICLE III REPRESENTATIONS, WARRANTIES AND CERTAIN COVENANTS
OF GATEWAY. . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-7
3.1 Organization and Good Standing. . . . . . . . . . . . . . . . . . .I-7
3.2 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . .I-8
3.3 Authorization; Binding Agreement. . . . . . . . . . . . . . . . . .I-8
3.4 Governmental Approvals. . . . . . . . . . . . . . . . . . . . . . .I-8
3.5 No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . .I-8
3.6 Securities Filings and Litigation . . . . . . . . . . . . . . . . .I-9
3.7 Gateway Financial Statements . . . . . . . . . . . . . . . . . . I-10
3.8 Absence of Certain Changes or Events. . . . . . . . . . . . . . . I-10
3.9 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . I-10
I-i
<PAGE>
ARTICLE IV ADDITIONAL COVENANTS OF ABTECH. . . . . . . . . . . . . . . . . . I-10
4.1 Conduct of Business of Abtech . . . . . . . . . . . . . . . . . . I-10
4.2 Notification of Certain Matters . . . . . . . . . . . . . . . . . I-12
4.3 Access and Information. . . . . . . . . . . . . . . . . . . . . . I-12
4.4 Shareholder Approval. . . . . . . . . . . . . . . . . . . . . . . I-12
4.5 Reasonable Business Efforts . . . . . . . . . . . . . . . . . . . I-13
4.6 Public Announcements . . . . . . . . . . . . . . . . . . . . . . I-13
4.7 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . I-13
4.8 Tax Opinion Certification . . . . . . . . . . . . . . . . . . . . I-13
ARTICLE V ADDITIONAL COVENANTS OF GATEWAY . . . . . . . . . . . . . . . . . I-14
5.1 Conduct of Business of Gateway . . . . . . . . . . . . . . . . . I-14
5.2 Notification of Certain Matters . . . . . . . . . . . . . . . . . I-15
5.3 Access and Information. . . . . . . . . . . . . . . . . . . . . . I-15
5.4 Reasonable Business Efforts . . . . . . . . . . . . . . . . . . . I-16
5.5 Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . I-16
5.6 SEC Filings, Shareholder Notices and News Releases. . . . . . . . I-16
ARTICLE VI CONDITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . I-16
6.1 Conditions to Each Party's Obligations. . . . . . . . . . . . . . I-16
6.1.1 Shareholder Approval. . . . . . . . . . . . . . . . . . . . . . . I-16
6.1.2 No Injunction or Action . . . . . . . . . . . . . . . . . . . . . I-16
6.1.3 Required Consents . . . . . . . . . . . . . . . . . . . . . . . . I-17
6.1.4 Blue Sky . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-17
6.1.5 Tax Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . I-17
6.2 Conditions to Obligations of Abtech . . . . . . . . . . . . . . . I-17
6.2.1 Gateway Representations and Warranties. . . . . . . . . . . . . . I-17
6.2.2 Performance by Gateway. . . . . . . . . . . . . . . . . . . . . . I-17
6.2.3 No Material Adverse Change. . . . . . . . . . . . . . . . . . . . I-17
6.2.4 Certificates and Other Deliveries . . . . . . . . . . . . . . . . I-17
6.3 Conditions to Obligations of Gateway. . . . . . . . . . . . . . . I-18
6.3.1 Abtech Representations and Warranties . . . . . . . . . . . . . . I-18
6.3.2 Performance by Abtech . . . . . . . . . . . . . . . . . . . . . . I-18
6.3.3 No Material Adverse Change . . . . . . . . . . . . . . . . . . . I-18
6.3.4 Certificates and Other Deliveries . . . . . . . . . . . . . . . . I-18
6.3.5 Balance Sheet Items . . . . . . . . . . . . . . . . . . . . . . . I-19
ARTICLE VII TERMINATION AND ABANDONMENT
7.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . I-19
7.2 Effect of Termination and Abandonment . . . . . . . . . . . . . . I-20
7.3 Procedure Upon Termination . . . . . . . . . . . . . . . . . . . I-20
I-ii
<PAGE>
ARTICLE VIII MISCELLANEOUS
8.1 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . I-20
8.2 Amendment and Modification . . . . . . . . . . . . . . . . . . . I-21
8.3 Waiver of Compliance; Consents . . . . . . . . . . . . . . . . . I-21
8.4 Survival of Representations and Warranties . . . . . . . . . . . I-21
8.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-22
8.6 Binding Effect; Assignment. . . . . . . . . . . . . . . . . . . . I-22
8.7 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-23
8.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . I-23
8.9 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . I-23
8.10 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . I-23
8.11 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . I-23
8.12 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . I-23
8.13 Specific Performance . . . . . . . . . . . . . . . . . . . . . . I-23
8.14 Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . I-24
8.15 By-Law Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . I-24
</TABLE>
I-iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (the "AGREEMENT") made and entered into
as of July 1, 1998, by and among Gateway Energy Corporation, a Delaware
corporation ("GATEWAY"), Gateway Processing Company, a Texas corporation and
wholly owned subsidiary of Gateway ("GATEWAY PROCESSING"), and Abtech Resources,
Inc., a Texas corporation ("ABTECH").
RECITALS
A. The respective Boards of Directors of Abtech, Gateway Processing and
Gateway have approved the merger (the "MERGER") of Abtech with and into Gateway
Processing in accordance with the laws of the State of Texas and the provisions
of this Agreement.
B. Abtech, Gateway Processing and Gateway desire to make certain
representations, warranties and agreements in connection with, and establish
various conditions precedent to, the Merger.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements hereinafter set forth, the parties hereto
agree as follows:
ARTICLE I
TERMS OF THE MERGER
1.1 THE MERGER. Upon the terms and subject to the conditions of this
Agreement, the Merger shall be consummated in accordance with the Texas Business
Corporation Act (the "TEXAS ACT"). At the Effective Time (as defined in
SECTION 1.2 below), upon the terms and subject to the conditions of this
Agreement, Abtech shall be merged with and into Gateway Processing in accordance
with the Texas Act and the Texas Act and the separate existence of Abtech shall
thereupon cease, and Gateway Processing, as the surviving corporation in the
Merger (the "SURVIVING CORPORATION"), shall continue its corporate existence
under the laws of the State of Texas as a subsidiary of Gateway. The parties
shall prepare and execute a certificate of merger (the "CERTIFICATE OF MERGER")
in order to comply in all respects with the requirements of the Texas Act and
with the provisions of this Agreement.
1.2 EFFECTIVE TIME. The Merger shall become effective at the time of the
filing of a Certificate of Merger with the Secretary of State of Texas in
accordance with the applicable provisions of the Texas Act or at such later time
as may be specified in the Certificate of Merger. The Certificate of Merger
shall be filed as soon as practicable after all of the conditions set forth in
this Agreement have been satisfied or waived by the party or parties entitled to
the benefit of the same. Gateway and Abtech shall mutually determine the time
of such filing and the place where the closing of the Merger (the "CLOSING")
shall occur. The time when
I-1
<PAGE>
the Merger shall become effective is herein referred to as the "EFFECTIVE
TIME" and the date on which the Effective Time occurs is herein referred to
as the "CLOSING DATE."
