<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1996
REGISTRATION NO. 333-06261
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
FRONTIER NATURAL GAS CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
----------------
OKLAHOMA 1311 73-1421000
(STATE OR JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
ONE BENHAM PLACE
9400 NORTH BROADWAY
OKLAHOMA CITY, OKLAHOMA 73114-7401
(405) 478-4455)
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
----------------
DAVID W. BERRY, PRESIDENT
FRONTIER NATURAL GAS CORPORATION
ONE BENHAM PLACE
9400 NORTH BROADWAY
OKLAHOMA CITY, OKLAHOMA 73114-7401
(405) 478-4455
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
JEANETTE C. TIMMONS, ESQ. DAVID ALAN MILLER, ESQ.
DAY EDWARDS FEDERMAN PROPESTER & GRAUBARD MOLLEN & MILLER
CHRISTENSEN, P.C. 600 THIRD AVENUE
210 PARK AVENUE, SUITE 2900 NEW YORK, NEW YORK 10016-2097
OKLAHOMA CITY, OKLAHOMA 73102 (212) 818-8800
(405) 239-2121
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRA-
TION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION
8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SEC-
TION 8(A), MAY DETERMINE.
(continued on next page)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
(continued from previous page)
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT (1) OFFERING PRICE (1) FEE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit: 3 Shares of Common
Stock ($.01 par value)
("Common Stock"), and 3
Series B Redeemable
Common Stock Purchase
Warrants ("Series B
Warrants")............. 1,380,000(2) $6.00 $ 8,280,000 $2,855.17
- -----------------------------------------------------------------------------------------
Common Stock Underlying
Units.................. 4,140,000 -- -- (3)
- -----------------------------------------------------------------------------------------
Series B Warrants
Underlying Units(5).... 4,140,000 -- -- (3)
- -----------------------------------------------------------------------------------------
Common Stock Issuable on
Exercise of Series B
Warrants(5)............ 4,140,000 $2.40 $ 9,936,000 $3,426.20
- -----------------------------------------------------------------------------------------
Underwriter's Unit
Purchase Option(4)(5).. 120,000 $.001 $100 (6)
- -----------------------------------------------------------------------------------------
Units Issuable on
Exercise of
Underwriter's Unit
Purchase Option(5)..... 120,000 $9.00 $ 1,108,800 $ 382.34
- -----------------------------------------------------------------------------------------
Common Stock Underlying
Units Underlying
Underwriter's Unit
Purchase Option(5)..... 360,000 -- -- (3)
- -----------------------------------------------------------------------------------------
Series B Warrants
Underlying
Underwriter's Unit
Purchase Option(5)..... 360,000 -- -- (3)
- -----------------------------------------------------------------------------------------
Common Stock Issuable on
Exercise of Series B
Warrants Underlying
Underwriter's Unit
Purchase Option(5)..... 360,000 $2.40 $ 864,000 $ 297.93
- -----------------------------------------------------------------------------------------
Common Stock............ 245,000 $2.00 $ 490,000 $ 168.97
- -----------------------------------------------------------------------------------------
Common Stock Issuable on
Exercise of Hi-Chicago
Warrant................ 300,000 $3.00 $ 900,000 $ 310.34
- -----------------------------------------------------------------------------------------
TOTAL................... $21,578,900 $7,440.95
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee pur-
suant to Rule 457.
(2) Includes 180,000 Units subject to the Underwriter's over-allotment option.
(3) Pursuant to Rule 457(i), no registration fee is required because such se-
curities will be issued for no additional consideration.
(4) The Unit Purchase Option entitles the Underwriter to purchase 120,000
Units.
(5) Pursuant to Rule 416, this Registration Statement also covers an indeter-
minate number of additional securities issuable upon future anti-dilution
adjustments in accordance with the terms of the Series B Warrants, the Un-
derwriter's Unit Purchase Option and the securities underlying the Under-
writer's Unit Purchase Option.
(6) Pursuant to Rule 457(g), no registration fee is payable.
<PAGE>
FRONTIER NATURAL GAS CORPORATION
----------------
REGISTRATION STATEMENT ON FORM SB-2
----------------
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
FORM SB-2 ITEM NUMBER HEADING OR LOCATION IN COMPANY PROSPECTUS
--------------------- -----------------------------------------
<C> <S> <C>
1. Front of Registration
Statement and Outside Front Facing Page; Cross Reference Sheet;
Cover of Prospectus........... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus..... Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information and Risk
Factors....................... Prospectus Summary; Risk Factors
4. Use of Proceeds............... Use of Proceeds
5. Determination of Offering
Price......................... Underwriting
6. Dilution...................... Not Applicable
7. Selling Security Holders...... Selling Securityholders (Selling
Securityholder Prospectus)
8. Plan of Distribution.......... Underwriting; Plan of Distribution
(Selling Securityholder Prospectus)
9. Legal Proceedings............. Business and Properties
10. Directors, Executive Officers,
Promoters and Control
Persons....................... Management
11. Security Ownership of Certain
Beneficial Ownership and
Management.................... Principal Stockholders
12. Description of Securities..... Description of Securities
13. Interest of Named Experts and
Counsel....................... Experts; Legal Matters
14. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................... Management
15. Organization Within Last Five
Years......................... Not Applicable
16. Description of Business....... Prospectus Summary; Business and
Properties
17. Management's Discussion and
Analysis or Plan of Management's Discussion and Analysis of
Operation..................... Financial Condition and Results of
Operations
18. Description of Property....... Business and Properties
19. Certain Relationships and
Related Transactions.......... Certain Transactions
20. Market for Common Equity and
Related Stockholder Matters... Price Range of Securities; Dividend Policy
21. Executive Compensation........ Management
22. Financial Statements.......... Financial Statements of the Company
23. Changes in and Disagreements
With Accountants on Accounting
and Financial Disclosure...... Not Applicable
</TABLE>
<PAGE>
EXPLANATORY NOTE
The Registration Statement contains a prospectus (the "Company Prospectus"),
which will be used in connection with an underwritten offering of Units, each
Unit consisting of three shares of Common Stock (the "Common Stock") and three
Series B Redeemable Common Stock Purchase Warrants (the "Series B Warrants").
Following the Company Prospectus, there are alternate pages to be included in
a second prospectus (the "Selling Securityholder Prospectus") which will be
used by certain shareholders of the Company (the "Selling Securityholders") in
connection with an offering by them for their accounts of up to 545,000 shares
of Common Stock from time to time in open market transactions. The Selling
Securityholder Prospectus will be identical to the Company Prospectus, except
for the changes indicated by the alternate pages, including alternate cover
pages (to be substituted for the cover pages of the Company Prospectus) and an
insert to page 52, containing a section entitled "Selling Securityholders" and
a section entitled "Plan of Distribution" (to be inserted immediately follow-
ing the section entitled "Underwriting" in the Company Prospectus).
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Filed pursuant to Rule 424(a)
SEC File No. 333-06261
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 31, 1996
PROSPECTUS
1,200,000 UNITS
LOGO
[LOGO OF FRONTIER NATURAL GAS CORPORATION APPEARS HERE]
FRONTIER NATURAL GAS CORPORATION
EACH UNIT CONSISTING OF THREE SHARES OF COMMON STOCK
AND THREE SERIES B REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Frontier Natural Gas Corporation (the "Company") hereby offers (the "Offer-
ing") 1,200,000 Units (the "Units"), each Unit consisting of three shares of
Common Stock (the "Common Stock") and three Series B Redeemable Common Stock
Purchase Warrants (the "Series B Warrants"). Each Series B Warrant entitles the
holder to purchase one share of Common Stock for $ [40% of the per-unit of-
fering price] commencing , 1997 and ending , 2001. Each Series B Warrant
is redeemable by the Company with the prior consent of Gaines, Berland Inc.
(the "Underwriter") at a price of $.01 per warrant, at any time after the Se-
ries B Warrants become exercisable, upon not less than 30 days prior written
notice, if the last sale price of the Common Stock has been at least 200% of
the then-exercise price of the Series B Warrants (initially $ ) for the 20
consecutive trading days ending on the third day prior to the date on which the
notice of redemption is given. The securities comprising the Units are immedi-
ately separable and transferable. See "Description of Securities."
The Registration Statement of which this Prospectus forms a part also regis-
ters up to 545,000 shares of Common Stock (including 300,000 shares of Common
Stock issuable upon exercise of a Common Stock purchase warrant (the "Hi-Chi-
cago Warrant")) on behalf of certain shareholders of the Company (the "Selling
Securityholders") that may be sold by them for their accounts from time to time
in open market transactions (collectively, the "Selling Securityholders'
Shares"). The Selling Securityholders' Shares are not part of the underwritten
offering, and the Company will not receive any proceeds from the sale of the
Selling Securityholders' Shares. The Selling Securityholders may not sell a
portion of their shares prior to the expiration of various time periods without
the prior consent of the Underwriter. See "Shares Eligible for Future Sale."
The Common Stock is traded on the Nasdaq Small Cap Market ("Nasdaq") under
the symbol "FNGC." On July 29, 1996, the last reported sale price of the Common
Stock, as reported on Nasdaq, was $1 15/16 per share. See "Price Range of Secu-
rities." Prior to this Offering, there has been no public market for the Series
B Warrants. Application will be made for the Series B Warrants to be included
on Nasdaq under the symbol FNGCZ. There can be no assurance that a trading mar-
ket will develop for the Series B Warrants following this Offering.
----------
THESE SECURITIES ARE SPECULATIVE IN NATURE, INVOLVE A HIGH DEGREE OF RISK
AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO
CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" ON
PAGE 11.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
<CAPTION>
PRICE UNDERWRITING DISCOUNTS PROCEEDS
TO AND TO
PUBLIC COMMISSIONS (1) COMPANY (2)(3)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit............................. $ $ $
- --------------------------------------------------------------------------------------------------
Total (3)............................ $ $ $
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include a 3% nonaccountable expense allowance which the Company
has agreed to pay to the Underwriter. The Company has also agreed to sell
to the Underwriter an option (the "Unit Purchase Option") to purchase
120,000 Units at $ per Unit and to indemnify the Underwriter against
certain liabilities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses in connection with this Offering payable by the
Company, including the Underwriter's nonaccountable expense allowance in
the amount of $ ($ if the Underwriter's over-allotment option is ex-
ercised in full), estimated at $ .
(3) The Company has granted the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 180,000 additional
Units upon the same terms and conditions as set forth above, solely to
cover over-allotments, if any. If such over-allotment option is exercised
in full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $ , $ and $ , respectively. See
"Underwriting."
The Units are being offered, subject to prior sale, when, as and if delivered
to and accepted by the Underwriter and subject to the approval of certain legal
matters by counsel and to certain other conditions. The Underwriter reserves
the right to withdraw, cancel or modify the Offering and to reject any order in
whole or in part. It is expected that delivery of certificates representing the
securities comprising the Units will be made against payment therefor at the
offices of the Underwriter in New York City on or about , 1996.
GAINES, BERLAND INC.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE UNITS, COM-
MON STOCK OR SERIES B WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTIN-
UED AT ANY TIME.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance there-
with files reports and other information with the Securities and Exchange Com-
mission (the "Commission"). These reports, proxy statements and other informa-
tion concerning the Company can be inspected and copied at the public refer-
ence facilities maintained by the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549; and at the following regional offices of the
Commission: Seven World Trade Center, Suite 1300, New York, New York 10048;
and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661. Copies of such material can also be obtained from the Commission at
prescribed rates through its Public Reference Section at 450 Fifth Street,
N.W., Washington, D.C. 20549.
The Company has filed a Registration Statement on Form SB-2 (the "Registra-
tion Statement") with the Commission under the Securities Act with respect to
the securities offered hereby. As permitted by the rules and regulations of
the Commission, this Prospectus does not contain all of the information set
forth in the Registration Statement and in the exhibits and schedules thereto.
For further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement and the exhibits
thereto. Statements contained in this Prospectus concerning the provisions of
documents filed with the Registration Statement as exhibits and schedules are
necessarily summaries of such documents, and each such statement is qualified
in its entirety by reference to the copy of the applicable document filed with
the Commission. The Registration Statement, including the exhibits and sched-
ules thereto, may be inspected without charge and copied upon payment of the
charges prescribed by the Commission at the Public Reference Room of the Com-
mission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed in-
formation and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. A glossary of technical terms used in this Pro-
spectus is included on pages 9 and 10.
THE COMPANY
The Company is an independent energy company primarily engaged in the explo-
ration for natural gas and oil reserves and in the acquisition, production, de-
velopment and marketing of natural gas and oil properties. The Company's early
growth was through acquisitions of natural gas reserves, principally in the
Mid-Continent area of Arkansas, Kansas, Oklahoma and Texas. In recent years,
however, the Company's business activities have focused more on exploration and
related developmental drilling projects situated in Southern Louisiana and
along the Gulf Coast of Alabama, Mississippi and Texas. The Company's current
business strategy is to increase its reserves by drilling natural gas and oil
wells on prospects identified and developed through the use of well correla-
tions, computer-aided exploration ("CAEX") technologies and 3-D seismic sur-
veys, with emphasis on projects situated along the Gulf Coast and, particular-
ly, the transition zone of Southern Louisiana. As a supplemental part of such
strategy, the Company may also acquire producing properties as market condi-
tions and the Company's resources allow.
During 1995, as part of its refocusing activities, the Company sold to Amoco
Production Company ("Amoco") a 50% interest in one of the Company's primary ex-
ploration projects in the Mid-Continent area, a 33 square mile 3-D seismic
shoot located in Garvin County, Oklahoma. Additional activities in 1995 in-
cluded (i) the drilling of two exploratory wells in Mobile Bay, Alabama which
began production in December 1995, (ii) the execution of a joint venture agree-
ment to explore for gas and oil on prospects located in Southern Louisiana and
along the Texas Gulf Coast, and (iii) the acquisition of leasehold rights in
various prospects, including one prospect located in Terrebonne Parish, Louisi-
ana (the "Starboard Prospect"). The Starboard Prospect is comprised of a group
of four distinct high potential exploration prospects, as well as proved unde-
veloped locations. The proved undeveloped portion of the Starboard Prospect has
been evaluated by independent petroleum engineers as containing substantial
proved undeveloped reserves. The Company intends to conduct a 3-D seismic sur-
vey to further define the prospect. As of December 31, 1995, the Company and
its partners had acquired acreage in the Starboard Prospect which included es-
timated proved undeveloped reserves of 11 Bcfe and estimated future net reve-
nues of over $19 million. In March 1996, affiliates of a utility acquired a 48%
interest in the Company's interest in the Starboard Prospect, and through a
non-recourse loan to the Company is funding all of the Company's cost in ob-
taining the leasehold and seismic data on the prospect (the "Starboard Prospect
Funding"). The Company intends to fund its share of developmental drilling
costs in the prospect from its existing credit facility with Bank of America
Illinois (the "Credit Agreement"). Exploratory drilling costs will be funded
through proceeds of this Offering and/or industry partners. As of the date of
this Prospectus, the Company owns a 48% working interest in a joint venture
formed to exploit the Starboard Prospect (the "Starboard Prospect Joint Ven-
ture"). The Company is continuing to search for additional prospects in the ar-
ea. See "Business and Properties--Exploration and Development."
In addition to 3-D seismic, the Company makes extensive use of 2-D seismic
reprocessing and CAEX enhancement technologies to delineate "bright spot" seis-
mic anomalies. The Mobile Bay wells, which began production in December 1995,
were located by identification of such "bright spot" seismic anomalies, deline-
ated by the Company through reprocessing and enhancement of existing 2-D seis-
mic data. The Company plans to commence drilling on its third Mobile Bay area
"bright spot"-delineated prospect by October 1996. The Company believes that
additional drilling prospects in the Gulf Coast area may be identified through
delineation of such "bright spot" seismic anomalies. In September 1995, the
Company entered into an agreement to acquire, reprocess and interpret up to
1,600 miles of 2-D seismic data in the shallow offshore Gulf Coast area. The
reprocessing and interpretation of such data is designed to identify "bright
spot" gas accumulations which
3
<PAGE>
potentially can identify the location of commercial quantities of hydrocarbons.
The Company entered into an agreement with Marconi, Inc. to jointly explore any
prospects thus identified.
The Company plans to continue to expand its exploration activities in the
Gulf Coast area through a number of current activities, including the (1) gen-
eration of prospects with its existing partners; (2) identification of "bright
spot" seismic anomalies; (3) continuing acquisition of acreage on additional
potential Southern Louisiana exploration projects identified by the Company;
and (4) continuing evaluation of high-graded exploration prospect opportunities
in Southern Louisiana and other Gulf Coast areas.
Certain statements contained herein that set forth management's intentions,
hopes, plans, beliefs, expectations or predictions of the future are forward-
looking statements. It is important to note that actual results could differ
materially from those projected in such forward-looking statements. The risks
and uncertainties include but are not limited to potential unfavorable or un-
certain results of 3-D seismic surveys not yet completed, drilling cost and op-
erational uncertainties, risks associated with quantities of total reserves and
rates of production from existing gas and oil reserves and product pricing, po-
tential delays in the timing of planned operations, competition and other risks
associated with permitting seismic surveys and with leasing gas and oil proper-
ties, potential cost overruns, the availability of capital to fund planned ex-
penditures and general industry and market conditions. See "Risk Factors."
The Company, through its predecessor, Frontier, Inc., was incorporated under
the laws of the State of Oklahoma in 1988. The Company's principal office is
located at One Benham Place, 9400 North Broadway, Oklahoma City, Oklahoma
73114, and its telephone number is (405) 478-4455.
THE OFFERING
Securities offered................
1,200,000 Units, each Unit consisting
of three shares of Common Stock and
three Series B Warrants. Each Series B
Warrant entitles the holder to purchase
one share of Common Stock for $ dur-
ing the four-year period commencing one
year from the date of this Prospectus.
Each Series B Warrant is redeemable by
the Company at a price of $.01 per war-
rant at any time after the Series B
Warrants become exercisable, upon not
less than 30 days prior written notice,
if the last sale price of the Common
Stock on Nasdaq has been at least 200%
of the then-exercise price of the Se-
ries B Warrants (initially $ ) for
the 20 consecutive trading days ending
on the third day prior to the date on
which the notice of redemption is giv-
en. The securities comprising the Units
are immediately separable and transfer-
able. See "Description of Securities."
Common Stock outstanding.......... 5,208,406 shares
Shares of Common Stock to be out-
standing after the Offering....... 8,808,406 shares
4
<PAGE>
Nasdaq Symbols (1)................
Common Stock: FNGC Series B Warrants:
- -------- FNGCZ (Proposed)(2)
(1) The Company's Convertible Preferred Stock and Series A Warrants are listed
on the Nasdaq Small Cap Market under the symbols FNGCP and FNGCW, respec-
tively.
(2) Quotation on Nasdaq provides no assurance that a trading market will
develop for the Series B Warrants or that such a market, if developed, will
be maintained.
USE OF PROCEEDS
The Company intends to use the net proceeds from this Offering, assuming a
per-Unit offering price of $6.00, approximately as follows: (i) $4,214,000 (ap-
proximately 70%) will be used to fund the Company's exploration, developmental
and acquisition projects in Southern Louisiana, along the Gulf Coast of Ala-
bama, Mississippi and Texas and in Garvin County, Oklahoma; (ii) $1,295,000
(approximately 22%) to service the debt repayment requirements for the 12
months subsequent to the date of this Prospectus pursuant to the Credit Agree-
ment; and (iii) $511,000 (approximately 8%) for working capital and general
corporate purposes (which may include the payment of dividends on the Convert-
ible Preferred Stock). The Company will not receive any of the proceeds from
the sale of the Selling Securityholders' Shares, except that it will receive
cash proceeds attributable to the exercise of the Hi-Chicago Warrant. See "Use
of Proceeds."
RISK FACTORS
This Offering involves a substantial degree of risk including, among others,
the Company's net operating losses, limited history of exploration activity,
reliance on CAEX and 3-D seismic technology, the inherent uncertainties in es-
timating proved gas and oil reserves, the speculative nature of gas and oil ex-
ploration, the uncertainties of leasing gas and oil mineral rights and ob-
taining the necessary permits to conduct seismic surveys over such leases, the
uncertainties of gas and oil prices, the existence of mortgages on the
Company's gas and oil properties, and the existence of certain anti-takeover
provisions. See "Risk Factors."
5
<PAGE>
SUMMARY GAS AND OIL RESERVE DATA
The following table sets forth summary information, as estimated by Hofmann &
Assoc. Engineering Co. and Atwater Consultants, Ltd., independent petroleum en-
gineers, as stated in their reports dated February 13, 1996 and March 21, 1996,
respectively, regarding gas and oil reserves at December 31, 1995. See "Risk
Factors--Uncertainty of Estimates of Gas and Oil Reserves," "Business and Prop-
erties--Natural Gas and Oil Reserves," and "Business and Properties--Acquisi-
tions and Divestments."
<TABLE>
<CAPTION>
GAS
GAS OIL EQUIVALENT
(MCF) (BBL) (MCFE) (1)
---------- ------- ----------
<S> <C> <C> <C>
Proved developed reserves...................... 7,307,717 72,515 7,742,807
Proved undeveloped reserves (2)................ 11,256,424 206,986 12,498,340
Total proved reserves (2)...................... 18,564,141 279,501 20,241,147
</TABLE>
--------
(1) Oil production is converted to Mcfe at the rate of six Mcf of natural
gas per Bbl of oil, based upon the approximate energy content of natu-
ral gas and oil.
(2) Subsequent to December 31, 1995, the Company reduced its working inter-
est in the Starboard Prospect Joint Venture from 100% to 48%. As a re-
sult of the transactions, the Company's proved undeveloped reserves
were reduced by 5,806,783 Mcfe. After giving effect to the transac-
tions, the Company's proved undeveloped reserves and total proved re-
serves at December 31, 1995 would have been 6,691,557 Mcfe and
14,434,364 Mcfe, respectively.
SUMMARY GAS AND OIL PRODUCTION INFORMATION
The following table sets forth certain information regarding the production
volumes, average prices received and average production costs associated with
the Company's sale of gas and oil for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
-------------------------------- ENDED
1995 1994 1993 MARCH 31, 1996
---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Net production:
Oil (Bbl).................... 23,244 30,528 29,717 2,142
Gas (Mcf).................... 1,146,696 1,482,264 1,516,947 483,051
Gas equivalent (Mcfe)........ 1,286,160 1,665,432 1,695,249 495,903
Average sales price realized:
Oil ($ per Bbl).............. $ 17.36 $ 15.25 $ 17.23 $ 18.17
Gas ($ per Mcf).............. $ 1.58 $ 1.72 $ 1.87 $ 2.05
Average lease operating
expenses and taxes
($ per Mcfe).................. $ .84 $ .78 $ .76 $ .49
</TABLE>
6
<PAGE>
SUMMARY ESTIMATE OF FUTURE NET REVENUE FROM PROVED RESERVES
The following table sets forth summary information, as estimated by Hofmann &
Assoc. Engineering Co. and Atwater Consultants, Ltd., independent petroleum en-
gineers, as stated in their reports dated February 13, 1996 and March 21, 1996,
respectively, regarding estimated future net revenue and the present value of
future net revenue from net proved reserves as of December 31, 1995.
<TABLE>
<CAPTION>
12/31/95
-----------
<S> <C>
Estimated total future net revenue(1)(2).................... $31,265,445
Present value of future net revenue(2)(3)................... $20,049,726
</TABLE>
- --------
(1) Estimated future net revenue represents estimated future gross revenue to
be generated from the production of proved reserves, net of estimated pro-
duction and future development costs, using prices and costs in effect as
of the date indicated. The amounts shown do not give effect to non-property
related expenses, such as general and administrative expenses, debt service
and future income tax expense or to depreciation, depletion and amortiza-
tion.
(2) Subsequent to December 31, 1995, the Company reduced its working interest
in the Starboard Prospect Joint Venture from 100% to 48%. As a result of
the transactions, the Company's estimated total future net revenue and the
present value of the future net revenue were reduced by $10,217,817 and
$5,971,265, respectively. After giving effect to the transactions, the
Company's estimated total future net revenue and the present value of the
future net revenue at December 31, 1995 would have been $21,047,628 and
$14,078,461, respectively.
(3) Present value is calculated by discounting estimated future net revenue by
10% annually.
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth summary consolidated financial information
concerning the Company for each of the two fiscal years ended December 31, 1995
and 1994, derived from the audited consolidated financial statements of the
Company and its subsidiaries, and the three months ended March 31, 1996 and
1995, prepared by the Company, appearing elsewhere in this Prospectus, and
should be read in conjunction with such Consolidated Financial Statements, in-
cluding the Notes thereto. See "Selected Consolidated Financial Data" and "Man-
agement's Discussion and Analysis of Financial Condition and Results of Opera-
tions."
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------ --------------------
1995 1994 1996 1995
-------- -------- --------- ---------
($ IN THOUSANDS) ($ IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................ $ 4,654 $ 5,465 $ 1,250 $ 1,196
Costs and expenses.................. 6,249 6,707 2,019 1,584
Net income (loss) before taxes...... (1,595) (1,242) (769) (388)
Net income (loss)................... (1,595) (869) (769) (388)
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(1)(2)
------- -----------------
($ IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.................................... $ (481) $ 648
Total assets....................................... 10,414 15,139
Long-term debt..................................... 3,513 2,836
Stockholders' equity............................... 4,569 10,589
</TABLE>
- --------
(1) Gives effect to the sale of the Units hereby (assuming a per-Unit offering
price of $6.00) and the application of the estimated net proceeds there-
from. See "Use of Proceeds" and "Capitalization."
(2) Assumes that none of the proceeds of this Offering will used to pay divi-
dends on the Convertible Preferred Stock.
Unless otherwise indicated, the information included in this Prospectus as-
sumes (i) no exercise of the Series B Warrants offered hereby, the Underwrit-
er's over-allotment option or the Unit Purchase Option, (ii) no conversion of
the Company's outstanding 12% cumulative convertible preferred stock (the "Con-
vertible Preferred Stock") into an aggregate of 171,922 shares of Common Stock
and 171,922 Series A Common Stock Purchase Warrants (the "Series A Warrants"),
assuming a conversion rate of two shares of Common Stock for each share of Con-
vertible Preferred Stock, (iii) no exercise of outstanding options to purchase
108,000 shares of Common Stock under the Management Incentive Stock Plan (the
"Incentive Plan"), outstanding options to purchase 180,000 shares of Common
Stock under the Incentive Stock Option Plan or outstanding options to purchase
350,000 shares of Common Stock under the Stock Incentive Option Plan-1996 (the
"1996 Option Plan"), (iv) no exercise of other outstanding warrants to purchase
902,000 shares of Common Stock (including 300,000 shares of Common Stock issua-
ble upon exercise of the Hi-Chicago Warrant), and (v) no exercise of outstand-
ing Series A Warrants to purchase 1,578,078 shares of Common Stock or the Se-
ries A Warrants which may be issued upon conversion of the Convertible Pre-
ferred Stock. As of the date of this Prospectus, 505,000 options have an exer-
cise price equal to or less than the assumed per-share offering price of $2.00.
See "Underwriting" and "Description of Securities."
8
<PAGE>
GLOSSARY
As used in this Prospectus, the terms defined below have the meanings as-
signed them in this section.
BBL. One stock tank barrel, or 42 U.S. gallons liquid volume, used in refer-
ence to crude oil or other liquid hydrocarbons.
BCF. Billion cubic feet of gas.
BCFE. Billion cubic feet of gas equivalent.
BTU. British thermal unit, which is the heat required to raise the tempera-
ture of a one-pound mass of water from 58.5 to 59.5 degrees fahrenheit.
CAEX. COMPUTER AIDED EXPLORATION TECHNOLOGY. Technology used to collect and
analyze geological, geophysical, engineering, production and other data ob-
tained about a potential prospect for the purpose of, among other things, cor-
relating density and sonic characteristics of subsurface formations obtained
from well logs and/or two-dimensional seismic surveys with like data from sim-
ilar properties to determine the likely geological composition of a prospect,
locate potential areas of hydrocarbon accumulation in the prospect and formu-
late models.
CARRIED INTEREST. An agreement under which one party (the "carrying party")
agrees to pay for a portion or for all of the drilling, development and oper-
ating costs of another party (the "carried party") on a property in which both
own a portion of the working interest.
DEVELOPMENT WELL. A well drilled as an additional well to the same reservoir
as other producing wells on a lease, or drilled on an offset lease not more
than one location away from a well producing from the same reservoir.
DRY HOLE. A well found to be incapable of producing either gas or oil in
quantities sufficient to justify completion as an gas or oil well.
EXPLORATORY WELL. A well drilled to find and produce gas or oil in an un-
proved area, to find a new reservoir in a field previously found to be produc-
tive of gas or oil in another reservoir, or to extend a known reservoir.
FORMATION. A succession of sedimentary beds that were deposited under the
same general geologic conditions.
GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may be, in
which a working interest is owned.
LEASE. A lease is an agreement whereby the grantee receives for a period of
time the full or partial interest in gas and/or oil properties, gas and oil
mineral rights, fee rights, or other rights of grantor, and which gives the
grantee the right to drill for, produce and sell gas and oil upon payment of
rentals, bonuses and/or royalties.
MMBTU. One million Btu's.
MCF. One thousand cubic feet.
MCFE. One thousand cubic feet of gas equivalent.
NET ACRES OR NET WELLS. The sum of the fractional working interests owned in
gross acres or gross wells.
PRESENT VALUE. When used with respect to gas and oil reserves, present value
means the estimated future gross revenue to be generated from the production
of proved reserves, net of estimated production and future
9
<PAGE>
development costs, using prices and costs, without giving effect to non-prop-
erty related expenses such as general and administrative expenses, debt serv-
ice and future income tax expense or to depreciation, depletion and amortiza-
tion, discounted using an annual discount rate of 10%.
PRODUCTIVE WELL. A well that is producing gas or oil or that is capable of
production.
PROSPECT. A specified area, upon which one or more potential drill sites
have been identified, containing possible accumulations of gas and/or oil de-
posits.
PROVED DEVELOPED RESERVES. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
PROVED RESERVES. The estimated quantities of crude oil, natural gas and nat-
ural gas liquids which geological and engineering data demonstrate with rea-
sonable certainty to be recoverable in future years from known reservoirs un-
der existing economic and operating conditions, i.e., using prices and costs
as of the date the estimate is made and any price changes provided for by ex-
isting contracts.
PROVED UNDEVELOPED RESERVES. Reserves that are expected to be recovered from
new wells on undrilled acreage, or from existing wells where a relatively ma-
jor expenditure is required for recompletion.
ROYALTY INTEREST. An interest in a gas and oil property entitling the owner
to a share of gas or oil production free of costs of production.
2-D SEISMIC. A process for mapping geologic structures on a perpendicular
plane using seismic energy waves and observing the arrival time of the waves
reflected from acoustic-impedance contrasts.
SWAP. An agreement between a producer and a broker in which a swap or strike
price is established on the agreement date for a commodity such as gas or oil.
If the market price at the settlement date is above the swap price, the pro-
ducer pays the broker the difference, and vice versa if the market price is
below the strike price.
3-D SEISMIC. A process which produces a three-dimensional image based upon
seismic data obtained from multiple horizontal and vertical points within a
geological formation.
WORKING INTEREST. The operating interest under a gas or oil lease which
gives the owner the right to drill, produce and conduct operating activities
on the property and a share of production, subject to all royalties, overrid-
ing royalties and other cost burdens.
10
<PAGE>
RISK FACTORS
An investment in the securities being offered hereby involves substantial
risk. Prospective investors should carefully consider the following factors,
in addition to the other information set forth in this Prospectus.
HISTORY OF LOSSES; ACCUMULATED AND WORKING CAPITAL DEFICITS
For the years ended December 31, 1994 and 1995 and for the three months
ended March 31, 1996, the Company had net losses of $868,576, $1,595,478 and
$769,226, respectively. At March 31, 1996, the Company had an accumulated def-
icit of $3,624,113 and working capital deficit of $480,928. The Company antic-
ipates that it will continue to have net losses for the fiscal year ending De-
cember 31, 1996 and thereafter until it acquires or develops enough additional
gas and oil properties to achieve profitability and generate cash flow. There
can be no assurance that it will be able to do so. See "Management's Discus-
sion and Analysis of Financial Condition and Results of Operations."
LIMITED OPERATING HISTORY; RELIANCE ON CAEX AND 3-D SEISMIC TECHNOLOGY
The Company, through its predecessor, commenced operations in August 1988.
The principal activity of the Company has evolved since its inception from the
acquisition, production and marketing of natural gas and oil reserves to a
greater emphasis upon exploration and development. The Company's strategy for
discovering natural gas and oil reserves depends upon the effective use of
CAEX technology and 3-D seismic surveys to accurately define detailed and com-
plex geologic features, which requires greater pre-drilling expenditures than
traditional drilling strategies. Although the Company believes that its use of
CAEX technology and 3-D seismic surveys will increase the probability of suc-
cess of its exploration wells and will reduce average finding costs through
the elimination of prospects that might otherwise be drilled solely on the ba-
sis of conventional 2-D seismic data and other traditional methods, there can
be no assurance as to the success of the Company's drilling program. Although
the individual members of the Company's management have extensive experience
in gas and oil exploration, to date the Company has drilled only 19 wells, 12
of which have been productive. The Company used CAEX technology or 3-D seismic
surveys in 12 of the drilled wells, six of which have been productive.
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company has made and intends to make substantial capital expenditures in
connection with the exploration and production of its gas and oil properties.
Historically, the Company has funded its capital expenditures through a
combination of internally generated funds, equity and long-term debt
financing, and short-term financing arrangements. Based on its current
operations, the Company anticipates that the net proceeds from the Offering,
together with its cash flow from operations, the availability of credit under
the Credit Agreement and the Starboard Prospect Funding, will be sufficient to
meet estimated capital expenditures through 1997. However, no assurance can be
given that the cash flow and funds available to the Company will be sufficient
for the Company to carry out its proposed plans through such date. Future cash
flows and the availability of credit under the Credit Agreement are subject to
a number of variables, such as the level of production from existing wells,
prices of gas and oil and the Company's success in locating and producing new
reserves. If cash flows do not develop as anticipated or funds are not
available under the Credit Agreement, the Company will be required to find
additional sources of capital. The Company has not entered into any
arrangements to obtain alternate financing, and there can be no assurance of
the availability of any financing on acceptable terms. See "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
MORTGAGED GAS AND OIL PROPERTIES; CREDIT AGREEMENT COVENANTS AND RESTRICTIONS
Pursuant to the Credit Agreement, the Company has granted to Bank of America
Illinois a mortgage on substantially all of the proved developed gas and oil
properties of the Company to secure repayment under the Credit Agreement. The
granting of these liens limit the ability of the Company to borrow additional
funds. The amount of borrowings under the Credit Agreement is based on the
maintenance of adequate natural gas and oil reserves to support the amount
borrowed. Should the estimated proved natural gas and oil reserves or the
price
11
<PAGE>
to be received for these reserves decline below the required reserve value,
the Company would be required to either accelerate payment, repay a specified
amount of the borrowing so as to have adequate reserve value to support the
borrowing, or provide additional collateral for the loan. The Company is sub-
ject to certain covenants and restrictions contained in the Credit Agreement.
The Company is currently in compliance with all its obligations under the
Credit Agreement, and the Company believes that it will be able to continue to
meet the covenants and restrictions and make the payments required by the
Credit Agreement as a result of the Offering contemplated herein, but there
can be no assurance of this. A failure by the Company to comply with the cove-
nants and restrictions contained in the Credit Agreement will constitute a de-
fault under the terms of the Credit Agreement, resulting in the indebtedness
becoming immediately due and payable and enabling the lender to foreclose
against the collateral for the loan. See "Use of Proceeds."
Additionally, in connection with the Starboard Prospect Funding, the Company
granted to the lending party a mortgage on the properties comprising the Star-
board Prospect. The Company is subject to certain default provisions including
cross-defaults under the Credit Agreement. Accordingly, a failure by the Com-
pany to comply with any of the covenants and restrictions of the Credit Agree-
ment will constitute a default under the terms of the Starboard Project Fund-
ing, resulting in the indebtedness becoming immediately due and payable and
enabling the lender to foreclose against the mortgaged properties.
UNCERTAINTY OF ESTIMATES OF GAS AND OIL RESERVE
There are numerous uncertainties inherent in estimating quantities of proved
gas and oil reserves, including many factors beyond the control of the Compa-
ny. The process of estimating gas and oil reserves is complex, requiring sig-
nificant assumptions and subjective decisions in the evaluation of available
geological, engineering and economic data for each reservoir. As a result,
such estimates are inherently an imprecise evaluation of reserve quantities or
the future net revenue therefrom. Actual future production, revenue, taxes,
development expenditures, operating expenses and quantities of recoverable gas
and oil reserves may vary substantially from those assumed in the estimate.
Any significant variance in these assumptions could materially affect the es-
timated quantity and value of the Company's reserves. In addition, the
Company's reserves may be subject to downward or upward revision, based upon
production history, results of future exploration and development, prevailing
gas and oil prices and other factors. See "Business and Properties--Gas and
Oil Reserves."
UNCERTAINTY OF GAS AND OIL PRICES
The Company's revenues, profitability and future rate of growth substan-
tially depend upon prevailing prices for oil, natural gas and natural gas li-
quids, which, in turn, depend upon numerous external factors such as various
economic, political and regulatory developments and competition from other
sources of energy. The unsettled nature of the energy markets and the unpre-
dictability of actions of the Organization of Petroleum Exporting Countries
("OPEC") members make it particularly difficult to estimate future prices of
oil, natural gas and natural gas liquids. Prices of oil, natural gas and natu-
ral gas liquids are subject to wide fluctuations, and there can be no assur-
ance that future decreases in such prices will not occur. All of these factors
are beyond the control of the Company. See "Business and Properties."
UNCERTAINTY OF PRODUCTION AND REPLACEMENT OR EXPANSION OF RESERVES
The Company must continually acquire and explore for and develop new gas and
oil reserves to replace those being depleted by production. Without successful
drilling or acquisition ventures, the Company's assets and revenues will de-
cline. There can be no assurance that the Company will be able to find addi-
tional reserves or that the Company will drill economically productive wells
or acquire properties containing proved reserves. Gas and oil exploration and
development are speculative, involve a high degree of risk and are subject to
all the hazards typically associated with the search for, development of and
production of gas and oil. The process of drilling for gas and oil can be haz-
ardous and carry the risk that no commercially viable gas or oil production
will be obtained. The cost of drilling, completing and operating wells is of-
ten uncertain. Moreover, drilling may be curtailed, delayed or canceled as the
result of many factors, including title problems, weather conditions, short-
ages of or delays in delivery of equipment, as well as the financial instabil-
ity of well operators, major working interest owners and well-servicing compa-
nies. The availability of a ready market for the Company's gas and oil depends
on numerous factors beyond its control, including the demand for and supply of
gas and oil,
12
<PAGE>
the proximity of the Company's natural gas reserves to pipelines, the capacity
of such pipelines, fluctuations in production and seasonal demand, the effects
of inclement weather and governmental regulation. New gas wells may be shut-in
for lack of a market until a gas pipeline or gathering system with available
capacity is extended into the area. New oil wells may have production cur-
tailed until production facilities and delivery arrangements are acquired or
developed. In addition, the Company's properties may be susceptible to hydro-
carbon drainage from production by other operators on adjacent properties.
OPERATING HAZARDS
The gas and oil business involves a variety of operating risks, including
the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formations and environmental hazards such as oil spills, gas leaks, ruptures
or discharges of toxic gases. The occurrence of any of these events could re-
sult in substantial losses to the Company due to injury or loss of life, se-
vere damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, clean-up responsibilities, regulatory
investigation and penalties and suspension of operations. In accordance with
customary industry practice, the Company maintains insurance against some, but
not all, of these risks. There can be no assurance that any insurance will be
adequate to cover any losses or liabilities. The Company cannot predict the
continued availability of insurance, or its availability at premium levels
that justify its purchase. See "Business and Properties."
