<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Solicit Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Cornerstone Natural Gas, Inc.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a(6)(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
_____________________________________________________________________
(2) Aggregate number of securities to which transaction applies:
_____________________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
_____________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
_____________________________________________________________________
(5) Total fee paid:
_____________________________________________________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
_____________________________________________________________________
(2) Form, Schedule or Registration Statement No.:
_____________________________________________________________________
(3) Filing Party:
_____________________________________________________________________
(4) Dated Filed:
_____________________________________________________________________
<PAGE>
CORNERSTONE NATURAL GAS, INC.
8080 N. Central Expressway, Suite 1200
Dallas, Texas 75206-1815
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 15, 1995
TO THE STOCKHOLDERS OF CORNERSTONE NATURAL GAS, INC.:
NOTICE IS HEREBY GIVEN that the annual meeting (the "Annual Meeting") of
the stockholders of Cornerstone Natural Gas, Inc., a Delaware corporation (the
"Company"), will be held on Monday, May 15, 1995, at 1:00 p.m., local time, at
The Dallas Petroleum Club, 2200 Ross Avenue, Dallas, Texas, 40th Floor, East
Room, for the following purposes:
1. To elect ten (10) directors to serve until the next Annual Meeting of
the stockholders of the Company or until their successors have been
elected and qualified;
2. To ratify the appointment of Arthur Andersen LLP as the Company's
independent auditors; and
3. To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
Only stockholders of record at the close of business on March 20, 1995, are
entitled to notice of and to vote at the Annual Meeting or any adjournment
thereof. The transfer books will not be closed.
The stockholders are cordially invited to attend the Annual Meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE
COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING
ENVELOPE. IF YOU DO ATTEND THE ANNUAL MEETING IN PERSON, YOU MAY WITHDRAW YOUR
PROXY AND VOTE IN PERSON.
By Order of the Board of Directors,
/s/ Kelly J. Jameson
Kelly J. Jameson
Vice President, General Counsel
and Secretary
Dallas, Texas
April 13, 1995
<PAGE>
CORNERSTONE NATURAL GAS, INC.
8080 N. Central Expressway, Suite 1200
Dallas, Texas 75206-1815
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 15, 1995
This Proxy Statement is furnished to the stockholders of Cornerstone
Natural Gas, Inc., a Delaware corporation (the "Company"), in connection with
the solicitation of proxies by the Board of Directors of the Company (the
"Board") to be used at the annual meeting of the stockholders of the Company
(the "Annual Meeting") to be held on Monday, May 15, 1995, at 1:00 p.m., local
time, and at any and all adjournments thereof.
When a properly executed proxy is received prior to the Annual Meeting, the
shares of common stock, $0.10 par value per share ("Common Stock"), of the
Company represented will be voted at the Annual Meeting in accordance with the
directions noted thereon. If no direction is given, the shares of Common Stock
will be voted FOR the election of the nominees listed herein as directors and
FOR the ratification of Arthur Andersen LLP as the independent auditors. A
proxy may be revoked at any time before it is exercised by submitting a written
revocation or a later dated proxy to Kelly Jameson, the Secretary of the
Company, or by attending the Annual Meeting in person and so notifying the
meeting judges.
The Board of Directors does not intend to present any business for a vote
at the Annual Meeting other than the election of directors and the ratification
of Arthur Andersen LLP as the independent auditors and it has no information
that others will do so. If other matters requiring the vote of the stockholders
properly come before the Annual Meeting, it is the intention of the persons
named in the attached proxy card to vote such proxies held by them in accordance
with their judgement on such matters.
This proxy solicitation will be conducted principally by mail, and the
expenses of soliciting proxies will be borne by the Company. Proxies may also
be solicited personally or by telephone by officers and regular employees of the
Company, but such persons will not receive any special compensation for such
services. Arrangements will be made with brokerage houses, custodians,
nominees and other fiduciaries to send proxy materials to the beneficial owners
of shares of Common Stock held of record by such persons, and the Company may
reimburse such persons or entities for their reasonable out-of-pocket expenses.