1.3 MERGER CONSIDERATION. Subject to the provisions of this Agreement and
any applicable backup or other withholding requirements, each of the issued and
outstanding shares (the "ABTECH SHARES") of common stock, par value $1.00 per
share, of Abtech (the "ABTECH COMMON STOCK") as of the Effective Time shall be
converted into the right to receive, and there shall be paid and issued as
hereinafter provided, in exchange for each of the Abtech Shares, either 33.536
shares of Gateway common stock, $0.25 par value per share ("GATEWAY STOCK") or
$29.33 cash (collectively the "MERGER CONSIDERATION"). The exact amount of the
Merger Consideration to be payable to each holder (the "SELLING SHAREHOLDER" and
collectively "SELLING SHAREHOLDERS") of Abtech Common Stock is as follows:
<TABLE>
<CAPTION>
Number of Shares of
Name Abtech Common Stock Owned Merger Consideration
<S> <C> <C>
Michael Fadden 8,200 275,000 shares of
Gateway Stock
Advanced Extraction 1,500 $ 44,000.00
Technologies, Inc.
Thomas Warren 300 10,061 shares of
Gateway Stock
</TABLE>
1.4 SURRENDER AND EXCHANGE OF SHARES; PAYMENT OF MERGER CONSIDERATION. (a)
Prior to the Closing Date, Gateway shall distribute to the Selling Shareholders
the Transmittal and Representation letter attached as EXHIBIT 1 to this
Agreement. On the Closing Date, each holder of an Abtech Share shall surrender
and deliver the Certificates to Gateway together with a duly completed and
executed Transmittal and Representation Letter. Upon such surrender and
delivery, the holder shall receive a certificate representing the number of
whole shares of Gateway Stock and cash into which such holder's Abtech Shares
have been converted pursuant to this Agreement. Until so surrendered and
exchanged, each outstanding Certificate after the Effective Time shall be deemed
for all purposes to evidence the right to the Merger Consideration.
(a) At the Effective Time, the stock transfer books of Abtech shall be
closed and no transfer of Abtech Shares shall be made thereafter, other than
transfers of Abtech Shares that have occurred prior to the Effective Time. In
the event that, after the Effective Time, Certificates are presented to the
Surviving Corporation, they shall be canceled and exchanged for the Merger
Consideration as provided in SECTION 1.3.
1.5 OTHER EFFECTS OF MERGER. The Merger shall have all further effects as
specified in the applicable provisions of the Texas Act.
I-2
<PAGE>
1.6 PRIVATE OFFERING. The exchange of the Abtech Common Stock for the
Gateway Stock shall be effected pursuant to Section 4(2) of the Securities Act
of 1933, as amended ("SECURITIES ACT") and Sections 5.G and 5.I of the Texas
Securities Act. Michael T. Fadden and Thomas Warren will be provided a Gateway
Form 10-KSB for the Year Ended February 28, l998 and a definitive proxy
statement for the 1998 Annual Meeting of Shareholders along with a copy of this
Agreement. Messrs Fadden and Warren will be required to execute and deliver to
Gateway a Transmittal and Representation Letter in the form contained as Exhibit
1 hereto. The certificates for the Gateway Stock shall contain a legend
reflecting the appropriate resale restrictions under Section 4(2) of the
Securities Act.
1.7 TAX-FREE REORGANIZATION. The parties intend that the Merger qualify
as a reorganization within the meaning of Section 368 (a) of the Internal
Revenue Code of 1986, as amended, and the regulations thereunder (the "CODE").
None of the parties will knowingly take any action that would cause the Merger
to fail to qualify as a reorganization within the meaning of Section 368(a) of
the Code.
1.8 ADDITIONAL ACTIONS. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of Gateway Processing or Abtech or otherwise to carry out
this Agreement, the officers and directors of the Surviving Corporation shall be
authorized to execute and deliver, in the name and on behalf of Gateway
Processing or Abtech, all such deeds, bills of sale, assignments and assurances
and to take and do, in the name and on behalf of Gateway Processing or Abtech,
all such other actions and things as may be necessary or desirable to vest,
perfect or confirm any and all right, title and interest in, to and under such
rights, properties or assets in the Surviving Corporation or otherwise to carry
out this Agreement.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND CERTAIN
COVENANTS OF ABTECH
Abtech represents, warrants and/or covenants to and with Gateway as
follows:
2.1 ORGANIZATION AND GOOD STANDING. Abtech is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas and has all requisite corporate or partnership power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. Abtech is duly qualified or licensed and in good standing to do
business in each jurisdiction in which the character of the property owned,
leased or operated by it or the nature of the business conducted by it makes
such qualification or licensing necessary, except where the failure to be so
duly qualified or licensed and in good standing would not have a material
adverse effect
I-3
<PAGE>
on the business, assets (including, but not limited to, intangible assets),
prospects, condition (financial or otherwise), properties (including, but not
limited to, intangible properties), liabilities or the results of operations
of Abtech (ABTECH MATERIAL ADVERSE EFFECT"). Abtech has heretofore made
available to Gateway accurate and complete copies of the Articles of
Incorporation and Bylaws, as currently in effect, of Abtech.
2.2 CAPITALIZATION. As of the date hereof, the authorized capital stock
of Abtech consists of 10,000 shares of Abtech Common Stock. As of the date
hereof, all 10,000 shares of Abtech Common Stock were issued and outstanding.
No other capital stock of Abtech is authorized or issued. All issued and
outstanding shares of the Abtech Common Stock are duly authorized, validly
issued, fully paid and non-assessable and were issued free of preemptive rights
and in compliance with applicable securities laws. Thereof there are no
outstanding rights, subscriptions, warrants, puts, calls, unsatisfied preemptive
rights, options or other agreements of any kind relating to any of the
outstanding, authorized but unissued, unauthorized or treasury shares of the
capital stock or any other security of Abtech, and there is no authorized or
outstanding security of any kind convertible into or exchangeable for any such
capital stock or other security. There are no restrictions upon the transfer of
or otherwise pertaining to the securities (including, but not limited to, the
ability to pay dividends thereon) or retained earnings of Abtech or the
ownership thereof other than those imposed by the Securities Act, applicable
state securities laws or applicable corporate law.
2.3 AUTHORIZATION; BINDING AGREEMENT. Abtech has all requisite corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby, including, but not
limited to, the Merger, have been duly and validly authorized by Abtech's Board
of Directors and no other corporate proceedings on the part of Abtech are
necessary to authorize the execution and delivery of this Agreement or to
consummate the transactions contemplated hereby (other than the adoption of this
Agreement by the shareholders of Abtech in accordance with the Texas Act and the
Articles of Incorporation and Bylaws of Abtech). This Agreement has been duly
and validly executed and delivered by Abtech and constitutes, and upon execution
and delivery thereof as contemplated by this Agreement will constitute, the
legal, valid and binding agreement of Abtech, enforceable against Abtech in
accordance with its terms, except to the extent that enforceability thereof may
be limited by applicable bankruptcy, insolvency, reorganization or other similar
laws affecting the enforcement of creditors' rights generally and by principles
of equity regarding the availability of remedies ("ENFORCEABILITY EXCEPTIONS".)
2.4 GOVERNMENTAL APPROVALS. No consent, approval, waiver or authorization
of, notice to or declaration or filing with ("CONSENT") any nation or
government, any state or other political subdivision thereof, any entity,
authority or body exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, including, without
limitation, any governmental or regulatory authority, agency, department, board,
commission,
I-4
<PAGE>
administration or instrumentality, any court, tribunal or arbitrator and any
self-regulatory organization ("GOVERNMENTAL AUTHORITY") on the part of Abtech
is required in connection with the execution or delivery by Abtech of this
Agreement or the consummation by Abtech of the transactions contemplated
hereby other than (i) the filing of the Certificate of Merger with the
Secretary of State of Texas in accordance with the Texas Act, (ii) filings
with state securities laws administrators, and (iii) such filings as may be
required in any jurisdiction where Abtech is qualified or authorized to do
business as a foreign corporation in order to maintain such qualification or
authorization.