ENVIRONMENTAL RISKS
Gas and oil operations are subject to extensive foreign, federal, state and
local laws regulating the discharge of materials into the environment or oth-
erwise relating to the protection of the environment. Numerous governmental
departments issue rules and regulations to implement and enforce such laws
which are often difficult and costly to comply with and which carry substan-
tial penalties for failure to comply. The regulatory burden on the gas and oil
industry increases its cost of doing business and consequently affects its
profitability. These laws, rules and regulations affect the operations of the
Company. To date, expenditures related to complying with these laws and for
remediation of existing environmental contamination have not been significant
in relation to the results of operations of the Company. However, there can be
no assurance that future compliance with environmental requirements generally
will not have a material adverse effect upon the capital expenditures, earn-
ings or competitive position of the Company.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980 and certain state laws and regulations impose liability for cleanup of
waste sites and in some circumstances attorney's fees, exemplary damages
and/or trebling of damages. Also, the federal Clean Water Act, together with
the related National Pollution Discharge Elimination System, and similar state
environmental laws are expected to prohibit gas and oil producers from dis-
charging produced water overboard into waters of the U.S. shoreward of the
territorial seas. In such event, the Company would be required to install un-
derground injection facilities to dispose of the produced water or abandon its
remaining reserves produced from water-bearing zones at any applicable proper-
ties.
GOVERNMENTAL REGULATION
In addition to environmental regulations, gas and oil operations are subject
to various other federal, state and local governmental regulations which may
be changed from time to time in response to economic or political conditions.
Matters subject to regulation include discharge permits for drilling opera-
tions, drilling bonds, reports concerning operations, the spacing of wells,
unitization and pooling of properties and taxation. From time to time, regula-
tory agencies have imposed price controls and limitations on production by re-
stricting the rate of flow of gas and oil wells below actual production capac-
ity in order to conserve supplies of gas and oil. See "Business and Proper-
ties--Regulation."
COMPETITION FOR GAS AND OIL LEASES AND SEISMIC PERMITS
There is substantial competition for gas and oil leases and there can be no
assurance the Company will acquire gas and oil leases it seeks. There is simi-
lar competition for seismic permits without which 2-D and 3-D
13
<PAGE>
seismic surveys cannot be conducted. There can be no assurance that the Com-
pany can obtain the permits necessary to conduct seismic surveys it may desire
to conduct. This risk can be greater in the State of Louisiana where current
law requires permits from owners of at least an undivided 80% interest in each
tract over which the Company intends to conduct seismic surveys. See "Business
and Properties--Regulation."
COMPETITION
The Company operates in a highly competitive environment. The Company com-
petes with major integrated and independent gas and oil companies for the ac-
quisition of desirable gas and oil properties and leases, for the equipment
and labor required to develop and operate such properties, and in the market-
ing of natural gas to end-users. Many of these competitors have financial and
other resources substantially greater than those of the Company. See "Business
and Properties--Competition."
BROAD DISCRETION AS TO USE OF PROCEEDS; SIGNIFICANT AMOUNT MAY BE APPLIED TO
DEBT REPAYMENT
The Company's intended use of proceeds is based on its current business
plan, which is subject to change. The Company has allocated approximately
$4,214,000 (approximately 70%) to fund the Company's exploration, developmen-
tal and acquisition projects in Southern Louisiana, along the Gulf Coast of
Alabama, Mississippi and Texas and in Garvin County, Oklahoma, over which the
Company will have broad discretion. Additionally, the Company has allocated
approximately $1,295,000 (approximately 22%) to service the debt repayment re-
quirements for the 12 months subsequent to the date of this Prospectus pursu-
ant to the Credit Agreement, and approximately $511,000 (approximately 8%) for
working capital and general corporate purposes (which may include the payment
of dividends on the Convertible Preferred Stock). Although the Company has no
plans other than as stated for utilization of the net proceeds of this Offer-
ing, events subsequent to the date of this Prospectus may make desirable or
necessary an alternative use of such proceeds, for which the Company retains
broad discretion. See "Use of Proceeds."
DIVIDEND POLICY
The Company does not currently pay cash dividends on its Common Stock and
does not anticipate paying such dividends in the near future. Holders of
shares of the Company's Convertible Preferred Stock are entitled to receive
cumulative cash dividends at the rate of 12% per annum when, as and if de-
clared by the Board of Directors of the Company out of funds at the time le-
gally available therefor. If not declared, dividends cumulate from quarter to
quarter without interest until declared and paid. No dividends on the Convert-
ible Preferred Stock have been paid since April 1995. As of May 31, 1996, the
accumulated but undeclared and unpaid dividends equaled $111,749, representing
four quarterly dividend periods.
The Company is also restricted under the terms of the Credit Agreement from
making distributions of any type with respect to any class of its capital
stock unless it meets certain financial requirements (the "Restricted Payment
Tests"), including the maintenance of a current ratio of not less than 1.1:1
and maintenance of tangible net worth in excess of $5,000,000, after giving
effect to the proposed distribution. The Company currently does not meet all
of the Restricted Payment Tests and, accordingly, is restricted under the
terms of the Credit Agreement from making any dividend payments or other dis-
tribution with respect to any class of its capital stock. See "Dividend Poli-
cy."
RIGHT OF HOLDERS OF CONVERTIBLE PREFERRED STOCK TO ELECT TWO ADDITIONAL BOARD
MEMBERS
Whenever dividends on the Convertible Preferred Stock have not been paid in
an aggregate amount equal to at least six quarterly dividends on such shares
(whether or not consecutive), the number of directors of the Company will be
increased by two. The holders of the Convertible Preferred Stock, voting sepa-
rately as a class, will be entitled to elect such two additional directors to
the Board of Directors at any meeting of stockholders of the Company at which
directors are to be elected held during the period such dividends remain in
arrears. Such voting right will terminate when all such dividends accrued and
in default have been paid in full or set apart for payment, and the term of
office of all directors so elected will terminate immediately upon such pay-
ment or setting apart for payment. The existence of the Restricted Payment
Tests under the Credit Agreement, to the
14
<PAGE>
extent that they operate to prevent the Company from declaring and paying div-
idends on the Convertible Preferred Stock, increases the likelihood that hold-
ers of Convertible Preferred Stock may be able to elect two additional direc-
tors to the Board by late 1996. The Company intends to seek a waiver of the
Restricted Payment Tests in order to resume dividend payments on the Convert-
ible Preferred Stock prior to an aggregate of six quarterly dividend payments
being in arrears. There can be no assurance, however, that the Company will be
able to obtain such a waiver. See "Management--The Board of Directors" and
"Description of Securities--Preferred Stock."
RELIANCE ON KEY PERSONNEL
The Company depends upon the efforts of David W. Berry, Chairman of the
Board and President, David B. Christofferson, Executive Vice President,
Secretary, General Counsel and Chief Financial Officer, Michael A. Barnes,
Vice President of Exploration and Production and S. Gordon Reese, Jr., Senior
Vice President--Gulf Coast Region. Although the Company has entered into
employment agreements with Messrs. Berry, Christofferson, Barnes and Reese,
the unexpected loss of the services of any of these individuals could have a
detrimental effect on the Company. The Company has obtained "key man"
insurance in the amount of $1 million on the life of each of Messrs. Berry and
Christofferson, but does not have similar insurance on Messrs. Barnes and
Reese. See "Management."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
8,808,406 shares of Common Stock (assuming no exercise of the Underwriter's
over-allotment option or the Unit Purchase Option). Of these shares all of the
3,600,000 shares sold in the Offering (assuming no exercise of the Underwrit-
er's over-allotment option) will be freely transferable by persons other than
affiliates (as defined in regulations under the Securities Act), without re-
striction or further registration under the Securities Act. Of the remaining
5,208,406 shares of Common Stock outstanding, 3,861,156 shares are registered
and are currently freely tradeable (except as subject to lockup agreements de-
scribed in "Shares Eligible for Future Sale") and 1,347,250 shares are "Re-
stricted Securities" within the meaning of Rule 144 under the Securities Act
and may not be sold in the absence of registration under the Securities Act,
unless an exemption from registration is available, including the exemption
provided by Rule 144. Under Rule 144 as currently in effect, all such shares
are currently eligible for sale. The holders of 1,348,180 shares of Common
Stock (including the 1,347,250 shares of Common Stock which constitute "Re-
stricted Securities") have agreed with the Underwriter not to sell their
shares until twelve months after the date of this Prospectus without obtaining
the prior written approval of the Underwriter. The foregoing does not give ef-
fect to any shares issuable on exercise of outstanding options and warrants.
The Company has outstanding (i) 85,961 shares of Convertible Preferred Stock,
which are convertible into an aggregate of 171,922 shares of Common Stock and
171,922 Series A Warrants, assuming a conversion rate of two shares of Common
Stock for each share of Convertible Preferred Stock, (ii) other warrants to
purchase 902,000 shares of Common Stock (including 300,000 shares of Common
Stock issuable upon exercise of the Hi-Chicago Warrant), (iii) outstanding op-
tions to purchase 108,000 shares of Common Stock under the Incentive Plan,
outstanding options to purchase 180,000 shares of Common Stock under the In-
centive Stock Option Plan and outstanding options to purchase 350,000 shares
of Common Stock under the 1996 Option Plan, and (iv) outstanding Series A War-
rants to purchase 1,578,078 shares of Common Stock (excluding the 171,922 Se-
ries A Warrants which may be issued upon conversion of the Convertible Pre-
ferred Stock). In addition, the Selling Securityholders have agreed with the
Underwriter to various limitations on the sale of shares of Common Stock owned
by such holders or issuable to them upon exercise of warrants. No prediction
can be made as to the effect, if any, that future sales of such shares of Com-
mon Stock, or the availability of such shares for future sales, will have on
the market price of the Common Stock from time to time. Sale of substantial
amounts of Common Stock, or the perception that such sales could occur, could
adversely affect prevailing market prices for the Company's securities. See
"Shares Eligible for Future Sale."
REGISTRATION RIGHTS
Upon consummation of the Offering, other than the shares of Common Stock is-
suable upon exercise of the Unit Purchase Option for which the Underwriter has
been granted registration rights, the holders of 500,000 shares of Common
Stock issuable upon exercise of outstanding warrants of the Company have the
right to either
15
<PAGE>
require the Company to register those shares under the Securities Act or have
their shares included in any registration statement filed by the Company, sub-
ject to certain limitations, to enable a public sale of those shares. In the
event the holders of a material amount of such shares should seek to have
their shares registered for sale under the Securities Act, these obligations
could result in considerable expense to the Company and the effect of the of-
fer and sale of such shares may be to depress the market price for the
Company's Common Stock. Compliance with these obligations may also interfere
with the Company's ability to raise additional capital when required.
IMMEDIATE AND SUBSTANTIAL DILUTION
On the basis of a per-Unit offering price of $6.00 and attributing no value
to the Series B Warrants included in the Units, this Offering involves an im-
mediate dilution of approximately $.80 per share of Common Stock (approxi-
mately 40% of the offering price attributable to each share of Common Stock
included in the Units) between the offering price per share included in the
Units and the pro forma net tangible book value per share of the Common Stock
immediately after the completion of this Offering.
LIMITED TRADING MARKET FOR COMMON STOCK; NO PRIOR MARKET FOR SERIES B WARRANTS
Historically, there has been only a limited trading market for the Common
Stock and other securities of the Company. No assurance can be given that an
active market will develop further or be sustained for the Common Stock. Addi-
tionally, prior to this Offering, there has been no market for the Series B
Warrants, and there can be no assurance that an active market will develop for
such securities or be sustained. In the absence of an established trading mar-
ket, holders of the securities of the Company may be unable to sell their
holdings in an efficient manner. See "Price Range of Securities."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE SERIES
B WARRANTS
Holders of the Series B Warrants will have the right to exercise the Series
B Warrants for the purchase of shares of Common Stock only if a current pro-
spectus relating to such shares is then in effect and only if the shares are
qualified for sale under the securities laws of the applicable state or states
or an exemption from any such qualification is available. Although the Company
has undertaken to maintain such a current prospectus and intends to seek to
qualify the shares of Common Stock underlying the Series B Warrants for sale
in those states where the Units are to be offered, there is no assurance that
it will be able to do so. See "Description of Securities--Series B Warrants."
NO SEPARATE QUOTATION OF UNITS
The Company will not make application for the separate quotation of the
Units on Nasdaq. This will not affect the quotation on Nasdaq of the Common
Stock or the Series B Warrants. See "Description of Securities."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF SERIES B WARRANTS
The Series B Warrants initially are exercisable at $ . The Series B War-
rants are redeemable by the Company at a price of $.01 per Warrant at any time
after the Series B Warrants become exercisable, upon not less than 30 days'
prior written notice if the last sale price of the Common Stock has been at
least 200% of the then-exercise price of the Series B Warrants for the 20 con-
secutive trading days ending on the third day prior to the date the notice of
redemption is given. Notice of redemption of the Series B Warrants could force
the holders to (i) exercise the Series B Warrants and pay the exercise price
at a time when it may be disadvantageous for them to do so, (ii) sell the Se-
ries B Warrants at the current market price when they might otherwise wish to
hold the Series B Warrants, or (iii) accept the redemption price, which is
likely to be substantially less than the market value of the Series B Warrants
at the time of redemption. See "Description of Securities--Series B Warrants."
AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER
PROVISIONS
The Company's Certificate of Incorporation (the "Certificate") authorizes
the issuance of preferred stock with such designations, rights and preferences
as may be determined from time to time by the Board of Directors. Accordingly,
the Board of Directors is empowered, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other
16
<PAGE>
rights of holders of the Company's Common Stock. In the event of issuance, the
preferred stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company, which
could have the effect of discouraging bids for the Company and, thereby, pre-
vent stockholders from receiving the maximum value for their shares. Although
the Company has no present intention to issue any shares of its preferred
stock, there can be no assurance that the Company will not do so in the fu-
ture. See "Description of Securities."
In addition to the provision for the issuance of preferred stock, the
Company's Certificate and Bylaws include several other provisions which may
have the effect of inhibiting a change of control of the Company. These in-
clude a classified Board of Directors, no stockholder action by written con-
sent and advance notice requirements for stockholder proposals and director
nominations. The provisions may discourage a party from making a tender offer
for or otherwise attempting to obtain control of the Company. Moreover, as an
Oklahoma corporation, the Company is subject to the provisions of the Oklahoma
General Corporation Act (the "OGCA") which also could render it difficult or
tend to discourage attempts to acquire the Company.
The Oklahoma Takeover Disclosure Act includes provisions which are intended
to encourage persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with the Company's board of directors rather
than pursue non-negotiated takeover attempts. These existing takeover provi-
sions may have a significant effect on the ability of a stockholder to benefit
from certain kinds of transactions that may be opposed by the incumbent board
of directors. See "Description of Securities--Certain Anti-Takeover Provi-
sions."
LIMITED LIABILITY OF DIRECTORS; INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate, as permitted by the OGCA, eliminates in some cir-
cumstances the monetary liability of directors of the Company for breach of
their fiduciary duty as directors. In those circumstances the Company's direc-
tors will not be liable to the Company or its stockholders for breach of such
duty. The Company's Certificate also provides that the Company shall indemnify
all directors and officers of the Company to the full extent permitted by the
OGCA.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units offered hereby,
assuming a per-Unit offering price of $6.00, are estimated to be $6,020,000
(or $6,959,600 if the Underwriter's over-allotment option is exercised in
full). The Company intends to use such net proceeds approximately as follows:
(i) $4,214,000 (approximately 70%) will be used to fund the Company's explora-
tion, developmental and acquisition projects in Southern Louisiana, along the
Gulf Coast of Alabama, Mississippi and Texas and in Garvin County, Oklahoma;
(ii) $1,295,000 (approximately 22%) to service the debt repayment requirements
for the 12 months subsequent to the date of this Prospectus pursuant to the
Credit Agreement; and (iii) $511,000 (approximately 8%) for working capital
and general corporate purposes (which may include the payment of dividends on
the Convertible Preferred Stock). If the over-allotment option is exercised,
the additional net proceeds will be added to the Company's working capital and
may be used for the Company's exploration activities.
The Credit Agreement was entered into in January 1996 at an interest rate of
LIBOR (reserve adjusted) plus one and seven-eighths percent. The proceeds re-
ceived were used to (i) terminate a gas sales agreement by repaying $1,867,577
of deferred gas revenues remaining under the agreement plus a settlement pay-
ment of $313,912, (ii) repay bank indebtedness of $180,554, (iii) pay approxi-
mately $1,061,000 in infrastructure costs relating to the Company's Mobile Bay
properties, and (iv) pay approximately $150,000 in bank and legal fees relat-
ing to the Credit Agreement. The Credit Agreement calls for payment in varying
monthly installments over a five-year period. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capi-
tal Resources."
17
<PAGE>
The following table summarizes the Company's intended uses of the net pro-
ceeds of this Offering:
<TABLE>
<CAPTION>
USE AMOUNT PERCENT
--- ------ -------
<S> <C> <C>
Development, drilling and acquisition..................... $4,214,000 70%
Repayment of loan indebtedness............................ 1,295,000 22%
Working capital and general corporate purposes............ 511,000 8%
---------- ----
Total................................................... $6,020,000 100%
========== ====
</TABLE>
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations, that the proceeds from this Offering, together
with projected cash flow from operations, the credit available under the
Credit Agreement and the Starboard Prospect Funding, will be sufficient to
satisfy its contemplated capital and operating cash requirements through fis-
cal 1997. If cash flows do not develop as anticipated, funds are not available
under the Credit Agreement, or if the Company's proposed plans or the basis
for its assumptions change, the Company will be required to obtain additional
sources of capital. Moreover, the additional funds available under the Credit
Agreement may not be available if the Company's then existing natural gas and
oil reserves are not sufficient to secure the additional borrowings. At pres-
ent, the Company has used most of its existing assets to secure the Credit
Agreement and the Starboard Prospect Funding, and there can be no assurance
additional assets will be available to secure additional borrowings.
The Company plans to use a substantial amount of the proceeds from this Of-
fering for exploration and development activities. The actual allocation of
funds, however, will depend on the Company's success in exploring for, funding
and developing gas and oil reserves and drilling activities. If results do not
meet the Company's requirements (due to unanticipated expenses, absence of gas
and oil or otherwise), it may reallocate the proceeds among other current ex-
ploration and development projects or pursue different exploration and devel-
opment activities or seek to acquire additional natural gas or oil assets. The
Company may use a portion of the proceeds to acquire lease or other interests
in prospects. Any decision to make an acquisition will be dependent on consid-
eration of a variety of factors, including business prospects, purchase price
and financial terms of the transaction. The Company has no agreements, under-
standings or arrangements with respect to any acquisition.
Pending application by the Company of the net proceeds of this Offering,
such proceeds will be invested in short-term, investment-grade, interest-bear-
ing obligations. The Company will not receive any of the proceeds from the
sale of the Selling Securityholders' Shares, except that it will receive cash
proceeds attributable to the exercise of the Hi-Chicago Warrant.
DIVIDEND POLICY
To date, the Company has not paid any dividends on its Common Stock. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend on the Company's earnings, its capital re-
quirements and financial condition and other relevant factors. The Company
does not expect to declare or pay any dividends on Common Stock in the fore-
seeable future.
The Company is also restricted under the terms of the Credit Agreement from
making distributions of any type with respect to any class of its capital
stock unless it meets the Restricted Payment Tests provisions of the Credit
Agreement, including the maintenance of a current ratio of not less than 1.1:1
and maintenance of tangible net worth in excess of $5,000,000, after giving
effect to the proposed distribution. The Company currently does not meet all
of the Restricted Payment Tests and, accordingly, is restricted under the
terms of the Credit Agreement from making any dividend payments or other dis-
tribution with respect to any class of its capital stock.
The Company has 85,961 shares of Convertible Preferred Stock outstanding.
Holders are entitled to receive cumulative cash dividends at the rate of 12%
per annum when, as and if declared by the Board of Directors of the Company
out of funds legally available therefor. If not declared, dividends cumulate
from quarter to quarter without interest until declared and paid. No dividends
on the convertible Preferred Stock have been paid since April 1995. As of May
31, 1996, the accumulated but undeclared and unpaid dividends equaled
$111,749. The Company intends to seek a waiver of the Restricted Payment Tests
in order to resume dividend payments on the Convertible Preferred Stock prior
to an aggregate of six quarterly dividend payments being in arrears. There can
be no assurance, however, that the Company will be able to obtain such a waiv-
er. See "Description of Securities--Preferred Stock--Convertible Preferred
Stock Series."
18
<PAGE>
PRICE RANGE OF SECURITIES
The Common Stock, Convertible Preferred Stock and Series A Warrants have
been listed on Nasdaq since November 12, 1993, and trade under the symbols
"FNGC," "FNGCP" and "FNGCW," respectively. There was no public market for the
securities prior to November 12, 1993.
For the periods indicated below, the following table sets forth the range of
high and low bid prices for the Company's Common Stock, Convertible Preferred
Stock and Series A Warrants as reported by Nasdaq. Nasdaq quotations represent
prices between dealers without adjustment for retail markups, markdowns or
commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
CONVERTIBLE SERIES A
COMMON PREFERRED WARRANTS
------------- --------------- -------------
CALENDAR QUARTER HIGH LOW HIGH LOW HIGH LOW
---------------- ---- --- ------ ----- ---- ---
<S> <C> <C> <C> <C> <C> <C>
1994
First quarter........... $4 $3 1/8 $10 1/4 $ 9 $ 1 $ 5/8
Second quarter.......... 4 3 1/2 10 1/4 9 1/2 3/4 3/8
Third quarter........... 5 3/8 3 5/8 13 9 1/4 1 1/4 3/8
Fourth quarter.......... 5 3/8 3 1/4 12 3/4 9 1 1/4 3/4
1995
First quarter........... 4 5/8 3 1/4 11 3/4 8 3/4 1 1/8 1 1/16
Second quarter.......... 3 1/2 1 7/8 9 5/8 7 3/4 1 1/16 1/4
Third quarter........... 2 1 13/16 9 1/4 9 1/4 1/8
Fourth quarter.......... 1 7/8 7/8 9 6 1/2 3/16 1/16
1996
First quarter........... 2 11/16 1 27/64 7 1/4 7 1/4 11/32 1/8
Second quarter (through
July 29, 1996)......... 2 11/16 1 7/8 8 5/8 7 1/4 1/2 7/32
</TABLE>
At July 29, 1996, there were approximately 64 shareholders of Common Stock
of record and the Company believes there were more than approximately 700 ben-
eficial owners of the Common Stock. The last sale price of the Common Stock on
Nasdaq on July 29, 1996 was $1 15/16. Prior to the date of this Prospectus,
there has been no public market for the Series B Warrants, and there can be no
assurance that any market will develop. The securities comprising the Units
are immediately separable and transferable.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996 and as adjusted to give effect to the sale of the 1,200,000 Units of-
fered hereby at an assumed per-Unit price of $6.00 and the application of the
estimated net proceeds as described under "Use of Proceeds." This table should
be read in conjunction with the Financial Statements of the Company appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Long-term debt, less current maturities, net of
unamortized discount of $288,803 (1)............. $3,513,411 $ 2,836,411
========== ===========
Shareholders' Equity:
Preferred Stock; $.01 par value, 5,000,000
shares authorized; 85,961 issued and
outstanding.................................... $ 860 $ 860
Common Stock; $.01 par value, 20,000,000 shares
authorized; 5,058,406 shares issued and
outstanding; 8,658,406 shares as adjusted (2).. 50,584 86,584
Common Stock to be issued (3)................... 234,375 234,375
Unamortized value of warrants issued (4)........ (75,372) (75,372)
Common Stock subscribed (5)..................... 45,000 45,000
Common Stock subscription receivable (5)........ (45,000) (45,000)
Additional paid-in capital...................... 7,982,379 13,966,379
Retained earnings (deficit) (6)................. (3,624,113) (3,624,113)
---------- -----------
Total shareholders' equity.................... 4,568,713 10,588,713
========== ===========
Total capitalization........................ $8,082,124 $13,425,124
========== ===========
</TABLE>
- --------
(1) Assumes debt repayments will include $618,000 of long-term debt classified
as current at March 31, 1996, and $677,000 of long-term debt classified as
long-term at such date.
(2) Assumes (i) no exercise of the Series B Warrants offered hereby, the Un-
derwriter's over-allotment option or the Unit Purchase Option, (ii) no
conversion of the Company's outstanding Convertible Preferred Stock into
an aggregate of 171,922 shares of Common Stock and 171,922 Series A War-
rants, assuming a conversion rate of two shares of Common Stock for each
shares of Convertible Preferred Stock, (iii) no exercise of outstanding
options to purchase 108,000 shares of Common Stock under the Incentive
Plan, outstanding options to purchase 180,000 shares of Common Stock under
the Incentive Stock Option Plan or outstanding options to purchase 350,000
shares of Common Stock under the 1996 Option Plan, (iv) no exercise of
other outstanding warrants to purchase 902,000 shares of Common Stock (in-
cluding 300,000 shares of Common Stock issuable upon exercise of the Hi-
Chicago Warrant), and (v) no exercise of outstanding Series A Warrants to
purchase 1,578,078 shares of Common Stock or the Series A Warrants which
may be issued upon conversion of the Convertible Preferred Stock. As of
the date of this Prospectus, 505,000 options have an exercise price equal
to or less than the assumed per-share offering price of $2.00. See "Under-
writing" and "Description of Securities." See "Underwriting" and "Descrip-
tion of Securities."
(3) Includes the fair market value of 150,000 common shares committed for is-
suance in January 1996 and issued June 3, 1996.
(4) Value of warrants for Common Stock granted in January 1996 less amortiza-
tion since date of issue, in accordance with Financial Accounting Standard
Board No. 123.
(5) Common shares subscribed in 1993 but unpaid.
(6) Assumes that none of the proceeds of this Offering will used to pay divi-
dends on the Convertible Preferred Stock.
20
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data with re-
spect to the Company for the periods and as of the dates indicated. The finan-
cial data for the years ended December 31, 1995 and December 31, 1994 were ex-
tracted from the audited financial statements of the Company. The financial
data for the three months ended March 31, 1996 and March 31, 1995 have been
extracted from the Company's unaudited financial statements, which have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, include all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the information set forth herein.
This information is not necessarily indicative of the Company's future perfor-
mance. The financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements of the Company and the notes thereto.
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------- -------------------------
1995 1994 1996 1995
--------- -------- ------------ ------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gas and oil revenues......... $ 2,673 $ 3,726 $ 1,092 $ 708
Gain on sale of assets....... 722 1,029 13 238
Sale of seismic data......... 601 -- -- --
Operating fees............... 416 537 73 128
Other revenues............... 242 173 72 122
--------- -------- ----------- -----------
Total revenues............. 4,654 5,465 1,250 1,196
Cost and expenses:
Lease operating expense...... 862 1,079 167 220
Transportation and market-
ing......................... -- -- 129 --
Production taxes............. 214 264 77 50
Gas purchases under deferred
contract.................... 550 564 82 121
Depletion, depreciation and
amortization................ 1,183 1,104 432 285
Exploration costs............ 1,105 1,270 106 336
Interest expense............. 43 -- 97 --
Deferred gas contract settle-
ment........................ -- -- 369 --
General and administrative... 2,292 2,426 560 572
--------- -------- ----------- -----------
Income (loss) before provision
for income taxes.............. (1,595) (1,242) (769) (388)
Benefit for income taxes--de-
ferred...................... -- 373 -- --
--------- -------- ----------- -----------
Net income (loss).............. $ (1,595) $ (869) $ (769) $ (388)
========= ======== =========== ===========
Net income (loss) per common
and common equivalent share... $ (1.05) $ (0.69) $ (0.16) $ (0.24)
========= ======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- MARCH 31,
1995 1994 1996
------ ------ ---------
($ IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................ $ 64 $ 615 $ 496
Working capital (deficit)(1)........................ (2,771) (538) (481)
Net properties and equipment........................ 9,121 9,238 8,241
Total assets........................................ 10,439 11,252 10,414
Current portion of long-term debt................... 227 64 656
Deferred gas revenues--current...................... 828 828 --
Long-term debt...................................... 150 160 3,513
Deferred gas revenues--long-term.................... 1,114 1,960 --
Total stockholders' equity.......................... 5,063 6,554 4,569
</TABLE>
- --------
(1) Included in current liabilities for the calculation of working capital for
the years ended December 31, 1994 and 1995 is $828,000 for each year, pur-
suant to an agreement to deliver gas to an end-user which was terminated
in January 1996.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis reviews the Company's operations for
the years ended December 31, 1995 and 1994 and for the three months ended
March 31, 1996 and 1995. Certain statements contained in this discussion are
not based on historical facts, but are forward-looking statements that are
based upon numerous assumptions about future conditions which may ultimately
prove to be inaccurate and actual events and results may materially differ
from anticipated results described in such statements. The Company's ability
to achieve such results is subject to certain risks and uncertainties dis-
cussed in the "Risk Factors" section herein. The following discussion and
analysis should be read in conjunction with the discussion about such risk
factors and the Financial Statements of the Company and notes related thereto
included elsewhere in this Prospectus.
OPERATING DATA
The following table sets forth certain information regarding the operating
results, production volumes, average prices received and average production
costs associated with the Company's sale of gas and oil for the periods indi-
cated.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------- -------------------
1995 1994 1993 1996 1995
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Operating Results:
Gas and oil revenues... $2,673,497 $3,725,488 $3,795,999 $1,091,963 $708,036
Lease operating
expense............... 862,575 1,079,165 1,052,881 166,567 220,540
Depletion, depreciation
and amortization...... 1,182,988 1,104,061 960,778 431,988 284,874
General and
administrative
expense............... 2,291,701 2,425,647 1,197,929 560,515 571,742
Net production:
Oil (Bbl).............. 23,244 30,528 29,717 2,142 9,192
Gas (Mcf).............. 1,146,696 1,482,264 1,516,947 483,051 310,872
Gas equivalent (Mcfe).. 1,286,160 1,665,432 1,695,249 495,903 366,024
Average sales price
realized:
Oil ($ per Bbl)........ $ 17.36 $ 15.25 $ 17.23 $ 18.17 $ 17.10
Gas ($ per Mcf)........ $ 1.58 $ 1.72 $ 1.87 $ 2.05 $ 1.54
Average lease operating
expenses and taxes ($
per Mcfe)............... $ .84 $ .78 $ .76 $ .49 $ .74
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 Compared with the Three Months Ended March
31, 1995
Revenue. Revenue from gas and oil sales increased 54% for the three months
ended March 31, 1996 as compared to the three months ended March 31, 1995. The
increase was largely due to production from the Mobile Bay wells which con-
tributed approximately 237,000 Mcf of production during the quarter. These
wells began production in December 1995. The average price for all gas sold
during the three months ended March 31, 1996 was $2.05 per Mcf as compared to
$1.54 per Mcf for the three months ended March 31, 1995. The extent to which
future gas and oil prices will affect revenues cannot be determined. The in-
crease in revenues from gas and oil sales during the first quarter of 1996 as
compared to the same quarter of 1995 was partially offset by lower operating
fee revenue due to fewer operated wells in the first quarter of 1996 and by a
decline in the gain on sale of assets.
The gain on sale of assets for the quarter ended March 31, 1996 included the
sale of several small interests which provided less than $100,000 of cash pro-
ceeds. The remaining cash proceeds came from the conveyance, at cost, of work-
ing interests in the Starboard Prospect Joint Venture. See "--Liquidity and
Capital Resources" and "Business and Properties--Exploration and Development--
Gulf Coast--Southern Louisiana and Gulf Coast of Texas." The gain on sale of
assets for the quarter ended March 31, 1995 also included sales of interests
in numerous wells.
Costs and Expenses. Costs and expenses increased $435,555 for the three
months ended March 31, 1996 as compared to March 31, 1995 largely due to a
one-time charge of approximately $369,000 in expenses related to the settle-
ment on the termination of a gas sales agreement with Waldorf Corporation
("Waldorf"). Transpor-
22
<PAGE>
tation and marketing costs, production taxes and depletion, depreciation and
amortization increased largely due to production from the Mobile Bay wells
offset by a reduction in costs for wells sold in 1995. The transportation and
marketing costs represent costs for pipeline transportation on the Mobile Bay
wells.
Depletion, depreciation and amortization include $109,000 in impairment of
proved gas and oil properties as a result of the implementation of Statement
of Financial Accounting Standards No. 121 "Accounting for Long-Lived Assets
and for Long-Lived Assets to be Disposed of." An impairment of proved gas and
oil properties is provided if the net capitalized costs of the proved gas and
oil properties at the field level exceed their realizable value based on ex-
pected future cash flows. When the net capitalized costs of the proved gas and
oil properties exceed their realizable value, an impairment loss is recognized
in the amount by which the net capitalized costs exceed the fair value of the
asset. The fair value of each asset is determined by estimating the present
value of estimated cash flow using a discount rate commensurate with the risks
involved for each asset measured.
Exploration costs declined due to a reduction in seismic and drilling activ-
ity in the first quarter of 1996 as compared to the same period in 1995. Ex-
ploration costs in 1995 included approximately $180,000 in seismic costs and
$155,000 in dry hole costs. In 1996, exploration costs were largely due to the
impairment of leases. Interest costs increased due to the Company's new fi-
nancing arrangements as well as a reduction in capitalized interest as a re-
sult of the reduced drilling activity.
The Company's general and administrative expense remained relatively un-
changed for the comparable periods.
Net Loss. The Company's net loss increased from $388,241 for the three
months ended March 31, 1995 to $769,226 for the three months ended March 31,
1996 for the reasons previously discussed, including a one-time charge of
$368,960 relating to the settlement payment to terminate the Company's long-
term gas sales agreement with Waldorf.
The Company's loss per share decreased from $0.24 per share for the three
months ended March 31, 1995 to a loss of $0.16 per share in the comparable pe-
riod of 1996. The per share decrease was a result of the preferred stock con-
version completed in 1995 which increased the number of common shares out-
standing at March 31, 1996.
Year Ended December 31, 1995 Compared with the Year Ended December 31, 1994
Revenue. Total revenues decreased 15% for the year ended December 31, 1995
compared to the year ended December 31, 1994. The decline was largely due to a
28% decline in gas and oil revenues and a 23% decline in operating fees. The
decrease in gas and oil revenues was caused by a decline in revenues from the
sale of the Company's Lirette Field, located in Terrebonne Parish, Louisiana,
which generated approximately $354,000 in revenues in 1994 prior to its sale,
an 8% reduction in gas prices and a 12% decline in gas and oil production from
wells other than the Lirette Field wells due to the sale of producing proper-
ties and a decline in production on existing wells. The extent to which any
future increase or decrease in gas and oil prices, if any, will affect reve-
nues cannot be determined. Operating fees decreased largely due to a decline
in Company supervised drilling, recompletion and workover activities in the
comparable periods.
The gain on sale of assets during the year ended December 31, 1994 included
approximately $983,000 in gain on the sale of the Lirette Field. The gain on
sale of assets in 1995 represented the sale of interests in numerous wells.
Revenue from the sale of seismic data represented the proceeds from the sale
of seismic data which had been entirely expensed in 1994 as required under the
successful efforts method of accounting.
Costs and Expenses. Total costs and expenses of the Company declined
$457,423 for the comparable period. Lease operating expenses and production
taxes declined in 1995 as compared to 1994 due to the sale of operated proper-
ties including the Lirette Field and a decline in rework activity.
The 1995 exploration costs also reflect the impairment of gas and oil leases
and investments of $530,000, dry hole costs of $181,000 and the expensing of
seismic costs of $389,000. Approximately $68,000 and $129,000 of interest
costs incurred in 1994 and 1995, respectively, were capitalized to ongoing ex-
ploration activities.
General and administrative costs decreased $133,946 during the year ended
December 31, 1995, as compared to the year ended December 31, 1994. General
and administrative costs in 1994 included a $107,509 charge relating to the
accrued costs of the Incentive Plan resulting from an increase in the Common
Stock market price in excess of the exercise price. The Incentive Plan expense
for 1995 was $107,509 less due to the decline in the Common Stock market
price. The remaining decrease in general and administrative costs was largely
due
23
<PAGE>
to a reduction in costs implemented during the second quarter of 1995, offset
by the Company's settlement of the Hi-Chicago Trust claim, which resulted in
an expense of approximately $100,000.
Net Loss. The net loss increased from a loss of $868,576 for the year ended
December 31, 1994 to a loss of $1,595,478 for the year ended December 31,
1995. This increase was due to the combination of factors previously dis-
cussed.
The net loss per common share increased from a net loss of $.69 per share in
1994 to a net loss of $1.05 per share in 1995. Of the 1995 loss, $0.55 was due
to the non-recurring charge for recognizing the value of the premium of two
additional shares of Common Stock per share of Convertible Preferred Stock
paid as an inducement to convert the Convertible Preferred Stock to Common
Stock during 1995.
Liquidity and Capital Resources. The Company, through two financing transac-
tions, increased its working capital by $2,290,000 during the first quarter of
1996. The financing proceeds primarily were used to refinance existing short-
term liabilities and terminate the gas sales agreement with Waldorf. The Com-
pany also used proceeds from the sale of assets to fund $457,000 of additional
capital costs largely associated with the Starboard Prospect. Approximately
$58,000 was used to fund capital costs associated with the Company's Mobile
Bay wells. Assets sold included working interests in the Starboard Prospect
Joint Venture, which provided over $495,000 in proceeds. The Company antici-
pates that future capital expenditures during the remainder of 1996 to fund
the Company's exploration, developmental and acquisition projects in Southern
Louisiana, along the Gulf Coast of Alabama, Mississippi and Texas and in Gar-
vin County, Oklahoma will be approximately $3,260,000. Funding for approxi-
mately $1,500,000 of these capital expenditures will be provided by a financ-
ing agreement entered into in March 1996 and payable solely out of an overrid-
ing working interest on the funded project. See "Business and Properties--Ex-
ploration and Development--Gulf Coast."
During January 1996, the Company entered into a $15,000,000 Credit Agreement
with Bank of America Illinois. The Credit Agreement is divided in three sepa-
rate "tranches" of $4,000,000, $2,500,000 and $8,500,000. The Company borrowed
the $4,000,000 available under the first tranche in January 1996 to (i) termi-
nate the gas sales agreement with Waldorf by repaying $1,867,577 of deferred
gas revenues remaining under the agreement plus a settlement payment of
$313,912, (ii) repay bank indebtedness of $180,554, (iii) pay approximately
$1,061,000 in infrastructure costs relating to the Company's Mobile Bay prop-
erties, (iv) pay approximately $150,000 in bank and legal fees relating to the
Credit Agreement, and (v) reduce other current liabilities by approximately
$427,000. Borrowings under the Credit Agreement are collateralized by substan-
tially all significant producing gas and oil properties of the Company and are
payable in monthly installments over a five year period.
The Credit Agreement provides that the Company may borrow up to $2,500,000
in the second tranche, subject to bank approval based on the results of the 3-
D seismic survey to be conducted by the Company of the lease areas for the
Starboard Prospect, which amount will be used to fund the Company's share of
developmental drilling costs in the Starboard Prospect. After completion of
the initial development phase of the Starboard Prospect, the Company will be
permitted to borrow a further $8,500,000 for further exploration activities,
contingent upon the Company's reserve base meeting the bank's lending parame-
ters.
Under the terms of the Credit Agreement, the Company is subject to certain
covenants which escalate in 1996, as well as certain other operating restric-
tions. The Company is currently in compliance with all its obligations under
the Credit Agreement. The material financial covenants include current ratio,
cash on hand, tangible net worth and debt to capitalization, as follows:
<TABLE>
<CAPTION>
AS OF
COVENANT, AS DEFINED INITIAL DECEMBER 31, 1996
-------------------- ---------- -----------------
<S> <C> <C>
Tangible Net Worth................................ $4,000,000 $5,000,000
Current Ratio..................................... 0.8 1.0
Debt to Capitalization............................ 0.6 0.6
Cash Flow Ratio................................... 2.0 3.0
Cash on Hand...................................... $ 200,000 $ 200,000
</TABLE>
Management believes that the net proceeds of this Offering may be necessary
so that the Company will continue to be in compliance with the loan covenants
after September 30, 1996. Management believes it may not be in compliance with
the tangible net worth requirement and certain other covenants if it does not
raise additional capital by that date. If the Company is not able to satisfy
the covenants, the monies payable to the bank under the Credit Agreement will
be accelerated. In addition, the amount of borrowing under the Credit
24
<PAGE>
Agreement is based on the maintenance of adequate natural gas and oil reserves
to support the amount borrowed. Should the estimated proved natural gas and
oil reserves or the price to be received for these reserves decline below the
required reserve value, the Company would be required to either accelerate
payment, repay a specified amount of the borrowing so as to have adequate re-
serve value to support the borrowing, or provide additional collateral for the
loan. The Company has not entered into any arrangements to obtain alternate
financing, and there can be no assurance of the availability of any financing
on acceptable terms. The level of current or additional activity to be
achieved will be dependent upon the Company's ability to generate capital from
outside sources.