The date on which this Proxy Statement and Proxy were first given or sent to the
stockholders was April 13, 1995.
The Annual Report to the stockholders of the Company for its fiscal year
ended December 31, 1994, accompanies this Proxy Statement, however, the Annual
Report does not constitute a part of the proxy solicitation material.
1
<PAGE>
OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock and 5,000,000 shares of preferred stock, $0.10 par value per
share ("Preferred Stock"). The record date for the stockholders of the Company
entitled to vote at the Annual Meeting is March 20, 1995, (the "Record Date").
At the close of business on the Record Date, the Company had issued, outstanding
and entitled to vote at the Annual Meeting 12,515,959 shares of Common Stock and
no shares of Preferred Stock.
QUORUM AND VOTING
The presence, in person or by proxy, of holders of a majority of the
outstanding shares of Common Stock as of the Record Date is necessary to
constitute a quorum at the Annual Meeting. In deciding all questions, a holder
of shares of Common Stock is entitled to one vote, in person or by proxy, for
each share held in his or her name on the Record Date. No stockholder is
entitled to cumulative voting rights. Abstentions are counted in the number of
shares present in person or represented by proxy for purposes of determining
whether a quorum is present for a proposal to be approved, whereas broker non-
votes are not counted for those purposes.
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of Common Stock of
the Company as of March 20, 1995, by (i) all persons known to the Company to be
the beneficial owners of more than 5% of the Company's outstanding Common Stock,
and (ii) by the Company's Directors, Named Executive Officers and all the
Company's Directors and Executive Officers as a group:
<TABLE>
<CAPTION>
BENEFICIALLY PERCENT
OWNED OF CLASS
<S> <C> <C>
CERTAIN BENEFICIAL OWNERS
Endevco Investors Joint Venture (1)
8080 N. Central Expressway, Suite 1200
Dallas, TX 75206 2,576,659 21
DIRECTORS AND EXECUTIVE OFFICERS (11)
Richard D. Brannon (2) 55,000 *
James W. Bryant (3) 513,062 4
Robert L. Cavnar (7) 35,000 *
Ted Collins, Jr. (4) 228,832 2
Ben H. Cook (5)(6) 2,131,433 16
Ray C. Davis (6)(7)(8) 1,180,619 9
Scott G. Heape (9) 74,942 *
David S. Hunt (10) -- *
W.J. (Bill) Murray, Jr. (2) 54,000 *
C. Robert Sledge 5,300 *
Kelcy L. Warren (6)(7)(8) 1,183,279 9
All Directors and Executive Officers
as a group (15 persons) 5,821,716 39
<FN>
___________________________
*Less than one percent.
</TABLE>
2
<PAGE>
(1) Pursuant to the Endevco Investors Joint Venture (the "Joint Venture"), each
partner of the Joint Venture has the right to vote his pro rata share of
the shares of Common Stock held by the Joint Venture.
(2) Includes 50,000 shares of Common Stock held by a partner in the Joint
Venture over which this Stockholder has the right to vote.
(3) Does not include 544 shares beneficially owned by Mr. Bryant's wife as to
which Mr. Bryant disclaims beneficial ownership.
(4) Includes 228,832 shares of Common Stock held by a partner in the Joint
Venture over which this Stockholder has the right to vote.
(5) Includes 512,821 shares of Common Stock purchasable under warrants issued
in connection with the recapitalization of the Company (the "Warrants").
Each Warrant has an exercise price of $0.78 per share.
(6) Excludes shares of Common Stock held by the Joint Venture. Such
stockholder has disclaimed beneficial ownership of such securities.
(7) Includes 30,000 shares subject to employee stock options exercisable within
60 days.
(8) Includes 769,231 shares of Common Stock purchasable upon the exercise of
Warrants.
(9) Includes 74,942 of shares held by H & S Production, Inc., Pension Trust, as
a partner in the Joint Venture of which Mr. Heape is a beneficiary.
(10) Mr. Hunt is a beneficiary of the Lyda Hunt-Herbert Trust for David S. Hunt.