2.5 NO VIOLATIONS. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and compliance by Abtech
with any of the provisions hereof will not (i) conflict with or result in any
breach of any provision of the Articles of Incorporation or Bylaws or other
governing instruments of Abtech, (ii) require any Consent under or result in a
violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation
or acceleration or augment the performance required) under any of the terms,
conditions or provisions of any Abtech Material Contract (as hereinafter
defined), (iii) result in the creation or imposition of any lien or encumbrance
of any kind upon any of the assets of Abtech, or (iv) contravene any applicable
provision of any constitution, treaty, statute, law, code, rule, regulation,
ordinance, policy or order of any Governmental Authority or other matters having
the force of law including, but not limited to, any orders, decisions,
injunctions, judgments, awards and decrees of or agreements with any court or
other Governmental Authority ( "Law",) currently in effect to which Abtech
assets or properties are subject, except in the case of clauses (ii), (iii) and
(iv), above, for any deviations from the foregoing which do not or would not
have a Abtech Material Adverse Effect.
2.6 LITIGATION. There is no action, cause of action, claim, demand, suit,
proceeding, citation, summons, subpoena, inquiry or investigation of any nature,
civil, criminal, regulatory or otherwise, in law or in equity, by or before any
court, tribunal, arbitrator or other Governmental Authority ("LITIGATION")
pending, or to the knowledge of Abtech, threatened against Abtech, any officer,
director, employee or agent thereof in his or her capacity as such, or otherwise
relating to Abtech or its securities or any properties or rights of Abtech.
Further, Abtech management is unaware of any facts based upon which Litigation
could be initiated against Abtech.
2.7 ABTECH FINANCIAL STATEMENTS. The unaudited financial statements of
Abtech for the year ended December 31, 1997 (the "ABTECH FINANCIAL STATEMENTS")
present fairly, in all material respects, the financial position of Abtech as of
December 31, 1997.
2.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1997,
through the date of this Agreement, there has not been (i) any event,
occurrence,
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fact, condition, change, development or effect ("EVENT") that has had or
could reasonably be expected to have a Abtech Material Adverse Effect; or
(ii) any declaration, payment or setting aside for payment of any dividend
(other than a pre-closing cash dividend not to exceed $5,000.00) or other
distribution or any redemption, purchase or other acquisition of any shares
of capital stock or securities of Abtech by or from Abtech.
2.9 COMPLIANCE WITH LAWS. The business of Abtech has been operated in
compliance with all Laws and all tariffs, rules and regulations applicable to
the its business except for any instances of non-compliance which do not and
will not have a Abtech Material Adverse Effect.
2.10 PERMITS. (i) Abtech has all permits, certificates, licenses,
approvals, tariffs and other authorizations required in connection with the
operation of their business (collectively, "ABTECH PERMITS"), (ii) Abtech is
not in violation of any Abtech Permit, and (iii) no proceedings are pending or,
to the knowledge of Abtech, threatened, to revoke or limit any Abtech Permit,
except, in each case, those the absence or violation of which do not and will
not have a Abtech Material Adverse Effect.
2.11 FINDERS AND INVESTMENT BANKERS. Neither Abtech nor any of its
officers or directors has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated hereby.
2.12 CONTRACTS. Except for the Agreement dated April 27, 1994 as amended
through January 6, 1997 between Abtech and Advanced Extraction Technologies,
Inc. ("AET AGREEMENT"), Abtech is neither a party nor is subject to any
material note, bond, mortgage, indenture, contract, lease, license, agreement,
or instrument, ("ABTECH MATERIAL CONTRACT"), which Abtech Material Contract may
be oral or in writing. The AET Agreement is valid and binding and is in full
force and effect and enforceable against Abtech in accordance with its terms.
The AET Agreement shall continue in full force and effect in accordance with its
terms without penalty, acceleration or rights of early termination by reason of
the consummation of the transactions contemplated by this Agreement. Abtech is
not in violation or breach of or default under the AET Agreement.
2.13 TAXES AND RETURNS.
(a) Abtech has timely filed, or caused to be timely filed all material
Tax Returns required to be filed by it, and has paid, collected or withheld, or
caused to be paid, collected or withheld, all material amounts of Taxes required
to be paid, collected or withheld, other than such Taxes for which adequate
reserves in the Abtech Financial Statements have been established or which are
being contested in good faith. There are no claims or assessments pending
against Abtech for any alleged deficiency in any Tax, and Abtech has not been
notified in writing of any proposed Tax claims or assessments against Abtech
(other than in each case, claims or assessments for which adequate reserves in
the Abtech Financial Statements have been established or which are being
contested in good
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faith or are immaterial in amount). Abtech has not executed any waivers or
extensions of any applicable statute of limitations to assess any material
amount of Taxes. There are no outstanding requests by Abtech for any
extension of time within which to file any material Tax Return or within
which to pay any material amounts of Taxes shown to be due on any return.
(b) To the best knowledge of Abtech, there are no liens for material
amounts of Taxes on the assets of Abtech except for statutory liens for current
Taxes not yet due and payable.
(c) For purposes of this Agreement, the term "TAX" shall mean any federal,
state, local, foreign or provincial income, gross receipts, property, sales,
use, license, excise, franchise, employment, payroll, alternative or added
minimum, ad valorem, transfer or excise tax, or any other tax, custom, duty,
governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest or penalty imposed by any Governmental Authority.
The term "TAX RETURN" shall mean a report, return or other information
(including any attached schedules or any amendments to such report, return or
other information) required to be supplied to or filed with a governmental
entity with respect to any Tax, including an information return, claim for
refund, amended return or declaration or estimated Tax.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND
CERTAIN COVENANTS OF GATEWAY
Gateway represents, warrants and/or covenants to and with Abtech as
follows:
3.1 ORGANIZATION AND GOOD STANDING. Gateway and Gateway Processing each
is a corporation duly organized, validly existing and in good standing under the
laws of the States of Delaware and Texas, respectively, and each has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as now being conducted. Gateway is duly qualified
or licensed and in good standing to do business in each jurisdiction in which
the character of the property owned, leased or operated by it or the nature of
the business conducted by it makes such qualification or licensing necessary,
except where the failure to be so duly qualified or licensed and in good
standing would not have a material adverse effect on the business, assets
(including, but not limited to, intangible assets), prospects, condition
(financial or otherwise), properties (including, but not limited to, intangible
properties), liabilities or the results of operations of Gateway taken as a
whole ("GATEWAY MATERIAL ADVERSE EFFECT"). Gateway has heretofore made
available to Abtech accurate and complete copies of the Certificate of
Incorporation and Bylaws, as currently in effect, of Gateway.
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3.2 CAPITALIZATION. As of the date hereof, the authorized capital stock
of Gateway consists of 17,500,000 shares of Gateway Stock. As of July 1, 1998,
14,457,400 shares of Gateway Stock were issued and outstanding. No other
capital stock of Gateway is authorized or issued. All issued and outstanding
shares of the Gateway Stock are duly authorized, validly issued, fully paid and
non-assessable and were issued free of preemptive rights and in compliance with
applicable securities laws. Except as set forth in the Gateway Securities
Filings (as hereinafter defined) or as otherwise contemplated by this Agreement,
as of the date hereof there are no outstanding rights, subscriptions, warrants,
puts, calls, unsatisfied preemptive rights, options or other agreements of any
kind relating to any of the outstanding, authorized but unissued, unauthorized
or treasury shares of the capital stock or any other security of Gateway, and
there is no authorized or outstanding security of any kind convertible into or
exchangeable for any such capital stock or other security. Except as disclosed
in the Gateway Securities Filings, there are no restrictions upon the transfer
of or otherwise pertaining to the securities (including, but not limited to, the
ability to pay dividends thereon) or retained earnings of Gateway or the
ownership thereof other than those imposed by the Securities Act, the Securities
Exchange Act, applicable state securities laws or applicable corporate law.