The Credit Agreement also requires (a) the Company to enter into an interest
rate swap agreement guaranteeing a fixed rate of 8.28% over the life of the
loan, (b) the issuance to the Bank of America Illinois of a warrant to pur-
chase 250,000 shares of Common Stock for a period of five years at an exercise
price of the highest average of the daily closing bid prices for thirty (30)
consecutive trading days between January 1, 1996 and June 30, 1996, (c) the
purchase of a natural gas hedge agreement on 62,500 MMBtu per month of natural
gas at $1.566 per MMBtu for the life of the loan period from April 1, 1996
through January 31, 1999 and a commodity collar transaction on 62,500 MMBtu
per month of natural gas for February and March 1996 with a cap of $2.195 per
MMBtu and a floor of $1.25 per MMBtu, and (d) the assignment to Bank of Amer-
ica Illinois of a four percent (4%) overriding royalty interest in the mort-
gaged properties until such time as Bank of America Illinois has received an
internal rate of return of fifteen percent (15%) on the commitment amount at
which time the overriding royalty interest will be reduced to two percent
(2%).
The second financing transaction was the Starboard Prospect Funding which
occurred in March 1996, and encompasses certain agreements entered into by the
Company with South Coast Exploration Company and certain affiliates of South
Coast Exploration Company, including Soco Exploration, L.P. and 420 Energy In-
vestments, Inc. (collectively, the "Soco Group"). Pursuant to the agreements,
the Soco Group acquired a 48% interest in the Company's interest in the Star-
board Prospect Joint Venture, and through a non-recourse loan to the Company
is funding all of the Company's cost in obtaining the leasehold and seismic
data on the Starboard Prospect. The loan is anticipated to total approximately
$1,728,000 at its conclusion. The loan will be repaid solely from revenues at-
tributable to an overriding royalty interest granted to the Soco Group by the
Company. The overriding royalty interest, which is equal to 8% of the
Company's original interest in the Starboard Prospect Joint Venture (not tak-
ing into account the 48% working interest assignment to the Soco Group), con-
tinues until such time as the Soco Group has received an amount equal to the
loan borrowings plus closing costs and a 15% internal rate of return. After
the funds have been repaid, the overriding royalty interest will be reduced to
2% of the Company's remaining 48% interest in the Starboard Prospect Joint
Venture. The loan currently is secured by a first mortgage on the properties
comprising the Starboard Prospect. During March 1996, the Company received a
$240,000 prospect fee as part of the agreement, a reimbursement of costs from
the Soco Group of $255,000 and an advance on the non-recourse loan of
$278,000. Approximately $430,000 of the costs reimbursed and advanced were in-
curred as of December 31, 1995 and included in the Company's gas and oil prop-
erties. These funds were used by the Company for working capital requirements.
The Company anticipates that the remaining funds will be advanced throughout
1996 to fund additional leasehold acquisitions and seismic activity on the
Starboard Prospect. The Company anticipates it will obtain most of its financ-
ing needs for the Starboard Prospect activities in the second and third quar-
ters of 1996 from this arrangement.
Both financings were obtained with the assistance of Weisser, Johnson & Co.
Capital Corporation, an investment banking firm ("Weisser Johnson"). Pursuant
to an agreement with Weisser Johnson, the Company agreed to pay Weisser John-
son a combination of cash, stock and warrants for assisting the Company in ob-
taining the Bank of America Illinois financing and the Starboard Prospect
Funding. As part of the agreement, the Company paid $200,000 in cash in March
1996 and issued 150,000 shares of Common Stock in June 1996 to Weisser John-
son, accompanied by rights to demand registration at any time between July 1,
1996 and December 31, 1996. The Company agreed to guarantee a minimum of
$200,000 in proceeds, net of commission or selling costs, if these shares are
sold (or an attempt to sell such shares has been made and there is no market
for such sale over a reasonable period of time) prior to December 31, 1996.
The 150,000 shares of Common Stock issued to Weisser Johnson, as well as
20,000 shares of Common Stock already owned by it, are included in the Selling
Securityholders' Shares which are being registered pursuant to the Registra-
tion Statement of which this Prospectus forms a part. The Company will also
issue Weisser Johnson warrants to purchase 250,000 shares of the Company's
Common Stock at $2.00 per share. The warrants have a five-year term, both de-
mand and
25
<PAGE>
"piggyback" registration rights, and permit partial exercise at the election
of the holder by exchanging the warrants with appreciated value equal to each
exercise price in lieu of cash. If the additional $2,500,000 in additional
funds are not made available by Bank of America Illinois, up to 175,000 war-
rants will be returned pro-rated based upon the funds made available by Bank
of America Illinois.
On May 26, 1995, the Company successfully completed a tender offer to con-
vert up to 90% of its Convertible Preferred Stock. In the tender offer, the
Company offered to exchange one share of Convertible Preferred Stock for four
shares of Common Stock and two Series A Warrants. The tender offer closed on
May 26, 1995 with 603,939 shares or 87% of the then outstanding Convertible
Preferred Stock tendered. As a result of the tender, the Company issued
2,415,756 shares of Common Stock and 1,207,878 Series A Warrants. The exchange
ratio for the remaining Convertible Preferred Stock reverted to its original
terms at the close of the Offering. The Company believes that in addition to
providing a greater variety of financial options available to the Company, the
conversion will conserve cash by reducing the obligation to accrue and/or pay
cash dividends from over $825,000 annually to approximately $103,000 annually.
The Company has not made any dividend payments on its Convertible Preferred
Stock since April 30, 1995. Dividends are cumulative but are not paid unless
declared by the Board of Directors. At May 31, 1996, accumulated but unde-
clared and unpaid dividends totaled $111,749.
The Company intends to seek to minimize natural gas price volatility by mar-
keting reserves through the use of long-term end-user gas contracts utilizing
the purchase of short-term commodity futures. During January 1996, the Company
terminated the long-term contract with Waldorf as discussed previously. The
Company has replaced the contract with two swap agreements on natural gas pro-
duction to minimize price volatility. The first agreement, which was required
by the terms of the Credit Agreement, is effective for the period from April
1, 1996 through January 31, 1999 on 62,500 MMBtu per month of mid-continent
natural gas at a price of $1.566 per MMBtu. The second agreement is effective
from January 1996 through December 1996 on 45,000 MMBtu per month of Mobile
Bay natural gas at a price of $2.03 per MMBtu. The Company's gas production
during the first quarter of 1996 averaged approximately 63,600 Mcf or 68,986
MMBtu per month from the Mid-Continent area and approximately 97,300 Mcf or
98,332 MMBtu per month from the Mobile Bay area. The MMBtu's reflect an ad-
justment to the volume of gas produced (Mcf) for the heat value of the gas.
During the quarter ended March 31, 1996, the price for natural gas exceeded
the swap price and resulted in a charge against gas and oil revenues of ap-
proximately $78,000. If both swaps had been in effect during the quarter, an
additional reduction in gas and oil revenues of approximately $55,000 would
have been recorded during the quarter. Whether the swaps result in future in-
creases or reductions in revenues will depend upon whether future gas prices
are less than or greater than the swap prices. As of March 31, 1996, spot mar-
ket prices exceeded the swap price.
The Company is currently planning to move its corporate headquarters from
Oklahoma City, Oklahoma to Houston, Texas in the third quarter of 1996. The
Company anticipates that direct costs related to the move will be less than
$100,000.
The Company may seek additional exploration capital for its Garvin County
and Gulf Coast activities. To satisfy said objectives, the Company is in nego-
tiation to divest several non-mortgaged producing and non-producing gas and
oil properties. Other options available to the Company to raise the additional
drilling funds for exploration include, but are not limited to: (a) additional
outside partners, (b) additional private borrowing, and (c) the further sale
of 3-D seismic data. The Company is actively evaluating its options in this
regard.
The Company has made and intends to make substantial capital expenditures in
connection with the exploration and development of its gas and oil properties.
Historically, the Company has funded its capital expenditures through a combi-
nation of internally generated funds, equity and long-term debt financing, and
short-term financing arrangements.
Based on its current operations, the Company anticipates that the net pro-
ceeds from the Offering, together with its cash flow from operations, the
availability of credit under the Credit Agreement and the Starboard Prospect
Funding, will be sufficient to meet estimated capital expenditures through
1997. However, no assurance can be given that the cash flow and funds avail-
able to the Company will be sufficient for the Company to carry out its pro-
posed plans through such date. Future cash flows and the availability of
credit under the Credit Agreement are subject to a number of variables, such
as the level of production from existing wells, prices of gas and oil and the
Company's success in locating and producing new reserves. If cash flows do not
develop as anticipated or funds are not available under the Credit Agreement,
the Company will be required to find additional sources of capital.
26
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
The Company is an independent energy company primarily engaged in the explo-
ration for natural gas and oil reserves and in the acquisition, production,
development and marketing of natural gas and oil properties. The Company's
early growth was through acquisitions of natural gas reserves, principally in
the Mid-Continent area of Arkansas, Kansas, Oklahoma and Texas. In recent
years, however, the Company's business activities have focused more on explo-
ration and related developmental drilling projects situated in Southern Loui-
siana and along the Gulf Coast of Alabama, Mississippi and Texas. The
Company's current business strategy is to increase its reserves by drilling
natural gas and oil wells on prospects identified and developed through the
use of well correlations, CAEX technologies and 3-D seismic surveys, with em-
phasis on projects situated along the Gulf Coast and, particularly, the tran-
sition zone of Southern Louisiana. As a supplemental part of such strategy,
the Company may also acquire producing properties as market conditions and the
Company's resources allow.
During 1995, as part of its refocusing activities, the Company sold to Amoco
a 50% interest in one of the Company's primary exploration projects in the
Mid-Continent area, a 33 square mile 3-D seismic shoot located in Garvin Coun-
ty, Oklahoma. Additional activities in 1995 included (i) the drilling of two
exploratory wells in Mobile Bay, Alabama which began production in December
1995, (ii) the execution of a joint venture agreement to explore for gas and
oil on prospects located in Southern Louisiana and along the Texas Gulf Coast,
and (iii) the acquisition of leasehold rights in various prospects, including
the Starboard Prospect located in Terrebonne Parish, Louisiana. The Starboard
Prospect is comprised of a group of four distinct high potential exploration
prospects, as well as proved undeveloped locations. The proved undeveloped
portion of the Starboard Prospect has been evaluated by independent petroleum
engineers as containing substantial proved undeveloped reserves. The Company
intends to conduct a 3-D seismic survey to further define the prospect. As of
December 31, 1995, the Company and its partners had acquired acreage in the
Starboard Prospect which included estimated proved undeveloped reserves of 11
Bcfe and estimated future net revenues of over $19 million. In March 1996, the
Company completed the Starboard Prospect Funding, pursuant to which affiliates
of a utility acquired a 48% interest in the Company's interest in the Star-
board Prospect Joint Venture, and through a non-recourse loan to the Company
is funding all of the Company's cost in obtaining the leasehold and seismic
data on the prospect. The Company intends to fund its share of developmental
drilling costs in the prospect from borrowings under the Credit Agreement. Ex-
ploratory drilling costs will be funded through proceeds of this Offering
and/or industry partners. As of the date of this Prospectus, the Company owns
a 48% working interest in the Starboard Prospect Joint Venture. The Company is
continuing to search for additional prospects in the area.
In addition to 3-D seismic, the Company makes extensive use of 2-D seismic
reprocessing and CAEX enhancement technologies to delineate "bright spot"
seismic anomalies. The Mobile Bay wells, which began production in December
1995, were located by identification of such "bright spot" seismic anomalies,
delineated by the Company through reprocessing and enhancement of existing 2-D
seismic data. The Company plans to commence drilling on its third Mobile Bay
area "bright spot"- delineated prospect by October 1996. The Company believes
that additional drilling prospects in the Gulf Coast area may be identified
through delineation of such "bright spot" seismic anomalies. In September
1995, the Company entered into an agreement to acquire, reprocess and inter-
pret up to 1,600 miles of 2-D seismic data in the shallow offshore Gulf Coast
area. The reprocessing and interpretation of such data is designed to identify
"bright spot" gas accumulations which potentially can identify the location of
commercial quantities of hydrocarbons. In connection with this agreement, the
Company also entered into an agreement with Marconi, Inc. to jointly explore
any prospects thus identified.
The Company plans to continue to expand its exploration activities in the
Gulf Coast area through a number of current activities, including the (1) gen-
eration of prospects with its existing partners; (2) identification of "bright
spot" seismic anomalies; (3) continuing acquisition of acreage on additional
high potential Southern Louisiana exploration projects identified by the Com-
pany; and (4) continuing evaluation of high-graded exploration prospect oppor-
tunities in Southern Louisiana and other Gulf Coast areas.
CAEX TECHNOLOGY AND 3-D SEISMIC
The Company uses CAEX technology to collect and analyze geological, geophys-
ical, engineering, production and other data obtained about a potential gas or
oil prospect. Using such technology, the Company correlates
27
<PAGE>
density and sonic characteristics of subsurface formations obtained from two-
dimensional seismic surveys with like data from similar properties and uses
computer programs and modeling techniques to determine the likely geological
composition of a prospect and potential locations of hydrocarbons.
Once all available data has been analyzed in this manner to determine the
areas with the highest potential within a prospect area, the Company may con-
duct 3-D seismic surveys to enhance and verify the geological interpretation
of the structure, including its location and potential size. The 3-D seismic
process produces a three-dimensional image based upon seismic data obtained
from multiple horizontal and vertical points within a geological formation.
The tremendous number of calculations needed to process such data is made pos-
sible by computer programs and advanced computer hardware.
While 3-D seismic and CAEX technologies have been used by large oil compa-
nies for approximately 20 years, the method was not affordable to smaller, in-
dependent gas and oil companies until recently, when improved data acquisition
equipment and techniques and computer technology became available at reduced
costs. The Company began using 3-D seismic and CAEX technologies in 1992 and
is using these technologies on a continuing basis. In 1995, the Company cre-
ated its own seismic processing division--Exploration Geophysical Services--
for the purpose of assisting the prospect generation efforts of the Company.
The Company believes that its use of CAEX and 3-D seismic technology may pro-
vide it with certain advantages in the exploration process over those compa-
nies that do not use this technology. Because computer modeling generally pro-
vides clearer and more accurate projected images of geological formations, the
Company believes it is better able to identify potential locations of hydro-
carbon accumulations and the desirable locations for wellbores. However, the
technology has not been used extensively enough by the Company to make any
conclusion regarding its performance and the Company's ability to interpret
and use the information developed from the technology.
EXPLORATION AND DEVELOPMENT
Gulf Coast
General. The Company considers the Gulf Coast, and in particular Southern
Louisiana, to be the premier area in the United States to explore for signifi-
cant new reserves. This conclusion is based on several characteristics of
Southern Louisiana including (1) a large number of productive intervals
throughout a significant sedimentary section, (2) numerous wells with which to
calibrate 3-D seismic, and (3) complicated geology that the Company believes
3-D seismic is particularly well suited to interpret. In 1994, the Company be-
gan devoting more of its energy to the Gulf Coast region. The Company ini-
tially entered this area by evaluating the onshore shallow Frio/Miocene Trend.
The Company's emphasis is shifting to larger exploration targets in this area
due to the greater potential return on investment resulting from the size of
the geological features which remain to be explored and produced. This in-
cludes shallow offshore prospects such as the Company's Mobile Bay activities
and deeper and potentially much larger prospects centering in the transitional
lands and waters of Southern Louisiana. Additional 2-D and 3-D seismic surveys
may need to be conducted to evaluate these areas more fully, and when deter-
mined appropriate, the Company will acquire acreage and drill wells as indi-
cated by the evaluations.
Most of the prospects in Southern Louisiana being pursued by the Company are
either on the edge of a large existing producing field or between such fields.
The prospects generally involve drilling in fault blocks that have not been
tested adequately to date. Thus, the Company intends to drill prospects where
the formations being tested are known to be productive in the area and where
it believes 3-D seismic can be used to increase resolution and thereby lower
risk. The extent to which the Company will pursue its activities in the Gulf
Coast region will be determined by the availability of Company resources and
the availability of joint venture partners.
Southern Louisiana and Gulf Coast of Texas. A primary area of focus for the
Company to identify gas and oil on prospects is in Southern Louisiana and
along the Gulf Coast of Texas. The Company directly and in conjunction with
industry partners has identified a number of prospects to be explored in the
target areas, and the Company has acquired its initial position in certain
prospects, including one which the Company refers to as the Starboard Pros-
pect. The Starboard Prospect is comprised of a group of four distinct high po-
tential exploration prospects, as well as proved undeveloped locations. The
proved undeveloped portion of the Starboard Prospect has been evaluated by in-
dependent petroleum engineers as containing substantial proved undeveloped re-
serves.
28
<PAGE>
The Company intends to conduct a 3-D seismic survey to further define the
prospect. As of December 31, 1995, the Company and its partners in the Star-
board Prospect Joint Venture had acquired acreage in the Starboard Prospect
which included estimated proved undeveloped reserves of 11 Bcfe and estimated
future net revenues of over $19 million. As of the date of this Prospectus,
the Company has a 48% working interest in the Starboard Prospect Joint Venture
and a net working interest in the properties comprising the Starboard Prospect
of 18%-34%, depending on the zone, with associated reserves of 5.4 Bcfe and
future net revenues of approximately $9 million. Based on subsurface and cur-
rently available 2-D seismic surveys, the Company has defined potential well
locations within the Starboard Prospect, including at least five proved unde-
veloped locations and four exploratory prospects. The presence of proved unde-
veloped reserves within the Starboard Prospect is expected to lower the pro-
ject's overall risk. The Company plans to conduct a 3-D seismic survey to fur-
ther define the prospect and provide additional data on the exploratory well
locations. The Company has continued and will continue to acquire additional
acreage in the areas of the proved undeveloped locations, increasing its work-
ing interest in the proved developed reserves of the Starboard Prospect. No
significant acquisition of proved developed acreage has occurred since Decem-
ber 31, 1995.
In March 1996, the Company completed the Starboard Prospect Funding, pursu-
ant to which the Soco Group (i) acquired a 48% interest in the Company's in-
terest in the Starboard Prospect Joint Venture, and (ii) through a non-re-
course loan to the Company is funding all of the Company's cost in obtaining
the leasehold and seismic data on the Starboard Prospect. The loan is antici-
pated to total approximately $1,728,000 at its conclusion. The loan will be
repaid solely from revenues attributable to an overriding royalty interest
granted to the Soco Group by the Company. The overriding royalty interest,
which is equal to 8% of the Company's original interest in the Starboard Pros-
pect Joint Venture (not taking into account the 48% working interest assign-
ment to the Soco Group), continues until such time as the Soco Group has re-
ceived an amount equal to the loan borrowings plus closing costs and a 15% in-
ternal rate of return. After the funds have been repaid, the overriding roy-
alty interest will be reduced to 2% of the Company's remaining 48% interest in
the Starboard Prospect Joint Venture. The agreement also calls for another af-
filiate of the Soco Group, Interactive Exploration Solutions, Inc. of Houston,
Texas, to manage the 3-D seismic data acquisition, processing and interpreta-
tion. In addition, up to $11,000,000 is available under the Credit Agreement
to fund the Company's actual developmental drilling and acquisition activities
in the Starboard Prospect.
Mobile Bay, Alabama. In February and April 1995, the Company successfully
completed two wells in the Mobile Bay area of Alabama offshore waters. The
wells are currently producing gas for sale at the combined rate of approxi-
mately 11,000 Mcf of gas per day. The Company owns approximately a 30% working
interest in each well. Sales from these wells commenced in December 1995. The
wells, drilled on "bright spot" seismic anomalies, were identified and devel-
oped by the Company utilizing CAEX technologies. The Company plans to commence
the drilling of a third Mobil Bay area well by October 1996. The Company has
expanded its exploration efforts in similar shallow waters in offshore Missis-
sippi and Louisiana, seeking to identify similar "bright spot" anomalies with
CAEX technology.
Gulf Coast "Bright Spot" Project. In September 1995, the Company entered
into an agreement with a seismic vendor to acquire, reprocess and interpret up
to 1,600 miles of 2-D seismic data in the shallow offshore Gulf Coast area to
identify "bright spot" gas accumulation indicators on the reprocessed data.
The Company entered into an agreement with Marconi, Inc. to jointly explore
any prospects thus identified. Under the joint venture agreement, Marconi,
Inc. bears 100% of the anticipated costs of the seismic reprocessing and in-
terpretation. The Company has rights to a 50% working interest in all pros-
pects located pursuant to this agreement.
Garvin County, Oklahoma
In January 1992, the Company began conducting extensive subsurface geologi-
cal work in an area comprising eight townships located within Garvin County in
Southern Oklahoma. This work has included subsurface mapping, CAEX mapping and
geological evaluation of potential prospects, as well as evaluation of 3-D
seismic data shot by the Company in an attempt to delineate oil structures
that are small in surface area but may produce significant amounts of oil from
depths of 5,000 to 8,000 feet. The area of concentration in Garvin County is
believed to be underlaid by a "blanket" of highly permeable, highly porous
reservoir sandstones referred to as the "Simpson Group Sands." Where trapping
occurs in conjunction with these sands, small geological features may yield
significant reserves of oil. The geological traps in this area containing hy-
drocarbons have been historically difficult to find with conventional explora-
tion techniques because of their complexity and size.
29
<PAGE>
During 1994 and the first half of 1995, the Company drilled a total of five
wells in Garvin County, only two of which were completed as oil producers. Due
to these results and the need for additional capital to enable the Company to
continue its exploration along the Gulf Coast region, as well as in Southern
Oklahoma, the Company entered into an agreement in June 1995 with Amoco to
jointly explore one of the areas in Garvin County, Oklahoma which the Company
had previously targeted. The Amoco joint venture agreement also calls for the
processing and interpretation of more than 33 square miles of the Company's 3-
D seismic data which has been partially completed. The Company has recently
completed three exploratory wells in Garvin County. Test results indicate ini-
tial production in the first well of approximately 100 Bbl per day in the Oil
Creek which is part of the Simpson Group Sands. The two other wells were dry
holes. Additional capital from third-party partners may be necessary to fully
participate in the exploration activities with Amoco.
ACQUISITIONS AND DIVESTMENTS
The Company periodically acquires producing natural gas and oil properties.
Historically, the Company concentrated its acquisition activity in the Mid-
Continent Region of Kansas, Oklahoma, Arkansas and Texas, believing that these
areas had potential for exploitation through additional development and en-
hanced recovery and improved operating techniques. The Company typically
sought properties that were underdeveloped, overly burdened with expenses or
owned by financially troubled companies. During 1994, natural gas and oil re-
serves generally available for acquisition were at unusually high costs. As a
result and in reaction to the market conditions, the Company divested selected
proved producing natural gas and oil properties to take advantage of the rela-
tively higher prices being paid for such properties, and refocused most of its
1994 and 1995 activities on its exploration program. However, the Company will
continue to evaluate properties for acquisition if they meet the Company's ac-
quisition criteria, and as resources permit.
The Company's acquisition program is overseen by its management which in-
cludes four officers with combined experience of more than 75 years in the gas
and oil industry. It is anticipated that acquisition opportunities will be
brought to the attention of the Company's management by certain of its offi-
cers, directors and their affiliates as well as by various unaffiliated sourc-
es. The Company currently does not engage professional firms or consultants
that specialize in acquisitions on a formal basis. The Company may engage such
firms in the future, in which case the Company may pay a finder's fee or other
cash or stock compensation.
In connection with each acquisition, the Company considers (i) current and
historic production levels and reserve estimates; (ii) exploitation potential;
(iii) capital requirements; (iv) proximity of product markets; (v) regulatory
compliance; (vi) acreage potential; and (vii) existing production transporta-
tion capabilities. The Company also considers the historic financial operating
results and cash flow potential of each acquisition opportunity. Each acquisi-
tion involves management's analysis of its ability to improve the operations
of other acquired properties. Evaluation of the merits of a particular acqui-
sition is based, to the extent relevant, on all of the above factors as well
as other factors deemed relevant by the Company's management.
MARKETING
The Company markets its natural gas through monthly spot sales or pursuant
to long-term fixed-price gas sales agreements. Sales pursuant to long-term
contracts may involve a prepayment of a portion or all of the purchase price.
Because sales not made under fixed-price contracts may result in fluctuating
revenues to the Company depending upon the market price of gas, the Company
may enter into various hedging agreements to minimize the fluctuations and the
effect of price declines or swings. During January 1996, the Company entered
into a swap agreement on 62,500 MMBtu of its mid-continent natural gas produc-
tion per month for $1.566 per MMBtu for the period beginning April 1, 1996 and
ending January 31, 1999, and a swap contract on 45,000 MMBtu of natural gas
per month from a portion of its Mobile Bay production for $2.03 per MMBtu for
the period from January 1996 through December 1996. The 62,500 MMBtu swap
agreement was required pursuant to the terms of the Credit Agreement.
Currently, all of the Company's oil production is sold under market-sensi-
tive or spot price contracts. The Company's revenues from oil sales fluctuate
depending upon the market price of oil.
30
<PAGE>
No purchaser accounted for more than 10% of the Company's total revenue in
1995 except for the gas sales contract discussed below. The Company does not
believe the loss of any existing purchaser would have a materially adverse ef-
fect on the Company.
At year end 1995, the Company's only long-term, fixed-price contract was
with Waldorf, which was terminated on January 31, 1996. Sales under the Wal-
dorf agreement amounted to approximately 36% of the Company's total revenues
for 1995. The Company has been able to sell all of its natural gas production
to other sources at higher prices since the termination of the contract. The
Company anticipates that it will be able to continue to sell all available
natural gas production in the foreseeable future.
PRINCIPAL AREAS OF OPERATIONS
The Company owns and operates producing properties located in six states
with proved reserves located primarily in Alabama, Louisiana, Oklahoma and
Texas. The Company currently owns interests in 30 wells it operates and also
owns non-operated interests in approximately 27 producing wells in Alabama,
Arkansas, Kansas, Louisiana, Oklahoma and Texas. Daily production from both
operated and non-operated wells net to the Company's interest averaged 3,142
Mcf per day and 63.68 Bbls of oil per day for the year ended December 31,
1995. These properties provide the basis for the Company's revenues to date.
GAS AND OIL RESERVES
The Company engaged independent petroleum engineers, Hofmann & Assoc. Engi-
neering Co. and Atwater Consultants, Ltd., (the "Engineers"), to estimate the
Company's net proved reserves, projected future production, estimated future
net revenue from proved reserves and the present value of such estimated net
revenue as of the date, and in relation to the properties, specified in their
reports. The estimates set forth in such reports were based upon a review of
production histories and other geologic, economic, ownership and engineering
data provided by the Company. In determining the estimates of the reserve
quantities that are economically recoverable, the Engineers used selling
prices and estimated development and production costs in effect as of the
dates of its report and, where no prior sales existed, selling prices and pro-
duction costs of comparable wells in the general area were used. In accordance
with guidelines promulgated by the Commission, no price or cost escalation or
deescalation was considered.
Estimated Proved Reserves. The following table sets forth summary informa-
tion, as estimated by the Engineers, regarding gas and oil reserves at Decem-
ber 31, 1995.
<TABLE>
<CAPTION>
GAS
GAS OIL EQUIVALENT
(MCF) (BBL) (MCFE) (1)
---------- ------- ----------
<S> <C> <C> <C>
Proved developed reserves......................... 7,307,717 72,515 7,742,807
Proved undeveloped reserves (2)................... 11,256,424 206,986 12,498,340
Total proved reserves (2)......................... 18,564,141 279,501 20,241,147
</TABLE>
- --------
(1) Oil production is converted to Mcfe at the rate of six Mcf of natural gas
per Bbl of oil, based upon the approximate energy content of natural gas
and oil.
(2) Subsequent to December 31, 1995, the Company reduced its working interest
in the Starboard Prospect Joint Venture from 100% to 48%. As a result of
the transactions, the Company's proved undeveloped reserves were reduced
by 5,806,783 Mcfe. After giving effect to the transactions, the Company's
proved undeveloped reserves and total proved reserves at December 31, 1995
would have been 6,691,557 Mcfe and 14,434,364 Mcfe, respectively.
Estimate of Future Net Revenue From Proved Reserves. The following table
sets forth summary information, as estimated by Hofmann & Assoc. Engineering
Co. and Atwater Consultants, Ltd., independent petroleum engineers, as stated
in their reports dated February 13, 1996 and March 21, 1996, respectively, re-
garding estimated future net revenue and the present value of future net reve-
nue from net proved reserves as of December 31, 1995.
<TABLE>
<CAPTION>
12/31/95
-----------
<S> <C>
Estimated total future net revenue (1)(2)................... $31,265,445
Present value of future net revenue (2)(3).................. $20,049,726
</TABLE>
- --------
(1) Estimated future net revenue represents estimated future gross revenue to
be generated from the production of proved reserves, net of estimated pro-
duction and future development costs, using prices and costs in
31
<PAGE>
effect as of the date indicated. The amounts shown do not give effect to
non-property related expenses, such as general and administrative expenses,
debt service and future income tax expense or to depreciation, depletion
and amortization.
(2) Subsequent to December 31, 1995, the Company reduced its working interest
in the Starboard Prospect Joint Venture from 100% to 48%. As a result of
the transactions, the Company's estimated total future net revenue and the
present value of the future net revenue were reduced by $10,217,817 and
$5,971,265, respectively. After giving effect to the transactions, the
Company's estimated total future net revenue and the present value of the
future net revenue at December 31, 1995 would have been $21,047,628 and
$14,078,461, respectively.
(3) Present value is calculated by discounting estimated future net revenue by
10% annually.
DRILLING ACTIVITY
The Company drilled only one well in each of 1991, 1992 and 1993, each of
which was productive. In 1994, the Company drilled a total of six wells, in-
cluding five exploratory wells, of which four were productive, and one devel-
opmental well which was not productive. In 1995, the Company drilled seven ex-
ploratory wells, of which four were productive. The Company anticipates an in-
crease in its drilling activity as it continues to complete and increase its
CAEX analysis and 3-D seismic surveys of the Alabama, Mississippi, Southern
Louisiana and Texas Gulf Coast and Garvin County, Oklahoma prospects. The Com-
pany has recently drilled three exploratory wells in Garvin County. Test re-
sults indicate initial production in the first well, which was successfully
completed, of approximately 100 Bbl per day in the Oil Creek which is part of
the Simpson Group Sands. The two other wells were dry holes.
PRODUCTIVE WELL SUMMARY
The following table sets forth certain information regarding the Company's
ownership as of April 30, 1996 of productive gas and oil wells in the areas
indicated.
<TABLE>
<CAPTION>
GAS OIL
--------------------- ---------------------
STATE GROSS WELLS NET WELLS GROSS WELLS NET WELLS
- ----- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Oklahoma............................ 34 16.84 5 1.28
Texas............................... 1 0.07 11 2.93
Louisiana........................... 2 0.79 0 0
Alabama............................. 2 0.44 0 0
Arkansas............................ 1 0.10 0 0
Kansas.............................. 1 0.10 0 0
--- ----- --- ----
Total............................. 41 18.34 16 4.21
=== ===== === ====
</TABLE>
VOLUMES, PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the production
volumes, average prices received and average production costs associated with
the Company's sale of gas and oil for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
1995 1994 1993 MARCH 31, 1996
--------- --------- --------- --------------
<S> <C> <C> <C> <C>
Net production:
Oil (Bbl)...................... 23,244 30,528 29,717 2,142
Gas (Mcf)...................... 1,146,696 1,482,264 1,516,947 483,051
Gas equivalent (Mcfe).......... 1,286,160 1,665,432 1,695,249 495,903
Average sales price realized:
Oil ($ per Bbl)................ $ 17.36 $ 15.25 $ 17.23 $ 18.17
Gas ($ per Mcf)................ $ 1.58 $ 1.72 $ 1.87 $ 2.05
Average lease operating expenses
and taxes ($ per Mcfe).......... $ .84 $ .78 $ .76 $ .49
</TABLE>
32
<PAGE>
LEASEHOLD ACREAGE
The following table sets forth as of April 30, 1996, the gross and net acres
of proved developed and proved undeveloped gas and oil leases which the Com-
pany holds or has the right to acquire.
<TABLE>
<CAPTION>
PROVED DEVELOPED PROVED UNDEVELOPED
----------------- -------------------
STATE GROSS NET GROSS NET
- ----- ----------------- -------------------
<S> <C> <C> <C> <C>
Oklahoma.................................. 39,690 14,488 5,617 1,855
Texas..................................... 10,742 1,999 0 0
Alabama--Onshore.......................... 2,731 2,582 2,994 1,012
Alabama--Offshore......................... 2,425 2,295 2,348 704
Arkansas.................................. 1,672 357 6,360 2,544
Louisiana................................. 1,341 371 4,680 4,233
Kansas.................................... 1,600 126 0 0
-------- -------- --------- ---------
Total................................... 60,201 22,218 21,999 10,348
======== ======== ========= =========
</TABLE>
COMPETITION
The gas and oil industry is highly competitive in all of its phases. The
Company encounters competition from other gas and oil companies in all areas
of its operations, including the acquisition of producing properties, the per-
mitting and conducting of seismic surveys and the marketing of gas and oil.
Many of these competitors possess greater financial, technical and other re-
sources than the Company. Competition for acquisition of producing properties
is affected by the amount of funds available to the Company, information about
producing properties available to the Company and any standards established
from time to time by the Company for the minimum projected return on invest-
ment. Competition may also be presented by alternative fuel sources, including
heating oil and other fossil fuels. There has been increased competition for
lower risk development opportunities and for available sources of financing.
In addition, the marketing and sale of natural gas and processed gas are com-
petitive. Because the primary markets for natural gas liquids are refineries,
petrochemical plants and fuel distributors, prices are generally set by or in
competition with the prices for refined products in the petrochemical, fuel
and motor gasoline markets.
REGULATION
The gas and oil industry is extensively regulated by federal, state and lo-
cal authorities. In particular, gas and oil production operations and econom-
ics are affected by price controls, environmental protection statutes, tax
statutes and other laws and regulations relating to the petroleum industry, as
well as changes in such laws, changing administrative regulations and the in-
terpretations and application of such laws, rules and regulations. Gas and oil
industry legislation and agency regulation are under constant review for
amendment and expansion for a variety of political, economic and other rea-
sons. Numerous regulatory authorities, federal, state and local, issue rules
and regulations binding on the gas and oil industry, some of which carry sub-
stantial penalties for failure to comply. The regulatory burden on the gas and
oil industry increases the Company's cost of doing business and, consequently,
affects its profitability. The Company believes it is in compliance with all
federal, state and local laws, regulations and orders applicable to the Com-
pany and its properties and operations, the violation of which would have a
material adverse effect on the Company or its financial condition.
Seismic Permits. Current law in the State of Louisiana requires permits from
owners of at least an undivided 80% interest in each tract over which the Com-
pany intends to conduct seismic surveys. As a result of such requirement, the
Company may not be able to conduct seismic surveys covering its entire area of
interest. Moreover, 3-D seismic surveys are typically conducted from various
locations both inside and outside the area of interest in order to obtain the
most detailed data of the geological features within the area. To the extent
that the Company is unable to obtain permits to access locations to conduct
the seismic surveys, the data obtained may not be as detailed as might other-
wise be available.
Exploration and Production. The Company's operations are subject to various
types of regulation at the federal, state and local levels. Such regulation
includes (i) requiring permits for the drilling of wells; (ii)
33
<PAGE>
maintaining bonding requirements in order to drill or operate wells; and (iii)
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled, the
plugging and abandoning of wells and the disposal of fluids used in connection
with well operations. The Company's operations are also subject to various
conservation regulations. These include the regulation of the size of drilling
and spacing units, the density of wells which may be drilled, and the
unitization or pooling of gas and oil properties. In addition, state conserva-
tion laws establish maximum rates of production from gas and oil wells, gener-
ally prohibiting the venting or flaring of gas and impose certain requirements
regarding the ratability of production. The effect of these regulations is to
limit the amount of gas and oil the Company can produce from its wells and to
limit the number of wells or the locations at which the Company can drill. Re-
cently enacted legislation and/or regulatory action in Texas and Oklahoma is
intended to reduce the total production of natural gas in those states. Al-
though such restrictions have not had a material impact on the Company's oper-
ations to date, the extent of any future impact therefrom cannot be predicted.
The Company's drilling activities in the Mobile Bay area are subject not only
to the State of Alabama regulation, but also to regulations of the U.S. Army
Corp. of Engineers and various other federal and state environmental regula-
tions relating to offshore activities.
Marketing and Transportation. The sale of some natural gas production by the
Company may be subject to regulation under the Natural Gas Act and the Natural
Gas Policy Act of 1978 (the "NGPA"). Under the NGPA, ceiling prices apply to
first sales of certain natural gas production in both interstate and intra-
state commerce. Administration and enforcement of the NGPA ceiling prices are
delegated to the Federal Energy Regulatory Commission (the "FERC"). As a re-
sult of the Natural Gas Wellhead Decontrol Act of 1989 (the "Decontrol Act"),
all price and non-price controls are eliminated for gas not under contract on
July 26, 1989. With respect to gas under contract on July 26, 1989, the Decon-
trol Act provides that price and non-price controls are eliminated upon con-
tract termination or by written agreement of the parties. Since current market
prices for the Company's gas production which continues to be price controlled
are below NGPA maximum lawful prices, the Company is doubtful that the Decon-
trol Act will have a significant impact on the prices received by the Company
for gas production in the near future.
In April 1992, the FERC issued Order No. 636, which provides for the funda-
mental restructuring of interstate pipeline sales and transportation services.
Among other things, Order No. 636 requires interstate pipelines to "unbundle"
their merchant sales functions from their transportation and storage functions
and to assign capacity rights they have on upstream pipelines to the pipe-
lines' former sales customers, and provides for the recovery by interstate
pipelines of costs associated with the pipelines' transition from providing
bundled sales services to providing unbundled transportation and storage serv-
ices. Order No. 636 may also increase transportation costs and tariffs on in-
terstate pipelines and cause interstate pipelines to seek to renegotiate or
terminate certain of their existing purchase contracts, but ultimately may en-
hance gas marketing opportunities and available transportation. The rules con-
tained in Order No. 636, as amended by Order No. 636-A (issued in August 1992)
and Order No. 636-B (issued in November 1992) are far reaching and complex. In
addition, several provisions of Order No. 636 are currently subject to court
challenges. Although the ultimate outcome of these challenges under Order No.
636 cannot be predicted with certainty, the Company does not believe the Order
No. 636 will adversely affect its operations. Nevertheless, the Order has re-
sulted in a degree of uncertainty with respect to interstate natural gas sales
and transportation.
No Price Controls on Liquid Hydrocarbons. There are currently no price con-
trols on crude oil, condensate or natural gas liquids.
Environmental and Occupational Regulation. Various federal, state and local
laws and regulations covering the discharge of materials into the environment,
or otherwise relating to the protection of the public health and the environ-
ment, may affect the Company's operations, expenses and costs. The trend in
environmental regulation which affects the Company has been to place more re-
strictions and limitations on activities that impact the environment, such as
emissions of pollutants, generation and disposal of wastes, and the use and
handling of chemical substances. Increasingly, strict environmental restric-
tions and limitations have resulted in higher operating costs for the Company
and other similar businesses throughout the United States, and it is possible
that the costs of compliance with environmental laws and regulations will con-
tinue to increase.
34
<PAGE>
State initiatives to regulate further the disposal of gas and oil wastes are
also pending in certain states, including states in which the Company has op-
erations, and these initiatives could have a similar impact on the Company. In
addition, the Company is subject to laws and regulations concerning occupa-
tional health and safety. It is not anticipated that the Company will be re-
quired in the near future to expend amounts that are material in relation to
its total capital expenditures program by reason of environmental or occupa-
tional health and safety laws and regulations, but inasmuch as such laws and
regulations are frequently changed, the Company is unable to predict the ulti-
mate cost of compliance.