Excludes 76,277 shares of Common Stock held by the Joint Venture indirectly
owned by such trust. Mr. Hunt has disclaimed beneficial ownership of such
securities.
(11) The address for all directors and executive officers is c/o The Secretary,
Cornerstone Natural Gas, Inc., 8080 N. Central Expressway, Suite 1200,
Dallas, Texas, 75206-1815.
ELECTION OF DIRECTORS
The Bylaws of the Company provide for a Board of Directors of no greater
than twelve (12) and no less than seven (7). The Company is electing ten (10)
directors at this time. A brief description of each person nominated to become
a director of the Company is provided below. Each nominee is a current director
of the Company. The term of office of each person elected as a director will
continue until the next Annual Meeting of stockholders or until the successor
has been elected and qualified. An affirmative vote of a majority of those
shares of Common Stock represented and entitled to vote at the Annual Meeting
where a quorum is present is required to elect directors.
RICHARD D. BRANNON, age 36, has served as President of Brannon Oil and Gas,
Inc. (oil and gas exploration and investments) since 1983. Mr. Brannon has been
a director of the Company since November 2, 1993, and is a member of the
Compensation and Audit Committees.
JAMES W. BRYANT, age 61, is President of Cardinal Resources, Inc., and has
served as consultant to the Company since November 1993. Mr. Bryant founded the
Company in 1977 and was Chairman of the Board and Chief Executive Officer from
1977 to 1993. From 1980 to 1990, Mr. Bryant served as President of the Company.
Mr. Bryant has been a director since 1977 and is currently a member of the
Executive Committee.
3
<PAGE>
TED COLLINS, JR., age 56, has served as President of Collins and Ware, Inc.
(oil and gas exploration, production and investments) since 1988. Mr. Collins
has been a director since November 2, 1993, and is currently Chairman of the
Audit Committee.
BEN H. COOK, age 69, is a private investor. Mr. Cook retired from Colt
Industries, Inc., in 1991, where he had served as the Executive Vice President
of Operations. Mr. Cook has been a director since November 2, 1993, and is
currently Chairman of the Executive and Compensation Committees.
RAY C. DAVIS, age 53, has served as Chairman of the Board and Chief
Executive Officer of the Company since June 1993. Mr. Davis served as Director
and General Partner of Hydro Environmental Services, Inc., from 1989 to 1992,
and as Chief Executive Officer of Healthco International, Inc., from June 1991
to August 1992. He was also Chairman of the Board of HPSC, Inc., from 1991 to
1992. On June 9, 1993, Healthco International, Inc., filed for protection under
Chapter 11 in the U.S. Bankruptcy Court in the Western District of
Massachusetts, Western Division, Case No. 93-41604-JFQ.
SCOTT G. HEAPE, age 45, has served as President of H & S Production, Inc.,
(oil and gas exploration) since 1978. Mr. Heape has been a director since
August 9, 1994.
DAVID S. HUNT, age 32, has been Administrative Assistant of Petro-Hunt
Corporation (oil and gas and investments) since 1989. Mr. Hunt has served as a
director since January 1, 1994, and is currently a member of the Audit
Committee.
WILLIAM J. MURRAY, JR., age 80, petroleum engineer and energy consultant.
Mr. Murray is a director of Kelley Oil Corporation and New Paraho Corporation.
Mr. Murray has been a director since August 9, 1994.
C. ROBERT SLEDGE, age 63, was a partner of Benjamin Jacobson & Sons from
1984 to 1992. Mr. Sledge is currently engaged in investments. Mr. Sledge has
been a director since 1983 and is a member of the Audit Committee.
KELCY L. WARREN, age 39, is President and Chief Operating Officer of the
Company. Mr. Warren has been a director of the Company since 1985. He served
as President and Chief Operating Officer from August 1990 to December 1992, and
from 1989 to 1990 was Executive Vice President. Mr. Warren resumed his duties
as President and Chief Operating Officer in June 1993.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH OF THE
NOMINEES.