3.3 AUTHORIZATION; BINDING AGREEMENT. Gateway and Gateway Processing have
all requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transaction
contemplated hereby, including, but not limited to, the Merger, have been duly
and validly authorized by the respective Boards of Directors of Gateway and
Gateway Processing, as appropriate, and no other corporate proceedings on the
part of Gateway or Gateway Processing are necessary to authorize the execution
and delivery of this Agreement or to consummate the transactions contemplated
hereby or thereby (other than the requisite approval by the sole shareholder of
Gateway Processing of this Agreement and the Merger). This Agreement has been
duly and validly executed and delivered by each of Gateway and Gateway
Processing and constitutes, and upon execution and delivery thereof as
contemplated by this Agreement, will constitute, the legal, valid and binding
agreements of Gateway and Gateway Processing, enforceable against each of
Gateway and Gateway Processing in accordance with its terms, subject to the
Enforceability Exceptions.
3.4 GOVERNMENTAL APPROVALS. No Consent from or with any Governmental
Authority on the part of Gateway is required in connection with the execution or
delivery by Gateway of this Agreement or the consummation by Gateway of the
transactions contemplated hereby or thereby.
3.5 NO VIOLATIONS. The execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby and thereby and compliance
by Gateway with any of the provisions hereof or thereof will not (i) conflict
with or result in any breach of any provision of the Certificate of
Incorporation or Bylaws or other governing instruments of Gateway, (ii) require
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any Consent under or result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation or acceleration or augment the performance
required) under any of the terms, conditions or provisions of any Gateway
Material Contract (as hereinafter defined), (iii) result in the creation or
imposition of any lien or encumbrance of any kind upon any of the assets of
Gateway, or (iv) contravene any Law currently in effect to which Gateway or its
or any of its assets or properties is subject, except in the case of clauses
(ii), (iii) and (iv), above, for any deviations from the foregoing which do not
or would not have an Gateway Material Adverse Effect.
3.6 SECURITIES FILINGS AND LITIGATION. Gateway has made available to
Abtech true and complete copies of (i) its Annual Report on Form 10-KSB, for
the year ended February 28, 1998, as filed with the Securities and Exchange
Commission ("SEC") and (ii) its proxy statement relating to the annual meeting
of shareholders of Gateway for 1998, as filed with the SEC. The reports and
statements set forth in clauses (i) and (ii), above, and those subsequently
provided or required to be provided pursuant to this Section, are referred to
collectively as the "GATEWAY SECURITIES FILINGS"). As of their respective
dates, or as of the date of the last amendment thereof, if amended after filing,
none of the Gateway Securities Filings (including all schedules thereto and
disclosure documents incorporated by reference therein), contained or, as to
Gateway Securities Filings subsequent to the date hereof, will contain any
untrue statement of a material fact or omitted or, as to Gateway Securities
Filings subsequent to the date hereof, will omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. Each of
the Gateway Securities Filings at the time of filing or as of the date of the
last amendment thereof, if amended after filing, complied or, as to Gateway
Securities Filings subsequent to the date hereof, will comply in all material
respects with the Securities Exchange Act or the Securities Act, as applicable.
There is no Litigation pending or, to the knowledge of Gateway, threatened
against Gateway, any officer, director, employee or agent thereof, in his
official capacity as such, or as a fiduciary with respect to any Gateway Benefit
Plan, as hereinafter defined, or otherwise relating to Gateway or the
securities of any of them, or any properties or rights of Gateway or any Gateway
Benefit Plan which is required to be described in any Gateway Securities Filing
that is not so described. No event has occurred as a consequence of which
Gateway would be required to file a Current Report on Form 8-K pursuant to the
requirements of the Securities Exchange Act as to which such a report has not
been timely filed with the SEC. Any reports, statements and registration
statements and amendments thereof (including, without limitation, Reports on
Form 10-KSB, Quarterly Reports on Form 10-QSB and Current Reports on Form 8-K,
as amended) filed by Gateway with the SEC after the date hereof shall be
provided to Abtech on the date of such filing.
3.7 GATEWAY FINANCIAL STATEMENTS. The audited consolidated financial
statements and unaudited interim financial statements of Gateway included in the
Gateway Securities Filings (the "GATEWAY FINANCIAL STATEMENTS") have been
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prepared in accordance with generally accepted accounting principles applied on
a consistent basis (except as may be indicated therein or in the notes thereto)
and present fairly, in all material respects, the financial position of Gateway
as at the dates thereof and the results of their operations and cash flows for
the periods then ended subject, in the case of the unaudited interim financial
statements, to normal year-end audit adjustments, any other adjustments
described therein and the fact that certain information and notes have been
condensed or omitted in accordance with the Securities Exchange Act.
3.8. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in the
Gateway Securities Filings and as described below, since February 28, 1998
through the date of this Agreement, there has not been: (i) any Event that has
had or could reasonably be expected to have an Gateway Material Adverse Effect;
or (ii) any declaration, payment or setting aside for payment of any dividend or
other distribution or any redemption, purchase or other acquisition of any
shares of capital stock or securities of Gateway by or from Gateway.
3.9 COMPLIANCE WITH LAWS. The business of Gateway has been operated in
compliance with all Laws applicable to its business, except for any instances of
non-compliance which do not and will not have an Gateway Material Adverse
Effect.
ARTICLE IV
ADDITIONAL COVENANTS OF ABTECH
Abtech represents, covenants and agrees as follows:
4.1 CONDUCT OF BUSINESS OF ABTECH. Except as expressly contemplated by
this Agreement, during the period from the date of this Agreement to the
Effective Time, Abtech shall conduct its business in the ordinary course and
consistent with past practice, subject to the limitations contained in this
Agreement, and Abtech shall use its reasonable business efforts to preserve
intact its business organization, to keep available the services of its officers
and to maintain satisfactory relationships with all persons with whom it does
business. Without limiting the generality of the foregoing, and except as
otherwise expressly provided in this Agreement, after the date of this Agreement
and prior to the Effective Time, Abtech will not, without the prior written
consent of Gateway:
(i) amend or propose to amend its Articles of Incorporation or
Bylaws in any material respect;
(ii) authorize for issuance, issue, grant, sell, pledge, dispose of
or propose to issue, grant, sell, pledge or dispose of any shares of, or
any options, warrants, commitments, subscriptions or rights of any kind to
acquire or sell any shares of, the capital stock or other securities of
Abtech including, but not limited to, any securities convertible into or
exchangeable for shares of stock of any class of Abtech; and
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(iii) split, combine or reclassify any shares of its capital stock or
declare, pay or set aside any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock, or directly or indirectly redeem, purchase or otherwise
acquire or offer to acquire any shares of its capital stock or other
securities;
(iv) other than in the ordinary course of business consistent with
past practice, (a) create, incur or assume any debt or obligations in
respect of capital leases, except refinancings of existing obligations on
terms that are no less favorable to Abtech than the existing terms; (b)
assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, indirectly, contingently or otherwise) for the
obligations of any person; (c) make any capital expenditures or make any
loans, advances or capital contributions to, or investments in, any other
person (other than customary travel, relocation or business advances to
employees made in the ordinary course of business consistent with past
practice); (d) acquire the stock or assets of, or merge or consolidate
with, any other person; (e) voluntarily incur any material liability or
obligation (absolute, accrued, contingent or otherwise); or (f) sell,
transfer, mortgage, pledge or otherwise dispose of, or encumber, or agree
to sell, transfer, mortgage, pledge or otherwise dispose of or encumber,
any assets or properties, real, personal or mixed material to Abtech other
than to secure debt permitted under (a) of this clause (iv);
(v) increase in any manner the compensation of any of its officers
or enter into any employment, consulting, retention, change in control,
collective bargaining, bonus or other incentive compensation, profit
sharing, health or other welfare, stock option or other equity, pension,
retirement, vacation, severance, deferred compensation or other
compensation or benefit plan, policy, agreement, trust, fund or arrangement
with, for or in respect of, any shareholder, officer, director, other
employee, agent, consultant or affiliate other than as required pursuant to
the terms of agreements in effect on the date of this Agreement and such as
are in the ordinary course of business consistent with past practice;
(vi) enter into any lease or amend any lease of real property other
than in the ordinary course of business consistent with past practice; or
(vii) modify, amend or terminate the AET Agreement.