The Company does not believe that its environmental risks are materially
different from those of comparable gas and oil companies operating in similar
geographic areas. Nevertheless, no assurance can be given that environmental
laws will not, in the future, result in a curtailment of production or mate-
rial increases in the cost of production, development or exploration or other-
wise adversely affect the Company's operations and financial condition. Al-
though the Company maintains liability insurance coverage against certain lia-
bilities from pollution, such environmental risks generally are not fully in-
surable.
Louisiana Legislation. The Louisiana legislature passed Act 404 in 1993,
which permits a party transferring an oil field site to establish a site-spe-
cific trust account for such oil field. If the site-specific trust account is
established in accordance with the requirements of the statute, the party
transferring the oil field site shall not thereafter be held liable by the
state for any site restoration costs or actions associated with the trans-
ferred oil field site. The parties to a transfer may elect not to establish a
site-specific trust account; however, in the absence of such an account, the
transferring party will continue to have liability for the costs of restora-
tion of the site. In the event the parties to a transfer elect to establish a
site-specific trust account pursuant to the statute, the Louisiana Department
of Natural Resources ("DNR") requires an oil field site restoration assessment
to be made at the time of the transfer or within one year thereafter, to de-
termine the site restoration requirements existing at the time of transfer.
Based upon the site restoration assessment, the parties to the transfer must
propose to the DNR a funding schedule for the site-specific trust account,
providing for some contribution to the account at the time of transfer and at
least quarterly payment thereafter. If the establishment and funding of the
site-specific trust account is approved by the DNR, the selling party shall
not thereafter be held liable by the state for any site restoration costs. The
purchaser will thereafter be the responsible party to the state, except that
the failure of a transferring party to make a good faith disclosure of all oil
field site conditions existing at the time of the transfer will render that
party liable for the costs of restoration of such undisclosed conditions in
excess of the balance of the site-specific trust fund.
TITLE TO PROPERTIES
Title to properties is subject to royalty, overriding royalty, carried work-
ing, net profits, working and other similar interests and contractual arrange-
ments customary in the gas and oil industry, to liens for current taxes not
yet due and to other encumbrances. As is customary in the industry in the case
of undeveloped properties, little investigation of record title is made at the
time of acquisition (other than a preliminary review of local records). Inves-
tigations, including a title opinion of local counsel, are generally made be-
fore commencement of drilling operations. The Company has granted to an affil-
iate of the Soco Group a mortgage on its interest in the Starboard Prospect to
secure repayment of the funding provided by such affiliate and relating to
such prospect, and has granted to Bank of America Illinois a mortgage on vir-
tually all remaining producing gas and oil properties to secure repayment un-
der the Credit Agreement.
OPERATING HAZARDS AND INSURANCE
The gas and oil business involves a variety of operating risks, including
the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formations and environmental hazards such as oil spills, gas leaks, ruptures
or discharges of toxic gases, the occurrence of any of which could result in
substantial losses to the Company due to injury or loss of life, severe damage
to or destruction of property, natural resources and equipment, pollution or
other environmental damage, cleanup responsibilities, regulatory investigation
and penalties and suspension of operations.
35
<PAGE>
The Company maintains a gas and oil lease operator policy that insures the
Company against certain sudden and accidental risks associated with drilling,
completing and operating its wells. There can be no assurance that this insur-
ance will be adequate to cover any losses or exposure to liability. The Com-
pany also carries comprehensive general liability policies and an umbrella
policy. The Company and its subsidiaries carry workers' compensation insurance
in all states in which they operate. The Company maintains various bonds as
required by state and federal regulatory authorities. While the Company be-
lieves these policies are customary in the industry, they do not provide com-
plete coverage against all operating risks. An uninsured or partially insured
claim, if successful and of sufficient magnitude, could have a material ad-
verse effect on the Company and its financial condition. If the Company expe-
riences significant claims or losses, the Company's insurance premiums could
be increased which may adversely affect the Company and its financial condi-
tion or limit the ability of the Company to obtain coverage. Any difficulty in
obtaining coverage may impair the Company's ability to engage in its business
activities.
FACILITIES
The Company's headquarters are currently located in Oklahoma City, Oklahoma,
and occupy a total of approximately 8,568 square feet of leased space at an
annual rent of $106,656. The current lease expires August 31, 1996. The Com-
pany is planning to move its headquarters to Houston, Texas upon expiration of
the lease term because of a shift in the Company's emphasis to the Gulf Coast
area. In May 1996, the Company opened a small temporary office in Houston on a
month-to-month lease, and in July 1996 the Company executed a five year lease
agreement commencing September 1, 1996 to occupy approximately 7,600 square
feet of office space in downtown Houston, at an annual rate of $106,008.
EMPLOYEES
The Company employs nine people in its Oklahoma City office, one person in
Houston, Texas, and one person in Covington, Louisiana. They are all full time
employees. Their functions include management, engineering, production, geolo-
gy, geophysics, land and legal, gas marketing, accounting, financial planning
and administration. Certain operations of the Company's field activities are
accomplished through independent contractors and are supervised by the Compa-
ny. The Company believes its relations with its employees and contractors are
good. No employees of the Company are represented by a union. As previously
discussed, the Company intends to move its headquarters to Houston, Texas when
the lease on its headquarters located in Oklahoma City, Oklahoma expires in
August 1996. Some of the current employees will not be willing or able to re-
locate, or will not be offered the opportunity to join the Company in such re-
location. The Company believes that, if the need arises, it will be able to
hire individuals with similar credentials and upon similar terms in the Hous-
ton market to replace any employees that do not relocate.
LEGAL PROCEEDINGS
The Company is party to a lawsuit filed on June 14, 1994 in the Circuit
Court of Mobile, Alabama. The lawsuit was brought by Frontier Exploration and
Production Corporation ("Frontier"), a subsidiary of the Company, as plaintiff
to quiet title to leases it owns in the Mobile Bay area in Mobile County, Ala-
bama. The original defendant, The Offshore Group, Inc. ("TOG"), filed various
counterclaims pursuant to which, inter alia, it (i) claimed an ownership in-
terest in the Mobile Bay area wells drilled by the Company and (ii) sought re-
covery of substantial damages it claimed to have sustained due to, among other
stated reasons, delays in drilling allegedly caused by the Company. The well
for which TOG alleged it sustained damages was a dry hole. The Company has
been awarded summary judgment as to all counterclaims of TOG with respect to
the Mobile Bay area wells, other than TOG's claim for damages related to the
drilling of its well, and the Company has sued TOG and certain of its princi-
pals for fraudulently asserting such claims. The grant of summary judgment may
be appealed. The Company does not believe TOG's remaining claim has any merit.
The Company's 1992 federal income tax return is currently being examined by
the Internal Revenue Service. The IRS has proposed an increase to the amount
of income declared for the year of $4,994,759 resulting in an additional tax
liability of $1,553,338 for that year plus penalty and interest. The Company
has filed a response to the proposed change and intends to defend its position
vigorously. The Company believes it has adequate net operating losses incurred
in 1992 and subsequent years to offset any potential tax liability.
36
<PAGE>
In addition to the above, the Company is a defendant from time to time in
lawsuits incidental to its business. The Company believes that none of such
current proceedings, individually or in the aggregate, will have a materially
adverse effect on the Company.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding the directors,
executive officers and key employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
David W. Berry............ 46 Chairman of the Board of Directors and President
David B. Christofferson... 48 Executive Vice President, Secretary, General
Counsel, Chief Financial Officer, and Director
S. Gordon Reese, Jr....... 46 Vice President--Gulf Coast Region and Director
Michael A. Barnes......... 54 Vice President of Exploration and Production
James R. Harris, Jr....... 50 Treasurer and Controller
Neal M. Elliott........... 56 Director
Jeffrey R. Orgill......... 51 Director
Allen H. Sweeney.......... 49 Director
</TABLE>
DAVID W. BERRY has served as President of the Company since the incorpora-
tion of its predecessor on August 1, 1988, and has served as Chairman of the
Board of Directors since 1991. Mr. Berry is a member of the Independent Petro-
leum Association of America.
DAVID B. CHRISTOFFERSON has served as General Counsel, Secretary and a di-
rector of the Company since 1989, Executive Vice President since January 1993
and as Chief Financial Officer since December 1994. He received his Bachelor
of Science degree in Finance in 1971 and a Juris Doctor in 1974 from the Uni-
versity of Oklahoma. He also received a Master of Divinity degree with Magna
Cum Laude honors from Phillips University in 1985. He has been active in the
gas and oil industry for more than 15 years. Mr. Christofferson is a member of
the Independent Petroleum Association of America.
S. GORDON REESE, JR. was elected a Director in June 1996 and has served as
Vice President of the Gulf Coast Region since January 1993. He received a
Bachelor of Science degree from Louisiana State University in 1971. From 1991,
until joining the Company in January 1993, he was the managing general partner
of Reese Production Company, a gas and oil company. From 1986 till 1991, he
was the President of Reese Energy Corporation. Mr. Reese is a director of the
Louisiana Independent Oil and Gas Association and a past vice president of the
Independent Petroleum Association of America.
MICHAEL A. BARNES joined the Company on May 15, 1996 as Vice President of
Exploration and Production. From March 1991 until his employment with the Com-
pany, Mr. Barnes served as Exploration Manager--Gulf Coast for Great Western
Resources, Inc. Mr. Barnes has 30 years experience in the gas and oil industry
with emphasis in the Gulf Coast region. Mr. Barnes holds a Bachelor of Science
degree in Geology from the University of Texas.
JAMES R. HARRIS, JR. has served as Treasurer and Controller since July 1991.
He has a Bachelor of Arts degree in Economics from DePaul University and a
Master of Business Administration degree from Oklahoma City University. Prior
to joining the Company, Mr. Harris was employed as an accountant with Matthews
Exploration Company, a gas and oil exploration company. Mr. Harris has indi-
cated that he will not continue with the Company after the relocation of its
principal offices to Houston, Texas and will cease his employment on or about
the date of the move.
37
<PAGE>
NEAL M. ELLIOTT has served as a director of the Company since September
1991. He has served as Chairman of the Board and President of Horizon
Healthcare Corp. since 1986. Horizon Healthcare Corp. is a publicly-traded
company listed on the New York Stock Exchange which operates extended nursing
care facilities in over 50 locations nationwide. Mr. Elliott received a Bache-
lor of Arts degree from Stanford University in 1963 and a Master of Business
Administration degree from Columbia University in 1965. His background in-
cludes public accounting with the firm of Price Waterhouse, as well as execu-
tive senior management duties for major health care providers. Mr. Elliott
also serves as a director of LTC Properties, a publicly traded real estate in-
vestment trust.
JEFFREY R. ORGILL has served as Vice Chairman of the Board of Directors
since 1991. From October 1988 to May 1996, he served as the Company's Vice
President of Exploration and Production. Mr. Orgill became a consultant to the
Company on May 1, 1996. Mr. Orgill received a Bachelor of Science degree in
Geology in 1970 and a Master of Science degree in Geology in 1971 from Brigham
Young University. Mr. Orgill has 25 years of experience in the gas and oil in-
dustry.
ALLEN H. SWEENEY has served as a director of the Company since September
1993. From 1991 to 1994, Mr. Sweeney also served as Chief Accountant and as a
consultant to the Company. Since 1990, Mr. Sweeney has served as President and
a director of AHS & Associates, Inc., a gas and oil consulting firm; as Presi-
dent and a director of Columbia Production Company, an independent gas and oil
company; and as Vice President and a director of Mid-America Waste Management,
Inc., a waste management company. Mr. Sweeney received a Bachelor of Science
degree in Accounting from Oklahoma State University in 1969 and a Master of
Business Administration degree from Oklahoma City University in 1972. He is
also a director of Panaco, Inc., a publicly held oil and gas exploration and
production company.
THE BOARD OF DIRECTORS
Pursuant to provisions of the Company's Certificate and Bylaws (the "Charter
Documents"), the Board of Directors has fixed the number of directors at sev-
en. The Charter Documents also provide that the directors shall be divided
into three classes, as nearly equal in number as possible, with each class
serving staggered three-year terms. Currently, the Board consists of six di-
rectors. The Board is continuing to search for a qualified and available nomi-
nee to fill the remaining vacant board seat which, when filled, will have a
term expiring in 1999.
Whenever dividends on the Convertible Preferred Stock have not been paid in
an aggregate amount equal to at least six quarterly dividends on such shares
(whether or not consecutive), the number of directors of the Company will be
increased by two, and the holders of the Convertible Preferred Stock, voting
separately as a class, will be entitled to elect such two additional directors
to the Board of Directors at any meeting of stockholders of the Company at
which directors are to be elected held during the period such dividends remain
in arrears. Such voting right will terminate when all such dividends accrued
and in default have been paid in full or set apart for payment. The term of
office of all directors so elected will terminate immediately upon such pay-
ment or setting apart for payment. No dividends on the Convertible Preferred
Stock have been paid since April 1995. As of May 31, 1996, the accumulated but
undeclared and unpaid dividends equaled $111,749, representing four quarterly
dividend periods. The Company anticipates that it will resume dividend pay-
ments prior to an aggregate of six quarterly dividend payments being in ar-
rears. The Company intends to seek a waiver of the Restricted Payment Tests in
order to resume dividend payments on the Convertible Preferred Stock prior to
an aggregate of six quarterly dividend payments being in arrears. There can be
no assurance, however, that the Company will be able to obtain such a waiver.
EXECUTIVE COMPENSATION
Set forth in the following table is information as to the compensation paid
or accrued to each officer and director receiving compensation of at least
$100,000 and the Chief Executive Officer ("CEO") for the three years ended De-
cember 31, 1995:
38
<PAGE>
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------- ---------------------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SAR'S COMPENSATION
- --------------------------- ---- -------- ------- ------------- ------------
(# OF SHARES)
<S> <C> <C> <C> <C> <C>
David W. Berry............. 1995 $120,000 $ 0 0 $18,367 (2)
Chairman of the Board 1994 120,000 0 0 18,367 (2)
and President 1993 71,250 29,250 24,000 (1) 9,184 (2)
Jeffrey R. Orgill ......... 1995 120,000 0 0 31,344 (2)
Vice Chairman of the Board 1994 120,000 0 0 31,344 (2)
and Vice President of 1993 71,250 29,250 24,000 (1) 15,672 (2)
Exploration and Production
(3)
David B. Christofferson ... 1995 95,000 5,000 0 20,090 (2)
Executive Vice President, 1994 90,000 10,000 0 20,090 (2)
Secretary, General 1993 70,000 30,000 204,000 (4) 10,045 (2)
Counsel,
Chief Financial Officer
and Director
S. Gordon Reese, Jr. ...... 1995 70,000 35,000 0 0
Vice President--Gulf Coast 1994 70,000 20,000 12,000 (1) 0
Region 1993 70,000 30,000 0 0
and Director
</TABLE>
- --------
(1) Indicates units ("Plan Units") awarded in the Company's Incentive Plan.
Each Plan Unit contains one option to purchase one share of Common Stock
(the "Plan Option") and one stock appreciation right ("SAR"), represent-
ing the right to receive a cash payment equal to twice the amount by
which the fair market value of the Common Stock on the date of exercise
of the Plan Option exceeds the exercise price thereof. Plan Options are
granted with an exercise price equal to the fair market value of the Com-
mon Stock on the date of the grant.
(2) Represents accrued liabilities of the Company pursuant to deferred com-
pensation benefits payable to the individual officers.
(3) Mr. Orgill resigned as Vice President of Exploration and Production ef-
fective May 1, 1996.
(4) Includes 24,000 Plan Units and 180,000 options issued under the Incentive
Stock Option Plan. Each option granted under the Incentive Stock Option
Plan entitles the holder to purchase one share of Common Stock at an ex-
ercise price equal to the fair market value of the Common Stock on the
date of the grant.
DIRECTORS' COMPENSATION
During the fiscal year ended December 31, 1995, directors who were not offi-
cers of the Company were paid $1,000 for each Board of Director's meeting at-
tended and, additionally, received an automatic grant of 2,000 Plan Units un-
der the Incentive Plan. Each Plan Unit contains one Plan Option to purchase
one share of Common Stock and one SAR, representing the right to receive a
cash payment equal to twice the amount by which the fair market value of the
Common Stock on the date of exercise of the Plan Option exceeds the exercise
price thereof. Plan Options are granted with an exercise price equal to the
fair market value of the Common Stock on the date of the grant. Each year di-
rectors who are not officers of the Company receive automatic grants of Plan
Units under the Incentive Plan, which vest one year from the grant date. Each
of Messrs. Elliott and Sweeney were granted 2,000 Plan Units in September 1993
which vested in January 1994, and an additional 2,000 Plan Units in June 1995
which vest in June 1996. The exercise prices of the 1993 and 1995 grants are
$3.10 and $2.09, respectively. In January 1996, the Board of Directors discon-
tinued the Incentive Plan, and amended the directors' compensation to grant
non-employee directors an automatic annual grant of 6,000 Common Stock pur-
chase options which vest in twelve months from the date of grant. On June 6,
1996, Messrs. Elliott and Sweeney each were granted non-qualified options to
purchase 6,000 shares of Common Stock at an exercise price of $2.00 per share,
the fair market value of the Common Stock on the date of grant.
STOCK OPTIONS GRANTED IN FISCAL 1995
No options to purchase Common Stock were granted in fiscal 1995 to the exec-
utive officers named in the Summary Compensation Table.
39
<PAGE>
No options were exercised by the Company's executive officers during the
fiscal year ended December 31, 1995. The following table sets forth informa-
tion about the unexercised options and SAR's held by Messrs. Berry, Orgill,
Christofferson and Reese at December 31, 1995.
FISCAL 1995 YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SAR'S AT 12/31/95 OPTIONS/SAR'S AT 12/31/95
--------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David W. Berry............ 16,000 (1) 8,000 (1) $ 0 $ 0
Jeffrey R. Orgill......... 16,000 (1) 8,000 (1) 0 0
David B. Christofferson... 148,000 (2) 56,000 (2) 181,500 77,000
S. Gordon Reese........... 8,000 (1) 4,000 (1) 0 0
------- ------ -------- -------
Total................... 188,000 76,000 181,500 77,000
</TABLE>
- --------
(1) Number of securities indicated represents Plan Units, each of which is
comprised of one Plan Option and two SAR's.
(2) Number of securities indicated represents 16,000 Plan Units and 132,000
Common Stock options granted pursuant to the Incentive Stock Option Plan,
which were presently exercisable at December 31, 1995, and 8,000 Plan
Units and 48,000 Common Stock options granted pursuant to the Incentive
Stock Option Plan, which were not exercisable at such date. Each Plan
Unit is comprised of one Plan Option and two SAR's.
1996 OPTION PLAN
The Board of Directors has adopted the 1996 Option Plan, which was approved
by the shareholders on June 6, 1996. All 350,000 options authorized under the
1996 Option Plan have been granted. Each option entitles the holder to pur-
chase one share of Common Stock at an exercise price equal to the fair market
value of the Common Stock on the date of grant. Options granted to officers
and other key employees vest over a three-year period with one-third of the
options exercisable on or after each of the three succeeding anniversary dates
of the grant date. Each option expires ten years from the date of grant if not
exercised. The following table sets forth the options which have been granted
pursuant to the 1996 Option Plan to the executive officers and directors of
the Company:
<TABLE>
<CAPTION>
NAME NUMBER OF OPTIONS
---- -----------------
<S> <C>
David W. Berry............. 120,000 (1)
David B. Christofferson.... 100,000 (2)
S. Gordon Reese, Jr........ 85,000 (2)
Michael A. Barnes.......... 25,000 (3)
-------
Total.................... 330,000
</TABLE>
- --------
(1) Each of the options shown has an exercise price of $1.62, which is equal
to 110% plus $.01 of the fair market value of the Common Stock on the ef-
fective date of the grant, January 16, 1996.
(2) Each of the options shown has an exercise price of $1.47, which is equal
to the fair market value of the Common Stock on the effective date of the
grant, January 16, 1996.
(3) Each of the options shown has an exercise price of $2.125, which is equal
to the fair market value of the Common Stock on the effective date of the
grant, May 15, 1996.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with David W. Berry and David B.
Christofferson ("Employees"). Each of these agreements expires December 31,
1998. Each agreement automatically renews for additional one-year terms each
December 31st unless terminated by either the Company or Employee. Under these
agreements, Mr. Berry currently receives an annual salary of $120,000 and Mr.
Christofferson currently receives an annual salary of $100,000. In addition,
each Employee is entitled to receive deferred compensation, provided he re-
mains employed by the Company until expiration of the initial term of his
agreement and has not been terminated for cause thereunder. The deferred com-
pensation shall be an annual payment equal to the product of $9,000 multiplied
by the number of years the Employee is employed by the Company beginning with
July 1,
40
<PAGE>
1993 (up to a maximum of 10 years); payments commence the year the Employee
reaches 65 or retires from the Company, whichever is later. Deferred payments
shall be paid for a maximum of 15 years thereafter. In the event of Employee's
death or permanent disability during the term of his employment, deferred com-
pensation shall be paid to Employee or his estate beginning at the time of
said death or disability, in an aggregate amount computed as if Employee were
employed for ten years after July 1, 1993; provided, however, that any such
payments pursuant to the Employee's disability will be reduced by the amount
of any employer paid insurance which pays disability payments to Employee.
"Cause" for termination of an Employee includes: the conviction of a felony;
the perpetration of a fraud, misappropriation or embezzlement of property of
the Company; willful misconduct with respect to the duties or obligations of
Employee under his employment agreement; or intentional or continual neglect
of duties. For one year following the termination of Employee, Employee is
prohibited from engaging in or assisting in any business which is identical,
competitive with, or comparable to, the Company's business within 50 miles of
any area in which Employee rendered services to the Company.
The Company also has employment agreements with Michael A. Barnes and S.
Gordon Reese, Jr. Mr. Barnes' agreement, which commenced May 15, 1996 and ex-
pires on December 31, 1997, automatically renews for successive one-year terms
each December 31st unless terminated by either the Company or Mr. Barnes. Un-
der the agreement, Mr. Barnes receives an annual salary of $100,000, as well
as certain incentive compensation. Such incentive compensation consists of
25,000 options granted to Mr. Barnes on May 15, 1996 under the 1996 Option
Plan, in connection with the execution of his employment agreement, and an ad-
ditional 50,000 options to be granted on January 31, 1997 with an exercise
price equal to the then current market price of the Common Stock. Mr. Reese's
agreement commenced on January 1, 1995 and automatically renews for successive
on-year terms each December 31 unless terminated by either the Company or Mr.
Reese. Under the agreement, Mr. Reese receives an annual salary of $100,000.
Both agreements contain provisions prohibiting the disclosure to third parties
of proprietary information relating to the Company.
The Company and Mr. Orgill agreed to the termination of his employment
agreement effective May 1, 1996. However, Mr. Orgill continues to serve as a
director and as a consultant to the Company. The consulting agreement provides
for Mr. Orgill to furnish exploration and production oversight services on the
Company's existing properties and prospects in the Mid-Continent area and
prospect generation and evaluation services on the Company's existing 3-D
seismic date over acreage in the Mid-Continent area, for a period of 23 months
commencing May 1, 1996 at a monthly compensation of $10,000. To the extent
that Mr. Orgill's consulting services exceed 40 hours per month, the consult-
ing agreement provides that he will receive an additional $70 per hour, up to
a maximum of $400 per day. Mr. Orgill's agreement contains a provision prohib-
iting for one year subsequent to termination of employment the disclosure to
third parties of proprietary information relating to the Company.
OFFICER AND DIRECTOR LIABILITY
As permitted by the provisions of the OGCA, the Company's Certificate elimi-
nates, in certain circumstances, the monetary liability of directors of the
Company for a breach of their fiduciary duty as directors. These provisions do
not eliminate the liability of a director (i) for a breach of the director's
duty of loyalty to the Company or its stockholders; (ii) for acts or omissions
by a director not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for liability arising under Section 1053 of
the OGCA (relating to the declaration of dividends and purchase or redemption
of shares in violation of the OGCA); or (iv) for any transaction from which
the director derived an improper personal benefit. In addition, these provi-
sions do not eliminate the liability of a director for violations of federal
securities laws or limit the rights of the Company or its stockholders, in ap-
propriate circumstances, to seek equitable remedies such as injunctive or
other forms of non-monetary relief. Such remedies may not be effective in all
cases.
The Company's Certificate provides that the Company shall indemnify all di-
rectors and officers of the Company to the full extent permitted by the OGCA.
Under such provisions, any director or officer, who in his capacity as such,
is made or threatened to be made, a party to any suit or proceeding, may be
indemnified if the Board of Directors determines such director or officer
acted in good faith and in a manner he reasonably believed to be in or not op-
posed to the best interest of the Company. The Certificate and the OGCA fur-
ther provide that
41
<PAGE>
such indemnification is not exclusive of any other rights to which such indi-
viduals may be entitled under the Certificate, the Bylaws, any agreement, vote
of stockholders or disinterested directors or otherwise.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been ad-
vised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore, unenforce-
able.
CERTAIN TRANSACTIONS
From December 1992 through December 1995 the Company was a party to a Con-
sultant's Agreement with Federman Associates, Inc. ("Federman Associates"),
pursuant to which Federman Associates agreed to provide financial consulting
services to the Company and the Company agreed to pay Federman Associates
$3,000 per month. In addition, Mr. H. L. Federman of Federman Associates was
granted 6,000 Plan Units under the Company's Incentive Plan. Federman Associ-
ates was engaged to advise the Company relative to general financing matters.
These matters include structural and other issues involved in the Company's
private placement in February 1993 (the "Private Placement"), its initial pub-
lic offering in November 1993 and future financing needs. Mr. Federman is ei-
ther the father or spouse of all of the beneficiaries of the Hi-Chicago Trust,
which owned, as of May 31, 1996, 367,200 shares of Common Stock, 2,000 shares
of Convertible Preferred Stock and a warrant to purchase 300,000 shares of
Common Stock at an exercise price of $3.00 per share.
During 1995, Hi-Chicago Trust asserted a claim against the Company claiming
that the Company failed to use its best efforts to register in a timely manner
Hi-Chicago Trust's stock obtained under the convertible note agreement. The
Company had an obligation to register within one year of the effective date of
its initial public offering 200,000 shares of Common Stock issued or issuable
to the Hi-Chicago Trust upon conversion of its Convertible Notes, and an addi-
tional 107,200 shares subscribed for by the Hi-Chicago Trust pursuant to the
Private Placement. The registration statement relating to such shares was
filed in January 1995 and declared effective by the SEC in May 1995. The Com-
pany and Hi-Chicago Trust agreed to a settlement in December 1995, in which
the Company issued 75,000 shares of Common Stock (the "Settlement Shares") and
a warrant to purchase up to 300,000 shares of Common Stock at an exercise
price of $3.00 per share in settlement of this claim. The warrant is exercis-
able through the earlier of 60 months from the settlement date or for a period
of 30 days after the closing bid price of the Company's stock equals or ex-
ceeds $6.00 per share for 60 consecutive trading days. The Settlement Shares
are "restricted securities" within the meaning of Rule 144 under the Securi-
ties Act and the Company has granted certain demand and "piggyback" registra-
tion rights relating to such shares. The Settlement Shares are included in the
Selling Securityholders' Shares which are being registered pursuant to the
Registration Statement of which this Prospectus forms a part. The settlement
provides for issuance of additional shares of the Company's stock if the Com-
pany does not register the Settlement Shares promptly upon demand by the Hi-
Chicago Trust. The Company recorded a loss of $96,093 related to this settle-
ment in 1995.
The Company from time to time makes advances to officers and employees of
the Company. During 1994, 1995 and for the period from January 1, 1996 through
June 10, 1996, such advances aggregated $10,385, $14,234 and $36,748, respec-
tively, and repayments of $6,204, $30,282 and $9,000, respectively, were made
to the Company. At June 10, 1996, David W. Berry owed $64,740 in loans, which
bear interest at a rate of 8.28%, and advances of $12,485, which carry no in-
terest but which are normally repaid within 60 days or reclassified as a loan.
At June 10, no other officer or director had outstanding loans or advances in
excess of $60,000.
During 1994 and 1995, Mr. Neal Elliott, a director of the Company, partici-
pated as a working interest owner in the drilling of several wells and in sev-
eral seismic ventures conducted by the Company. In connection with such ven-
tures, Mr. Elliott paid the Company $160,754 and $35,995 in 1994 and 1995, re-
spectively. Mr. Elliott is also an additional general partner of the 1993 3-D
Seismic Exploration Limited Partnership (the "Partnership"), of which the Com-
pany serves as managing general partner. Mr. Elliott contributed $104,805 and
$12,201 in contributions to the Partnership in 1994 and 1995, respectively.
The Partnership and the Company are also joint venture partners in various
seismic and drilling activities, for which the Partnership paid the Company
$427,735 in 1994 for its share of the actual cost of such activities. At De-
cember 31, 1994 and 1995, the Partnership owed
42
<PAGE>
the Company $153,000 and $137,787, respectively. At March 31, 1996, the Part-
nership owed the Company $137,787.
All future and ongoing transactions between the Company and its directors,
officers, principal stockholders or affiliates will be on terms no less favor-
able to the Company than may be obtained from unaffiliated third parties, and
any such transactions will be approved by a majority of the disinterested di-
rectors of the Company.
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of June 14, 1996, and as ad-
justed to reflect the sale of the 1,200,000 Units offered hereby, concerning
the beneficial ownership of Common Stock by each of the Company's directors,
each executive officer named in the Summary Compensation Table and all direc-
tors and executive officers of the Company as a group, and by each person who
is known by the Company to own more than 5% of the outstanding shares of Com-
mon Stock. Unless otherwise indicated, the beneficial owner has sole voting
and investment power with respect to such stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS PERCENT OF CLASS PERCENT OF CLASS
OF BENEFICIAL HOLDER NUMBER OF SHARES BEFORE OFFERING AFTER OFFERING
-------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
David W. Berry* (2)(3)..... 684,930 13.1% 7.8%
Jeffrey R. Orgill* (2)(4).. 592,500 11.3% 6.7%
David B. Christofferson*
(2)(5).................... 212,000 4.0% 2.3%
Neal M. Elliott* (2)(6).... 74,750 1.4% .9%
S. Gordon Reese, Jr.*
(2)(7).................... 8,000 .1% .1%
Allen H. Sweeney* (2)(6)... 4,000 .1% .1%
Hi-Chicago Trust (8)(9).... 675,200 12.3% 7.5%(11)
All executive officers and
directors as a group
(7 persons)(10)........... 1,532,180 28.5% 17.5%
</TABLE>
- --------
* Director
(1) This tabular information conforms to Item 403 of Regulation S-B, and
gives effect to the exercise of warrants or options exercisable within
60 days of the date of this table owned in each case by the person or
group listed.
(2) Address is c/o Frontier Natural Gas Corporation, One Benham Place, 9400
North Broadway, Oklahoma City, Oklahoma 73114.
(3) Includes 24,000 shares issuable pursuant to options immediately exercis-
able under the Incentive Plan and excludes 120,000 shares issuable pur-
suant to options granted under the 1996 Option Plan which become exer-
cisable in the future.
(4) Includes 24,000 shares issuable pursuant to options immediately exercis-
able under the Incentive Plan.
(5) Includes 132,000 shares issuable pursuant to options immediately exer-
cisable under the Incentive Stock Option Plan and 24,000 shares issuable
pursuant to options immediately exercisable under the Incentive Plan;
and excludes 48,000 shares issuable pursuant to options granted under
the Incentive Plan and 100,000 shares issuable pursuant to options
granted under the 1996 Option Plan, which become exercisable in the fu-
ture.
(6) Includes 4,000 shares issuable pursuant to options immediately exercis-
able under the Incentive Plan and excludes 6,000 shares issuable pursu-
ant to options granted on June 6, 1996 which become exercisable in the
future.
(7) Includes 8,000 shares issuable pursuant to options immediately exercis-
able under the Incentive Plan; and excludes 4,000 shares issuable pursu-
ant to options granted under the Incentive Plan and 85,000 shares issua-
ble pursuant to options granted under the 1996 Option Plan, which become
exercisable in the future.
(8) Includes 300,000 shares issuable upon exercise of warrants which are
presently exercisable at $3.00 per share, 4,000 shares issuable upon con-
version of 2,000 shares of Convertible Preferred Stock which are pres-
ently convertible and 4,000 shares issuable upon exercise of 4,000 war-
rants which are issuable upon conversion of the Convertible Preferred
Stock and presently exercisable.
(9) Address is Two North LaSalle Street, Chicago, Illinois 60602.
43
<PAGE>
(10) Includes 88,000 shares issuable pursuant to options immediately exercis-
able under the Incentive Plan and 132,000 shares issuable pursuant to
options immediately exercisable under the Incentive Stock Option Plan;
and excludes 4,000 shares issuable pursuant to options granted under the
Incentive Plan, 48,000 shares issuable pursuant to options granted under
the Incentive Stock Option Plan and 330,000 shares issuable pursuant to
options granted under the 1996 Option Plan, which become exercisable in
the future.
(11) 5.4% taking into account the sale of 375,000 Selling Securityholders'
Shares which are being registered concurrently with this offering in a
registration statement of which this Prospectus forms a part.
The Company also has outstanding 85,961 shares of its Convertible Preferred
Stock. As of the date of this Prospectus, each share of Convertible Preferred
Stock is convertible into 2.26 shares of Common Stock and two Series A War-
rants. No director, or any of the above referenced officers owns any shares of
Convertible Preferred Stock.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, $.01 par value per share, and 5,000,000 shares of Preferred
Stock, $.01 par value per share. Immediately prior to this Offering, 5,208,406
shares of Common Stock were issued and outstanding, and 85,961 shares of Con-
vertible Preferred Stock were issued and outstanding.
UNITS
Each Unit consists of three shares of Common Stock and three Series B War-
rants, each of which entitles the holder to purchase one share of Common
Stock. The Common Stock and Series B Warrants comprising the Units are immedi-
ately detachable and separately transferable.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters submitted to a vote of shareholders. There is no cumulative voting
with respect to the election of directors. Accordingly, holders of a majority
of the shares entitled to vote in any election of directors may elect all of
the directors standing for election. Subject to preferences that may be appli-
cable to any then outstanding class of preferred stock, the holders of Common
Stock are entitled to receive such dividends, if any, as may be declared by
the Board of Directors from time to time out of legally available funds. Upon
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets of the Company that are le-
gally available for distribution, after payment of all debts and other liabil-
ities and subject to the prior rights of holders of any class of preferred
stock then outstanding. The holders of Common Stock have no preemptive, sub-
scription, redemption or conversion rights. The rights, preferences and privi-
leges of holders of Common Stock are subject to the rights of the holders of
shares of any series of preferred stock that the Company may issue in the fu-
ture.
SERIES B WARRANTS
Each Series B Warrant entitles the registered holder to purchase one share
of Common Stock at a price of $ per share, subject to adjustment in cer-
tain circumstances, during the period commencing one year and ending five
years from the date of this Prospectus.
The Series B Warrants are redeemable by the Company, at the option of the
Company, with the prior consent of the Underwriter, at a price of $.01 per
warrant at any time after the Series B Warrants become exercisable, upon not
less than 30 days' written notice, provided that the last sales price of the
Common Stock equals or exceeds 200% of the then-exercise price of the Series B
Warrants (the "Redemption Threshold") for the 20 consecutive trading days end-
ing on the third day prior to the notice of redemption to warrant holders. The
warrant holders shall have the right to exercise the Series B Warrants until
the close of business on the date fixed for redemption.
The Series B Warrants will be issued in registered form under a Warrant
Agreement between the Company and Liberty National Bank and Trust Company of
Oklahoma City, N.A. as Warrant Agent. Reference is made to such Warrant Agree-
ment (which has been filed as an exhibit to the Registration Statement of
which this Pro-
44
<PAGE>
spectus is a part) for a complete description of the terms and conditions ap-
plicable to the Series B Warrants (the description herein contained being
qualified in its entirety by reference to such Warrant Agreement).
The exercise price, number of shares of Common Stock issuable on exercise of
the Series B Warrants and Redemption Threshold are subject to adjustment in
certain circumstances, including in the event of a stock dividend, recapitali-
zation, reorganization, merger or consolidation of the Company. However, the
Series B Warrants are not subject to adjustment for issuances of Common Stock
at a price below their exercise price.
The Series B Warrants may be exercised upon surrender of the Warrant Certif-
icate representing the Series B Warrants on or prior to the expiration date at
the offices of the Warrant Agent, with the exercise form on the reverse side
of the Warrant Certificate completed and executed as indicated, accompanied by
full payment of the exercise price (by certified check, payable to the Compa-
ny) for the number of Series B Warrants being exercised. The Company has re-
served from its authorized but unissued shares a sufficient number of shares
of Common Stock for issuance on exercise of the Series B Warrants. Exercise of
each Warrant may be effected by delivery of the Warrant, duly endorsed for ex-
ercise and accompanied by payment of the exercise price, to the Warrant Agent.
The shares of Common Stock issuable on exercise of the Series B Warrants will
be, when issued and paid for in the manner contemplated by the Series B War-
rants, fully paid and non-assessable. The warrant holders do not have the
rights or privileges of holders of Common Stock.
No Series B Warrants will be exercisable unless at the time of exercise
there is a current prospectus covering the shares of Common Stock issuable
upon exercise of such warrants under an effective registration statement filed
with the Commission and such shares have been qualified for sale or are exempt
from qualification under the securities laws of the state of residence of the
holder of such Series B Warrants. Although the Company has undertaken to have
all shares so qualified for sale in those states where the Units are being of-
fered and to maintain a current prospectus relating thereto until the expira-
tion of the Series B Warrants, subject to the terms of the Warrant Agreement,
there can be no assurance that it will be able to do so.
No fractional shares will be issued upon exercise of the Series B Warrants.
However, if a warrant holder exercises all Series B Warrants then owned of
record by it, the Company will pay to such warrant holder, in lieu of the is-
suance of any fractional share which is otherwise issuable to such warrant
holder, an amount in cash based on the market value of the Common Stock on the
last trading day prior to the exercise date.
For the life of the Series B Warrants, the holders thereof have the opportu-
nity to profit form a rise in the market for the Company's Common Stock, with
a resulting dilution in the interest of all other stockholders. So long as the
Series B Warrants are outstanding, the terms on which the Company could obtain
additional capital may be adversely affected. The holders of the Series B War-
rants might be expected to exercise them at a time when the Company would, in
all likelihood, be able to obtain any needed capital by a new offering of se-
curities on terms more favorable than those provided for by the Series B War-
rants.
SERIES A WARRANTS
Each Series A Warrant entitles the registered holder to purchase one share
of Common Stock at a price of $6.00 per share, subject to adjustment in cer-
tain circumstances, until November 12, 1998.
The Series A Warrants currently are redeemable by the Company, at the option
of the Company, at a price of $.25 per warrant at any time, upon not less than
30 days' written notice. The warrant holders have the right to exercise the
Series A Warrants until the close of business on the date fixed for redemp-
tion.
The Series A Warrants were issued in registered form under a Warrant Agency
Agreement between the Company and Liberty National Bank and Trust Company of
Oklahoma City, N.A. as Warrant Agent. Reference is made to such Warrant Agency
Agreement (which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part) for a complete description of the terms and
conditions applicable to the Series A Warrants (the description herein con-
tained being qualified in its entirety by reference to such Warrant Agency
Agreement).
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<PAGE>
The exercise price, number of shares of Common Stock issuable on exercise of
the Series A Warrants are subject to adjustment in certain circumstances, in-
cluding in the event of a stock dividend, recapitalization, reorganization,
merger or consolidation of the Company. However, the Series A Warrants are not
subject to adjustment for issuances of Common Stock at a price below their ex-
ercise price.
The Series A Warrants may be exercised upon surrender of the Warrant Certif-
icate representing the Series A Warrants on or prior to the expiration date at
the offices of the Warrant Agent, with the exercise form on the reverse side
of the Warrant Certificate completed and executed as indicated, accompanied by
full payment of the exercise price (by certified check, payable to the Compa-
ny) for the number of Series A Warrants being exercised. The Company has re-
served from its authorized but unissued shares a sufficient number of shares
of Common Stock for issuance on exercise of the Series A Warrants. Exercise of
each Warrant may be effected by delivery of the Warrant, duly endorsed for ex-
ercise and accompanied by payment of the exercise price, to the Warrant Agent.