4
<PAGE>
BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors held five (5) meetings during the 1994 fiscal year.
No incumbent director attended fewer than 75 percent of the aggregate total
number of meetings of the Board and all meetings of Committees of the Board on
which the director served. Board Committees include an Audit Committee,
Compensation Committee and Executive Committee. All of the members of the Audit
and Compensation Committees are Directors independent of management.
The Audit Committee held one meeting in 1994 and is currently comprised of
Messrs. Collins (Chairman), Brannon, Sledge and Hunt. The Audit Committee
reviews the scope and procedures of internal auditing work, the results of
independent audits, the accounting policies of management, and recommends to the
Board the appointment of the Company's outside auditors.
The Compensation Committee held one meeting for 1994 and is currently
comprised of Messrs. Cook (Chairman) and Brannon. Functions of the Compensation
Committee include reviewing and making recommendations to the Board of Directors
regarding compensation for officers of the Company during the ensuing year. In
addition to compensation matters, the committee determines, develops, and makes
recommendations to the Board regarding benefit packages, special bonuses or
stock plans, and employment agreements.
The Executive Committee held no meetings in 1994 and is currently comprised
of Messrs. Cook (Chairman), Bryant and Davis. The Executive Committee has the
authority to act for the Board on most matters during intervals between Board
meetings.
Directors who are not employees of the Company receive a fee of $500.00 for
each Board and Board Committee meeting attended, except committee chairmen
receive a fee of $750.00 for each committee meeting attended. Directors are
also reimbursed for costs incurred by them in attending meetings of the Board.
The Company has a consulting agreement with director Bryant which expires
November 1, 1996. Under the consulting agreement, Mr. Bryant is to receive no
less than $200,000 per year. Mr. Bryant is obligated under the consulting
agreement to present certain projects to the Company which has a right of first
refusal. If the Company elects to pursue a project originated by Mr. Bryant,
then he is entitled to additional compensation. The consulting agreement was
assigned in 1994 to Cardinal Resources, Inc., a consulting and engineering
company owned by Mr. Bryant. In 1995, the Company modified the consulting
agreement for a one-year period. Under the modified agreement, Cardinal must
provide the services of an additional consultant for $50,000.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or to be paid to those
persons who were, at December 31, 1994, (i) Chief Executive Officer and (ii) the
other two most highly compensated named executive officers of the Company for
services rendered in all capacities to the Company for the last three fiscal
years.
5
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENATION AWARDS PAYOUTS
-----------------------------------------------------------------------------------------------
OTHER SECURITIES ALL
ANNUAL RESTRICTED UNDER- OTHER
COMPEN- STOCK LYING LTIP COMPEN-
NAME AND SATION AWARD(S) OPTIONS/ PAYOUTS SATION
PRINCIPAL POSITION YEAR SALARY($) BONUS ($) ($)(1) ($) SARs(#) ($) ($) (2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ray C. Davis 1994 210,000 106,029 0 0 0 0 1,848
Chairman and Chief 1993 117,923 0 0 0 150,000 0 0
Executive Officer(3)
Kelcy L. Warren 1994 205,000 93,250 0 0 0 0 1,848
President and Chief 1993 188,063(5) 0 4,500 0 150,000 0 3,265
Operating Officer(4) 1992 144,375 0 0 0 0 0 7,219 (7)
Robert L. Cavnar 1994 135,000 54,529 0 0 0 0 1,350
Senior Vice President, 1993 70,654 0 27,949 0 150,000 0 0
Chief Financial Officer and
Treasurer(6) 1994
<FN>
Notes to Summary Compensation Table
(1) The amount of "Other Annual Compensation" includes compensation for fiscal
year 1994 only, and perquisites and other personal benefits, only if the
aggregate amount of such compensation exceeds the lesser of $50,000 or 10%
of the total annual salary and bonus reported for the named officer for the
fiscal year 1994.
(2) Represents matching contributions made by the Company pursuant to the
Company's 401(k) Plan.
(3) Mr. Davis was employed by the Company on June 4, 1993.