Furthermore, Abtech covenants, represents and warrants that from and after
the date of this Agreement, unless Gateway shall otherwise expressly consent in
writing, Abtech shall use its reasonable business efforts to comply in all
material respects with all Laws applicable to it or any of its properties,
assets or business and maintain in full force and effect all Abtech Permits
necessary for, or otherwise material to, such business.
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4.2 NOTIFICATION OF CERTAIN MATTERS. Abtech shall give prompt notice to
Gateway if any of the following occur after the date of this Agreement: (i) any
notice of, or other communication relating to, a default or Event which, with
notice or lapse of time or both, would become a default under the AET Agreement;
(ii) receipt of any notice or other communication in writing from any third
party alleging that the Consent of such third party is or may be required in
connection with the transactions contemplated by this Agreement; (iii) receipt
of any material notice or other communication from any Governmental Authority
in connection with the transactions contemplated by this Agreement; (iv) the
occurrence of an Event which could have a Abtech Material Adverse Effect; (v)
the commencement or threat of any Litigation involving or affecting Abtech, or
any of its properties or assets, or, to its knowledge, any employee, agent,
director or officer, in his or her capacity as such, of Abtech which, if
pending on the date hereof, would have been required to have been disclosed in
this Agreement or which relates to the consummation of the Merger or any
material development in connection with any Litigation disclosed by Abtech in or
pursuant to this Agreement; (vi) the termination, for whatever reason, of any of
the Abtech officers; and (vii) the occurrence of any Event that could cause a
breach by Abtech of any provision of this Agreement, including such a breach
that could occur if such Event had taken place on or prior to the date of this
Agreement.
4.3 ACCESS AND INFORMATION. Between the date of this Agreement and the
Effective Time, Abtech will give, and shall direct its accountants and legal
counsel to give, Gateway, and its respective authorized representatives
(including, without limitation, financial advisors, accountants and legal
counsel) at all reasonable times access as reasonably requested to all offices
and other facilities and to all contracts, agreements, commitments, books and
records of or pertaining to Abtech, will permit the foregoing to make such
reasonable inspections as they may require and will cause its officers promptly
to furnish Gateway with such financial and operating data and other information
with respect to the business and properties of Abtech as Gateway may from time
to time reasonably request.
4.4 SHAREHOLDER APPROVAL. As soon as practicable, Abtech will take all
steps necessary to duly call, give notice of, convene and hold a meeting of its
shareholders for the purpose of approving the Merger, including this Agreement
(the "ABTECH PROPOSAL") and for such other purposes as may be necessary or
desirable in connection with effectuating the transactions contemplated hereby.
In the alternative, shareholder approval of the Abtech Proposal will be obtained
by the unanimous written consent of Abtech's shareholders without a meeting.
Except as otherwise contemplated by this Agreement, the Board of Directors of
Abtech (i) will recommend to the shareholders of Abtech that they approve the
Abtech Proposal, and (ii) will use its reasonable best efforts to obtain any
necessary approval by Abtech's shareholders of the Abtech Proposal including,
without limitation, voting the Abtech Shares held by such Directors for such
adoption and approval.
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4.5 REASONABLE BUSINESS EFFORTS. Subject to the terms and conditions
herein provided, Abtech agrees to use its reasonable business efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the Merger and the transactions contemplated by this Agreement
including, but not limited to (i) obtaining any necessary Consents to this
Agreement and the transactions contemplated hereby, (ii) the defending of any
Litigation against Abtech challenging this Agreement or the consummation of the
transactions contemplated hereby, and (iii) obtaining all Consents from
Governmental Authorities required for the consummation of the Merger and the
transactions contemplated thereby. Upon the terms and subject to the conditions
hereof, Abtech agrees to use reasonable business efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary to
satisfy the other conditions of the closing set forth herein.
4.6 PUBLIC ANNOUNCEMENTS. SO long as this Agreement is in effect, Abtech
shall not, and shall cause its affiliates not to, issue or cause the publication
of any press release or any other announcement with respect to the Merger, the
Abtech Proposal or the transactions contemplated hereby without the consent of
Gateway, except where such release or announcement is required by applicable
Law, in which case Abtech, prior to making such announcement, shall consult with
Gateway regarding the same.
4.7 COMPLIANCE. In consummating the Merger and the transactions
contemplated hereby, Abtech shall comply in all material respects with the
provisions of, or be in compliance, in all material respects, with all
applicable Laws.
4.8 TAX OPINION CERTIFICATION. Abtech shall execute and deliver a
certificate in a form satisfactory to the counsel of both Abtech and Gateway,
signed by an officer of Abtech setting forth factual representations and
covenants that will serve as a basis for the tax opinion required pursuant to
SECTION 6.1.5 of this Agreement ("ABTECH TAX OPINION CERTIFICATE").
ARTICLE V
ADDITIONAL COVENANTS OF GATEWAY
Gateway covenants and agrees as follows:
5.1 CONDUCT OF BUSINESS OF GATEWAY. Except as expressly contemplated by
this Agreement, during the period from the date of this Agreement to the
Effective Time, Gateway shall conduct its business in the ordinary course and
consistent with past practice, subject to the limitations contained in this
Agreement, and Gateway shall use its reasonable business efforts to preserve
intact its business organization, to keep available the services of its officers
and employees and to maintain satisfactory relationships with all persons with
whom it does business. Without limiting the generality of the foregoing, and
except as
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otherwise expressly provided in this Agreement, after the date hereof and
prior to the Effective Time, Gateway will not, without the prior written
consent of Abtech:
(i) amend or propose to amend its Certificate of Incorporation or
Bylaws in any material respect;
(ii) authorize for issuance, issue, grant, sell, pledge, dispose of
or propose to issue, grant, sell, pledge or dispose of any shares of, or
any options, warrants, commitments, subscriptions or rights of any kind to
acquire or sell any shares of, the capital stock or other securities of
Gateway, including, but not limited to, any securities convertible into or
exchangeable for shares of stock of any class of Gateway, except for the
issuance of shares of Gateway Stock pursuant to the exercise of stock
options outstanding on the date of this Agreement in accordance with their
present terms and except for the grant of employee stock options and
issuance of shares of Gateway Stock pursuant to the exercise thereof in the
ordinary course of business consistent with past practice;
(iii) split, combine or reclassify any shares of its capital stock or
declare, pay or set aside any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock, other than dividends or distributions to Gateway, or
directly or indirectly redeem, purchase or otherwise acquire or offer to
acquire any shares of its capital stock or other securities; or
(iv) sell, transfer, mortgage, pledge or otherwise dispose of, or
encumber, or agree to sell, transfer, mortgage, pledge or otherwise dispose
of or encumber, any material assets or properties, real, personal or mixed,
material to Gateway, other than in the ordinary course of business
consistent with past practice.