The shares of Common Stock issuable on exercise of the Series A Warrants will
be, when issued and paid for in the manner contemplated by the Series A War-
rants, fully paid and non-assessable. The warrant holders do not have the
rights or privileges of holders of Common Stock.
No Series A Warrants will be exercisable unless at the time of exercise
there is a current prospectus covering the shares of Common Stock issuable
upon exercise of such warrants under an effective registration statement filed
with the Commission and such shares have been qualified for sale or are exempt
from qualification under the securities laws of the state of residence of the
holder of such Series A Warrants.
No fractional shares will be issued upon exercise of the Series A Warrants.
However, if a warrant holder exercises all Series A Warrants then owned of
record by it, the Company will pay to such warrant holder, in lieu of the is-
suance of any fractional share which is otherwise issuable to such warrant
holder, an amount in cash based on the market value of the Common Stock on the
last trading day prior to the exercise date.
For the life of the Series A Warrants, the holders thereof have the opportu-
nity to profit from a rise in the market for the Company's Common Stock, with
a resulting dilution in the interest of all other stockholders. So long as the
Series A Warrants are outstanding, the terms on which the Company could obtain
additional capital may be adversely affected. The holders of the Series A War-
rants might be expected to exercise them at a time when the Company would, in
all likelihood, be able to obtain any needed capital by a new offering of se-
curities on terms more favorable than those provided for by the Series A War-
rants.
PREFERRED STOCK
Shares of preferred stock may be issued from time to time in one or more se-
ries with such designations, voting powers, if any, preferences and relative,
participating, optional or other special rights, and such qualifications, lim-
itations and restrictions thereof, as are determined by resolution of the
Board of Directors of the Company. The issuance of preferred stock, while pro-
viding flexibility in connection with possible financings, acquisitions and
other corporate purposes, could, among other things, adversely affect the vot-
ing power of holders of Common Stock and, under certain circumstances, be used
as a means of discouraging, delaying or preventing a change in control of the
Company. Currently, the Company has outstanding one series of preferred stock,
designated as Convertible Preferred Stock, par value $.01 per share, of which
85,961 shares are currently issued and outstanding.
Convertible Preferred Stock Series
Each share of Convertible Preferred Stock is convertible into shares of Com-
mon Stock, at the rate described below (the "Conversion Rate"), and two Series
A Warrants (i) at any time at the option of the holder, and (ii) automatical-
ly, if the last reported sales price of the Convertible Preferred Stock as re-
ported on Nasdaq (or as reported on any national securities exchange on which
the Convertible Preferred Stock is then listed), exceeds $13.00 for a period
of 10 consecutive trading days.
The Conversion Rate is determined by dividing the Conversion Price then in
effect by $5.00. The "Conversion Price" is equal to $10.00 plus all accrued
and unpaid dividends, including the full dividend accrued through the end of
the quarter in which the conversion occurs, unless such accrued and unpaid
dividends are paid after
46
<PAGE>
notice of conversion. The Conversion Price is subject to adjustment in certain
events, including: the issuance of stock as a dividend on the Common Stock;
subdivisions or combinations of the Common Stock; the issuance to all holders
of Common Stock of certain rights or warrants (expiring within 45 days after
the record date for determining stockholders entitled to receive them) to sub-
scribe for or purchase Common Stock at a price less than current market price;
or the distribution to all holders of Common Stock of evidences of indebted-
ness of the Company, cash (excluding ordinary cash dividends), other assets or
rights or warrants to subscribe for or purchase any securities (other than
those referred to above). No adjustment of the Conversion Price will be re-
quired to be made until cumulative adjustments aggregate 1% or more of the
Conversion Price as last adjusted; however, any adjustment not made will be
carried forward. As of May 31, 1996, the accumulated but undeclared and unpaid
dividends equaled $111,749, or $1.30 per share of Convertible Preferred Stock,
resulting in a Conversion Price at such date of $11.30 per share of Convert-
ible Preferred Stock and a Conversion Rate of 2.26.
Holders of shares of Convertible Preferred Stock are entitled to receive,
when, as and if declared by the Board of Directors out of funds at the time
legally available therefor, cash dividends at an annual rate of $1.20 per
share. Dividends accrue and cumulate from the date of first issuance of the
Convertible Preferred Stock and are payable to holders of record as they ap-
pear on the stock books of the Company on such record dates as are fixed by
the Board of Directors. The Convertible Preferred Stock has priority as to
dividends over the Common Stock, and no dividend (other than dividends payable
solely in Common Stock or any other series or class of the Company's stock
hereafter issued that ranks junior as to dividends to the Convertible Pre-
ferred Stock) may be declared, paid or set apart for payment on, and no pur-
chase, redemption or other acquisition may be made by the Company of, any Com-
mon Stock or Common Stock derivatives unless all accrued and unpaid dividends
on the Convertible Preferred Stock have been paid or declared and set apart
for payment. No Convertible Preferred Stock dividends have been paid since
April 30, 1995. The amount of dividends payable per share of Convertible Pre-
ferred Stock for each quarterly dividend period is computed by dividing the
annual dividend amount by four. No interest is payable in respect of any divi-
dend payment on the Convertible Preferred Stock which may be in arrears. Under
the terms of the Credit Agreement, the Company is prohibited from making any
dividend payments with respect to any class of its capital stock unless it
meets certain Restricted Payment Tests.
The holders of the Convertible Preferred Stock have no voting rights except
as required by law, or under the circumstances described below. In exercising
any such vote, each outstanding share of Convertible Preferred Stock is enti-
tled to such number of votes per share as they would have if the Convertible
Preferred Stock were converted and shares of Common Stock are received.
Whenever dividends on the Convertible Preferred Stock have not been paid in
an aggregate amount equal to at least six quarterly dividends on such shares
(whether or not consecutive), the number of directors of the Company will be
increased by two, and the holders of the Convertible Preferred Stock, voting
separately as a class, will be entitled to elect such two additional directors
to the Board of Directors at any meeting of stockholders of the Company at
which directors are to be elected held during the period such dividends remain
in arrears. Such voting right will terminate when all such dividends accrued
and in default have been paid in full or set apart for payment. The term of
office of all directors so elected will terminate immediately upon such pay-
ment or setting apart for payment.
So long as any Convertible Preferred Stock is outstanding, the Company shall
not, without the affirmative vote of the holders of at least 66 2/3% of all
outstanding shares of Convertible Preferred Stock, voting separately as a
class, (i) amend, alter or repeal any provision of the Certificate or the By-
laws of the Company so as to adversely affect the relative rights, prefer-
ences, qualifications, limitations or restrictions of the Convertible Pre-
ferred Stock, (ii) authorize or issue, or increase the authorized amount of,
any additional class or series of stock, or any security convertible into
stock of such class or series, ranking senior to the Convertible Preferred
Stock as to dividends or upon liquidation, dissolution or winding up of the
Company, or (iii) effect any reclassification of the Convertible Preferred
Stock.
So long as any Convertible Preferred is outstanding, the Company shall not,
without the affirmative vote of the holders of at least 50% of all outstanding
shares of Convertible Preferred Stock, voting separately as a class, (i) au-
thorize, issue, or increase the authorized amount of any additional class or
series of stock, or any security convertible into stock of such class or se-
ries, ranking on a parity with the Convertible Preferred Stock as to
47
<PAGE>
dividends or liquidation and having superior voting rights, or (ii) incur in-
debtedness or authorize or issue, or increase the authorized amount of, any
additional class or series of stock, or any security convertible into stock of
such class or series, ranking on parity with the Convertible Preferred Stock
as to dividend or liquidation rights if, immediately following such event, Ad-
justed Stockholders' Equity is less than the aggregate liquidation preferences
of all Convertible Preferred Stock and stock ranking senior to or on parity
with the Convertible Preferred Stock as to liquidation. Adjusted Stockholders'
Equity is the Company's stockholders' equity as shown on its most recent bal-
ance sheet, increased by (a) the amount of any liability or other reduction in
stockholders' equity attributable to the Convertible Preferred Stock and each
series of stock senior to or on parity with the Convertible Preferred Stock as
to liquidation, and (b) the net proceeds of any equity financing since the
date of the balance sheet, reduced by any reduction in stockholders' equity
resulting from certain dispositions of assets since the date of the balance
sheet.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Charter Documents may be deemed to have
anti-takeover effects and may delay, defer or prevent a tender offer or takeo-
ver attempt that a stockholder might consider to be in such stockholder's best
interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders.
Classified Board. The Company's Certificate provides that (i) the Board of
Directors is divided into three classes of as equal size as possible, (ii) the
number of directors is to be fixed from time to time by the Board of Direc-
tors, and (iii) the term of office of each class expires in consecutive years
so that each year only one class is elected. These provisions may render more
difficult a change in control of the Company or the removal of incumbent man-
agement.
No Stockholder Action by Written Consent; Special Meetings. The Company's
Certificate provides that no action shall be taken by stockholders except at
an annual or special meeting of stockholders, and prohibits action by written
consent in of lieu of a meeting. The Company's Bylaws provide that, unless
otherwise proscribed by law, special meetings of stockholders can only be held
pursuant to a resolution of the Board of Directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Bylaws establish an advance notice procedure for the nomina-
tion, other than by or at the direction of the Board of Directors or a commit-
tee thereof, of candidates for election as directors as well as for other
stockholder proposals to be considered at stockholders' meetings.
Notice of stockholder proposals and director nominations must be timely
given in writing to the Secretary of the Company prior to the meeting at which
the matters are to be acted upon or Directors are to be elected. In all cases,
to be timely, notice must be received at the principal executive offices of
the Company not less than 40 days before the meeting, or, if on the day notice
of the meeting is given to the stockholders less than 45 days remain until the
meeting, (i) five days after notice is given but not less than five days prior
to the meeting in the case of stockholder proposals, and (ii) 10 days after
notice is given in the case of director nominations.
Notice to the Company from a stockholder who proposes to nominate a person
at a meeting for election as a director must contain all information about
that person as would be required to be included in a proxy statement solicit-
ing proxies for the election of the proposed nominee (including such person's
written consent to serve as a Director if so elected) and certain information
about the stockholder proposing to nominate that person. Stockholder proposals
must also include certain specified information.
These limitations on shareholder proposals do not restrict a stockholder's
right to include proposals in the Company's annual proxy materials pursuant to
rules promulgated under the Exchange Act.
Section 1090.3 of the OGCA. Section 1090.3 of the OGCA prohibits a publicly
held Oklahoma corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (I)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation, (ii) upon
48
<PAGE>
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock, or (iii) on or after such date the business combina-
tion is approved by the Board of Directors and by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the inter-
ested stockholder. A "business combination" includes mergers, asset sales and
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and associ-
ates, owns (or within three years, did own) 15% or more of the corporation's
voting stock. The effect of such statute may be to discourage certain types of
transactions involving an actual or potential change in control of the Compa-
ny.
TRANSFER AGENTS, WARRANT AGENT AND REGISTRAR
The transfer agent for the Common Stock, Units, Series A Warrants, Series B
Warrants and Convertible Preferred Stock, and the warrant agent for the Series
A Warrants and Series B Warrants, is Liberty National Bank and Trust Company
of Oklahoma City, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
Possible Rule 144 Sales. Upon completion of the Offering described in this
Prospectus, the Company will have outstanding 8,808,406 shares of Common Stock
(assuming no exercise of the Underwriter's over-allotment option or the Unit
Purchase Option). Of these shares all of the 3,600,000 shares sold in the Of-
fering (assuming no exercise of the Underwriter's over-allotment option) will
be freely transferable by persons other than affiliates (as defined in regula-
tions under the Securities Act), without restriction or further registration
under the Securities Act.
Of the remaining 5,208,406 shares of Common Stock outstanding, 3,861,156
shares are registered and are currently freely tradeable (except as subject to
lockup agreements described below) and 1,347,250 shares are "Restricted
Securities" within the meaning of Rule 144 under the Securities Act and may
not be sold in the absence of registration under the Securities Act, unless an
exemption from registration is available, including the exemption provided by
Rule 144. Under Rule 144 as currently in effect, all such shares are currently
eligible for sale. The holders of 1,348,180 shares of Common Stock (including
the 1,347,250 shares of Common Stock which constitute "Restricted Securities")
have agreed with the Underwriter not to sell their shares until twelve months
after the date of this Prospectus without obtaining the prior written approval
of the Underwriter. The foregoing does not give effect to any shares issuable
on exercise of outstanding options and warrants. The Company has outstanding
(i) 85,961 shares of Convertible Preferred Stock, which are convertible into
an aggregate of 171,922 shares of Common Stock and 171,922 Series A Warrants,
assuming a conversion rate of two shares of Common Stock for each share of
Convertible Preferred Stock, (ii) other warrants to purchase 902,000 shares of
Common Stock (including 300,000 shares of Common Stock issuable upon exercise
of the Hi-Chicago Warrant), (iii) outstanding options to purchase 108,000
shares of Common Stock under the Incentive Plan, outstanding options to
purchase 180,000 shares of Common Stock under the Incentive Stock Option Plan
and outstanding options to purchase 350,000 shares of Common Stock under the
1996 Option Plan, and (iv) outstanding Series A Warrants to purchase 1,578,078
shares of Common Stock (excluding the 171,922 Series A Warrants which may be
issued upon conversion of the Convertible Preferred Stock). In addition, the
Selling Securityholders have agreed with the Underwriter to various
limitations on the sale of shares of Common Stock owned by such holders or
issuable to them upon exercise of warrants. See "--Selling Securityholders'
Shares." The effect of the offer and sale of such shares may be to depress the
market price for the Company's Common Stock.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated for purposes of Rule 144) who beneficially owns
Restricted Securities with respect to which at least two years have elapsed
since the later of the date the shares were acquired from the Company or from
an affiliate of the Company, is entitled to sell, within any three month peri-
od, a number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock of the Company, or (ii) the average weekly
trading volume in Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also
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<PAGE>
subject to certain manner-of-sale provisions and notice requirements, and to
the availability of current public information about the Company. A person who
is not an affiliate, has not been an affiliate within 90 days prior to sale
and who beneficially owns Restricted Securities with respect to which at least
three years have elapsed since the later of the date the shares were acquired
from the Company or from an affiliate of the Company, is entitled to sell such
shares under Rule 144(k) without regard to any of the volume limitations or
other requirements described above.
Selling Securityholders' Shares. The Selling Securityholders, who benefi-
cially hold 537,200 shares of the outstanding Common Stock (1,087,200 shares
of Common Stock including outstanding warrants), have agreed with the Under-
writer to limit their ability to, directly or indirectly, sell or otherwise
dispose of certain of such shares, as follows:
(i) Weisser Johnson has agreed not to sell 170,000 shares of Common Stock
until 60 days after the date of this Prospectus which are registered
on the Registration Statement of which this Prospectus forms a part;
(ii) Weisser Johnson has also agreed not to sell 250,000 shares of Common
Stock issuable upon exercise of warrants until 12 months after the
date of this Prospectus;
(iii) With respect to an aggregate 292,200 shares of Common Stock, the Hi-
Chicago Trust has agreed not to sell any such shares until 30 days
after the date of this Prospectus, and then it may sell up to 97,400
of such shares after 30 days after the date of this Prospectus, an
additional 97,400 of such shares after 60 days after the date of
this Prospectus, and after 90 days after the date of this Prospectus
it may sell all such shares, except that the Underwriter has agreed
to permit the Hi-Chicago Trust to sell such shares if the closing
bid price of the Common Stock is $4.00 or greater for at least 10
consecutive trading days after the date of the Prospectus; and
(iv) The Hi-Chicago Trust has agreed not to sell 300,000 shares of Common
Stock issuable upon exercise of the Hi-Chicago Warrant until six
months after the date of this Prospectus, except that the Underwriter
has agreed to permit the Hi-Chicago Trust to sell such shares if the
closing bid price of the Common Stock is $4.00 or greater for at
least 15 consecutive trading days after the date of the Prospectus
which are registered on the Registration Statement of which this Pro-
spectus forms a part.
Registration Rights. Upon consummation of this Offering, other than the
shares of Common Stock issuable upon exercise of the Unit Purchase Option for
which the Underwriter has been granted registration rights, the holders of
500,000 shares of Common Stock issuable upon exercise of outstanding securi-
ties of the Company have the right to either require the Company to register
those shares under the Securities Act or have their shares included in any
registration statement filed by the Company, subject to certain limitations,
to enable a public sale of those shares. Either by reason of the terms of the
securities or agreements entered into by the holders thereof, the holders of
such registration rights cannot exercise those rights and seek to offer and
sell their shares of Common Stock until twelve months after the date of this
Prospectus. In the event the holders of a material amount of such shares
should seek to have their shares registered for sale under the Securities Act,
these obligations could result in considerable expense to the Company and the
effect of the offer and sale of such shares may be to depress the market price
for the Company's Common Stock. Compliance with these obligations may also in-
terfere with the Company's ability to raise additional capital when required.
If the Company were to waive the restriction on when these registration rights
are exercisable, it would not be required to give notice to the Company's
other stockholders and the earlier registration of such shares could have an
adverse impact on the market for the Company's shares.
UNDERWRITING
Gaines, Berland Inc. (the "Underwriter") has agreed, subject to the terms
and conditions of the Underwriting Agreement, to purchase from the Company
1,200,000 Units. The Underwriting Agreement provides that the obligations of
the Underwriter are subject to approval of certain legal matters by counsel to
the Underwriter and various other conditions precedent, and that the Under-
writer is obligated to purchase all of the Units offered by this Prospectus
(other than the Units covered by the over-allotment option described below) if
any are purchased.
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The Underwriter has advised the Company that it proposes to offer the Units
to the public at the initial public offering price set forth on the cover page
of this Prospectus. The Underwriter may allow to certain dealers concessions,
not in excess of $0. per Unit, of which not in excess of $0. per Unit may
be reallowed to other dealers.
The Company has granted to the Underwriter an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 180,000 additional
Units at the public offering price set forth on the cover page of this Pro-
spectus, less the underwriting discounts and commissions and the
nonaccountable expense allowance, for the sole purpose of covering over-allot-
ments, if any.
The Company has agreed to indemnify the Underwriter against certain liabili-
ties, including liabilities under the Securities Act. The Company has agreed
to pay to the Underwriter a nonaccountable expense allowance of 3% of the
gross proceeds derived from the sale of the Units underwritten (including the
sale of any Units subject to the Underwriter's over-allotment option), $50,000
of which has been paid as of the date of this Prospectus. The Company also has
agreed to pay all expenses in connection with qualifying the Units offered
hereby for sale under the laws of such states as the Underwriter may designate
and registering the Offering with the NASD, including fees and expenses of
counsel retained for such purposes by the Underwriter and the costs of inves-
tigatory searches of the Company and its directors and executive officers.
In connection with this Offering, the Company has agreed to sell to the Un-
derwriter and its designees, for an aggregate of $100, an option to purchase
up to an aggregate of 120,000 Units (the "Unit Purchase Option"). The Unit
Purchase Option is exercisable at $ per Unit (154% of the initial public
offering price) for a period of four years commencing one year from the date
of this Prospectus. The Units purchasable upon exercise of the Unit Purchase
Option are identical to those offered hereby. The Unit Purchase Option grants
to the holder thereof certain "piggyback" rights and one demand right for a
period of seven and five years, respectively, from the date of this Prospectus
with respect to the registration under the Securities Act of the securities
directly and indirectly issuable upon exercise of the Unit Purchase Option.
The Unit Purchase Option cannot be transferred, sold, assigned or hypothecated
during the one year period following the date of this Prospectus, except to
officers of the Underwriter and to selected dealers and their officers or
partners.
For a period of five years from the date of this Prospectus, and in the
event the Underwriter so designates, the Company will recommend and use its
best efforts to cause a designee of the Underwriter who is reasonably satis-
factory to the Company to be elected as a full voting member of its Board of
Directors. Until such time as the Underwriter exercises its option to desig-
nate a nominee for election to the Board of Directors, the Underwriter shall
have the right to have a representative present at all meetings of the
Company's Board of Directors. Such representative will be entitled to the same
notices and communications sent by the Company to its directors and to attend
directors' meetings, but will not be entitled to vote thereat. The Underwrit-
er's designee or representative, as the case may be, will be entitled to be
reimbursed for the out-of-pocket expenses incurred by him in attending such
meetings. As of the date of this Prospectus, the Underwriter has not named ei-
ther a nominee for election to full board membership or such non-voting repre-
sentative.
The Company has engaged the Underwriter, on a nonexclusive basis, as its
agent for the solicitation of the exercise of the Series B Warrants. To the
extent not inconsistent with the guidelines of the NASD and the rules and reg-
ulations of the Commission, the Company has agreed to pay the Underwriter for
bona fide services rendered a commission equal to 5% of the exercise price for
each Warrant exercised more than one year from the date of this Prospectus if
the exercise was solicited by the Underwriter. No compensation will be paid to
the Underwriter in connection with the exercise of the Series B Warrants if
the market price of the underlying shares of Common Stock is lower than the
exercise price, the Series B Warrants are held in a discretionary account, the
Series B Warrants are exercised in an unsolicited transaction, the
warrantholder has not confirmed in writing that the Underwriter solicited such
exercise or the arrangement to pay the commission is not disclosed in the pro-
spectus provided to warrant holders in connection with such exercise. In addi-
tion, unless granted an exemption by the Commission from Rule 10b-6 under the
Exchange Act, while it is soliciting exercise of the Series B Warrants, the
Underwriter will be prohibited from engaging in any market-making activities
or solicited brokerage activities with regard to the Company's securities un-
less the Underwriter has waived its right to receive a fee for the exercise of
the Series B Warrants.
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Pursuant to the Underwriting Agreement, the officers and directors, and cer-
tain family members or affiliates thereof (collectively, the "Insiders"), have
agreed not to sell any of their shares of Common Stock for a period of 12
months after the date of this Prospectus, without the prior written consent of
the Underwriter. Additionally, the Selling Securityholders, who hold 537,200
shares of the outstanding Common Stock (1,087,200 shares of Common Stock in-
cluding outstanding warrants), have agreed with the Underwriter to limit their
ability to, directly or indirectly, sell or otherwise dispose of 462,200 of
such shares (1,012,200 shares of Common Stock including outstanding warrants).
See "Shares Eligible for Resale."
LEGAL MATTERS
The validity of the securities being offered hereby has been passed upon for
the Company by Day, Edwards, Federman, Propester, & Christensen, P.C., Okla-
homa City, Oklahoma. Graubard Mollen & Miller, New York, New York, has served
as counsel to the Underwriter in connection with this Offering.
EXPERTS
The financial statements as of December 31, 1995 and 1994 and for each of
the two years in the period ended December 31, 1995 included in this Prospec-
tus have been audited by Deloitte & Touche LLP, independent auditors, are
stated in their report appearing herein, and have been so included in reliance
upon the reports of such firm given upon their authority as experts in ac-
counting and auditing.
The information appearing in this Prospectus regarding the proved reserves
of the Company as of December 31, 1995 was prepared by Hofmann & Assoc. Engi-
neering and Atwater Consultants, Ltd., independent petroleum engineers, as
stated in their reports dated February 13, 1996 and March 21, 1996, respec-
tively.
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF THE COMPANY
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements for the Years Ended December 31, 1995 and 1994
Independent Auditors' Report......................................... F-2
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Operations................................ F-4
Consolidated Statements of Stockholders' Equity...................... F-5
Consolidated Statements of Cash Flows................................ F-6
Notes to Consolidated Financial Statements........................... F-7
Financial Statements for the Three Months Ended March 31, 1996
(unaudited)
Consolidated Balance Sheets (unaudited).............................. F-22
Consolidated Statements of Income (unaudited)........................ F-23
Consolidated Statements of Cash Flows (unaudited).................... F-24
Notes to Consolidated Financial Statements (unaudited)............... F-25
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Frontier Natural Gas Corporation
We have audited the accompanying consolidated balance sheets of Frontier
Natural Gas Corporation and subsidiaries (the "Company") as of December 31,
1995 and 1994, and the related consolidated statements of income, stockhold-
ers' equity and cash flows for the years then ended. These financial state-
ments 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 stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from ma-
terial 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 esti-
mates made by management, as well as evaluating the overall financial state-
ment presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Frontier Natural
Gas Corporation and subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Oklahoma City, Oklahoma
March 22, 1996
F-2
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 63,908 $ 615,256
Accounts receivable, net of allowance for doubtful
accounts of $12,710 and $15,255 at December 31,
1995 and 1994, respectively....................... 612,876 854,049
Prepaid expenses and other......................... 178,737 218,332
Receivables from affiliates........................ 210,016 244,926
----------- -----------
Total current assets............................... 1,065,537 1,932,563
Property and equipment:
Gas and oil properties, at cost--successful efforts
method of accounting.............................. 11,109,678 10,913,272
Other property and equipment....................... 906,453 794,068
----------- -----------
12,016,131 11,707,340
Less accumulated depletion, depreciation and
amortization...................................... (2,895,159) (2,468,953)
----------- -----------
9,120,972 9,238,387
Other assets........................................ 252,966 81,133
----------- -----------
Total assets....................................... $10,439,475 $11,252,083
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................... $ 2,065,341 $ 726,186
Revenue distribution payable....................... 493,072 396,071
Current portion of long-term debt.................. 227,302 63,855
Deferred revenues under gas sales agreement........ 828,000 828,000
Accrued and other liabilities...................... 222,778 356,554
Obligation to redeem preferred stock (of a
subsidiary)....................................... -- 99,540
----------- -----------
Total current liabilities.......................... 3,836,493 2,470,206
Deferred revenues under gas sales agreement......... 1,113,977 1,960,427
Long-term debt...................................... 150,271 159,512
Other long-term liabilities......................... 275,298 107,509
----------- -----------
Total liabilities.................................. 5,376,039 4,697,654
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock $.01 par value; 5,000,000 shares
authorized; 85,961 and 694,400 shares issued and
outstanding at December 31, 1995 and 1994,
respectively; ($859,610 and $6,944,000 aggregate
liquidation preference at December 31, 1995 and
1994, respectively)............................... 860 6,944
Common stock:
Class A Common stock, $.01 par value; 20,000,000
shares authorized; 5,058,406 shares issued and
outstanding at December 31, 1995; 2,418,050 shares
issued and outstanding at December 31, 1994....... 50,584 24,181
Common stock subscribed............................ 45,000 247,500
Common stock subscription receivable............... (45,000) (247,500)
Additional paid-in capital......................... 7,866,879 7,548,605
Retained earnings (deficit)........................ (2,854,887) (1,025,301)
----------- -----------
Total stockholders' equity......................... 5,063,436 6,554,429
----------- -----------
Total liabilities and stockholders' equity......... $10,439,475 $11,252,083
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Revenues:
Gas and oil revenues............................... $ 2,673,497 $ 3,725,488
Gain on sale of assets............................. 722,004 1,029,194
Sale of seismic data............................... 601,100 --
Operating fees..................................... 415,925 536,948
Other revenues..................................... 241,948 173,393
----------- -----------
Total revenues................................... 4,654,474 5,465,023
----------- -----------
Costs and expenses:
Lease operating expense............................ 862,575 1,079,165
Production taxes................................... 214,664 264,324
Gas purchases under deferred contract.............. 549,800 564,507
Depletion, depreciation and amortization........... 1,182,998 1,104,061
Exploration costs.................................. 1,105,214 1,269,671
Interest expense................................... 43,000 --
General and administrative expense................. 2,291,701 2,425,647
----------- -----------
Total costs and expenses......................... 6,249,952 6,707,375
----------- -----------
Income (loss) before provision for income taxes...... (1,595,478) (1,242,352)
Benefit (provision) for income taxes--deferred....... -- 373,776
----------- -----------
Net income (loss).................................... (1,595,478) (868,576)
Accretion to redemption value-redeemable preferred
stock of a subsidiary............................... -- 16,651
Cumulative preferred stock dividend.................. 395,381 839,160
Value of common stock issued for cumulative preferred
stock in excess of original terms, net of relieved
preferred stock dividend............................ 2,183,471 --
----------- -----------
Net income (loss) applicable to common stockholders.. $(4,174,330) $(1,724,387)
=========== ===========
Net income (loss) per common and common equivalent
share............................................... $ (1.05) $ (.69)
=========== ===========
Weighted average number of common equivalent shares
(in thousands)...................................... 3,977 2,486
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A
PREFERRED STOCK COMMON SHARES ADDITIONAL RETAINED
----------------- ----------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT)
-------- ------- --------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 700,000 $ 7,000 2,406,850 $24,069 $7,548,661 $ 670,246
Conversion of preferred
stock.................. (5,600) (56) 11,200 112 (56) --
Accretion of preferred
stock of subsidiary.... -- -- -- -- -- (16,651)
Cumulative preferred
stock dividend......... -- -- -- -- -- (810,320)
Net loss................ -- -- -- -- -- (868,576)
-------- ------- --------- ------- ---------- -----------
Balance, December 31,
1994................... 694,400 6,944 2,418,050 24,181 7,548,605 (1,025,301)
-------- ------- --------- ------- ---------- -----------
Issuance of common
stock.................. -- -- 95,000 949 135,144 --
Issuance of subscribed
common stock........... -- -- 120,600 1,206 201,294 --
Conversion of preferred
stock.................. (608,439) (6,084) 2,424,756 24,248 (18,164) --
Cumulative preferred
stock dividend......... -- -- -- -- -- (234,108)
Net loss................ -- -- -- -- -- (1,595,478)
-------- ------- --------- ------- ---------- -----------
Balance, December 31,
1995................... 85,961 $ 860 5,058,406 $50,584 $7,866,879 $(2,854,887)
======== ======= ========= ======= ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $(1,595,478) $ (868,576)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depletion, depreciation and amortization......... 1,182,998 1,104,061
Gain on sale of assets........................... (722,004) (1,029,194)
Deferred revenues under gas contract............. (846,450) (759,077)
Deferred income taxes............................ -- (373,776)
Non-cash compensation expense attributable to
SAR's........................................... (107,509) 107,509
Stock issued for settlement of litigation........ 96,093 --
Exploration costs................................ 1,105,214 1,269,671
Changes in assets and liabilities:
Accounts receivable............................ 276,083 (109,634)
Prepaid expenses and other..................... 39,595 (99,370)
Other assets................................... (171,833) 17,171
Accounts payable............................... 278,155 (77,494)
Revenue distribution payable................... 97,001 (98,840)
Accrued and other.............................. 141,522 233,966
----------- -----------
Net cash provided by (used in) operating
activities.................................. (226,613) (683,583)
----------- -----------
Cash flows used in investing activities:
Capital expenditures--gas and oil properties....... (2,387,383) (4,947,364)
Capital expenditures--other property and equip-
ment.............................................. (131,775) (313,364)
Proceeds from sale of assets....................... 2,171,365 2,087,971
----------- -----------
Net cash used in investing activities........ (347,793) (3,172,757)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of debt..................... 442,001 124,265
Repayments of long-term debt....................... (287,795) (95,527)
Redemption of preferred stock of a subsidiary...... (99,540) (290,217)
Preferred stock dividends paid..................... (234,108) (810,320)
Net proceeds from issuance of common stock......... 202,500 --
----------- -----------
Net cash provided by (used in) financing
activities.................................. 23,058 (1,071,799)
----------- -----------
Net increase (decrease) in cash and cash equiva-
lents............................................... (551,348) (4,928,139)
Cash and cash equivalents at beginning of year....... 615,256 5,543,395
----------- -----------
Cash and cash equivalents at end of year............. $ 63,908 $ 615,256
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest............................... $ 72,679 $ 72,792
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The Company's primary business activities include gas
and oil exploration, production and sales, primarily in the Southwestern and
Gulf Coast areas of the United States. The accompanying consolidated financial
statements include the accounts of the Company, and its subsidiaries.
The preparation of financial statements in conformity with generally ac-
cepted accounting principles requires management to make estimates and assump-
tions that affect the reported amounts of assets and liabilities and disclo-
sure of contingent assets and liabilities at the date of the financial state-
ments and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash Equivalents--The Company considers all investments with a maturity of
three months or less when purchased to be cash equivalents.
Gas and Oil Properties--The Company uses the successful efforts method of
accounting for gas and oil exploration and development costs. All costs of ac-
quired wells, productive exploratory wells, and development wells are capital-
ized. Exploratory dry hole costs, geological and geophysical costs, and lease
rentals on non-producing leases are expensed as incurred. Gas and oil lease-
hold acquisition costs are capitalized. Costs of unproved properties are
transferred to proved properties when reserves are proved. Gains or losses on
sale of leases and equipment are recorded in income as incurred. Valuation al-
lowances are provided if the net capitalized costs of gas and oil properties
at the field level exceed their realizable values based on expected future
cash flows. Unproved properties are periodically assessed for impairment and,
if necessary, a loss is recognized by providing an allowance.
The costs of multiple producing properties acquired in a single transaction
are allocated to individual producing properties based on estimates of gas and
oil reserves and future cash flows.
Depletion is provided by the unit of production method based upon reserve
estimates. Depletion, depreciation and amortization includes $109,000 in im-
pairment of gas and oil properties as a result of the implementation of state-
ment of Financial Accounting Standards No. 121. "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
Other Property and Equipment--Other property and equipment is carried at
cost. The Company provides for depreciation of other property and equipment
using the straight-line method over the estimated useful lives of the assets
which range from three to ten years.
Upon sale or retirement of an asset, the cost of the asset disposed of and
the related accumulated depreciation are removed from the accounts, and the
resulting gain or loss is reflected in income.
Income Taxes--The Company accounts for income taxes on an asset and liabil-
ity method which requires the recognition of deferred tax liabilities and as-
sets for the tax effects of temporary differences between tax bases of assets
and liabilities, operating loss carryforwards, and tax credit carryforwards.
Commodity Transactions--The Company attempts to minimize the price risk of a
portion of its future oil and gas production with commodity futures contracts.
The market value changes of these contracts are recognized in revenues when
the contracts are closed. At December 31, 1995, the Company had no open con-
tracts.
Capitalized Interest--The Company capitalizes interest costs incurred on ex-
ploration projects. The interest capitalized for the years ended December 31,
1995 and 1994 was approximately $129,000 and $68,000, respectively.
Gas Balancing--The Company records gas revenue based on the entitlement
method. Under this method, recognition of revenue is based on the Company's
pro-rata share of each well's production. During such time as
F-7
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the Company's sales of gas exceed its pro-rata ownership in a well, a liabil-
ity is recorded, and conversely a receivable is recorded for wells in which
the Company's sales of gas are less than its pro-rata share. At December 31,
1995, the Company's gas balancing position was approximately 40,000 MCF over-
produced.
Exploration Costs--The Company expenses exploratory dry hole costs and geo-
logical and geophysical costs. During 1995 and 1994, $390,000 and $1,100,000
respectively of such costs represented geological and geophysical costs
expensed as required under the successful efforts method of accounting.
Earnings (Loss) per share--Primary average shares are computed on the basis
of weighted average shares of common stock outstanding and common stock equiv-
alent shares attributable to outstanding stock options, and stock
subscriptions. Common stock equivalent shares are computed using the treasury
stock method. The computation of fully diluted income per share was
antidilutive; therefore the amounts of primary and fully diluted earnings
(loss) are the same.
Reclassification--Certain reclassifications have been made to prior year fi-
nancial statements to conform them to the classification in 1995.
2. STOCKHOLDERS' EQUITY
On November 19, 1993 the Company closed the sale of its initial public of-
fering of 350,000 units of its securities. Each unit consisted of two shares
of cumulative convertible preferred stock (valued at $10.00 per share), one
(1) share of common stock (valued at $4.00) and one (1) warrant (valued at $
.10). The price of each unit was $24.10. The aggregate proceeds before ex-
penses amounted to $8,435,000. The net proceeds after underwriter commissions
and expenses was $6,937,350.
During 1995, the Company offered to exchange one share of cumulative con-
vertible preferred stock plus all unpaid and accrued preferred dividends for
four shares of common stock and two warrants for a limited period. The Company
concluded its offer on May 26, 1995 with a total of 603,939 shares of convert-
ible preferred stock tendered. As a result of the offering, the Company issued
2,415,756 shares of Common Stock and 1,207,878 Warrants. After May 26, 1995,
the exchange ratio reverted to the original conversion terms. The Company re-
flected the market value of the additional two shares of common stock paid as
a one-time premium to induce conversion of the cumulative convertible pre-
ferred stock as an addition to net loss in computing loss applicable to common
shareholders in the amount of $2,415,756. The Company was relieved of $232,285
of accrued dividends relating to the shares tendered which has been offset
against the inducement premium. As of December 31, 1995 and 1994, 85,961 and
694,400 shares of cumulative convertible preferred stock were outstanding, re-
spectively.
During 1995, the Company issued 120,600 shares of common stock for $202,500
pursuant to stock subscription agreements entered into in a private placement
transaction in March 1993.
Preferred Stock--The Board of Directors of the Company has adopted a Certif-
icate of Designations creating a series of convertible preferred stock con-
sisting of 1,000,000 shares, par value $.01 per share, none of which was out-
standing as of December 31, 1995 and 1994. Shares of cumulative convertible
preferred stock, in addition to the 1,000,000 shares of convertible preferred
stock, may be issued from time to time in one or more series with such desig-
nations, voting powers, if any, preferences, and relative participating, op-
tional or other special rights, and such qualifications, limitations and re-
strictions thereof, as are determined by resolution of the Board of Directors
of the Company.
Holders of shares of cumulative convertible preferred stock will be entitled
to receive, when and if declared by the Board of Directors out of funds at the
time legally available, cash dividends at a maximum annual rate of $1.20 per
share, payable quarterly, commencing 90 days after the date of first issuance.
Dividends are cumulative
F-8
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STOCKHOLDERS' EQUITY (CONTINUED)
from the date of issuance of the cumulative convertible preferred stock. Dur-
ing 1995 and 1994, $234,108 and $810,320 was declared and paid in cumulative
preferred stock dividends. The Company has undeclared and unpaid dividends in
the amount of $68,768 in its cumulative preferred stock for the period from
May 1, 1995 to December 31, 1995 or $0.80 per share. The Company is not re-
quired to declare and pay such dividends; however, until such dividends are
paid current, the Company is precluded from paying dividends to its common
shareholders.
In the event of any liquidation, dissolution or wind-up of the Company,
holders of shares of cumulative convertible preferred stock are entitled to
receive the liquidation preference of $10.00 per share, plus an amount equal
to any accrued and unpaid dividends to the payment date, before any payment or
distribution is made to the holders of common stock, or any series or class of
the Company's stock hereafter issued, that will rank junior as to liquidation
rights to the cumulative convertible preferred stock. However, the holders of
the shares of the convertible preferred stock will not be entitled to receive
liquidation preference of such shares, until the liquidation preference of any
other series or class of the Company's stock hereafter issued that ranks se-
nior as to liquidation rights to the cumulative convertible preferred stock,
has been paid in full.
The holders of cumulative convertible preferred stock will not have voting
rights except as required by law in connection with certain defaults and as
provided to approve certain future actions including any changes in the provi-
sions of the stock or the issuance of additional shares equal or senior to the
stock. Whenever dividends on the cumulative convertible preferred stock have
not been paid in an aggregate amount equal to at least six quarterly divi-
dends, the number of directors of the Company will be increased by two and the
holders of preferred stock will be entitled to elect additional directors.
Redemption--The cumulative convertible preferred stock is redeemable for
cash, in whole or in part, at the option of the Company, at $10.00 per share,
plus any accrued and unpaid dividends, whether or not declared.
Optional Conversion--At any time after the initial issuance of the cumula-
tive convertible preferred stock and prior to the redemption thereof, the
holders of cumulative convertible preferred stock shall have the right, exer-
cisable at their option, to convert any or all of such shares into common
stock at the rate of conversion described below. During 1995 and 1994, 4,500
and 5,600 shares of cumulative convertible preferred stock were converted to
common stock under the original conversion terms.
Automatic Conversion--If, at any time after the initial issuance thereof,
the last reported sales price of the cumulative convertible preferred stock as
reported on the NASDAQ System (or the closing sale price as reported on any
national securities exchange on which the cumulative convertible preferred
stock is then listed), shall, for a period of 10 consecutive trading days, ex-
ceed $13.00, then, effective as of the closing of business on the tenth such
trading day, all shares of cumulative convertible preferred stock then out-
standing shall immediately and automatically be converted into shares of com-
mon stock and warrants at the rate of conversion described below.