(4) Mr. Warren resigned the offices of President and Chief Operating Officer of
the Company on December 31, 1992, and resumed those offices on June 4,
1993.
(5) Comprised of $61,666 paid to Mr. Warren for consulting services rendered
between January 1, 1993, and June 3, 1993, and $126,397 in salary paid
between June 4, 1993, and December 31, 1993.
(6) Mr. Cavnar was employed by the Company on June 21, 1993.
(7) Includes $6,600 paid by the Company in life insurance premiums.
</TABLE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
There were no options or SARs granted by the Company during the 1994 fiscal
year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTIONS/SAR VALUES
The following table sets forth information concerning stock options and
SARs exercised during the year ended December 31, 1994, and the fiscal year-end
value of unexercised options and SARs for the named executive officers at
December 31, 1994. The value of the unexercised stock options is based on the
closing price per share of Common Stock of $1.50 on December 30, 1994, the last
trading day of fiscal year 1994, minus the exercise price. As of that date, no
SARs were outstanding.
6
<PAGE>
<TABLE>
<CAPTION>
Value of
Shares Value Number of Securities Underlying Unexercised
Acquired on Realized Unexercised Options/SARs at In-the-Money Options/SARs
Exercise (#) ($) FY-End (#) at FY-End ($)
--------------------------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ray C. Davis 0 0 30,000 120,000 11,250 45,000
Kelcy L. Warren 0 0 30,000 120,000 11,250 45,000
Robert L. Cavnar 0 0 30,000 120,000 11,250 45,000
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 28, 1993, the Company entered into that First Amended Stock Purchase
Agreement (the "Stock Purchase Agreement") with Ray Davis, Trustee. Under the
Stock Purchase Agreement, Ray Davis, Trustee, agreed to purchase 4,576,659
shares of Common Stock and Warrants to acquire 2,564,103 shares of Common Stock
at $.78 per share for $3,000,000. In connection with the Company's emergence
from bankruptcy on November 2, 1993, under the Stock Purchase Agreement, Endevco
Investors Joint Venture (the "Joint Venture") purchased 2,576,659 shares of
Common Stock; and Warrants to purchase 769,231, 512,821 and 769,231 shares of
Common Stock at $.78 per share were issued to Mr. Davis, Mr. Cook and Mr.
Warren, respectively. In addition, Mr. Davis is the managing partner and Mr.
Cook and Mr. Warren each have an interest in the Joint Venture.
The Company is a party to a management agreement with Energy Transfer I,
Ltd. ("Energy Transfer"). Mr. Warren is the sole shareholder of the general
partner of Energy Transfer, and Messrs. Davis, Warren and Cook are indirect
limited partners in Energy Transfer. Under such agreement, the Company markets
natural gas and operates a natural gas pipeline for Energy Transfer for a fixed
fee. The Company received $60,000 from Energy Transfer for the year ended
December 31, 1994, for management services.
The Company is also a party to a joint venture agreement with an affiliate
of Mr. Collins. Under such joint venture agreement, the Company and the
affiliate of Mr. Collins each bear a portion of the costs for developing
projects in the natural gas business and have a right of first refusal on such
projects.
REPORT OF THE COMPENSATION COMMITTEE
BACKGROUND
The Compensation Committee of the Board of Directors of the Company (the
"Committee") is comprised of two outside Board Members, Mr. Cook (Chairman) and
Mr. Brannon. The Committee was formed upon the Company's successfully
completing its Plan of Reorganization under Chapter 11 Bankruptcy in November
1993 after filing for protection in June 1993.
EXECUTIVE COMPENSATION PHILOSOPHY
The Committee generally believes that the majority of the value delivered
by the Company's compensation program should be directly related to the
performance of the Company on a short-term and long-term basis and on individual
performance of executives in their respective business units. As such, the
Committee has adopted the following philosophy and strategy regarding the
compensation of the Company's executives.