Furthermore, Gateway covenants, represents and warrants that from and after
the date of this Agreement, unless Abtech shall otherwise expressly consent in
writing, Gateway shall use its reasonable business efforts to comply in all
material respects with all Laws applicable to it or any of its properties,
assets or business and maintain in full force and effect all the Gateway Permits
necessary for, or otherwise material to, such business.
5.2 NOTIFICATION OF CERTAIN MATTERS. Gateway shall give prompt notice to
Abtech if any of the following occur after the date of this Agreement: (i) any
notice of, or other communication relating to, a default or Event which, with
notice or lapse of time or both, would become a default under any Gateway
Material Contract which could have an Gateway Material Adverse Effect; (ii)
receipt of any notice or other communication in writing from any third party
alleging that the Consent of such third party is or may be required in
connection with the transactions contemplated by this Agreement, provided that
such Consent would have been required to have been disclosed in this Agreement;
(iii) receipt of any material notice or other communication from any
Governmental Authority
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(including, but not limited to the NASD or any securities exchange) in
connection with the transactions contemplated by this Agreement; (iv) the
occurrence of an Event which could have an Gateway Material Adverse Effect;
(v) the commencement or threat of any Litigation involving or affecting
Gateway or any of its respective properties or assets, or, to its knowledge,
any employee, agent, director or officer, in his or her capacity as such, of
Gateway or any of its subsidiaries which, if pending on the date hereof,
would have been required to have been disclosed in this Agreement or which
relates to the consummation of the Merger or any material development in
connection with any Litigation disclosed by Gateway in or pursuant to this
Agreement or the Gateway Securities Filings; and (vi) the occurrence of any
Event that could cause a breach by Gateway of any provision of this Agreement
including such a breach that could occur if such Event had taken place on or
prior to the date of this Agreement.
5.3 ACCESS AND INFORMATION. Between the date of this Agreement and the
Effective Time, Gateway will give, and shall direct its accountants and legal
counsel to give Abtech, and its respective authorized representatives
(including, without limitation, its lenders, financial advisors, accountants and
legal counsel) at all reasonable times access as reasonably requested to all
offices and other facilities and to all contracts, agreements, commitments,
books and records of or pertaining to Gateway, will permit the foregoing to make
such reasonable inspections as they may require and will cause its officers
promptly to furnish Abtech with (a) such financial and operating data and other
information with respect to the business and properties of Gateway as Abtech
may from time to time reasonably request, and (b) a copy of each material
report, schedule and other document filed or received by Gateway pursuant to the
requirements of applicable securities laws.
5.4. REASONABLE BUSINESS EFFORTS. Subject to the terms and conditions
herein provided, Gateway agrees to use its reasonable business efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the Merger and the transactions contemplated by this Agreement
including, but not limited to (i) the defending of any Litigation against
Gateway challenging this Agreement or the consummation of the transactions
contemplated hereby, or (ii) obtaining all Consents from Governmental
Authorities required for the consummation of the Merger and the transactions
contemplated thereby. Upon the terms and subject to the conditions hereof,
Gateway agrees to use reasonable business efforts to take, or cause to be taken,
all actions and to do, or cause to be done, all things necessary to satisfy the
other conditions of the Closing set forth herein.
5.5 COMPLIANCE. In consummating the Merger and the transactions
contemplated hereby, Gateway shall comply in all material respects with the
provisions of the Securities Exchange Act and the Securities Act and shall
comply, and/or cause its subsidiaries to comply or to be in compliance, in all
material respects, with all other applicable Laws.
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5.6 SEC FILINGS, SHAREHOLDER NOTICES AND NEWS RELEASES. Gateway shall
send to Abtech a copy of all material public reports and materials as and when
it sends the same to its shareholders, the SEC or any state or foreign
securities commission.
ARTICLE VI
CONDITIONS
6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of
each party to effect the Merger shall be subject to the fulfillment or waiver at
or prior to the Effective Time of the following conditions:
6.1.1 SHAREHOLDER APPROVAL. The Abtech Proposal shall have been
approved at or prior to the Effective Time by the requisite vote of the
shareholders of Abtech in accordance with the Texas Act.
6.1.2 NO INJUNCTION OR ACTION. No order, statute, rule, regulation,
executive order, stay, decree, judgment or injunction shall have been
enacted, entered, promulgated or enforced by any court or other
Governmental Authority which prohibits or prevents the consummation of the
Merger which has not been vacated, dismissed or withdrawn by the Effective
Time. Abtech and Gateway shall use their reasonable best efforts to have
any of the foregoing vacated, dismissed or withdrawn by the Effective Time.
6.1.3 REQUIRED CONSENTS. Any required Consents of any person to the
Merger or the transactions contemplated hereby shall have been obtained and
be in full force and effect, except for those the failure of which to
obtain will not have a material adverse effect on the business, assets
(including, but not limited to, intangible assets), prospects, condition
(financial or otherwise), properties (including, but not limited to,
intangible properties), liabilities or the result of operations of the
Surviving Corporation ("SURVIVING CORPORATION MATERIAL ADVERSE EFFECT") or
an Gateway Material Adverse Effect.
6.1.4 BLUE SKY. Gateway shall have received all authorizations under
the Texas Securities Act necessary to consummate the transactions
contemplated hereby.
6.1.5 TAX OPINION. Gateway and Abtech shall have received an opinion
from Gateway's tax counsel substantially to the effect that, if the Merger
is consummated in accordance with the provisions of this Agreement, under
current Law, for federal income tax purposes, the Merger will qualify as a
reorganization within the meaning of Section 368 (a) of the Code.
I-16
<PAGE>
6.2 CONDITIONS TO OBLIGATIONS OF ABTECH. The obligation of Abtech to
effect the Merger shall be subject to the fulfillment at or prior to the
Effective Time of the following additional conditions, any one or more of which
may be waived by Abtech:
6.2.1 GATEWAY REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Gateway contained in this Agreement that are modified by
materiality or Gateway Material Adverse Effect shall be true and correct in
all respects and those that are not so modified shall be true and correct
in all material respects, on the date hereof and, except for changes not
prohibited by this Agreement, as of the Effective Time as if made at the
Effective Time.
6.2.2 PERFORMANCE BY GATEWAY. Gateway shall have performed and
complied with all of the covenants and agreements in all material respects
and satisfied in all material respects all of the conditions required by
this Agreement to be performed or complied with or satisfied by Gateway at
or prior to the Effective Time.
6.2.3 NO MATERIAL ADVERSE CHANGE. There shall not have occurred
after the date hereof any Event that has or reasonably could be expected to
have an Gateway Material Adverse Effect.
6.2.4 CERTIFICATES AND OTHER DELIVERIES. Gateway shall have
delivered to Abtech (i) a certificate executed on its behalf by its
President or another authorized officer to the effect that the conditions
set forth in SUBSECTIONS 6.2.1, 6.2.2 AND 6.2.3, above, have been
satisfied; (ii) a certificate of existence from the Secretary of State of
the State of Texas stating that Gateway is a validly existing corporation;
(iii) duly adopted resolutions of the Board of Directors of each of Gateway
and the Board of Directors and shareholder of Gateway Processing approving
the execution, delivery and performance of this Agreement and the
instruments contemplated hereby and thereby, each certified by its
Secretary; and (iv) such other documents and instruments as Abtech
reasonably may request.
6.3 CONDITIONS TO OBLIGATIONS OF GATEWAY. The obligations of Gateway to
effect the Merger shall be subject to the fulfillment at or prior to the
Effective Time of the following additional conditions, any one or more of which
may be waived by Gateway:
6.3.1 ABTECH REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Abtech contained in this Agreement that are modified by
materiality or Abtech Material Adverse Effect shall be true and correct in
all respects, and those that are not so modified shall be true and correct
in all material respects, on the date hereof and, except for changes not
prohibited by this Agreement, as of the Effective Time as if made at the
Effective Time.