Conversion Rate--The conversion rate for the cumulative convertible pre-
ferred stock (i.e., the number of shares of common stock into which each share
of cumulative convertible preferred stock is convertible) is determined by di-
viding the conversion price then in effect by $5.00. The initial conversion
price is $10.00; therefore, the cumulative convertible preferred stock is ini-
tially convertible into common stock and warrants at the conversion rate of
two shares of common stock and two warrants for each share of cumulative con-
vertible preferred stock converted.
Warrants--Each warrant issued in the initial public offering and in connec-
tion with the conversion of the preferred stock entitles the holder thereof to
purchase one share of common stock at a price equal to $6.00, until five years
from the effective date of the initial public offering. Outstanding warrants
may be redeemed by the
F-9
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STOCKHOLDERS' EQUITY (CONTINUED)
Company for $.25 each on 30 days notice. As of December 31, 1995 and 1994,
there were 1,578,078 and 361,200 of these warrants outstanding, respectively.
The Company has also issued a common stock warrant to purchase 25,000 shares
of common stock at $4.00 per share in connection with a loan agreement. This
warrant expires five (5) years from the effective date of the Company's ini-
tial public offering which was November 12, 1993. The loan was paid in full in
1993. Additionally, in 1995, a common stock warrant was issued to purchase
300,000 shares of common stock at $3.00 per share in settlement of a claim
(see Note 8).
Management Incentive Stock Plan--The plan provides for the granting of Units
to officers and other key employees and for the automatic receipt of Units by
directors who are not full-time employees. Each Unit consists of (1) an option
to purchase one share of common stock at the exercise price (as defined below)
and (2) a cash payment ("Stock Appreciation Right" or "SAR") to be made by the
Company when the option is exercised. Said SAR shall be equal to twice the
amount by which the fair market value of the common stock on the date of exer-
cise of the option exceeds the exercise price. The exercise price for Units
issued prior to the effective date of the initial public offering of common
stock of the Company was the average bid price per share of common stock for
the thirty day period immediately following the effective date (November 12,
1993) of said initial public offering which was $3.10. The exercise price for
Units granted following the effective date of the initial public offering will
be the fair market value of the common stock on the grant date. Payment for
shares purchased may be made, at the option of the purchaser, in cash or in
shares of common stock (valued at their then fair market value). The "fair
market value" of common stock will be defined by the plan by reference to the
market price of the common stock.
The total number of Units which may be granted under the plan is 240,000
Units. Units not granted in any year may be granted in any future year. The
number is subject to adjustment to reflect stock splits, stock dividends, re-
capitalization and other corporate events which affect outstanding shares of
common stock. If any such event occurs while Units are outstanding under the
plan, similar adjustments will be made in the number of shares and the exer-
cise price per share covered by such options. The options expire ten years
from date of grant if not exercised. On September 2, 1993, the Board of Direc-
tors of the Company granted 94,000 Units to key management and directors. On
January 20, 1994, the Company granted 22,000 units to key employees. During
1995, the Company granted 4,000 Units to its non-employee directors. The trad-
ing value of the stock is currently below the exercise price of the unit.
The plan is administered by a Compensation Committee of the Company's Board
of Directors. The Compensation Committee will grant Units and make all deci-
sions regarding interpretations of the plan. All members of the Compensation
Committee shall be "disinterested persons" who are not at such time, and have
not been for at least one year, eligible to receive grants of Units other than
as described below.
All options originally issued were vested as of January 31, 1996. All Units
issued subsequent to the initial grant shall be exercisable on the three suc-
ceeding anniversaries of their grant dates. All outstanding Units will also
become exercisable during a limited period prior to the consummation of any
merger of the Company (if it is not the surviving corporation), a sale of sub-
stantially all of the Company's assets or dissolution of the Company, but will
terminate on the consummation of any such transaction. In addition, all Units
will become exercisable if any party, together with its affiliates, acquires
ownership or control of the majority of the outstanding shares of common stock
of the Company.
All Units granted to outside directors shall be exercisable anytime after
January 1994. Except for outside directors, a holder of Units will forfeit all
unexercised Units if, prior to exercise, he or she ceases to be an employee of
the Company for any reasons except death, retirement (including early retire-
ment) or disability. If employment terminates because of any of these reasons,
Units may be exercised during limited periods thereafter.
F-10
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STOCKHOLDERS' EQUITY (CONTINUED)
Company's Incentive Stock Option Plan--The incentive stock option plan was
approved by the Company's stockholders in September 1993, and 180,000 shares
of common stock are authorized for issuance thereunder. Options granted under
the plan must be equal to or greater than the fair market value of common
stock on the date of grant, and are exercisable during the period beginning
one year from the date of grant and expiring nine years from the date of
grant. One employee has been granted the option under the plan to purchase
180,000 shares of common stock. The rights to purchase 132,000 of said shares
have vested, and the balance of the option will vest 24,000 shares per year
for the next two years. The exercise price of this option is $1.679.
The following table summarizes activity under the Company's stock option
plans for the year ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
INCENTIVE MANAGEMENT
STOCK OPTION PLAN INCENTIVE STOCK PLAN
----------------- -----------------------
1995 1994 1995 1994
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Shares available for grant....... 180,000 180,000 240,000 240,000
Shares under option at end of
period.......................... 180,000 180,000 120,000 116,000
Option price per share........... $1.679 $1.679 $3.10-$3.50 $3.10-$3.50
Shares exercisable at end of
period.......................... 132,000 108,000 72,667 36,667
Shares exercised during the
period.......................... -- -- -- --
Shares canceled.................. -- -- -- --
</TABLE>
On January 16, 1996, the Board of Directors approved a new option plan for
the granting of options to officers and other key employees and for the auto-
matic receipt of options by directors who are not full-time employees. The
Board of Directors also canceled all shares available for grant but not
granted under the Management Incentive Stock Plan. Each option in the new plan
consists of an option to purchase one share of common stock at an exercise
price equal to the last trade on the day preceding the date the grant was au-
thorized. The total number of options which may be granted under the plan is
350,000 options of which 325,000 were authorized to be granted by the Board of
Directors on January 16, 1996. Units not granted in any year may be granted in
any future year. The option expires ten years from the date of grant if not
exercised. All options except those issued to outside directors will be exer-
cisable equally on the three succeeding anniversaries of their grant date. Op-
tions issued to outside directors will be exercisable twelve months after the
date of grant. This plan is subject to stockholder approval.
Redeemable Preferred Stock of a Subsidiary--In 1991, Frontier, Inc., a sub-
sidiary of the Company, issued 563,700 shares of redeemable preferred stock
through private placements. During 1995 and 1994, the Company redeemed 142,200
and 421,500 shares for a price of $99,540 and $290,217, respectively.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-
Based Compensation." FAS 123 establishes a fair value method and disclosure
standards for stock-based employee compensation arrangements, such as stock
purchase plans and stock options. As allowed by FAS 123, the Company will con-
tinue to follow the provisions of Accounting Principles Board Opinion No. 25
for such stock-based compensation arrangement, and disclose the pro forma ef-
fects of applying FAS 123 for 1995 and 1996 in its 1996 financial statements.
Options granted to employees after December 31, 1995 will be accounted for us-
ing the FAS 123 fair value method.
3. SALE OF GAS AND OIL ASSETS AND SEISMIC DATA
During May 1994, the Company sold an undivided 40% working interest in the
Lirette Field. The net proceeds of the transaction after adjustments for in-
terim revenue and expense was $860,000. The Company recorded a net gain of
$468,000 relating to this transaction.
F-11
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SALE OF GAS AND OIL ASSETS AND SEISMIC DATA (CONTINUED)
During August 1994, in a separate transaction, the Company sold the balance
of its working interest in the Lirette Field. The net proceeds of the transac-
tion after adjustment for interim revenue and expense was $1,158,000. The Com-
pany recorded a net gain of $515,000 relating to this transaction.
During 1995, the Company sold properties in 18 different transactions re-
sulting in a cumulative gain of approximately $722,000.
On June 7, 1995, the Company entered into an agreement to jointly explore a
33 square mile area in Garvin County, Oklahoma. Pursuant to the agreement, the
Company sold a 50% ownership interest in its 3-D seismic data which had previ-
ously been expensed under the successful efforts method of accounting. The
Company recognized revenue of approximately $589,000 relating to the sale of
this seismic data.
4. GAS SALE AGREEMENT
Effective December 1, 1991, the Company entered into a Gas Sale Agreement to
deliver gas to an end-user over a specified period of time in the future. This
agreement was entered into jointly by the Company and a joint venture partner
as sellers, and a Minnesota based end-user as purchaser.
Under the terms of the agreement the Company's share of rights and obliga-
tions was one-third of the total and the joint venture partner's share was
two-thirds. On November 1, 1992 the Company assumed the joint venture part-
ner's two-thirds share of obligations and future rights under this agreement
as consideration for gas and oil properties acquired.
The Company was committed to deliver 7,100,000 Million British thermal units
(MMBTUs) of gas to purchaser over a period of seven years beginning December
1, 1991. The delivery commitment is approximately 1,000,000 MMBTUs per year.
At December 31, 1995, the remaining undelivered commitment was approximately
2,589,000 MMBTUs. The Company may deliver gas to satisfy the commitment from
its own reserves or from purchasing gas on the open market. The Company deliv-
ered 37% and 31% from purchases on the open market for the years ended Decem-
ber 31, 1995 and 1994, respectively (see Note 9). As of December 31, 1995, the
remaining prepaid obligation under the gas sales agreement totaled $1,941,977.
If the Company fails to deliver sufficient gas quantities as specified under
the terms of the contract, the purchaser has the right to enter into a deliv-
ery contract with other parties. The Company would then be required to reim-
burse the purchaser for amounts paid to third parties in excess, if any, of
the contract price plus any prepaid amounts.
The purchase price to be paid by purchaser is $1.50 per MMBTU fixed over the
life of the contract. As guarantee of performance, the Company agrees to have
under mortgage to the buyer, total gas and oil reserves on a MMBTU equivalent
basis equal to not less than 150% of the remaining contract quantity of gas to
be delivered.
The purchaser is obligated to pay to the Company certain prepayments for
this gas. The first payment was paid in early 1992 (Phase I) of which the
Company's share was $1,350,000. A second payment was made in August, 1992
(Phase II) of which the Company's share was $1,100,000. During 1994, the Com-
pany was prepaid under Phase II for an additional 640,000 MMBTU's for a total
of $480,000. Phase I prepayment was paid at $1.50 per MMBTU. Phase II prepay-
ment was paid at $.75 per MMBTU with an additional $.75 payable upon the de-
livery of Phase II gas which commenced during 1994. The Company completed de-
livery of Phase I Gas during 1994 and has delivered 1,811,000 MMBTU's under
Phase II. Deliveries will continue under Phase II for the duration of the con-
tract.
F-12
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. GAS SALE AGREEMENT (CONTINUED)
At December 31, 1995 and 1994, the total Phase I and Phase II prepayments
under this agreement amounted to $7,350,000. The Company's share of these pre-
payments was $2,930,000 at December 31, 1995 and 1994 and the Company's joint
venture partner received $4,450,000.
On January 5, 1996, the Company entered into an agreement with the end user
to terminate the Gas Sales Agreement as of January 31, 1996. The Company paid
the end user $2,181,489 which represents a return of its $.75 advance on
2,490,103 MMBTU's of gas plus a settlement payment of $313,912 (see Note 10).
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1995 1994
-------- --------
<S> <C> <C>
Notes payable to bank, interest at a New York bank prime
plus 1% (9.75% at December 31, 1995), payable in
monthly installments of $6,944.44 until August 1, 1996
when remaining balance is due, collateralized by
producing oil and gas properties (see Note 10)......... $180,554 --
Notes payable to bank, interest at 7.49% to 12.5%,
payable in monthly installments, due in various amounts
through 2000, collateralized by other property and
equipment.............................................. 97,019 107,117
Capitalized lease obligations, estimated interest of
15%, payable in monthly installments, due in various
amounts through 1995................................... -- 16,250
Note payable, interest at 12%, payable monthly,
principal due December 31, 1997........................ 100,000 100,000
-------- --------
377,573 223,367
Less current portion.................................... 227,302 63,855
-------- --------
$150,271 $159,512
======== ========
</TABLE>
Maturities of the non-current portion of long-term debt are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
YEAR 1995
---- ---------------
<S> <C>
1997 $124,586
1998 16,764
1999 8,362
2000 559
</TABLE>
6. INCOME TAXES
The tax benefit (provision) is for deferred taxes, as no current taxes are
payable and differs from the federal statutory rate primarily because of state
taxes and the valuation allowance recorded.
F-13
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities at December 31, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
Net operating tax loss carryforward................ $ 1,589,676 $ 770,703
Property and equipment............................. (1,010,789) (703,009)
Employee Benefits.................................. 66,500 (23,606)
Valuation Allowance................................ (645,387) (44,088)
----------- ---------
Net deferred tax asset (liability)............... $ -- $ --
=========== =========
</TABLE>
The Company has recorded a deferred tax evaluation allowance since based on
an assessment of all available historic evidence, it is more likely than not
that future taxable income will not be sufficient to realize the tax benefit.
The Company and its subsidiaries have estimated tax basis net operating loss
carryforwards at December 31, 1995 and 1994, of approximately $4,180,000 and
$2,030,000 which may be used to offset future taxable income. The net operat-
ing loss carryforwards expire in the tax years 2006 through 2010.
7. RELATED PARTY TRANSACTIONS
The Company made advances to officers and affiliates of the Company during
1995 and 1994 of $14,234 and $10,385, respectively, and repayments of $30,282
and $6,204, respectively, were made to the Company. The December 31, 1995 and
1994 receivables include $137,787 and $153,000, respectively, from an affili-
ated partnership for which the Company serves as the managing general partner.
8. COMMITMENTS AND CONTINGENCIES
The Company leases office space under lease agreements which are classified
as operating leases. Lease expense under these agreements $106,656 in 1995 and
$103,127 in 1994. A summary of future minimum rentals on these noncancellable
operating leases is as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
YEAR 1995
---- ---------------
<S> <C>
1996 $71,104
</TABLE>
The Company has entered into employment agreements with certain employees.
Each of these agreements expires December 31, 1998 (and automatically renews
for additional one-year terms each December 31 unless specifically terminated
by either the Company or employee). The agreements provide for salaries for
each person and in addition, each employee shall be entitled to receive de-
ferred compensation, provided the employee remains employed with the Company
until expiration of the initial term of his agreement and that he has not been
terminated for cause thereunder. Such deferred compensation shall be an annual
payment equal to the product of $9,000 multiplied by the number of years em-
ployee is employed by the Company commencing July 1, 1993 (up to a maximum of
ten years, and payments commence the year the Employee reaches 65 or retires
from the Company, whichever is later). Deferred payments shall be paid for a
maximum of 15 years thereafter. The liability for these payments is being ac-
crued over a ten year period commencing July 1, 1993.
On December 22, 1992, the Company entered into a Consultant's Agreement with
Federman Associates, Inc. ("FA"), pursuant to which FA agreed to provide fi-
nancial consulting to the Company. Under the terms of that agreement, the Com-
pany agreed to pay FA the sum of $3,000 per month which began March 31, 1993
for a term of 36 months commencing December 1992. In addition, FA was granted
6,000 Plan Units under the Company's Management Incentive Stock Option Plan
(see Note 2).
F-14
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On May 10, 1995, the Company entered into an agreement with a financial ad-
visor to obtain capital on a best efforts basis for the joint venture of the
Company to be utilized to explore oil and gas prospects in Southern Louisiana
and along the Gulf Coast of Texas, as well as for working capital for the Com-
pany. The Company issued 20,000 shares of common stock to the financial advi-
sor in partial payment of its services under the above agreement at a fair
market value of $2.00 per share. The financial advisor has the right to demand
registration of the stock at any time after December 31, 1995 at the Company's
expense (see Note 10).
The Company had an obligation to register within one year of the effective
date of the initial public offering under the Securities Act, 275,000 shares
of Common Stock issued or issuable upon conversion of Convertible Notes, and
an additional 147,400 shares subject to subscriptions pursuant to an offering
of securities in a private placement transaction in 1993. The Registration
Statement was filed in January 1995 and approved by the Securities and Ex-
change Commission in May 1995. Hi-Chicago Trust, a 6% shareholder asserted a
claim against the Company claiming that the Company failed to take reasonable
steps as required to timely register Hi-Chicago Trust's stock obtained under
the convertible note agreement. The Company and Hi-Chicago Trust agreed to a
settlement in December 1995 whereby the Company issued 75,000 shares of common
stock and a stock purchase warrant to purchase up to 300,000 shares of common
stock at an exercise price of $3.00 per share in settlement of the claim. The
warrant is exercisable through the earlier of 60 months from the settlement
date or for a period of 30 days after the closing bid price of the Company's
stock equals or exceeds $6.00 per share for sixty consecutive trading days.
The issued shares are unregistered. Hi-Chicago Trust has the right to demand
registration of the stock, at the Company's expense, at any time after 180
days following the effective date of any secondary public offering or April
30, 1996; if no registration statement has been declared effective under the
terms of the settlement. The settlement provides for the issuance of addi-
tional shares of the Company's stock if the Company does not promptly register
the stock upon demand by Hi-Chicago Trust. The Company recorded a loss of
$96,093 related to this settlement.
The Company is party to a lawsuit it filed on June 14, 1994 in the Circuit
Court of Mobile, Alabama. Said lawsuit was brought by a subsidiary of the Com-
pany as Plaintiff to quiet title to leases it owns in the Mobile Bay area in
Mobile County, Alabama. The original Defendant in said suit, The Offshore
Group, Inc. ("TOG"), claimed an ownership interest in certain of said leases
in which the Company is the record title owner. The trial judge has indicated
that he will award the Company summary judgment as to all claims of TOG
against the Company's developed wells. An order has been drafted and provided
to the judge for execution. Said order, if executed, may be appealed. The Com-
pany does not believe any such claim by TOG has ever had merit. TOG still has
claims against the Company for alleged damages TOG claimed to have sustained
by delays in drilling a dry hole due to actions of the Company. While the Com-
pany has been awarded summary judgment, said orders may be appealed; however,
management believes that a material adverse effect on the Company's financial
position or results of operations is not probable.
The Company's 1992 federal income tax return is currently being examined by
the Internal Revenue Service. The IRS has proposed a change to income of
$4,994,759 (a portion of which was recognized years subsequent to 1992) which
would result in a tax liability of $1,553,338 plus penalty and interest. The
Company has filed a response to the proposed change and intends to vigorously
defend its position. The Company believes it has adequate net operating losses
incurred in 1992 and subsequent years to offset the potential tax liability.
While the ultimate outcome of the examination cannot be determined at this
time, the Company has accrued $100,000 for a portion of the potential interest
costs on this proposed change.
The Company is party to various other lawsuits arising in the normal course
of business. Management believes that the ultimate outcome of these matters
will not have a material effect on the Company's consolidated financial posi-
tion or results of operations.
F-15
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SUPPLEMENTAL GAS AND OIL INFORMATION (UNAUDITED)
The Company's proved gas and oil reserves are located in the United States.
Proved reserves are those quantities of natural gas and crude oil which, upon
analysis of geological and engineering data, demonstrate with reasonable cer-
tainty to be recoverable in the future from known gas and oil reservoirs.
Proved developed (producing and non-producing) reserves are those proved re-
serves which can be expected to be recovered through existing wells with ex-
isting equipment and operating methods. Proved undeveloped gas and oil re-
serves are proved reserves that are expected to be recovered from new wells on
undrilled acreage, or from existing wells where a relatively major expenditure
is required for recompletion.
Financial Data
The Company's gas and oil producing activities represent substantially all
of the business activities of the Company. The following costs include all
such costs incurred during each period, except for depreciation and amortiza-
tion of costs capitalized:
COSTS INCURRED IN GAS AND OIL EXPLORATION AND PRODUCTION ACTIVITIES:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------
1995 1994
---------- ----------
<S> <C> <C>
Acquisition of properties
Proved............................................. $ 33,586 $ 322,897
Unproved........................................... 908,812 1,558,619
Exploration costs.................................... 1,601,664 1,577,164
Development costs.................................... 944,321 1,488,684
---------- ----------
Total costs incurred............................. $3,488,383 $4,947,364
========== ==========
</TABLE>
CAPITALIZED COSTS:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Proved and unproved properties being
amortized.................................... $ 9,641,369 $ 9,611,206
Unproved properties not being amortized....... 1,468,308 1,302,066
Less accumulated amortization................. (2,399,465) (2,167,828)
----------- -----------
Net capitalized costs..................... $ 8,710,212 $ 8,745,444
=========== ===========
</TABLE>
Costs incurred include $1,061,000 of amounts in accounts payable at December
31, 1995.
F-16
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SUPPLEMENTAL GAS AND OIL INFORMATION (UNAUDITED) (CONTINUED)
ESTIMATED QUANTITIES OF PROVED GAS AND OIL RESERVES:
The estimates of proved producing reserves were estimated by independent pe-
troleum engineers, Hofmann & Associates Engineering and Atwater Consultants,
Inc. Proved reserves cannot be measured exactly because the estimation of re-
serves involves numerous judgmental and arbitrary determinations. Accordingly,
reserve estimates must be continually revised as a result of new information
obtained from drilling and production history or as a result of changes in
economic conditions.
<TABLE>
<CAPTION>
CRUDE OIL,
CONDENSATE
AND
NATURAL
GAS
LIQUIDS
NATURAL GAS (MCF) (BARRELS)
---------------------- ---------------------
YEARS
ENDED
YEARS ENDED DECEMBER DECEMBER
31, 31,
---------------------- ---------------------
1995 1994 1995 1994
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Proved developed and undeveloped
reserves:
Beginning of period........... 9,885,882 12,437,348 359,604 385,699
Purchases of minerals-in-
place........................ 10,518,110 129,907 119,718 17,746
Sales of minerals-in-place.... (866,892) (1,892,161) (174,165) (47,966)
Revisions of previous
estimates.................... (1,474,440) 163,745 (2,412) (84,780)
Extensions, discoveries and
other additions.............. 1,648,177 529,307 -- 119,433
Production.................... (1,146,696) (1,482,264) (23,244) (30,528)
---------- ---------- ---------- ---------
End of period................. 18,564,141 9,885,882 279,501 359,604
========== ========== ========== =========
Proved developed reserves:
Beginning of period........... 7,792,814 9,529,148 254,107 177,677
========== ========== ========== =========
End of period................. 7,307,717 7,792,814 72,515 254,107
========== ========== ========== =========
</TABLE>
Reserves of wells which have performance history were estimated through
analysis of production trends and other appropriate performance relationships.
Where production and reservoir data were limited, the volumetric method was
used and it is more susceptible to subsequent revisions.
Under a pre-pay contract (see Note 5) the Company was committed to deliver
7,100,000 Million British thermal units (MMBTUs) of gas to a Purchaser over a
period of seven years beginning December 1, 1991. The delivery commitment is
approximately 1,000,000 MMBTUs per year. The Company may fulfill its delivery
obligation by purchasing gas on the open market or by delivering gas from its
own reserves. For the years ended December 31, 1995 and 1994, the Company and
its former joint venture partner have made the following deliveries:
<TABLE>
<CAPTION>
FOR YEAR ENDED FOR YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 (MMBTU) 1994 (MMBTU)
-------------- --------------
<S> <C> <C>
Gas purchased on open market................. 413,434 357,200
Gas delivered from own reserves.............. 715,166 809,900
--------- ---------
Total deliveries........................... 1,128,600 1,167,100
========= =========
</TABLE>
At December 31, 1995 and 1994, the remaining undelivered commitment was
2,589,000 and 3,718,000 MMBTUs, respectively. This agreement was terminated as
of January 5, 1996 (see Note 4).
F-17
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SUPPLEMENTAL GAS AND OIL INFORMATION (UNAUDITED) (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS:
The standardized measure of discounted future net cash flows is based on
criteria established by Financial Accounting Standards Board Statement No. 69,
"Accounting for Oil and Gas Producing Activities" and is not intended to be a
"best estimate" of the fair value of the Company's oil and gas properties. For
this to be the case, forecasts of future economic conditions, varying price
and cost estimates, varying discount rates and consideration of other than
proved reserves (i.e., probable reserves) would have to be incorporated into
the valuations.
Future net cash inflows are based on the future production of proved re-
serves of natural gas, natural gas liquids, crude oil and condensate as esti-
mated by petroleum engineers by applying current prices of gas and oil (with
consideration of price changes only to the extent fixed and determinable and
with consideration of the timing of gas sales under existing contracts or spot
market sales) to estimated future production of proved reserves. Average
prices used in determining future cash inflows for natural gas and oil for the
periods ended December 31, 1995 and 1994 were as follows: 1995--$1.83 per
MCF--Gas, $18.28 per barrel--Oil; 1994--$1.73 per MCF--Gas, $16.00 per bar-
rel--Oil, respectively. Future net cash flows are then calculated by reducing
such estimated cash inflows by the estimated future expenditures (based on
current costs) to be incurred in developing and producing the proved reserves
and by the estimated future income taxes. Estimated future income taxes are
computed by applying the appropriate year-end tax rate to the future pretax
net cash flows relating to the Company's estimated proved oil and gas re-
serves. The estimated future income taxes give effect to permanent differences
and tax credits and allowances.
The following table sets forth the Company's estimated standardized measure
of discounted future net cash flows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------
<S> <C> <C>
Future cash inflows.................. $ 45,403,797 $22,852,681
Future development and production
costs............................... (14,138,352) (7,764,627)
------------ -----------
Future net cash flows before income
taxes............................... 31,265,445 15,088,054
Discount of future net cash flows at
10%................................. 11,215,719 4,578,221
------------ -----------
Discounted future net cash flows
before income taxes................. 20,049,726 10,509,833
Future income taxes, net of discount
at 10%.............................. 3,645,106 1,494,394
------------ -----------
Standardized measure of discounted
future net cash flows............... $ 16,404,620 $ 9,015,439
============ ===========
</TABLE>
F-18
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SUPPLEMENTAL GAS AND OIL INFORMATION (UNAUDITED) (CONTINUED)
The following table sets forth changes in the standardized measure of dis-
counted future net cash flows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------
<S> <C> <C>
Standardized measure of discounted
future cash flows--beginning of
period............................. $ 9,015,439 $11,753,957
Net changes in sales prices and
production costs................... (352,359) (4,786,700)
Sales of oil and gas produced, net
of operating expenses.............. (976,107) (1,846,199)
Purchases of minerals-in-place...... 11,580,164 257,248
Sales of minerals-in-place.......... (2,254,822) (2,193,084)
Revisions of previous quantity
estimates.......................... (1,461,688) (296,596)
Extensions, discoveries and improved
recovery, less related costs....... 2,034,255 1,579,942
Previously estimated development
costs incurred during the year..... -- 748,021
Change in future development costs.. (56,220) 120,789
Accretion of discount............... 1,050,983 1,524,730
Net change of income taxes.......... (2,150,712) 1,998,979
Other............................... (24,313) 154,352
----------- -----------
Standardized measure of discounted
future cash flows--end of period... $16,404,620 $ 9,015,439
=========== ===========
</TABLE>
Subsequent to year end, as discussed in Note 10, the Company obtained a fi-
nancing package with a third party, which included their affiliate, to partici-
pate as a working interest owner in 48% of the acreage containing the proved
undeveloped reserves discussed above. As a part of said transaction, the third
party and its affiliate committed to fund over $3,500,000 in 3-D seismic and
acreage costs related to said project. An additional 4% working interest was
sold to another party in March 1996. The effect of these transactions is to re-
duce the Company's discounted proved undeveloped reserves recorded at year end
by $5,971,265 in 1996. Concurrently, the Company has continued and will con-
tinue to acquire additional options and acreage over this project which addi-
tional options and acreage include the same proved undeveloped reservoirs re-
sulting in an increase in proved undeveloped reserves during 1996.
F-19
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SUBSEQUENT EVENT
On January 3, 1996, the Company entered into a $15,000,000 credit agreement
with a bank. The agreement provided for the immediate funding of $4,000,000
which was used to terminate the Gas Sales Agreement and repay the deferred gas
revenues incurred under the Gas Sales Agreement (see Note 5), payoff the note
payable to a bank due August 1, 1996, pay the bank fees related to the financ-
ing with the remainder being used to pay current liabilities. The Company paid
the bank total fees of approximately $175,000. The loan is for a five year pe-
riod with payments of $390,000 in 1996, $910,000 in 1997, and $900,000 in 1999
and 2000. The remaining funds will be available for specified future drilling
activities of the Company subject to the approval of the bank. The loan is se-
cured by a mortgage on all of the Company's significant producing properties.
As part of the credit agreement, the Company is subject to certain covenants
and restrictions, among which are limitations on additional borrowing, and
sales of significant properties, working capital, cash, and net worth mainte-
nance requirements and a minimum debt to net worth ratio. Management believes
that the Company will need to raise additional capital prior to December 31,
1996 in order to satisfy the covenant requirements by December 31, 1996. The
required covenants escalate during 1996 as shown below.
<TABLE>
<CAPTION>
AS OF
COVENANT, AS DEFINED INITIAL DECEMBER 31, 1996
-------------------- ---------- -----------------
<S> <C> <C>
Tangible Net Worth........................... $4,000,000 $5,000,000
Current Ratio................................ 0.8 1.0
Debt to Capitalization....................... 0.6 0.6
Cash Flow Ratio.............................. 2.0 3.0
Cash on Hand................................. $ 200,000 $ 200,000
</TABLE>
In addition, the Company has entered into an interest rate swap guaranteeing
a fixed interest rate of 8.28% on the loan, and the Company will pay fees of
one-eighth of 1% (.8%) on the unused portion of the commitment amount. The
Company was also required to purchase a natural gas hedge agreement on 62,500
MMBTU of natural gas per month at $1.566 per MMBTU for mid-continent gas for
the period from April 1, 1996 through January 31, 1999 and a commodity collar
transaction for February and March 1996 with a price cap of $2.195 per MMBTU
and a price floor of $1.25 per MMBTU. The Company also issued to the bank a
warrant to purchase 250,000 shares of common stock for a period of five years
at an exercise price of the highest average of the daily closing bid prices
for thirty (30) consecutive trading days between January 1, 1996 and June 30,
1996. The Company will be required to register the common shares underlying
the warrants at the holder's request. As additional consideration for the
loan, the Company assigned the bank an overriding royalty interest in the
mortgaged properties.
In January 1996, the Company entered into another natural gas hedge agree-
ment on 45,000 MMBTU of natural gas per month at $2.03 per MMBTU for mid-con-
tinent gas for the period from January 24, 1996 through December 24, 1996. The
effect of the commodity transactions in 1996 on the reserve values at December
31, 1995, will be to reduce the future net cash flow from gas and oil proper-
ties by approximately $684,000 and to reduce the discounted future net cash
flows from gas and oil properties by approximately $380,000.
On March 12, 1996, the Company completed a financing package with a third
party to evaluate and develop a project in Terrebonne Parish, Louisiana. The
third party will participate in 48% of all evaluation and development of the
project area and provide a non-recourse loan to fund the Company's 48% share
of the leasehold and seismic evaluation costs of the project. The loan is se-
cured by a mortgage on the Company's interest in the project. During March
1996, the Company received funds of approximately $770,000 consisting of a
$240,000 prospect fee, a reimbursement of cost of $255,000 and an advance on
the non-recourse loan of $278,000. Approximately $430,000 of the costs reim-
bursed and advanced were incurred as of December 31, 1995. The non-recourse
loan will be paid solely by the assignment on an 8% overriding royalty inter-
est in the future revenues of the financed project. Future funding will be
provided as costs are incurred.
F-20
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SUBSEQUENT EVENT (CONTINUED)
As part of the above financing, the Company entered into an agreement on
January 12, 1996 with a financial advisor to pay a combination of cash, stock
and warrants for consideration in assisting with obtaining the financing. As
part of the agreement, the Company will pay $200,000 in cash and issue 150,000
shares of the Company's common stock to the advisor accompanied by rights to
demand registration at any time between July 1, 1996 and December 31, 1996.
The Company agreed to guarantee a minimum of $200,000 in proceeds, net of com-
mission or selling costs, if these shares are sold (or attempted to be sold
and there is no market for such sale over a reasonable period of time) prior
to December 31, 1996. The Company will also issue a warrant to purchase
250,000 shares of the Company's common stock at $2.00 per share. The warrant
has a five year term and provides for anti-dilution protection, registration
rights, and permits partial exercise at the election of the holder by exchang-
ing the warrants with appreciated value equal to each exercise price in lieu
of cash. If additional funds are not borrowed from the bank, a portion of the
warrants will be returned.
In September 1995, the Company signed a Letter of Intent with Gaines,
Berland Inc. in which Gaines, Berland Inc. will serve as an underwriter or as
representative of several underwriters to a public offering of between
$6,000,000 and $8,000,000. The Company is currently anticipating filing a reg-
istration statement with the Securities and Exchange Commission in the second
quarter of 1996 relating to this offering.
F-21
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 496,103 $ 63,908
Accounts receivable, net of allowance for doubtful
accounts of $12,175 and 12,710 at March 31, 1996
and December 31, 1995, respectively............... 630,394 612,876
Prepaid expenses and other......................... 183,001 178,737
Receivables from affiliates........................ 247,582 210,016
----------- -----------
Total current assets............................... 1,557,080 1,065,537
Property and equipment:
Gas and oil properties, at cost--successful efforts
method of accounting.............................. 10,608,400 11,109,678
Other property and equipment....................... 907,018 906,453
----------- -----------
11,515,418 12,016,131
Less accumulated depletion, depreciation and
amortization...................................... (3,274,641) (2,895,159)
----------- -----------
8,240,777 9,120,972
Other assets........................................ 616,146 252,966
----------- -----------
Total assets....................................... $10,414,003 $10,439,475
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................... $ 755,585 $ 2,065,341
Revenue distribution payable....................... 467,340 493,072
Current portion of long-term debt.................. 656,108 227,302
Deferred gas revenues.............................. -- 828,000
Accrued and other liabilities...................... 158,971 222,778
----------- -----------
Total current liabilities.......................... 2,038,004 3,836,493
Deferred gas revenues............................... -- 1,113,977
Long-term debt...................................... 3,513,411 150,271
Other long-term liabilities......................... 293,875 275,298
----------- -----------
Total liabilities.................................. 5,845,290 5,376,039
Commitments and contingencies
Stockholders' equity:
Preferred stock $.01 par value; 5,000,000 shares
authorized; 85,961 shares issued and outstanding
at March 31, 1996 and December 31, 1995; ($859,610
aggregate liquidation preference at March 31, 1996
and December 31, 1995)............................ 860 860
Common stock:
Class A Common stock, $.01 par value; 20,000,000
shares authorized; 5,058,406 shares issued and
outstanding, at March 31, 1996 and December 31,
1995.............................................. 50,584 50,584
Common stock to be issued.......................... 234,375 --
Unamortized value of warrants issued............... (75,372) --
Common stock subscribed............................ 45,000 45,000
Common stock subscription receivable............... (45,000) (45,000)
Additional paid-in capital......................... 7,982,379 7,866,879
Deficit............................................ (3,624,113) (2,854,887)
----------- -----------
Total stockholders' equity......................... 4,568,713 5,063,436
----------- -----------
Total liabilities and stockholders' equity......... $10,414,003 $10,439,475
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenues:
Gas and oil revenues................................ $1,091,963 $ 708,036
Gain on sale of assets.............................. 13,285 238,184
Operating fees...................................... 73,010 128,063
Other revenues...................................... 71,948 121,353
---------- ----------
Total revenues.................................... 1,250,206 1,195,636
Costs and expenses:
Lease operating expense............................. 166,567 220,540
Transportation and marketing........................ 128,873 --
Production taxes.................................... 77,163 49,997
Gas purchases under deferred contract............... 82,461 120,687
Depletion, depreciation and amortization............ 431,998 284,874
Exploration costs................................... 105,542 336,037
Interest expense.................................... 97,353 --
General and administrative costs.................... 560,515 571,742
Deferred gas contract settlement.................... 368,960 --
---------- ----------
Total costs and expenses.......................... 2,019,432 1,583,877
---------- ----------
Net loss.............................................. (769,226) (388,241)
Cumulative preferred stock dividend................... 25,788 206,970
---------- ----------
Net loss available to common stockholder's shares..... $ (795,014) $ (595,211)
========== ==========
Net loss per common and common equivalent share....... $ (0.16) $ (0.24)
========== ==========
Weighted average number of common and common
equivalent shares (in thousands)..................... 5,058 2,531
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $ (769,226) $ (388,241)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depletion, depreciation and amortization......... 431,998 284,874
Amortization of financing costs.................. 44,712 --
Gain on sale of assets........................... (13,285) (238,184)
Deferred revenues under gas contract............. (74,400) (216,675)
Deferred gas contract settlement................. 368,960 --
Non-cash compensation expense attributable to
SAR's........................................... -- (40,971)
Exploration costs................................ 105,542 336,037
Changes in assets and liabilities;
Accounts receivable............................ (55,084) 193,207
Prepaid expenses and other..................... (4,264) (99,866)
Other assets................................... (13,279) 5,424
Accounts payable............................... (248,756) 906,323
Revenue distribution payable................... (25,732) 32,817
Accrued and other liabilities.................. (45,230) (31,595)
----------- -----------
Net cash provided by (used in) operating
activities.................................. (298,044) 743,150
Cash flows used in investing activities:
Capital expenditures--gas and oil properties....... (1,617,501) (1,323,442)
Capital expenditures--other property and
equipment......................................... (565) (113,389)
Proceeds from sale of assets....................... 595,769 640,560
----------- -----------
Net cash used in investing activities........ (1,022,297) (796,271)
Cash flows from financing activities:
Proceeds from issuance of debt..................... 4,278,455 103,633
Repayments of long-term debt....................... (179,272) (49,530)
Debt issue costs................................... (165,158) --
Payment for settlement of deferred gas contract.... (2,181,489) --
Redemption of preferred stock of a subsidiary...... -- (99,540)
Preferred stock dividend........................... -- (208,320)
Proceeds from issuance of common stock............. -- 202,500
----------- -----------
Net cash provided (used) by financing
activities.................................. 1,752,536 (51,257)
----------- -----------
Net increase (decrease) in cash and cash
equivalents......................................... 432,195 (104,378)
Cash and cash equivalents at beginning of period..... 63,908 615,256
----------- -----------
Cash and cash equivalents at end of period........... $ 496,103 $ 510,878
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest............................. $ 134,568 $ 5,840
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements and related notes have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally ac-
cepted accounting principles have been omitted pursuant to such rules and reg-
ulations. The accompanying consolidated financial statements and related notes
should be read in conjunction with the audited financial statements of the
Company, and notes thereto, for the fiscal year ended December 31, 1995.
The information furnished reflects, in the opinion of management, all ad-
justments, consisting of normal recurring accruals, necessary for a fair pre-
sentation of the results of the interim periods presented. Operating results
of the interim period are not necessarily indicitive of the amounts that will
be reported for the fiscal year ended December 31, 1996.
2. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---------- ------------
<S> <C> <C>
Note payable pursuant to a credit agreement with a
bank of $4,000,000, interest at LIBOR rate
(reserve adjusted), plus one and seven-eighths
percent (1.875%) (7.25% at March 31, 1996),
principal payable in installments of $45,000 per
month for June 1996 through September 1996;
$70,000 per month for October 1996 through
December 1996; $76,000 per month for January 1997
through October 1997; and $75,000 per month until
December 2000, collateralized by producing oil and
gas properties; net of original discount of
$307,237: amortized on the interest method........ $3,711,197 $ --
Non-recourse loan, payable out of an 8% ORRI on the
Starboard Prospect, interest at 15%............... 278,455 --
Note payable to bank, interest at a New York bank
prime plus 1% (9.75% at December 31, 1995),
payable in monthly installments of $6,944.44 until
August 1, 1996 when remaining balance is due,
collateralized by producing oil and gas
properties........................................ -- 180,554
Notes payable to bank, interest at 7.49% to 12.5%,
payable in monthly installments, due in various
amounts through 2000, collateralized by other
property and equipment............................ 79,867 97,019
Note payable, interest at 12%, payable monthly,
principal due December 31, 1997................... 100,000 100,000
---------- --------
4,169,519 377,573
Less current portion............................... 656,108 227,302
---------- --------
$3,513,411 $150,271
========== ========
</TABLE>
On January 3, 1996, the Company entered into a $15,000,000 credit agreement
with a bank. The agreement provided for the immediate funding of $4,000,000.