BASE SALARY
Since the Committee expects most of the value of executives' pay will be
delivered from performance-based programs, the Committee believes that base
salaries should be fairly conservative. In
7
<PAGE>
general, base pay should be of a sufficient competitive level to attract and
retain key executive talent. To achieve this objective, the Committee intends
to target executive base salaries between the 25th and 50th percentiles of the
market. The Committee tends to regard other energy companies of similar size
and structure as its competitive market for industry specific positions. Since
the Company does not participate in any industry salary surveys, the Committee
relies on the services of outside compensation consultants to provide
competitive compensation data for these comparisons. The Committee believes
that the industry data used by the outside compensation consultants contains
compensation data from some, but not all, of the companies in the peer group
index of the performance graph in this proxy.
ANNUAL INCENTIVES
The Committee administers an annual incentive plan (the "Plan") for
officers and other key employees of the Company. The Plan is designed to
generate an annual incentive that is predetermined by the Committee based on the
financial performance of the Company as measured by the achievement of earnings
before interest, taxes, depreciation and amortization ("EBITDA"). Target awards
for full attainment of the EBITDA objective range from 20% to 50% of executives'
base salaries. If the Company greatly exceeds its financial performance target,
the plan will generate awards up to one and one-half times the executives'
target award. In addition, the plan has a minimum or threshold EBITDA figure
that must be achieved before any incentives will be considered. If the Company
achieves only this threshold level of performance, executives will earn one-
fifth of their target incentive awards. Furthermore, certain executives have a
portion of this annual incentive award based on the achievement of divisional
and/or individual performance objectives. Management has discretion in
determining the criteria for the divisional/individual portion of the annual
incentive award.
Target award levels were determined such that at those levels, executives'
total cash compensation (base salary plus annual incentive) would be comparable
to the 50th percentile total cash compensation of the competitive market as
discussed earlier. In 1994, the Company's actual EBITDA performance resulted in
incentive payments equal to 100% of each participant's target incentive.
LONG-TERM INCENTIVES
The Committee believes that stock-based incentives provide the strongest
link between the rewards earned by executives and the return generated for
stockholders. The Committee also believes that providing the potential for
significant share ownership helps focus executive behavior on the long-term
growth and strength of the organization. As the Company emerged from its
reorganization in late 1993, the Committee felt it was particularly important to
grant a similar stock incentive. Thus, in 1993 the Committee granted incentive
stock options ("ISOs") to 12 employees under the 1993 Long-Term Incentive Plan.
These options will become exercisable in equal installments of 20% over a 5-year
period. The number of options granted was based on competitive market data for
all industries combined as presented in Towers Perrin's Long-Term Incentive Plan
Survey. Option grant values as determined by the Black-Scholes option pricing
model generally corresponded to the 50th percentile of the market for all key
executives except Mr. Davis and Mr. Warren, who in order to conserve the number
of shares available for future grants to other executives, received option
grants which corresponded to the 25th percentile of the market. No stock
options were granted to any employee in 1994.
COMPENSATION FOR MR. DAVIS
Mr. Davis currently has a base salary of $210,000 per annum. The Committee
believes that although his base salary is considerably below that of other chief
executive officers in this industry and in other companies of similar size and
complexity, it is appropriate given his ownership interest in the Company. The
Committee intends to deliver most of Mr. Davis' compensation in the form of
annual cash-based incentives and long-term stock-based incentives that will
deliver significant value to Mr. Davis if, and only if, the Company achieves its
performance targets.
8
<PAGE>
The Committee bases Mr. Davis' annual incentive award on the Company's
EBITDA performance as discussed earlier. At the threshold performance level, Mr.
Davis earns a bonus equal to 10% of his base salary. If the Company meets its
earnings target, Mr. Davis will earn 50% of his base salary as a bonus. If the
Company achieves up to a predetermined maximum performance level, Mr. Davis has
the ability to earn up to 75% of his base salary as a bonus. Mr. Davis' bonus is
based entirely on Company performance. As with the entire executive team, the
Company must achieve a predetermined minimum EBIDTA target before any incentive
award will be considered for Mr. Davis. The Committee believes that the minimum
target and award levels are consistent with other companies in this industry.