I-17
<PAGE>
6.3.2 PERFORMANCE BY ABTECH. Abtech shall have performed and
complied with all the covenants and agreements in all material respects and
satisfied in all material respects all the conditions required by this
Agreement to be performed or complied with or satisfied by Abtech at or
prior to the Effective Time.
6.3.3 NO MATERIAL ADVERSE CHANGE. There shall have not occurred
after the date hereof any Event that has or reasonably could be expected to
have a Abtech Material Adverse Effect or a Surviving Corporation Material
Adverse Effect.
6.3.4 CERTIFICATES AND OTHER DELIVERIES. Abtech shall have
delivered, or caused to be delivered, to Gateway (i) a certificate executed
on its behalf by its President or another duly authorized officer to the
effect that the conditions set forth in SUBSECTIONS 6.3.1, 6.3.2 AND 6.3.3,
above, have been satisfied; (ii) a certificate of good standing from the
Secretary of State of the State of Texas stating that Abtech is a validly
existing corporation in good standing; (iii) duly adopted resolutions of
the Board of Directors and shareholders of Abtech approving the execution,
delivery and performance of this Agreement, the Abtech Proposal and the
instruments contemplated hereby and thereby, certified by the Secretary of
Abtech; (iv) a true and complete copy of the Articles of Incorporation
certified by the Secretary of State of the State of Texas, and a true and
complete copy of the Bylaws of Abtech certified by the Secretary thereof;
(v) the duly executed Abtech Tax Opinion Certificate; and (vi) such other
documents and instruments as Gateway reasonably may request.
6.3.5 DECEMBER 31, 1997 BALANCE SHEET ITEMS. Abtech shall have
caused the note payable to Warren in the amount of $1,950 to be paid and
the letter agreement dated January 9, 1996 between AET and Abtech shall be
transferred out of Abtech.
ARTICLE VII
TERMINATION AND ABANDONMENT
7.1 TERMINATION. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of the shareholders of
Abtech described herein:
(a) by mutual written consent of Gateway and Abtech;
(b) by either Gateway or Abtech if:
(i) the Merger shall not have been consummated on or
prior to December 31, 1998; PROVIDED, HOWEVER, that the right
to terminate this Agreement pursuant to this SECTION
I-18
<PAGE>
7.1(b)(i) shall not be available to any party whose failure
to perform any of its obligations under this Agreement
results in the failure of the Merger to be consummated by
such time;
(ii) the approval of Abtech's shareholders required by
SECTION 6.1.1 shall not have been obtained at a meeting duly
convened therefor or at any adjournment or postponement
thereof;
(iii) any Governmental Authority shall have issued an
order, decree or ruling or taken any other action permanently
enjoining, restraining or otherwise prohibiting the
consummation of the Merger and such order, decree or ruling or
other action shall have become final and nonappealable;
(c) by Gateway, if Abtech shall have breached in any material
respect any of its representations, warranties, covenants or other
agreements contained in this Agreement, which breach or failure to perform
is incapable of being cured or has not been cured within 20 days after the
giving of written notice to Abtech;
(d) by Gateway if the Board of Directors of Abtech or any committee
thereof shall have withdrawn or modified in a manner adverse to Gateway its
approval or recommendation of the Abtech Proposal, or failed to reconfirm
its recommendation within fifteen business days after a written request to
do so;
(e) by Abtech, if Gateway shall have breached in any material
respect any of its representations, warranties, covenants or other
agreements contained in this Agreement, which breach or failure to perform
is incapable of being cured or has not been cured within 20 days after the
giving of written notice to Gateway;
(f) by Abtech if the Board of Directors of Gateway or any committee
thereof shall have withdrawn or modified in a manner adverse to Abtech its
approval or recommendation of the Gateway Proposals, or failed to reconfirm
its recommendation within fifteen business days after a written request to
do so.
The party desiring to terminate this Agreement pursuant to the preceding
paragraphs (b), (c), (d), (e) and (f) shall give written notice of such
termination to the other party in accordance with SECTION 8.5 below.
7.2 EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination of
this Agreement and the abandonment of the Merger pursuant to this ARTICLE VII,
this Agreement (other than as set forth in this SECTION 7.2, SECTION 7.3,
SECTION 8.1 and SECTION 8.7) shall become void and of no effect with no
liability on the part of any party hereto (or of any of its directors, officers,
employees, agents, legal or
I-19
<PAGE>
financial advisors or other representatives); PROVIDED, HOWEVER, that no such
termination shall relieve any party hereto from any liability for any breach
of this Agreement.
7.3 PROCEDURE UPON TERMINATION. In the event of termination and
abandonment pursuant to this Article VII, this Agreement shall terminate and the
Merger shall be abandoned without further action by Abtech or Gateway, provided
that the agreements contained in SECTIONS 7.2, 8.1 AND 8.7 hereof shall remain
in full force and effect. If this Agreement is terminated as provided herein,
each party shall use its reasonable best efforts to redeliver all documents,
work papers and other material (including any copies thereof) of any other party
relating to the transactions contemplated hereby, whether obtained before or
after the execution hereof, to the party furnishing the same. Nothing contained
in this Agreement shall relieve any party from any liability for any inaccuracy,
misrepresentation or breach of this Agreement prior to termination.
ARTICLE VIII
MISCELLANEOUS
8.1 CONFIDENTIALITY. Unless (i) otherwise expressly provided in this
Agreement, (ii) required by applicable Law; (iii) necessary to secure any
required Consents as to which the other party has been advised, or (iv)
consented to in writing by Gateway and Abtech, any information or documents
furnished in connection herewith shall be kept strictly confidential by Abtech,
Gateway and their respective officers, directors, employees and agents. Prior
to any disclosure pursuant to the preceding sentence, the party intending to
make such disclosure shall consult with the other party regarding the nature and
extent of the disclosure. Nothing contained herein shall preclude disclosures
to the extent necessary to comply with accounting, SEC and other disclosure
obligations imposed by applicable Law. To the extent required by such
disclosure obligations, Gateway may file with the SEC a Report on Form 8-K
pursuant to the Securities Exchange Act with respect to the Merger, which report
may include, among other things, financial statements and pro forma financial
information with respect to the other party. Abtech shall cooperate with
Gateway and provide such information and documents as may be required in
connection with any such filings.
In the event the Merger is not consummated, each party shall use its
reasonable best efforts to return to the other any documents furnished by the
other and all copies thereof any of them may have made and will hold in absolute
confidence any information obtained from the other party except to the extent
(i) such party is required to disclose such information by Law or such
disclosure is necessary or desirable in connection with the pursuit or defense
of a claim, (ii) such information was known by such party prior to such
disclosure or was thereafter developed or obtained by such party independent of
such disclosure, or (iii) such information becomes generally available to the
public or is otherwise no longer confidential. Prior to any disclosure of
information pursuant to the exception in clause (i) of the preceding sentence,
the party intending to disclose
I-20
<PAGE>
the same shall so notify the party which provided the same in order that such
party may seek a protective order or other appropriate remedy should it
choose to do so.
8.2 AMENDMENT AND MODIFICATION. To the extent permitted by applicable
law, this Agreement may be amended, modified or supplemented only by a written
agreement among Abtech, Gateway and Gateway Processing, whether before or after
approval of this Agreement by the shareholders of Abtech and Gateway Processing.
8.3 WAIVER OF COMPLIANCE; CONSENTS. Any failure of Abtech on the one
hand, or Gateway on the other hand, to comply with any obligation, covenant,
agreement or condition herein may be waived by Gateway on the one hand, or
Abtech on the other hand, only by a written instrument signed by the party
granting such waiver, but such waiver or failure to insist upon strict
compliance with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure. Whenever this Agreement requires or permits consent by or on behalf of
any party hereto, such consent shall be given in writing in a manner consistent
with the requirements for a waiver of compliance as set forth in this SECTION
8.3.