The loan is for a five year period with payments of $390,000 in 1996, $910,000
in 1997, and $900,000 in 1999 and 2000. The remaining funds will be available
for specific future drilling activities of the Company subject to the approval
of the bank. The loan is secured by a mortgage on all of the Company's signif-
icant producing properties. As part of the credit agreement, the Company is
subject
F-25
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. LONG-TERM DEBT (CONTINUED)
to certain covenants and restrictions, among which are limitations on addi-
tional borrowing, and sales of significant properties, working capital, cash,
and net worth maintenance requirements and a minimum debt to net worth ratio.
Management believes that the Company will need to raise additional capital
prior to September 30, 1996 in order to satisfy the covenant requirements. The
required covenants escalate during 1996 as shown below.
<TABLE>
<CAPTION>
AS OF
COVENANT, AS DEFINED INITIAL DECEMBER 31, 1996
-------------------- ---------- -----------------
<S> <C> <C>
Tangible Net Worth........................... $4,000,000 $5,000,000
Current Ratio................................ 0.8 1.0
Debt to Capitalization....................... 0.6 0.6
Cash Flow Ratio.............................. 2.0 3.0
Cash on Hand................................. $ 200,000 $ 200,000
</TABLE>
The Company has entered into an interest rate swap with the bank to guaran-
tee a fixed interest rate of 8.28% for the life of the loan. In addition, the
Company will pay fees of one-eighth of 1% (0.125%) on the unused portion of
the commitment amount.
On March 12, 1996, the Company completed a financing package to evaluate and
develop a project in Terrebonne Parish, Louisiana. Under the terms of the
agreement, the Company conveyed a 48% working interest in all evaluation and
development of the project area for $495,455. In addition, the acquirer agreed
to provide a non-recourse loan to fund the Company's share of the leasehold
and seismic evaluation costs of the project. The loan is secured by a mortgage
on the Company's interest in the project. During March 1996, the Company re-
ceived an advance on the non-recourse loan of $278,455. The non-recourse loan
will be paid solely by the assignment on an 8% overriding royalty interest in
the future revenues of the financed project payable from the Company's inter-
est in the project. Future funding will be provided as costs are incurred.
3. GAS SALES AGREEMENT
On January 5, 1996, the Company entered into an agreement with the end user
to terminate the Gas Sales Agreement as of January 31, 1996. The Company paid
the end user $2,181,489 which represents a return of its $.75 advance on
2,490,103 MMBTU's of gas, the balance remaining as of January 31, 1996, plus a
settlement payment of $313,912. In addition, approximately $55,048 in deferred
charges relating to the contract were expensed.
4. COMMITMENTS AND CONTINGENCIES
As part of the financing obtained by the Company during the first quarter of
1996, the Company pursuant to an agreement with a financial advisor, agreed to
pay a combination of cash, stock and warrants for consideration in assisting
with obtaining the financing. As part of the agreement, the Company paid
$200,000 in cash as compensation for the financing of the project in Terre-
bonne Parish, Louisiana and will issue 150,000 shares of the Company's common
stock to the advisor accompanied by rights to demand registration at any time
between July 1, 1996 and December 31, 1996 as compensation for the credit
agreement. These shares have been valued at $234,375, the fair market value at
the date granted. The Company agreed to guarantee a minimum of $200,000 in
proceeds, net of commission or selling costs, if these shares are sold (or at-
tempted to be sold and there is no market for such sale over a reasonable pe-
riod of time) prior to December 31, 1996. The Company will also issue a war-
rant to purchase 250,000 shares of the Company's common stock at $2.00 per
share. The warrant has a five year term and provides for anti-dilution protec-
tion, registration rights, and permits partial exercise at the election of the
holder by exchanging the warrants with appreciated value equal to each exer-
cise price in lieu of cash. If additional funds are not borrowed from the
bank, a portion of the warrants will be returned. The Company has
F-26
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
recorded the warrants which are not subject to return at their fair value of
approximately $33,000. The warrants subject to return will be recorded when
additional funds are borrowed.
The Company also issued to the bank providing financing during the quarter
ended March 31, 1996, a warrant to purchase up to 250,000 shares of common
stock for a period of five years at an exercise price of the highest average
of the daily closing bid prices for thirty (30) consecutive trading days be-
tween January 1, 1996 and June 30, 1996. The Company will be required to reg-
ister the common shares underlying the warrants at the holder's request. The
Company has recorded the warrants at a value of approximately $82,500 as unam-
ortized value of warrants issued. The warrants are being amortized using the
interest method with an unamortized value of $75,372 at March 31, 1996.
Pursuant to the credit agreement with the bank, the Company has entered into
a natural gas swap agreement on 62,500 MMBTU of natural gas per month at
$1.566 MMBTU for mid-continent gas for the period from April 1, 1996 through
January 31, 1999. The Company has also entered into another natural gas swap
agreement on 45,000 MMBTU of natural gas per month at $2.03 per MMBTU for Mo-
bile Bay gas for the period from January 24, 1996 through December 24, 1996.
In September 1995, the Company signed a Letter of Intent with an underwriter
to serve as an underwriter or as representative of several underwriters to a
public offering of the Company's common stock between $6,000,000 and
$8,000,000. The Company is currently anticipating filing a registration state-
ment with the Securities and Exchange Commission in the second quarter of 1996
relating to this offering.
F-27
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OF-
FERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER
THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER, TO, OR A SOLIC-
ITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 2
Prospectus Summary....................................................... 3
Glossary................................................................. 9
Risk Factors............................................................. 11
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 18
Price Range of Securities................................................ 19
Capitalization........................................................... 20
Selected Financial Data.................................................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business and Properties.................................................. 27
Management............................................................... 37
Certain Transactions..................................................... 42
Principal Stockholders................................................... 43
Description of Securities................................................ 44
Shares Eligible for Future Sale.......................................... 49
Underwriting............................................................. 50
Legal Matters............................................................ 52
Experts.................................................................. 52
Financial Statements of the Company...................................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,200,000 UNITS
[LOGO OF FRONTIER NATURAL GAS CORPORATION APPEARS HERE]
--------------
PROSPECTUS
--------------
GAINES, BERLAND INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE COVER PAGE]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 31, 1996
PROSPECTUS
545,000 SHARES OF COMMON STOCK
[LOGO OF FRONTIER NATURAL GAS CORPORATION APPEARS HERE]
Pursuant to the Registration Statement of which this Prospectus forms a part,
Frontier Natural Gas Corporation (the "Company") is offering (the "Offering")
1,200,000 Units (the "Units"), each Unit consisting of three shares of Common
Stock (the "Common Stock") and three Series B Redeemable Common Stock Purchase
Warrants (the "Series B Warrants").
The Registration Statement of which this Prospectus forms a part also regis-
ters up to 545,000 shares of Common Stock (including 300,000 shares of Common
Stock issuable upon exercise of a Common Stock purchase warrant (the "Hi-Chi-
cago Warrant")) on behalf of certain shareholders of the Company (the "Selling
Securityholders") that may be sold by them for their accounts from time to time
in open market transactions (collectively, the "Selling Securityholders'
Shares"). The Selling Securityholders' Shares are not part of the underwritten
offering and the Company will not receive any proceeds from the sale of the
Selling Securityholders' Shares. The Selling Securityholders may not sell their
shares prior to the expiration of various time periods without the prior con-
sent of the Underwriter. See "Selling Securityholders."
The Common Stock is traded on the Nasdaq under the symbol "FNGC." On June 17,
1996, the last reported sale price of the Common Stock, as reported on Nasdaq,
was $ per share. See "Price Range of Securities."
------------
THESE SECURITIES ARE SPECULATIVE IN NATURE, INVOLVE A HIGH DEGREE OF RISK AND
SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS."
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
SELLING SECURITYHOLDERS
Pursuant to the Registration Statement of which this Prospectus forms a
part, 545,000 shares of the Company's Common Stock are being registered for
the account of the Selling Securityholders. The following table sets forth
certain information regarding the record ownership of the Company's Common
Stock for each entity which is a Selling Securityholder as of June 17, 1996.
Except as otherwise set forth in this Prospectus, none of the Selling
Securityholders has held any position or office or has had a material rela-
tionship with the Company or any of its affiliates within the past three
years. The Company believes that none of the holders listed below owns any
other securities of the Company. The Company will not receive any of the pro-
ceeds from the sale of these shares by the Selling Securityholders, except
that it will receive cash proceeds attributable to the exercise of the Hi-Chi-
cago Warrant.
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
OWNED PRIOR TO OFFERING OWNED AFTER OFFERING
------------------------ ------------------------
NAME AND ADDRESS SHARES BEING
OF SELLING SECURITYHOLDER NUMBER OF SHARES PERCENT REGISTERED NUMBER OF SHARES PERCENT
- ------------------------- ---------------- ------- ------------ ---------------- -------
<S> <C> <C> <C> <C> <C>
Hi-Chicago Trust (1).... 675,200 (3) 12.3% 375,000 (4) 300,200 3.3%
Weisser Johnson (2)..... 245,000 (5) 4.6% 170,000 75,000 .1%
</TABLE>
- --------
(1) The business address for the Hi-Chicago Trust is Two North LaSalle
Street, Chicago, Illinois 60602.
(2) The business address for Weisser Johnson is 300 Park Avenue, 17th Floor,
New York, New York 10022.
(3) Includes 300,000 shares issuable upon exercise of the Hi-Chicago Warrant
which are presently exercisable at $3.00 per share, 4,000 shares issuable
upon conversion of 2,000 shares of Convertible Preferred Stock which are
presently convertible and 4,000 shares issuable upon exercise of 4,000
warrants which are issuable upon conversion of the Convertible Preferred
Stock and presently exercisable.
(4) Includes 300,000 shares issuable upon exercise of the Hi-Chicago Warrant
which are presently exercisable at $3.00 per share.
(5) Includes 75,000 shares issuable upon exercise of warrants which are pres-
ently exercisable at $2.00 per share.
PLAN OF DISTRIBUTION
The securities offered hereby may be sold from time to time directly by the
Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through underwriters, dealers and agents
(including Gaines, Berland Inc.). The distribution of securities by the Sell-
ing Securityholders may be effected in one or more transactions that may take
place on the over-the-counter market, including ordinary broker's transac-
tions, privately-negotiated transactions or through sales to one or more bro-
ker-dealers for resale of such shares as principals, at market prices prevail-
ing at the time of sale, at prices related to such prevailing market prices or
at negotiated prices. Usual and customary or specifically negotiated brokerage
fees or commissions may be paid by the Selling Securityholders in connection
with such sales of securities. The Selling Securityholders and intermediaries
through whom such securities are sold may be deemed "underwriters" within the
meaning of the Securities Act with respect to the securities offered, and any
profits realized or commissions received may be deemed underwriting compensa-
tion. The Selling Securityholders may also elect to sell such securities pur-
suant to one or more exemptions from registration under the Securities Act,
including but not limited to sales under Rule 144.
At the time a particular offer of securities is made by or on behalf of a
Selling Securityholder, to the extent required, a Prospectus will be distrib-
uted which will set forth the numbers of shares being offered and the terms of
the offering, including the name or names of any underwriters, dealers or
agents, if any, the purchase price paid by any underwriter for shares pur-
chased from the Selling Securityholder and any discounts, commissions or con-
cessions allowed or reallowed or paid to dealers, and the proposed selling
price to the public.
Under the Exchange Act, and the regulations thereto, any person engaged in a
distribution of the securities of the Company offered by this Prospectus may
not simultaneously engage in market-making activities with respect to such se-
curities of the Company during the applicable "cooling off" period (nine days)
prior to the
52
<PAGE>
commencement of such distribution. In addition, and without limiting the fore-
going, the Selling Securityholders will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, including without
limitation, Rule 10b-6 and 10b-7, in connection with the transactions in such
securities, which provisions may limit the timing of purchases and sales of
such securities by the Selling Securityholders.
All costs, expenses and fees in connection with the registration of the
shares offered by the Selling Securityholders will be borne by the Company.
Brokerage commissions, if any, attributable to the sale of the securities of-
fered by the Selling Securityholders will be borne by the Selling
Securityholders. The Company has agreed to indemnify the Selling
Securityholders, and the Selling Securityholders have agreed to indemnify the
Company, against certain liabilities, including liabilities under the Securi-
ties Act.
Of the 545,000 Selling Securityholders' Shares, (i) Weisser Johnson has
agreed with the Underwriter not to sell 170,000 shares of Common Stock until
60 days after the date of this Prospectus, and (ii) the Hi-Chicago Trust has
agreed with the Underwriter not to sell 300,000 shares of Common Stock issua-
ble upon exercise of the Hi-Chicago Warrant until six months after the date of
this Prospectus, except that the Underwriter has agreed to permit the Hi-Chi-
cago Trust to sell such shares if the closing bid price of the Common Stock is
$4.00 or greater for at least 15 consecutive trading days after the date of
this Prospectus.
LEGAL MATTERS
The validity of the Units being offered hereby has been passed upon for the
Company by Day, Edwards, Federman, Propester, & Christensen, P.C., Oklahoma
City, Oklahoma. Graubard Mollen & Miller, New York, New York, has served as
counsel to the Underwriter in connection with this Offering.
EXPERTS
The financial statements as of December 31, 1995 and 1994 and for each of
the two years in the period ended December 31, 1995 included in this Prospec-
tus have been audited by Deloitte & Touche LLP, independent auditors, are
stated in their report appearing herein, and have been so included in reliance
upon the reports of such firm given upon their authority as experts in ac-
counting and auditing.
The information appearing in this Prospectus regarding the proved reserves
of the Company as of December 31, 1995 was prepared by Hofmann & Assoc. Engi-
neering and Atwater Consultants, Ltd., independent petroleum engineers, as
stated in their reports dated February 13, 1996 and March 21, 1996, respec-
tively.
53
<PAGE>
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----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 2
Prospectus Summary....................................................... 3
Glossary................................................................. 9
Risk Factors............................................................. 11
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 18
Price Range of Securities................................................ 19
Capitalization........................................................... 20
Selected Financial Data.................................................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business and Properties.................................................. 27
Management............................................................... 37
Certain Transactions..................................................... 42
Principal Stockholders................................................... 43
Description of Securities................................................ 44
Shares Eligible for Future Sale.......................................... 49
Underwriting............................................................. 50
Selling Securityholders.................................................. 52
Plan of Distribution..................................................... 52
Legal Matters............................................................ 52
Experts.................................................................. 52
Financial Statements of the Company...................................... F-1
</TABLE>
----------------
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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545,000 SHARES
OF
COMMON STOCK
[LOGO OF FRONTIER NATURAL GAS CORPORATION APPEARS HERE]
--------------
PROSPECTUS
--------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
FRONTIER NATURAL GAS CORPORATION
REGISTRATION STATEMENT ON FORM SB-2
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Oklahoma General Corporation Act grants every corporation the power to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, other than an action by or
in the right of the corporation, by reason of the fact that he is or was a di-
rector, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee, or agent
of another corporation, partnership, joint venture, trust, or other enter-
prise, against expenses, including attorneys' fees, judgments, fines, and
amounts paid in settlement actually and reasonably incurred by him in connec-
tion with such action, suit, or proceeding if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful.
The Oklahoma statute also grants every corporation the power to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he
is or was a director, officer, employee, or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employ-
ee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation, ex-
cept that no indemnification shall be made in respect of any claim, issue, or
matter as to which such person shall have been adjudged to be liable for neg-
ligence or misconduct in the performance of his duty to the corporation unless
and only to the extent that the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
The Oklahoma statute provides that to the extent that a director, officer,
employee, or agent of a corporation has been successful on the merits or oth-
erwise in defense of any action, suit, or proceeding referred to in the stat-
ute, or in defense of any claim, issue, or matter therein, he shall be indem-
nified against expenses, including attorneys' fees, actually incurred by him
in connection therewith.
Articles Eleven and Thirteen of the Registrant's Certificate of Incorpora-
tion indemnify and exculpate the directors, officers, employees, and agents of
the Registrant from and against certain liabilities. Article Eleven provides
that the Registrant shall indemnify to the full extent permitted under the
Oklahoma General Corporation Act any director, officer, employee, or agent of
the Registrant. Article Thirteen provides that a director of the Registrant
shall have no personal liability to the Registrant or its shareholders for
monetary damages for breach of fiduciary duty as a director, except for lia-
bility (a) for any breach of the director's duty of loyalty to the Registrant
or its shareholders, (b) for acts or omissions not in good faith or which in-
volve intentional misconduct or a knowing violation of law, (c) for acts or
omissions specified in Section 1053 of the Oklahoma General Corporation Act
regarding the unlawful payment of dividends and the unlawful purchase or re-
demption of the Registrant's stock, and (d) for any transaction from which the
director derived an improper personal benefit.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered. All expenses of reg-
istration of the Shares will be borne by the Company. All of the amounts shown
are estimates except the registration fee.
II-1
<PAGE>
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 7,431.03
NASD fees...................................................... 2,655.01
Underwriter's non-accountable expense allowance................ 216,000.00
Legal fees and expenses........................................ 75,000.00
Accounting fees and expenses................................... 12,000.00
Printing and engraving expenses................................ 65,000.00
Blue sky fees and expenses (including registration on Boston
Stock Exchange)............................................... 60,000.00
Nasdaq application fees........................................ 10,000.00
Miscellaneous.................................................. 11,913.96
-----------
TOTAL EXPENSES............................................... $460,000.00
===========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
<TABLE>
<CAPTION>
DATE OF PERSONS TO WHOM TYPE OF AMOUNT OF DESCRIPTION OF
TRANSACTION SECURITIES WERE SOLD SECURITIES SECURITIES SOLD THE TRANSACTION
- ------------ --------------------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
1/94 Stock Management, Common Stock Warrant to purchase Issued pursuant to the
Inc. PurchaseWarrant 30,000 shares of exemption from registration
Common Stock, provided by Section 4(2) of
exercisable for three the Securities Act.
years from date of
issue; warrant rights
earned at 2,500
shares per quarter at
$1.47/share.
1/95 William B. Federman Common Stock 6,700 shares, at Subscribed in March 1993 in
$1.679 per share connection with a private
(aggregate $11,250) placement effected pursuant
to Section 4(2) of the
Securities Act; the shares
were subsequently registered
on Form S-3 in May 1995.
3/95 Hi-Chicago Trust Common Stock 107,200 shares, at Subscribed in March 1993 in
$1.679 per share connection with a private
(aggregate $180,000) placement effected pursuant
to Section 4(2) of the
Securities Act; the shares
were subsequently registered
on Form S-3 in May 1995.
3/95 Lawrence E. Steinberg Common Stock 6,700 shares, at Subscribed in March 1993 in
$1.679 per share connection with a private
(aggregate $11,250) placement effected pursuant
to Section 4(2) of the
Securities Act; the shares
were subsequently registered
on Form S-3 in May 1995.
9/95 Weisser, Johnson & Co. Common Stock 20,000 shares Issued in exchange for
services rendered, pursuant
to the exemption from
registration provided by
Section 4(2) of the Securities
Act.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
DATE OF PERSONS TO WHOM TYPE OF AMOUNT OF DESCRIPTION OF
TRANSACTION SECURITIES WERE SOLD SECURITIES SECURITIES SOLD THE TRANSACTION
- ------------ --------------------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
12/95 Hi-Chicago Trust Common Stock 75,000 shares Issued in connection with
settlement of litigation,
pursuant to the exemption
from registration provided by
Section 4(2) of the Securities
Act.
12/95 Hi-Chicago Trust Common Stock Warrant to purchase Issued in connection with
Purchase Warrant 300,000 shares of settlement of litigation,
Common Stock for pursuant to the exemption
$3.00 per share; from registration provided by
exercisable for five Section 4(2) of the Securities
years from date of Act.
issuance.
1/96 LaSalle Street Natural Common Stock Warrant to purchase Issued as additional
Resources Corporation Purchase Warrant 250,000 shares of consideration for Credit
(an affiliate of Bank of Common Stock for Agreement, pursuant to the
America Illinois) $3.00 per share; exemption from registration
exercisable for five provided by Section 4(2) of
years from date of the Securities Act.
issuance.
1/96 Weisser, Johnson & Common Stock Warrant to purchase Issued in consideration of
Co. Purchase Warrant 250,000 shares of services rendered, pursuant
Common Stock for to the exemption from
$2.00 per shares; registration provided by
exercisable for five Section 4(2) of the Securities
years from date of Act.
issuance.
1/96 Weisser, Johnson & Common Stock 150,000 shares Issued in consideration of
Co. services rendered, pursuant
to the exemption from
registration provided by
Section 4(2) of the Securities
Act.
</TABLE>
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF EXHIBIT
------- ---------------
<C> <S>
1.1* Form of Underwriting Agreement between the Company and Gaines, Berland
Inc.
3.1* Amended and Restated Certificate of Incorporation
3.2 By-Laws as incorporated by reference to Exhibit 3.2 of the Company's
Registration Statement 33-69640-FW
3.3 Certificate of Designations of Convertible Preferred Stock is
incorporated by reference to Exhibit 3.1 and Exhibit 3.3,
respectively, of the Company's Registration Statement 33-69640-FW
4.1 See Articles V and VI of the Company's Amended and Restated
Certificate of Incorporation and Article V of the Company's Amended
and Restated By-Laws as provided in Exhibits 3.1 and 3.2 above, and
see also the Company's Certificate of Designations of Convertible
Preferred Stock is incorporated by reference to Exhibit 3.1 and
Exhibit 3.3, respectively, of the Company's Registration Statement 33-
69640-FW
4.2 Specimen Certificate of the Company's Convertible Preferred Stock is
incorporated by reference to Exhibit 4.1 of the Company's Registration
Statement 33-69640-FW
4.3 Specimen Certificate of the Company's Series A Warrants to purchase
Common Stock is incorporated by reference to Exhibit 4.2 of the
Company's Registration Statement 33-69640-FW
4.4 Specimen Certificate of the Company's Common Stock is incorporated by
reference to Exhibit 4.3 of the Company's Registration Statement 33-
69640-FW
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF EXHIBIT
------- ---------------
<C> <S>
4.5 Form of the Warrant Agency Agreement, dated November 12, 1993, between
the Company and Liberty National Bank and Trust Company of Oklahoma
City (relating to the Series A Warrants) is incorporated by reference
to Exhibit 4.4 of the of the Company's Registration Statement 33-
69640-FW
4.6* Form of Warrant Agreement between the Company and Liberty National
Bank and Trust Company of Oklahoma City (relating to the Series B
Warrants)
4.7* Specimen Certificate of the Company's Series B Warrants to purchase
the Common Stock
4.8 Warrant Agreement, dated as of January 3, 1996, between the Company
and LaSalle Street Natural Resources Corporation is incorporated by
reference to Exhibit 10(s) of the Company's Annual Report on Form 10-
KSB for the year ended December 31, 1995
4.9 Registration Rights Agreement, dated as of January 3, 1996, between
the Company and LaSalle Street Natural Resources Corporation is
incorporated by reference to Exhibit 10(S) (Annex 2 thereto) of the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995
4.10* Warrant Agreement between the Company and Weisser, Johnson & Co.
4.11* Registration Rights Agreement between the Company and Weisser, Johnson
& Co.
4.12 Common Stock Purchase Warrant, granting to Hi-Chicago Trust a warrant
to purchase 300,000 shares of Common Stock is incorporated by
reference to Exhibit 10(i) of the Company's Amended Report on Form 10-
KSB for the fiscal year ended December 31, 1995
4.13 Registration Rights Agreement between the Company and Hi-Chicago
Trust, dated December 8, 1995 (filed electronically herewith)
4.14 Common Stock Purchase Warrant Agreement dated July 15, 1993, issued by
the Company to Energy Finance Corporation, is incorporated by
reference to Exhibit 10.16 of the Company's Registration Statement 33-
69640-FW
4.15 Warrant Agreement between the Company and Paulson Investment Co., Inc.
is incorporated by reference to Exhibit 1.2 of the Company's
Registration Statement 33-69640-FW
4.16 $15,000,000 Credit Agreement dated as of January 3, 1996 between the
Company and Bank of America Illinois (the "Credit Agreement") is
incorporated by reference to Exhibit 10.1 of the Company's current
report on Form 8-K dated January 9, 1996
4.17 Loan Agreement dated as of March 1, 1996 by and between the Company
and 420 Energy Investments, Inc., is incorporated by reference to
Exhibit 10(r) of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995
4.18* Lockup Agreements among the Company, the Underwriter and each of the
Insiders
4.19* Lockup Agreement among the Company, the Underwriter and LaSalle Street
Natural Resources Corporation
4.20* Lockup Agreement among the Company, the Underwriter and the Hi-Chicago
Trust
4.21* Lockup Agreement among the Company, the Underwriter and Weisser,
Johnson & Co. Capital Corporation
4.22* Form of Unit Purchase Option to be issued by the Company to Gaines,
Berland Inc.
5.1* Opinion of Day, Edwards, Federman, Propester & Christensen, P.C. as to
the legality of the securities being registered
10.1 Employment Agreement by and between the Company and David W. Berry,
effective July 1, 1993, is incorporated by reference to Exhibit 10.1
of the Company's Registration Statement 33-69640-FW
10.2 Employment Agreement by and between the Company and David B.
Christofferson, effective July 1, 1993, is incorporated by reference
to Exhibit 10.2 of the Company's Registration Statement 33-69640-FW
10.3 The Company's Stock Incentive Plan--1996 is incorporated by reference
to Exhibit 10(t) of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995
10.4 The Company's Stock Incentive Plan is incorporated by reference to
Exhibit 10.4 of the Company's Registration Statement 33-69640-FW
10.5 The Company's Incentive Stock Option Plan is incorporated by reference
to Exhibit 10.5 of the Company's Registration Statement 33-69640-FW
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF EXHIBIT
------- ---------------
<C> <S>
10.6 Agreement and Mutual Release, dated December 8, 1995, by and among the
Company and Hi-Chicago Trust (filed electronically herewith)
10.7 Joint Venture Agreement between the Company and Polaris Energy
Corporation, dated May 10, 1995, as amended December 12, 1995, is
incorporated by reference to Exhibit 10(g) of the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995
10.8 Engagement Agreement between the Company and Weisser, Johnson & Co.
Capital Corporation dated May 10, 1995, as amended January 12, 1996,
is incorporated by reference to Exhibit 10(h) of the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995
10.9 Common Stock Purchase Warrant between the Company and Hi-Chicago
Trust, dated December 8, 1995, is incorporated by reference to Exhibit
10(i) of the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995
10.10 Maysville Project Agreement between the Company, Amoco Production
Company and Aspect Resources Limited Liability Company, dated as of
June 7, 1995, is incorporated by reference to Exhibit 10(j) of the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995
10.11 Gulf Coast Seismic "Bright Spot" Joint Venture Agreement between the
Company and Marconi Exploration, Inc., dated September 8, 1995, is
incorporated by reference to Exhibit 10(k) of the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995
10.12 Consulting Agreement between the Company and Jeffrey R. Orgill,
effective May 1, 1996 (filed electronically herewith)
10.13 Consultant's Agreement dated December 22, 1992, between the Company
and Federman Associates, Inc. is incorporated by reference to Exhibit
10.13 to the Company's Registration Statement 33-69640-FW
10.14 The Credit Agreement (included herein as Exhibit 4.1)
10.15 Lease Agreement dated June 20, 1991 between the Company and MLH Income
Realty Partnership IV is incorporated by reference to Exhibit 10.15 of
the Company's Registration Statement 33-69640-FW
10.16 First Amendment of Lease dated March 4, 1994 between the Company and
MLH Income Realty Partnership IV is incorporated by reference to
Exhibit 10(p) of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1994
10.17 Loan Agreement dated as of January 24, 1995 among the Company,
Frontier Acquisition Corporation, Frontier Exploration and Production
Corporation and Guaranty Bank & Trust Company is incorporated by
reference to Exhibit 10(q) of the Company's Annual Report on Form 10-
KSB for the year ended December 31, 1994
10.18 Loan Agreement, dated as of March 1, 1996, by and between the Company
and 420 Energy Investments, Inc. is included herein as Exhibit 4.3
10.19 Mortgage Agreement, dated as of March 1, 1996, by and between the
Company and 420 Energy Investments, Inc. (filed electronically
herewith)
10.20 Warrant Agreement between the Company and LaSalle Street Natural
Resources Corporation, dated as of January 3, 1996, is incorporated by
reference to Exhibit 10(s) of the Company's Annual Report on Form 10-
KSB for the year ended December 31, 1995
10.21 Employment Agreement between the Company and Gordon Reese, Jr.,
effective January 1, 1995 (filed electronically herewith)
10.22 Employment Agreement between the Company and Michael A. Barnes,
effective May 15, 1996 (filed electronically herewith)
10.23* Lease Agreement dated July 16, 1996 between the Company and Allen
Center Company.
11.1 Statement re: computation of per share earnings is incorporated by
reference to Exhibit 11 of the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF EXHIBIT
------- ---------------
<C> <S>
11.2 Statement re: computation of per share earnings in incorporated by reference to
Exhibit 11 of the Company's Annual Report on Form 10-QSB for the quarter ended
March 31, 1995
21.1 List of subsidiaries is incorporated by reference to Exhibit 21 of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1995
23.1 Consent of Atwater Consultants, Ltd., Independent Petroleum Engineers (filed
electronically herewith)
23.2 Consent of Hofmann & Assoc. Engineering Co., Independent Petroleum Engineers
(filed electronically herewith)
23.3 Consent of Deloitte & Touche, LLP., Independent Accountants (filed electronically
herewith)
23.4* Consent of Day, Edwards, Federman, Propester & Christensen, P.C. (included in
Exhibit 5.1)
24.1 Powers of Attorney (filed electronically herewith)
</TABLE>
- --------
* Filed herewith.
ITEM 28. UNDERTAKINGS.
1. The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the Securi-
ties Act;
(ii) reflect in the Prospectus any facts or events which, individually
or together, represent a fundamental change in the information in
the registration statement; and
(iii) include any additional or changed material information on the
plan of distribution.
(b) That, for the purpose of determining liability under the Securities
Act, each post-effective amendment shall be deemed to be a new regis-
tration statement of the securities offered, and the offering of the
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(c) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the termination or end of the of-
fering.
(d) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
2. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the Reg-
istrant pursuant to the foregoing provisions, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of appro-
priate jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the Reg-
istrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and has duly caused this Amendment No.
1 to the registration statement to be signed on its behalf by the undersigned,
thereon duly authorized in the City of Oklahoma City, State of Oklahoma, on
July 29, 1996.
Frontier Natural Gas Corporation,
an Oklahoma corporation
By: /s/ David B. Christofferson
-----------------------------------
DAVID B. CHRISTOFFERSON,
EXECUTIVE VICE PRESIDENT
PURSUANT TO THE REQUIREMENT OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
* /s/ David B. Christofferson Chairman of the June 6, 1996
- ------------------------------------- Board of Directors;
DAVID W. BERRY President and Chief
Executive Officer
/s/ David B. Christofferson General Counsel; June 6, 1996
- ------------------------------------- Executive Vice
DAVID B. CHRISTOFFERSON President;
Secretary; Chief
Financial Officer;
Director
* /s/ David B. Christofferson Vice President--Gulf June 6, 1996
- ------------------------------------- Coast Region and
S. GORDON REESE, JR. Director
* /s/ David B. Christofferson Vice President of June 6, 1996
- ------------------------------------- Exploration and
MICHAEL A. BARNES Production
* /s/ David B. Christofferson Treasurer and June 6, 1996
- ------------------------------------- Controller
JAMES R. HARRIS, JR.
* /s/ David B. Christofferson Director June 6, 1996
- -------------------------------------
NEAL M. ELLIOTT
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
* /s/ David B. Christofferson Director June 6, 1996
- -------------------------------------
JEFFREY R. ORGILL
* /s/ David B. Christofferson Director June 6, 1996
------------------------------------
ALLEN H. SWEENEY
*By: /s/ David B. Christofferson
---------------------------------
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
EXHIBIT 1.1
UNDERWRITING AGREEMENT
between
FRONTIER NATURAL GAS CORPORATION
and
GAINES, BERLAND INC.
Dated:
------------------
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
INDEX OF DEFINITIONS.................................................... v
1. Purchase and Sale of Securities 1
1.1 Firm Units.................................................... 1
1.1.1 Purchase of Firm Units................................. 1
1.1.2 Payment and Delivery................................... 1
1.2 Over-Allotment Option......................................... 2
1.2.1 Option Units........................................... 2
1.2.2 Exercise of Option..................................... 2
1.2.3 Payment and Delivery................................... 2
1.3 Underwriter's Purchase Option................................. 3
1.3.1 Purchase Option........................................ 3
1.3.2 Payment and Delivery................................... 3
2. Representations and Warranties of the Company...................... 3
2.1 Filing of Registration Statement.............................. 3
2.1.1 Pursuant to the Act.................................... 3
2.1.2 Pursuant to the Exchange Act........................... 3
2.2 No Stop Orders, Etc........................................... 4
2.3 Disclosures in Registration Statement......................... 4
2.3.1 10b-5 Representation................................... 4
2.3.2 Disclosure of Contracts................................ 4
2.3.3 Prior Securities Transactions.......................... 5
2.4 Changes After Dates in Registration Statement................. 5
2.4.1 No Material Adverse Change............................. 5
2.4.2 Recent Securities Transactions, Etc.................... 5
2.5 Independent Accountants....................................... 5
2.6 Financial Statements.......................................... 5
2.7 Authorized Capital; Options; Etc.............................. 5
2.8 Valid Issuance of Securities; Etc............................. 6
2.8.1 Outstanding Securities................................. 6
2.8.2 Securities Sold Pursuant to this Agreement............. 6
2.9 Registration Rights of Third Parties.......................... 6
2.10 Validity and Binding Effect of Agreements..................... 6
2.11 No Conflicts, Etc............................................. 7
2.12 No Defaults; Violations....................................... 7
2.13 Corporate Power; Licenses; Consents........................... 7
2.13.1 Conduct of Business................................... 7
2.13.2 Transactions Contemplated Herein...................... 8
2.14 Title to Property; Insurance.................................. 8
2.15 Litigation; Governmental Proceedings.......................... 8
2.16 Good Standing................................................. 8
2.17 Taxes......................................................... 8
2.18 Employees' Options............................................ 9
i
<PAGE>
Page
----
2.19 Transactions Affecting Disclosure to NASD.................... 9
2.19.1 Finder's Fees........................................ 9
2.19.2 Payments Within Twelve Months........................ 9
2.19.3 Use of Proceeds...................................... 9
2.19.4 Insiders' NASD Affiliation........................... 9
2.20 Foreign Corrupt Practices Act................................ 9
2.21 Nasdaq and The Boston Stock Exchange Eligibility............. 10
2.22 Intangibles.................................................. 10
2.23 Relations With Employees..................................... 10
2.23.1 Employee Matters..................................... 10
2.23.2 Employee Benefit Plans............................... 10
2.24 Officers' Certificate........................................ 11
2.25 Warrant Agreement............................................ 11
2.26 Lock-Up Agreements........................................... 11
2.27 [Intentionally omitted]...................................... 11
2.28 Subsidiaries................................................. 11
3. Covenants of the Company........................................... 12
3.1 Amendments to Registration Statement......................... 12
3.2 Federal Securities Laws...................................... 12
3.2.1 Compliance............................................ 12
3.2.2 Filing of Final Prospectus............................ 12
3.2.3 Exchange Act Registration............................. 12
3.3 Blue Sky Filing.............................................. 12
3.4 Delivery to Underwriter of Prospectuses...................... 12
3.5 Events Requiring Notice to the Underwriter................... 13
3.6 Review of Financial Statements............................... 13
3.7 Unaudited Financials......................................... 13
3.8 Secondary Market Trading and Standard & Poor's............... 13
3.9 Nasdaq and BSE Maintenance and De-listing of Units........... 14
3.10 Warrant Solicitation and Registration of Common Stock
underlying the Warrants...................................... 14
3.10.1 Warrant Solicitation................................. 14
3.10.2 Registration of Common Stock......................... 14
3.11 Public Relations Firm........................................ 14
3.12 Reports to the Underwriter................................... 14
3.12.1 Periodic Reports, Etc................................ 14
3.12.2 Transfer Sheets and Weekly Position Listings......... 15
3.13 Agreements between the Underwriter and the Company........... 15
3.13.1 [Intentionally omitted].............................. 15
3.13.2 [Intentionally omitted].............................. 15
3.13.3 Underwriter's Purchase Option........................ 15
3.14 Disqualification of Form S-1 (or other appropriate form)..... 15
3.15 Payment of Expenses.......................................... 15
3.15.1 General Expenses..................................... 15
3.15.2 Non-Accountable Expenses............................. 16
3.16 Application of Net Proceeds.................................. 16
ii
<PAGE>
Page
----
3.17 Delivery of Earnings Statements to Security Holders......... 17
3.18 Key Person Life Insurance................................... 17
3.19 Stabilization............................................... 17
3.20 Internal Controls........................................... 17
3.21 Accountants and Lawyers..................................... 17
3.22 Transfer Agent.............................................. 17
3.23 Sale of Securities.......................................... 17
3.24 Employment Agreement........................................ 17
4. Conditions of the Underwriter's Obligations....................... 18
4.1 Regulatory Matters.......................................... 18
4.1.1 Effectiveness of Registration Statement.............. 18
4.1.2 NASD Clearance....................................... 18
4.1.3 No Blue Sky Stop Orders.............................. 18
4.2 Company Counsel Matters..................................... 18
4.2.1 Effective Date Opinion of Counsel.................... 18
4.2.2 Other Counsel's Opinions............................. 22
4.2.3 Interpretation....................................... 23
4.2.4 Closing Date and Option Closing Date
Opinion of Counsel................................... 23
4.2.5 Reliance............................................. 23
4.3 Cold Comfort Letter......................................... 23
4.4 Officers' Certificates...................................... 25
4.4.1 Officers' Certificate................................ 25
4.4.2 Secretary's Certificate.............................. 25
4.5 No Material Changes......................................... 25
4.6 Delivery of Agreements...................................... 26
4.7 Opinion of Counsel for the Underwriter...................... 26
5. Indemnification................................................... 26
5.1 Indemnification of the Underwriter.......................... 26
5.1.1 General.............................................. 26
5.1.2 Procedure............................................ 27
5.2 Indemnification of the Company.............................. 27
5.3 Contribution................................................ 28
5.3.1 Contribution Rights.................................. 28
5.3.2 Contribution Procedure............................... 28
6. [Intentionally Omitted]........................................... 28
7. Additional Covenants.............................................. 28
7.1 Board Designee.............................................. 28
7.2 Form S-8 or any Similar Form................................ 29
7.3 Compensation and Other Arrangements......................... 29
8. Representations and Agreements to Survive Delivery................ 29
9. Effective Date of This Agreement and Termination Thereof.......... 29
9.1 Effective Date.............................................. 29
9.2 Termination................................................. 29
iii
<PAGE>
9.3 Notice...................................................... 30
9.4 Expenses.................................................... 30
9.5 Indemnification............................................. 30
10. Miscellaneous..................................................... 30
10.1 Notices..................................................... 30
10.2 Headings.................................................... 31
10.3 Amendment................................................... 31
10.4 Entire Agreement............................................ 31
10.5 Binding Effect.............................................. 31
10.6 Governing Law; Jurisdiction................................. 31
10.7 Execution in Counterparts................................... 32
10.8 Waiver, Etc................................................. 32
iv
<PAGE>
INDEX OF DEFINITIONS
Term Section
- ---- -------
Act...................................................................... 2.1.1
BSE....................................................................... 2.21
Closing Date............................................................. 1.1.2
Code.................................................................... 2.23.2
Commission............................................................... 2.1.1
Common Stock............................................................. 1.1.1
Company................................................. Introductory Paragraph
Company Counsel............................................................ 3.8
Effective Date........................................................... 1.2.2
ERISA Plans............................................................. 2.23.2
Exchange Act............................................................. 2.1.2
Filing Date............................................................. 2.19.2
Financial Consulting Agreement.......................................... 3.13.2
Firm Units............................................................... 1.1.1
Insiders................................................................ 2.26.1
Intangibles............................................................... 2.22
Merger and Acquisition Agreement........................................ 3.13.1
NASD.................................................................... 2.19.1
Option Closing Date...................................................... 1.2.2
Option Securities........................................................ 1.2.1
Option Units............................................................. 1.2.1
Other Counsel............................................................ 4.2.1
Over-allotment Option.................................................... 1.2.1
Preliminary Prospectus................................................... 2.1.1
Principal Stockholders..................................................... 7.2
Prospectus............................................................... 2.1.1
Public Securities........................................................ 1.2.1
Registration Statement................................................... 2.1.1
Regulations.............................................................. 2.1.1
Underwriter's Purchase Option............................................ 1.3.1
Underwriter's Securities................................................. 1.3.1
Underwriter's Units...................................................... 1.3.1
Underwriter's Warrants................................................... 1.3.1
Secondary Market Trading Memorandum..................................... 3.12.3
Securities............................................................... 1.3.1
144 Sellers................................................................ 7.3
Subsidiary(ies)........................................................... 2.27
Transfer Agent............................................................ 3.22
Unaudited Financials....................................................... 3.7
Underwriter............................................. Introductory Paragraph
Warrant.................................................................. 1.1.1
Warrant Agreement......................................................... 2.25
v
<PAGE>
FRONTIER NATURAL GAS CORPORATION
1,380,000 UNITS
UNDERWRITING AGREEMENT
----------------------
New York, New York
___________, 1996
Gaines, Berland Inc.