In 1994, Mr. Davis earned an annual incentive award of $106,029, or 50.5% of his
base salary. This award was based on the Company's EBITDA performance, which
exceeded the predetermined EBITDA target set by the Committee in 1993.
The Committee granted 150,000 stock options to Mr. Davis in December 1993.
The Committee feels that Mr. Davis has a significant portion of his personal
wealth invested in the Company and that he is well motivated to increase the
overall value of the Company and to generate returns on behalf of all
stockholders. The Committee did not grant stock options to Mr. Davis in 1994.
OTHER COMPENSATION MATTERS
The Company has addressed the potential impact of the $1 million dollar
deduction limitation on executive pay for the top five executives which was
implemented as part of the Omnibus Budget Reconciliation Act of 1993. The long-
term incentive plan includes a maximum limit on the number of shares which can
be granted to an individual each year and over all years in aggregate over the
life of the plan. The Committee does not believe that cash compensation from
either the base salary or annual incentive programs will be subject to the
deduction limitation and feels that further action is not necessary regarding
the new legislation. The Committee evaluates the Company's potential exposure
to the deduction limitation on an annual basis and will address the issue in the
future if necessary.
In conclusion, the Committee feels that all compensation programs are
reasonable and appropriate given the Company's industry, size and organizational
structure. Base salary and incentive programs are conservative yet provide
attractive features to motivate executives to enhance the performance of the
Company from year to year. The stock option grants provide a significant
incentive to executives to undertake policies and actions to enhance the overall
value of the organization well into the future.
THE COMPENSATION COMMITTEE
BEN H. COOK, CHAIRMAN
RICHARD D. BRANNON
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is comprised of Mr. Cook and Mr. Brannon.
During the 1994 fiscal year, neither of the members of the Committee was an
officer or employee of the Company or any of its subsidiaries, nor has either
member been an officer or employee of the Company or any of its subsidiaries.
9
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the yearly change in the cumulative total
stockholder return on the Company's Common Stock during the five fiscal years
ended December 31, 1994, with the cumulative total return on the S&P 500 Index
and the Peer Group Index. The Peer Group Index used by the Company is the S&P
Natural Gas Index formerly called the S&P Natural Gas Distributors Pipeline
Index. Such compilation was utilized to achieve a comparison with a group of
companies which together have similar operations to that of the Company. The
comparison assumes $100 was invested on December 31, 1989, in the Company's
Common Stock in each of the indexes.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG CORNERSTONE NATURAL GAS, INC., THE S&P 500 INDEX
AND THE S&P NATURAL GAS INDEX
[Graph]
DATA SOUCE: S & P COMPUSTAT SERVICES
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cornerstone Natural Gas, Inc. $100 $56 $31 $13 $27 $27
S&P 500 Index 100 97 126 136 150 152
S&P Natural Gas Index 100 88 76 84 100 95
</TABLE>
RATIFICATION OF INDEPENDENT AUDITORS
Arthur Andersen LLP served as the independent auditors and accountants of
the Company for the fiscal year ending December 31, 1994. Representatives of
Arthur Andersen LLP are expected to attend the annual meeting and will be
available to answer appropriate questions.
In May 1994, the Company terminated its relationship with its independent
auditors and accountants for fiscal year 1994, Ernst & Young LLP, and engaged
Arthur Andersen LLP as its independent auditors and accountants. Ernst & Young
LLP reports on the consolidated financial statements of the Company for fiscal
years 1992 and 1993 contained no adverse opinion or disclaimer of opinion and
were not qualified or modified as to certainty, audit scope or accounting
principles. During 1992 and 1993, or in any subsequent interim period preceding
the termination of Ernst & Young LLP,
10
<PAGE>
there were no disagreements between the Company and Ernst & Young LLP on any
matters of accounting principles or practice, financial statement disclosure or
auditing scope or procedure, and there were no reportable events.
The Audit Committee has recommended to the Board, and the Board has
approved the appointment of Arthur Andersen LLP as the Company's independent
auditors and accountants for fiscal year 1995. Although stockholder
ratification is not required by law or the Bylaws, the Board is submitting it to
the stockholders to ascertain their views.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL.