8.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective
representations, warranties, covenants and agreements of Abtech and Gateway
contained herein or in any certificates or other documents delivered prior to or
at the Closing shall survive the execution and delivery of this Agreement,
notwithstanding any investigation made or information obtained by the other
party, but shall terminate at the Effective Time.
8.5 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given when delivered in person, by
facsimile, receipt confirmed, or on the next business day when sent by overnight
courier or on the second succeeding business day when sent by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(i) IF TO ABTECH, TO:
Michael Fadden
1701 Hermann Dr., #905
Houston, TX. 77004
and
I-21
<PAGE>
(ii) IF TO GATEWAY OR GATEWAY PROCESSING, TO:
Larry J. Horbach
Gateway Energy Corporation
10842 Old Mill Road - Suite 5
Omaha, NE 68154
WITH A COPY TO:
Cline, Williams, Wright,
Johnson & Oldfather
1125 South 103rd St., Suite 720
Omaha, NE 68124
Attention: Stephen E. Gehring
Telephone: (402) 397-1700
Fax: (402) 397-1806
8.6 BINDING EFFECT; ASSIGNMENT. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto prior to the Effective Time without the prior written
consent of the other party hereto, except that Gateway Processing may assign to
Gateway or any other direct subsidiary of Gateway any and all rights, interests
and obligations of Gateway Processing under this Agreement; provided that any
assignment by Gateway Processing of any or all of its rights, interests and
obligations under this Agreement to Gateway shall require that the Merger
contemplated by this Agreement shall then be structured as a direct merger of
Abtech with and into Gateway or any other structure approved by Abtech.
8.7 EXPENSES. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such costs or expenses.
8.8 GOVERNING LAW . This Agreement shall be deemed to be made in, and in
all respects shall be interpreted, construed and governed by and in accordance
with the laws of the State of Texas.
8.9 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.10.INTERPRETATION. The article and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not in any way affect the meaning or interpretation of
this Agreement. As used in this Agreement, (i) the term "PERSON" shall mean and
include an individual, a partnership, a joint venture, a corporation, a limited
liability company, a trust, an association, an unincorporated organization, a
I-22
<PAGE>
Governmental Authority and any other entity; and (ii) the term "AFFILIATE," with
respect to any person, shall mean and include any person controlling, controlled
by or under common control with such person.
8.11 ENTIRE AGREEMENT. This Agreement and the documents or instruments
referred to herein, embody the entire agreement and understanding of the parties
hereto in respect of the subject matter contained herein. There are no
restrictions, promises, representations, warranties, covenants, or undertakings,
other than those expressly set forth or referred to herein. This Agreement
supersedes all prior agreements and the understandings between the parties with
respect to such subject matter.
8.12 SEVERABILITY. In case any provision in this Agreement shall be held
invalid, illegal or unenforceable in a jurisdiction, such provision shall be
modified or deleted, as to the jurisdiction involved, only to the extent
necessary to render the same valid, legal and enforceable, and the validity,
legality and enforceability of the remaining provisions hereof shall not in any
way be affected or impaired thereby nor shall the validity, legality or
enforceability of such provision be affected thereby in any other jurisdiction.
8.13 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. Accordingly, the parties further agree that each party shall be
entitled to an injunction or restraining order to prevent breaches of this
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States or any state having jurisdiction, this being in
addition to any other right or remedy to which such party may be entitled under
this Agreement, at law or in equity.
8.14 THIRD PARTIES. Nothing contained in this Agreement or in any
instrument or document executed by any party in connection with the transactions
contemplated hereby shall create any rights in , or be deemed to have been
executed for the benefit of, any person or entity that is not a party hereto or
thereto, or, a successor or permitted assign of such a party.
8.15 BY-LAW WAIVER. Upon the unanimous approval of the Abtech Proposal,
the provisions of Section VI 3 of the Abtech By-laws shall be deemed waived in
all respects.
I-23
<PAGE>
IN WITNESS WHEREOF, Gateway, Gateway Processing and Abtech have caused this
Agreement to be signed and delivered by their respective duly authorized
officers as of the date first above written.
GATEWAY ENERGY CORPORATION.
By /s/ Larry J. Horbach
---------------------------
Larry J. Horbach
GATEWAY PROCESSING COMPANY
By /s/ Larry J. Horbach
---------------------------
Larry J. Horbach
ABTECH RESOURCES, INC.
By /s/ Michael T. Fadden
---------------------------
Michael T. Fadden
I-24
<PAGE>
GATEWAY ENERGY CORPORATION & SUBSIDIARIES
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28,
-------------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
Weighted average number of common shares
outstanding 14,841,630 14,318,900
Add shares issuable pursuant to warrant
agreements less shares assumed - 9,800 (1)
repurchased at the average market price
Add shares issuable pursuant to stock
options less shares assumed repurchased
at the average market price 1,955 (1) 100 (1)
Add shares issuable from assumed conversion
of convertible notes 271,400 (1) 861,500 (1)
---------------- -----------------
Tentative number of shares for computation
of fully diluted earnings per share 15,114,985 15,190,300
---------------- -----------------
---------------- -----------------
Loss applicable to common stock (2,193,083) (1,176,800)
Add back interest expense for convertible
promissory notes assumed converted 31,480 (1) 66,300 (1)
---------------- -----------------
Tentative earnings (loss) for computation
of fully diluted earnings per share $ (2,161,603) $ (1,110,500)
---------------- -----------------
---------------- -----------------
Basic loss per common share $ (0.14) $ (0.08)
---------------- -----------------
---------------- -----------------
Fully diluted loss per common share $ (0.14) $ (0.08)
---------------- -----------------
---------------- -----------------
</TABLE>
(1) Not used in fully diluted earnings per share calculations as effect would be
antidilutive.
<PAGE>
GATEWAY ENERGY CORPORATION AND SUBSIDIARIES
EXHIBIT TO FORM 10-KSB FOR THE YEAR ENDED
FEBRUARY 28, 1999
EXHIBIT 21-SUBSIDIARIES
<TABLE>
<CAPTION>
COMPANY STATE PERCENT OWNED
------- ----- ---------------
<S> <C> <C>
Gateway Pipeline Company Texas 100%
Gateway Energy Marketing Louisiana 100%
Gateway Processing Company Texas 100%
Fort Cobb Fuel Authority, L.L.C. Oklahoma 100%
Gateway Offshore Pipeline Company Nebraska 100%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 223,693
<SECURITIES> 928,200
<RECEIVABLES> 931,162
<ALLOWANCES> 0
<INVENTORY> 78,312
<CURRENT-ASSETS> 2,322,161
<PP&E> 10,524,743
<DEPRECIATION> 2,542,259
<TOTAL-ASSETS> 11,264,110
<CURRENT-LIABILITIES> 806,983
<BONDS> 1,072,626
0
0
<COMMON> 3,810,624
<OTHER-SE> 5,573,877
<TOTAL-LIABILITY-AND-EQUITY> 11,264,110
<SALES> 7,650,797
<TOTAL-REVENUES> 7,650,797
<CGS> 4,693,043
<TOTAL-COSTS> 5,979,271
<OTHER-EXPENSES> 3,853,487 <F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 331,494
<INCOME-PRETAX> (2,183,083)
<INCOME-TAX> 10,000
<INCOME-CONTINUING> (2,193,083)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,193,083)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
<FN>
<F1>Includes 1,616,989 of non-cash expenses.
</FN>
</TABLE>