SECTION 16(A) COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
each director and executive officer of the Company, and each person who owns
more than 10% of a registered class of the Company's equity securities to file
by specific dates with the Securities and Exchange Commission (the "SEC").
The Company believes that, during the fiscal year which ended December 31,
1994, all reports were timely filed with the SEC.
STOCKHOLDER PROPOSAL FOR 1996 ANNUAL MEETING
Any proposals that stockholders of the Company intend to present at the
Annual Meeting in 1996 must be submitted in accordance with the rules of the
Securities and Exchange Commission and must be received by the Secretary of the
Company no later than November 29, 1995.
FORM 10-K
Upon written request, the Company will provide without charge to any
stockholder who was a beneficial holder on the Record Date, a copy of the
Company's Annual Report on Form 10-K for the year ended December 31, 1994,
without exhibits, as filed with the Securities and Exchange Commission.
By Order of the Board of Directors,
/s/ Kelly J. Jameson
Kelly J. Jameson
Vice President, General Counsel
and Secretary
Dallas, Texas
April 13, 1995
11
<PAGE>
Please complete the 1994 Proxy at right,
date, sign, detach it from this form at
perforations, and return immediately in
the accompanying envelope.
Comments:
______________________________________
_______________________________________
_______________________________________
_______________________________________
ADDRESS CHANGE
_______________________________________
STREET
_______________________________________
APT. NO./P.O. BOX
_______________________________________
CITY
_______________________________________
STATE
_______________________________________
ZIP CODE
_______________________________________
SIGNATURE
CORNERSTONE NATURAL GAS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Ray C. Davis and Kelcy L. Warren, and each
of them, proxies with power of substitution in each, and hereby authorizes
either of them to represent and to vote, as designated below, all shares of
common stock of CORNERSTONE NATURAL GAS, INC. (the "Company"), par value $.10
per share ("Common Stock"), standing in the name of the undersigned at the
close of business on March 20, 1995, at the annual meeting of stockholders to
be held on May 15, 1995, in Dallas, Texas, and at any adjournment thereof
and especially to vote on the items of business specified below, as more
fully described in the notice of the meeting dated April 13, 1995, and the
proxy statement accompanying the same, the receipt of which is hereby
acknowledged.
1. ELECTION OF FOR all nominees listed below WITHHOLD authority to vote
DIRECTORS: (except as marked to the for all nominees listed
contrary below) / / below / /
Richard D. Brannon, James W. Bryant, Ted Collins, Jr.,
Ben H. Cook, Ray C. Davis, Scott G. Heape, David S. Hunt,
William J. Murray, C. Robert Sledge, Kelcy L. Warren
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)
_______________________________________________________________________
2. RATIFICATION OF ARTHUR ANDERSEN, LLP, AS INDEPENDENT AUDITORS AND
ACCOUNTANTS.
/ / FOR / / AGAINST / / ABSTAIN
3. OTHER. In their discretion, the proxies are authorized to vote upon such
other business or matters as may properly come before the meeting or any
adjournment thereof.
---------- [FOLD HERE] ----------
This proxy when duly executed will be voted in the manner directed herein
by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR ALL NOMINEES FOR DIRECTOR NAMED ABOVE AND FOR PROPOSAL 2.
The undersigned hereby revokes any proxy or proxies heretofore given to
represent or vote such Common Stock and hereby ratifies and confirms all
action that said proxies, their substitutes, or any of them, might lawfully
take in accordance with the terms hereof.
Dated ___________________________, 1995
________________________________________
________________________________________
Signature(s) of Stockholder(s)
This proxy should be signed exactly as
your name appears hereon. Joint owners
should both sign. If signed as attorney,
executor, guardian, or in some other
representative capacity, or as an
officer of a corporation, please
indicate your capacity or title.
Please complete, date and sign this
proxy and return it in the enclosed
envelope, which requires no postage if
mailed in the United States.