950 Third Avenue
27th Floor
New York, New York 10022
Ladies and Gentlemen:
The undersigned, Frontier Natural Gas Corporation, an Oklahoma
corporation ("Company"), hereby confirms its agreement with Gaines, Berland Inc.
(being referred to herein variously as "you" or the "Underwriter"), as follows:
1. Purchase and Sale of Securities.
-------------------------------
1.1 Firm Units.
----------
1.1.1 Purchase of Firm Units. On the basis of the representations
----------------------
and warranties herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to issue and sell, and the Underwriter agrees to
purchase, 1,200,000 units ("Firm Units") for a purchase price of $____ per Firm
Unit. Each Firm Unit consists of three shares of the Company's Common Stock,
par value $.01 ("Common Stock"), and three Redeemable Common Stock Purchase
Warrants ("Warrant(s)"). The shares of Common Stock and the Warrants included
in the Firm Units are immediately detachable and separately transferable. Each
Warrant entitles its holder to purchase one share of Common Stock at an initial
exercise price of $_________ per share commencing on the first anniversary of
the Effective Date (as defined in Section 1.2.2 below) and ending on the fifth
anniversary of the Effective Date.
1.1.2 Payment and Delivery. Delivery and payment for the Firm Units
--------------------
shall be made at 10:00 A.M., New York time, on or before the third business day
following the date the Common Stock and Warrants commence trading or at such
earlier time as the Underwriter shall determine, or at such other time as shall
be agreed upon by the Underwriter and the Company, at the offices of Graubard
Mollen & Miller or at such other place as shall be agreed upon by the
Underwriter and the Company. The hour and date of delivery and payment for the
Firm Units are called the "Closing Date." Payment for the Firm Units shall be
made on the Closing Date at the Underwriter's election by certified or bank
cashier's check(s) in New York Clearing House funds, payable to the order of the
Company upon delivery to you of certificates (in form and substance satisfactory
to the Underwriter) representing the Firm Units for the account of the
Underwriter. The Firm Units shall be registered in such name or names and in
such authorized denominations as
<PAGE>
the Underwriter may request in writing at least two full business days prior to
the Closing Date. The Company will permit the Underwriter to examine and
package the Firm Units for delivery at least one full business day prior to the
Closing Date. The Company shall not be obligated to sell or deliver the Firm
Units except upon tender of payment by the Underwriter for all the Firm Units.
1.2 Over-Allotment Option.
---------------------
1.2.1 Option Units. For the purposes of covering any over-allotments
------------
in connection with the distribution and sale of the Firm Units, the Underwriter
is hereby granted an option to purchase up to an additional 180,000 Units from
the Company ("Over-allotment Option"). Such additional Units are hereinafter
referred to as the "Option Units." The Firm Units and the Option Units are,
together with the shares of Common Stock issuable upon exercise of the Warrants,
hereinafter referred to collectively as the "Public Securities." The purchase
price to be paid for the Option Units will be the same price per Option Unit as
the price per Firm Unit set forth in Section 1.1.1 hereof.
1.2.2 Exercise of Option. The Over-allotment Option granted pursuant
------------------
to Section 1.2.1 hereof may be exercised by the Underwriter as to all or any
part of the Option Units at any time, from time to time, within forty-five days
after the effective date ("Effective Date") of the Registration Statement (as
hereinafter defined). The Underwriter will not be under any obligation to
purchase any Option Units prior to the exercise of the Over-allotment Option.
The Over-allotment Option granted hereby may be exercised by the giving of oral
notice to the Company from the Underwriter, which must be confirmed by a letter
or telecopy setting forth the number of Option Units to be purchased, the date
and time for delivery of and payment for the Option Units and stating that the
Option Units referred to therein are to be used for the purpose of covering
over-allotments in connection with the distribution and sale of the Firm Units.
If such notice is given at least two full business days prior to the Closing
Date, the date set forth therein for such delivery and payment will be the
Closing Date. If such notice is given thereafter, the date set forth therein
for such delivery and payment will not be earlier than five full business days
after the date of the notice. If such delivery and payment for the Option Units
does not occur on the Closing Date, the date and time of the closing for such
Option Units will be as set forth in the notice (hereinafter the "Option Closing
Date"). Upon exercise of the Over-allotment Option, the Company will become
obligated to convey to the Underwriter, and, subject to the terms and conditions
set forth herein, the Underwriter will become obligated to purchase, the number
of Option Units specified in such notice.
1.2.3 Payment and Delivery. Payment for the Option Units will be at
--------------------
the Underwriter's election by certified or bank cashier's check(s) in New York
Clearing House funds, payable to the order of the Company at the offices of the
Underwriter or at such other place as shall be agreed upon by the Underwriter
and the Company upon delivery to you of certificates representing such
securities for the account of the Underwriter. The certificates representing
the Option Units to be delivered will be in such denominations and registered in
such names as the Underwriter requests not less than two full business days
prior to the Closing Date or the Option Closing Date, as the case may be, and
will be made available to the Underwriter for inspection, checking and packaging
at the aforesaid office of the Company's transfer agent or correspondent not
less than one full business day prior to such Closing Date.
2
<PAGE>
1.3 Underwriter's Purchase Option.
-----------------------------
1.3.1 Purchase Option. The Company hereby agrees to issue and sell
---------------
to the Underwriter (and/or its designees) on the Closing Date an option for an
aggregate purchase price of $100 ("Underwriter's Purchase Option") for the
purchase of an aggregate of 120,000 Units ("Underwriter's Units"). The
Underwriter's Units are initially exercisable at $_________ per Unit. The
Underwriter's Units are identical to the Firm Units. The Underwriter's Purchase
Option, the Underwriter's Units, the shares of Common Stock and Warrants
("Underwriter's Warrants") issuable upon exercise of the Underwriter's Purchase
Option and the shares of Common Stock issuable upon exercise of the
Underwriter's Warrants are hereinafter referred to collectively as the
"Underwriter's Securities." The Public Securities and the Underwriter's
Securities are hereinafter referred to collectively as the "Securities".
1.3.2 Payment and Delivery. Delivery and payment for the
--------------------
Underwriter's Purchase Option shall be made on the Closing Date. The Company
shall deliver to the Underwriter, upon payment therefor, certificates for the
Underwriter's Purchase Option in the name or names and in such authorized
denominations as the Underwriter may request. The Underwriter's Purchase Option
shall be exercisable for a period of four years commencing one year from the
Effective Date.
2. Representations and Warranties of the Company. The Company represents and
---------------------------------------------
warrants to the Underwriter as follows:
2.1 Filing of Registration Statement.
--------------------------------
2.1.1 Pursuant to the Act. The Company has filed with the Securities
-------------------
and Exchange Commission ("Commission") a registration statement and an amendment
or amendments thereto, on Form SB-2 (Registration No. 333-06261, including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Public Securities under the Securities Act of 1933, as amended ("Act"),
which registration statement and amendment or amendments have been prepared by
the Company in conformity with the requirements of the Act, and the rules and
regulations ("Regulations") of the Commission under the Act. Except as the
context may otherwise require, such registration statement, as amended, on file
with the Commission at the time the registration statement becomes effective
(including the prospectus, financial statements, schedules, exhibits and all
other documents filed as a part thereof or incorporated therein and all
information deemed to be a part thereof as of such time pursuant to paragraph
(b) of Rule 430A of the Regulations), is hereinafter called the "Registration
Statement," and the form of the final prospectus dated the Effective Date (or,
if applicable, the form of final prospectus filed with the Commission pursuant
to Rule 424 of the Regulations), is hereinafter called the "Prospectus." The
Registration Statement has been declared effective by the Commission on the date
hereof.
2.1.2 Pursuant to the Exchange Act. The Company has filed with the
----------------------------
Commission a registration statement on Form 8-A providing for the registration
under the Securities Exchange Act of 1934, as amended ("Exchange Act"), of the
Units and Warrants included in the Public Securities. Such registration has
been declared effective by the Commission on the date hereof. The Common Stock
is registered under the Exchange Act under registration statement on Form 8-A,
declared effective on ___________.
3
<PAGE>
2.2 No Stop Orders, Etc. Neither the Commission nor, to the best of the
--------------------
Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use of any Preliminary Prospectus or has instituted
or, to the best of the Company's knowledge, threatened to institute any
proceedings with respect to such an order.
2.3 Disclosures in Registration Statement.
-------------------------------------
2.3.1 10b-5 Representation. At the time the Registration Statement
--------------------
became effective and at all times subsequent thereto up to the Closing Date and
the Option Closing Date, if any, the Registration Statement and the Prospectus
contained and will contain all material statements which are required to be
stated therein in accordance with the Act and the Regulations, and conformed and
will conform in all material respects to the requirements of the Act and the
Regulations; neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, during such time period and on such dates,
contained or will contain any untrue statement of a material fact or omitted or
will omit to state any material fact required to be stated therein or necessary
to make the statements therein not misleading, nor did they or will they contain
any untrue statement of a material fact or did they or will they omit to state
any 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. When any Preliminary Prospectus was first filed with the
Commission (whether filed as part of the Registration Statement for the
registration of the Securities or any amendment thereto or pursuant to Rule
424(a) of the Regulations) and when any amendment thereof or supplement thereto
was first filed with the Commission, such Preliminary Prospectus and any
amendments thereof and supplements thereto at the time such filing was made
complied in all material respects with the applicable provisions of the Act and
the Regulations. The representation and warranty made in this Section 2.3.1
does not apply to statements made or statements omitted in reliance upon and in
conformity with written information furnished to the Company with respect to the
Underwriter expressly for use in the Registration Statement or Prospectus or any
amendment thereof or supplement thereto.
2.3.2 Disclosure of Contracts. The description in the Registration
-----------------------
Statement and the Prospectus of contracts and other documents is accurate and
presents fairly the information required to be disclosed and there are no
contracts or other documents required to be described in the Registration
Statement or the Prospectus or to be filed with the Commission as exhibits to
the Registration Statement which have not been so described or filed. Each
contract or other instrument (however characterized or described) to which the
Company is a party or by which its property or business is or may be bound or
affected and (i) which is referred to in the Prospectus, or (ii) is material to
the Company's business, has been duly and validly executed, is in full force and
effect in all material respects and is enforceable against the parties thereto
in accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditor's
rights generally and that the remedy of specific performance and injunctive
relief and other forms of equitable relief may be subject to equitable defenses
and to the discretion of the court before which any proceeding therefore may be
brought. None of such contracts or instruments has been assigned by the
Company, and neither the Company nor, to the best of the Company's knowledge,
any other party is in default thereunder and, to the best of the Company's
knowledge, no event has occurred which, with the lapse of time or the giving of
notice, or both, would constitute a default thereunder. None of the material
provisions of such contracts or instruments violates or will result in a
violation of any existing applicable law, rule, regulation, judgment, order or
decree of any governmental agency or court having jurisdiction over the
4
<PAGE>
Company or any of its respective assets or businesses, including, without
limitation, those relating to environmental laws and regulations.
2.3.3 Prior Securities Transactions. No securities of the Company
-----------------------------
have been sold by the Company or by or on behalf of, or for the benefit of, any
person or persons controlling, controlled by, or under common control with the
Company within the three years prior to the date hereof, except as disclosed in
the Registration Statement.
2.4 Changes After Dates in Registration Statement.
---------------------------------------------
2.4.1 No Material Adverse Change. Since the respective dates as of
--------------------------
which information is given in the Registration Statement and the Prospectus,
except as otherwise specifically stated therein, (i) there has been no material
adverse change in the condition, financial or otherwise, or in the results of
operations, business or business prospects of the Company, including, but not
limited to, a material loss or interference with its business from fire, storm,
explosion, flood or other casualty, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, whether or
not arising in the ordinary course of business, and (ii) there have been no
transactions entered into by the Company, other than those in the ordinary
course of business, which are material with respect to the condition, financial
or otherwise, or to the results of operations, business or business prospects of
the Company.
2.4.2 Recent Securities Transactions, Etc. Subsequent to the
------------------------------------
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as may otherwise be indicated or contemplated
herein or therein, the Company has not (i) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money; or (ii)
declared or paid any dividend or made any other distribution on or in respect to
its capital stock.
2.5 Independent Accountants. Deloitte & Touche LLP, whose report is filed
-----------------------
with the Commission as part of the Registration Statement, are independent
accountants as required by the Act and the Regulations.
2.6 Financial Statements. The financial statements, including the notes
--------------------
thereto and supporting schedules included in the Registration Statement and
Prospectus, fairly present the financial position and the results of operations
of the Company at the dates and for the periods to which they apply; and such
financial statements have been prepared in conformity with generally accepted
accounting principles, consistently applied throughout the periods involved; and
the supporting schedules included in the Registration Statement present fairly
the information required to be stated therein.
2.7 Authorized Capital; Options; Etc. The Company had at the date or
---------------------------------
dates indicated in the Prospectus duly authorized, issued and outstanding
capitalization as set forth in the Registration Statement and the Prospectus.
Based on the assumptions stated in the Registration Statement and the
Prospectus, the Company will have on the Closing Date the adjusted stock
capitalization set forth therein. Except as set forth in the Registration
Statement and the Prospectus, on the Effective Date and on the Closing Date
there will be no options, warrants, or other rights to purchase or otherwise
acquire any authorized but unissued shares of Common Stock of the Company,
including any issuances pursuant to anti-dilution provisions, or any security
convertible into shares of Common Stock of the Company, or any contracts or
commitments to
5
<PAGE>
issue or sell shares of Common Stock or any such options, warrants, rights or
convertible securities.
2.8 Valid Issuance of Securities; Etc.
----------------------------------
2.8.1 Outstanding Securities. All issued and outstanding securities
----------------------
of the Company have been duly authorized and validly issued and are fully paid
and non-assessable; the holders thereof have no rights of rescission with
respect thereto, and are not subject to personal liability by reason of being
such holders; and none of such securities were issued in violation of the
preemptive rights of any holders of any security of the Company or similar
contractual rights granted by the Company. The outstanding options and warrants
to purchase shares of Common Stock constitute the valid and binding obligations
of the Company, enforceable in accordance with their terms, except (i) as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally, (ii) as enforceability of
any indemnification provision may be limited under the federal and state
securities laws, and (iii) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to the equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought. The authorized Common Stock and outstanding options and
warrants to purchase shares of Common Stock conform to all statements relating
thereto contained in the Registration Statement and the Prospectus. The offers
and sales by the Company of the outstanding Common Stock, options and warrants
to purchase shares of Common Stock were at all relevant times either registered
or qualified under the Act and registered or qualified under the applicable
state securities or Blue Sky Laws or exempt from such registration requirements.
2.8.2 Securities Sold Pursuant to this Agreement. The Securities
------------------------------------------
have been duly authorized and, when issued and paid for, will be validly issued,
fully paid and non-assessable; the holders thereof are not and will not be
subject to personal liability by reason of being such holders; the Securities
are not and will not be subject to the preemptive rights of any holders of any
security of the Company or similar contractual rights granted by the Company;
and all corporate action required to be taken for the authorization, issuance
and sale of the Securities has been duly and validly taken. When issued, the
Underwriter's Purchase Option, the Underwriter's Warrants and the Warrants will
constitute valid and binding obligations of the Company to issue and sell, upon
exercise thereof and payment therefor, the number and type of securities of the
Company called for thereby and the Underwriter's Purchase Option, the
Underwriter's Warrants and the Warrants will be enforceable against the Company
in accordance with their respective terms, except (i) as such enforceability may
be limited by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally, (ii) as enforceability of any indemnification
provision may be limited under the federal and state securities laws, and (iii)
that the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to the equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought.
2.9 Registration Rights of Third Parties. Except as set forth in the
------------------------------------
Prospectus, no holders of any securities of the Company or of any options or
warrants of the Company exercisable for or convertible or exchangeable into
securities of the Company have the right to require the Company to register any
such securities of the Company under the Act or to include any such securities
in a registration statement to be filed by the Company at any time.
2.10 Validity and Binding Effect of Agreements. This Agreement, the
-----------------------------------------
Underwriter's Purchase Option and the Warrant Agreement (as hereinafter defined)
have been duly and validly
6
<PAGE>
authorized by the Company and constitute, or when executed and delivered will
constitute, the valid and binding agreements of the Company, enforceable against
the Company in accordance with their respective terms, except (i) as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally, (ii) as enforceability of
any indemnification provision may be limited under the federal and state
securities laws, and (iii) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to the equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.
2.11 No Conflicts, Etc. The execution, delivery, and performance by the
------------------
Company of this Agreement, the Underwriter's Purchase Option and the Warrant
Agreement, the consummation by the Company of the transactions herein and
therein contemplated and the compliance by the Company with the terms hereof and
thereof do not and will not, with or without the giving of notice or the lapse
of time or both, (i) result in a breach of, or conflict with any of the terms
and provisions of, or constitute a default under, or result in the creation,
modification, termination or imposition of any lien, charge or encumbrance upon
any property or assets of the Company pursuant to the terms of any indenture,
mortgage, deed of trust, note, loan or credit agreement or any other agreement
or instrument evidencing an obligation for borrowed money, or any other
agreement or instrument to which the Company is a party or by which the Company
may be bound or to which any of the property or assets of the Company is
subject; (ii) result in any violation of the provisions of the Certificate of
Incorporation or the By-Laws of the Company; (iii) violate any existing
applicable law, rule, regulation, judgment, order or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over the Company or
any of its properties or business; or (iv) have a material adverse effect on any
permit, license, certificate, registration, approval, consent, license or
franchise concerning the Company.
2.12 No Defaults; Violations. Except as described in the Prospectus, no
-----------------------
default exists in the due performance and observance of any term, covenant or
condition of any material license, contract, indenture, mortgage, deed of trust,
note, loan or credit agreement, or any other agreement or instrument evidencing
an obligation for borrowed money, or any other material agreement or instrument
to which the Company is a party or by which the Company may be bound or to which
any of the properties or assets of the Company is subject. The Company is not
in violation of any term or provision of its Certificate of Incorporation or By-
Laws or in violation of any franchise, license, permit, applicable law, rule,
regulation, judgment or decree of any governmental agency or court, domestic or
foreign, having jurisdiction over the Company or any of its properties or
business, except as described in the Prospectus.
2.13 Corporate Power; Licenses; Consents.
-----------------------------------
2.13.1 Conduct of Business. The Company has all requisite corporate
-------------------
power and authority, and has all necessary authorizations, approvals, orders,
licenses, certificates and permits of and from all governmental regulatory
officials and bodies to own or lease its properties and conduct its business as
described in the Prospectus, and the Company is and has been doing business in
compliance with all such material authorizations, approvals, orders, licenses,
certificates and permits and all federal, state and local laws, rules and
regulations. The disclosures in the Registration Statement concerning the
effects of federal, state and local regulation on the Company's business as
currently contemplated are correct in all material respects and do not omit to
state a material fact.
7
<PAGE>
2.13.2 Transactions Contemplated Herein. The Company has all
--------------------------------
corporate power and authority to enter into this Agreement and to carry out the
provisions and conditions hereof, and all consents, authorizations, approvals
and orders required in connection therewith have been obtained. No consent,
authorization or order of, and no filing with, any court, government agency or
other body is required for the valid issuance, sale and delivery, of the
Securities pursuant to this Agreement, the Warrant Agreement and the
Underwriter's Purchase Option, and as contemplated by the Prospectus, except
with respect to applicable federal and state securities laws.
2.14 Title to Property; Insurance. The Company has good and marketable
----------------------------
title to, or valid and enforceable leasehold estates in, all items of real and
personal property (tangible and intangible) owned or leased by it, free and
clear of all liens, encumbrances, claims, security interests, defects and
restrictions of any material nature whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable. All the property in
which the Company has an interest is adequately insured against loss or damage
by fire or other casualty. The Company maintains, in adequate amounts, such
other insurance as is usually maintained by companies engaged in the same or
similar business.
2.15 Litigation; Governmental Proceedings. Except as set forth in the
------------------------------------
Prospectus, there is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding pending or threatened
against, or involving the properties or business of, the Company which might
materially and adversely affect the financial position, prospects, value or the
operation or the properties or the business of the Company, or which question
the validity of the capital stock of the Company or this Agreement or of any
action taken or to be taken by the Company pursuant to, or in connection with,
this Agreement. There are no outstanding orders, judgments or decrees of any
court, governmental agency or other tribunal naming the Company and enjoining
the Company from taking, or requiring the Company to take, any action, or to
which the Company, its properties or business is bound or subject.
2.16 Good Standing. The Company has been duly organized and is validly
-------------
existing as a corporation and is in good standing under the laws of the state of
its incorporation. The Company is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which ownership or
leasing of any properties or the character of its operations requires such
qualification or licensing, except where the failure to qualify would not have a
material adverse effect on the Company.
2.17 Taxes. The Company has filed all returns (as hereinafter defined)
-----
required to be filed with taxing authorities prior to the date hereof or has
duly obtained extensions of time for the filing thereof. The Company has paid
all taxes (as hereinafter defined) shown as due on such returns that were filed
and has paid all taxes imposed on or assessed against the Company. The
provisions for taxes payable, if any, shown on the financial statements filed
with or as part of the Registration Statement are sufficient for all accrued and
unpaid taxes, whether or not disputed, and for all periods to and including the
dates of such consolidated financial statements. Except as disclosed in writing
to the Underwriter, (i) no issues have been raised (and are currently pending)
by any taxing authority in connection with any of the returns or taxes asserted
as due from the Company, and (ii) no waivers of statutes of limitation with
respect to the returns or collection of taxes have been given by or requested
from the Company. The term "taxes" mean all federal, state, local, foreign, and
other net income, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, license, lease, service, service use, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property,
windfall profits, customs, duties or other
8
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taxes, fees, assessments, or charges of any kind whatever, together with any
interest and any penalties, additions to tax, or additional amounts with respect
thereto. The term "returns" means all returns, declarations, reports,
statements, and other documents required to be filed in respect to taxes.
2.18 Employees' Options. No shares of Common Stock are eligible for sale
------------------
pursuant to Rule 701 promulgated under the Act in the 12 month period following
the Effective Date.
2.19 Transactions Affecting Disclosure to NASD.
-----------------------------------------
2.19.1 Finder's Fees. Except as described in the Prospectus, there
-------------
are no claims, payments, issuances, arrangements or understandings for services
in the nature of a finder's or origination fee with respect to the sale of the
Securities hereunder or any other arrangements, agreements, understandings,
payments or issuance with respect to the Company that may affect the
Underwriter's compensation, as determined by the National Association of
Securities Dealers, Inc. ("NASD").
2.19.2 Payments Within Twelve Months. The Company has not made any
------------------------------
direct or indirect payments (in cash, securities or otherwise) to (i) any
person, as a finder's fee, investing fee, consulting fee or otherwise, in
consideration of such person raising capital for the Company or introducing to
the Company persons who provided capital to the Company or rendering financial
consulting services to the Company, (ii) to any NASD member, or (iii) to any
person or entity that has any direct or indirect affiliation or association with
any NASD member within the twelve month period prior to the date on which the
Registration Statement was filed with the Commission ("Filing Date") or
thereafter, other than payments to the Underwriter.
2.19.3 Use of Proceeds. None of the net proceeds of the offering
---------------
will be paid by the Company to any NASD member or any affiliate or associate of
any NASD member.
2.19.4 Insiders' NASD Affiliation. No officer or director of the
--------------------------
Company or owner of any of the Company's unregistered securities has any direct
or indirect affiliation or association with any NASD member. The Company will
advise the Underwriter and the NASD if any 5% or greater stockholder of the
Company is or becomes an affiliate or associated person of an NASD member
participating in the distribution.
2.20 Foreign Corrupt Practices Act. Neither the Company nor any of its
-----------------------------
officers, directors, employees, agents or any other person acting on behalf of
the Company has, directly or indirectly, given or agreed to give any money, gift
or similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or agent of a
customer or supplier, or official or employee of any governmental agency or
instrumentality of any government (domestic or foreign) or any political party
or candidate for office (domestic or foreign) or any political party or
candidate for office (domestic or foreign) or other person who was, is, or may
be in a position to help or hinder the business of the Company (or assist it in
connection with any actual or proposed transaction) which (i) might subject the
Company to any damage or penalty in any civil, criminal or governmental
litigation or proceeding, (ii) if not given in the past, might have had a
materially adverse effect on the assets, business or operations of the Company
as reflected in any of the financial statements contained in the Prospectus or
(iii) if not continued in the future, might adversely affect the assets,
business, operations or prospects of the Company. The Company's internal
accounting controls and
9
<PAGE>
procedures are sufficient to cause the Company to comply with the Foreign
Corrupt Practices Act of 1977, as amended.
2.21 Nasdaq and The Boston Stock Exchange Eligibility. As of the
------------------------------------------------
Effective Date, the Public Securities have been approved for quotation on the
Nasdaq SmallCap Market and for listing on The Boston Stock Exchange ("BSE").
2.22 Intangibles. The Company owns or possesses the requisite licenses or
-----------
rights to use all trademarks, service marks, service names, trade names, patents
and patent applications, copyrights and other rights (collectively,
"Intangibles") described as being licensed to or owned by it in the Registration
Statement. The Company's Intangibles which have been registered in the United
States Patent and Trademark Office have been fully maintained and are in full
force and effect. There is no claim or action by any person pertaining to, or
proceeding pending or threatened and the Company has not received any notice of
conflict with the asserted rights of others which challenges the exclusive right
of the Company with respect to any Intangibles used in the conduct of the
Company's business except as described in the Prospectus. The Intangibles and
the Company's current products, services and processes do not infringe on any
intangibles held by any third party. To the best of the Company's knowledge, no
others have infringed upon the Intangibles of the Company.
2.23 Relations With Employees.
------------------------
2.23.1 Employee Matters. The Company has generally enjoyed a
----------------
satisfactory employer-employee relationship with its employees and is in
compliance in all material respects with all federal, state and local laws and
regulations respecting the employment of its employees and employment practices,
terms and conditions of employment and wages and hours relating thereto. There
are no pending investigations involving the Company by the U.S. Department of
Labor or any other governmental agency responsible for the enforcement of such
federal, state or local laws and regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or threatened against or involving the Company or any predecessor
entity, and none has ever occurred. No question concerning representation
exists respecting the employees of the Company and no collective bargaining
agreement or modification thereof is currently being negotiated by the Company.
No grievance or arbitration proceeding is pending under any expired or existing
collective bargaining agreements of the Company, if any.
2.23.2 Employee Benefit Plans. Other than as set forth in the
----------------------
Registration Statement, the Company neither maintains, sponsors nor contributes
to, nor is it required to contribute to, any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan," or a,
"multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and
3(37), respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). The Company does not, and has at no time,
maintained or contributed to a defined benefit plan, as defined in Section 3(35)
of ERISA. If the Company does maintain or contribute to a defined benefit plan,
any termination of the plan on the date hereof would not give rise to liability
under Title IV of ERISA. No ERISA Plan (or any trust created thereunder) has
engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA
or Section 4975 of the Internal Revenue Code of 1986, as amended ("Code"), which
could subject the Company to any tax penalty for prohibited transactions and
which has not adequately been corrected. Each ERISA Plan is in compliance with
all material reporting, disclosure and other
10
<PAGE>
requirements of the Code and ERISA as they relate to any such ERISA Plan.
Determination letters have been received from the Internal Revenue Service with
respect to each ERISA Plan which is intended to comply with Code Section 401(a),
stating that such ERISA Plan and the attendant trust are qualified thereunder.
The Company has never completely or partially withdrawn from a "multi-employer
plan".
2.24 Officers' Certificate. Any certificate signed by any duly authorized
---------------------
officer of the Company and delivered to you or to your counsel shall be deemed a
representation and warranty by the Company to the Underwriter as to the matters
covered thereby.
2.25 Warrant Agreement. The Company has entered into a warrant agreement
-----------------
with respect to the Warrants and the Underwriter's Warrants substantially in the
form filed as an exhibit to the Registration Statement ("Warrant Agreement")
with Liberty National Bank & Trust Company of Oklahoma City, N.A., in form and
substance satisfactory to the Underwriter, providing for among other things that
the Warrants will not be redeemed by the Company unless the Underwriter
consents, which consent will not be withheld unless in the reasonable judgment
of the Underwriter, the market conditions generally or specifically for the
Company's securities or the proposed redemption will specifically, adversely
affect the market for the Company's securities.
2.26 Lock-Up Agreements. The Company has caused to be duly executed a
------------------
legally binding and enforceable agreement ("Lock-up Agreement") pursuant to
which all of the officers and directors of the Company (including their family
members and affiliates) and, other than persons whose percentage ownership is
unknown to the Company, its officers, directors and affiliates after reasonable
inquiry, and all persons (including their family members and affiliates) who
beneficially own or hold one percent or more of the outstanding Common Stock of
the Company (collectively, "Insiders") agree not to sell any shares of Common
Stock owned by them (either pursuant to Rule 144 of the Regulations or
otherwise) for a period of 12 months following the Effective Date except with
the consent of the Underwriter and, if applicable, a state securities
commission. In addition, the Company also has caused to be duly executed Lock-
up Agreements pursuant to which Hi-Chicago Trust and Weisser, Johnson & Co.
Capital Corporation will not sell shares of Common Stock owned by them for the
periods set forth in the Prospectus. The Company further agrees that it will
not permit or cause the private or public offering of any equity securities of
the Company owned or to be owned of record or beneficially by any participant
(including their family members and/or affiliates) in projects for the
exploration or development of gas properties financed by Weisser Johnson & Co.
Capital Corp. until the later of six months after the issuance of such equity
securities or 12 months after the Effective Date.
2.27 [Intentionally omitted]
2.28 Subsidiaries. The representations and warranties made by the Company
------------
in this Agreement shall also apply and be true with respect to each subsidiary,
individually and taken as a whole with the Company and all other subsidiaries,
as if each representation and warranty contained herein made specific reference
to the subsidiary each time the term "Company" was used.
11
<PAGE>
3. Covenants of the Company. The Company covenants and agrees as follows:
------------------------
3.1 Amendments to Registration Statement. The Company will deliver to the
------------------------------------
Underwriter, prior to filing, any amendment or supplement to the Registration
Statement or Prospectus proposed to be filed after the Effective Date and not
file any such amendment or supplement to which the Underwriter shall reasonably
object.
3.2 Federal Securities Laws.
-----------------------
3.2.1 Compliance. During the time when a Prospectus is required to
----------
be delivered under the Act, the Company will use all reasonable efforts to
comply with all requirements imposed upon it by the Act, the Regulations and the
Exchange Act and by the regulations under the Exchange Act, as from time to time
in force, so far as necessary to permit the continuance of sales of or dealings
in the Public Securities in accordance with the provisions hereof and the
Prospectus. If at any time when a Prospectus relating to the Public Securities
is required to be delivered under the Act, any event shall have occurred as a
result of which, in the opinion of counsel for the Company or counsel for the
Underwriter, the Prospectus, as then amended or supplemented, includes an untrue
statement of a material fact or omits to state any 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, or if it is necessary
at any time to amend the Prospectus to comply with the Act, the Company will
notify the Underwriter promptly and prepare and file with the Commission,
subject to Section 3.1 hereof, an appropriate amendment or supplement in
accordance with Section 10 of the Act.
3.2.2 Filing of Final Prospectus. The Company will file the
--------------------------
Prospectus (in form and substance satisfactory to the Underwriter) with the
Commission pursuant to the requirements of Rule 424 of the Regulations.
3.2.3 Exchange Act Registration. For a period of five years from the
-------------------------
Effective Date, the Company will use its best efforts to maintain the
registration of the Units, Common Stock and Warrants under the provisions of the
Exchange Act.
3.3 Blue Sky Filing. The Company will endeavor in good faith, in
---------------
cooperation with the Underwriter, at or prior to the time the Registration
Statement becomes effective to qualify the Public Securities for offering and
sale under the securities laws of such jurisdictions as the Underwriter may
reasonably designate, provided that no such qualification shall be required in
any jurisdiction where, as a result thereof, the Company would be subject to
service of general process or to taxation as a foreign corporation doing
business in such jurisdiction. In each jurisdiction where such qualification
shall be effected, the Company will, unless the Underwriter agrees that such
action is not at the time necessary or advisable, use all reasonable efforts to
file and make such statements or reports at such times as are or may be required
by the laws of such jurisdiction.
3.4 Delivery to Underwriter of Prospectuses. The Company will deliver to
---------------------------------------
the Underwriter, without charge, from time to time during the period when the
Prospectus is required to be delivered under the Act, or the Exchange Act such
number of copies of each Preliminary Prospectus and the Prospectus as such
Underwriter may reasonably request and, as soon as the Registration Statement or
any amendment or supplement thereto becomes effective, deliver to you two
original executed Registration Statements, including exhibits, and all post-
effective
12
<PAGE>
amendments thereto and copies of all exhibits filed therewith or incorporated
therein by reference and all original executed consents of certified experts.
3.5 Events Requiring Notice to the Underwriter. The Company will notify
------------------------------------------
the Underwriter immediately and confirm the notice in writing (i) of the
effectiveness of the Registration Statement and any amendment thereto, (ii) of
the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding for that purpose, (iii) of the issuance by any
state securities commission of any proceedings for the suspension of the
qualification of the Public Securities for offering or sale in any jurisdiction
or of the initiation, or the threatening, of any proceeding for that purpose,
(iv) of the mailing and delivery to the Commission for filing of any amendment
or supplement to the Registration Statement or Prospectus, (v) of the receipt of
any comments or request for any additional information from the Commission, and
(vi) of the happening of any event during the period described in Section 3.4
hereof which, in the judgment of the Company, makes any statement of a material
fact made in the Registration Statement or the Prospectus untrue or which
requires the making of any changes in the Registration Statement or the
Prospectus in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. If the Commission or
any state securities commission shall enter a stop order or suspend such
qualification at any time, the Company will make every reasonable effort to
obtain promptly the lifting of such order.
3.6 Review of Financial Statements. For a period of five years from the
------------------------------
Effective Date, the Company, at its expense, shall cause its regularly engaged
independent certified public accountants to review (but not audit) the Company's
financial statements for each of the first three fiscal quarters prior to the
announcement of quarterly financial information, the filing of the Company's
Form 10-Q quarterly reports and the mailing of quarterly financial information
to stockholders.
3.7 Unaudited Financials. The Company will furnish to the Underwriter as
--------------------
early as practicable prior to the date hereof and the Closing Date, but no later
than two full business days prior thereto, a copy of the latest available
unaudited interim financial statements ("Unaudited Financials") of the Company
(which in no event shall be as of a date more than thirty days prior to the
Effective Date) which have been read by the Company's independent accountants,
as stated in their letter to be furnished pursuant to Section 4.3 hereof.
3.8 Secondary Market Trading and Standard & Poor's. The Company will
----------------------------------------------
cause Day Edwards Federman Propester & Christensen, P.C. ("Company Counsel") to
opine as of the Effective Date that the Company is duly listed in the
Corporation Records Service published by Standard & Poor's Corporation in a
manner sufficient that the Company's securities will be eligible for
transactional exemptions under the Blue Sky laws of the various states relating
to manual exemptions and the Company will maintain such publication with updated
quarterly information for a period of five years from the Effective Date,
including the payment of any necessary fees and expenses. The Company shall
take such action as may be reasonably requested by the Underwriter to obtain a
secondary market trading exemption in such States as may be requested by the
Underwriter, including the payment of any necessary fees and expenses and the
filing of a Form (e.g. 25101(b)) for secondary market trading in the State of
California on the Effective Date as soon as permissible. The Company will cause
Company Counsel to prepare and deliver to the Underwriter on the Effective Date
a memorandum surveying the blue sky laws of the 50 states, indicating where the
Common Stock and Warrants are eligible for secondary trading.
13
<PAGE>
3.9 Nasdaq and BSE Maintenance and De-listing of Units. For a period of
--------------------------------------------------
five years from the date hereof, the Company will use its best efforts to
maintain the quotation by Nasdaq SmallCap and, if the Company satisfies the
inclusion standards of the Nasdaq National Market System to apply for and
maintain quotations thereon for such period. Until such listing may be permitted
on the National Market System, the Company shall obtain prior to the Effective
Date and thereafter for a period of five years and maintain a listing for the
Common Stock, and, if outstanding, the Warrants on the Boston Stock Exchange
("BSE"). Upon request by the Underwriter, the Company agrees to take all actions
necessary to immediately de-list the Units from Nasdaq SmallCap Market and the
BSE.
3.10 Warrant Solicitation and Registration of Common Stock underlying the
--------------------------------------------------------------------
Warrants.
- --------
3.10.1 Warrant Solicitation. The Company hereby engages the
--------------------
Underwriter, on a non-exclusive basis, as its agent for the solicitation of the
exercise of the Warrants. The Company, at its cost, will (i) assist the
Underwriter with respect to such solicitation, if requested by the Underwriter
and will (ii) provide the Underwriter, and direct the Company's transfer and
warrant agent to provide to the Underwriter, lists of the record and, to the
extent known, beneficial owners of the Warrants. Commencing one year from the
Effective Date, the Company will pay to the Underwriter a commission of five
percent of the Warrant exercise price for each Warrant exercised, payable on the
date of such exercise, on the terms provided for in the Warrant Agreement, if
allowed under the rules and regulations of the NASD and the Underwriter is
designated in writing by the Warrantholders as having solicited the exercise.
In addition to soliciting, either orally or in writing, the exercise of
Warrants, such services may also include disseminating information, either
orally or in writing, to Warrantholders about the Company or the market for the
Company's securities, and assisting in the processing of Warrants. The
Underwriter may engage sub-agents in its solicitation efforts. The Company will
disclose the arrangement to pay such solicitation fees to the Underwriter in any
prospectus used by the Company in connection with the registration of the shares
of Common Stock underlying the Warrants.
3.10.2 Registration of Common Stock. The Company agrees that prior
----------------------------
to the date that the Warrants become exercisable, it shall file with the
Commission a post-effective amendment to the Registration Statement, if possible
or a new registration statement, for the registration, under the Act, of the
Common Stock issuable upon exercise of the Warrants. In either case, the
Company shall cause the same to become effective at or prior to the date that
the Warrants become exercisable, and to maintain the effectiveness of such
registration statement and keep current a prospectus thereunder until the
expiration of the Warrants in accordance with the provisions of the Warrant
Agreement.
3.11 Public Relations Firm. The Company shall retain a public relations
---------------------
firm acceptable to the Underwriter for a period of five years from the Effective
Date.
3.12 Reports to the Underwriter.
--------------------------
3.12.1 Periodic Reports, Etc. For a period of five years from the
----------------------
Effective Date, the Company will promptly furnish to the Underwriter copies of
such financial statements and other periodic and special reports as the Company
from time to time files with any governmental authority or files with any
governmental authority or furnishes generally to holders of any class of its
securities, and promptly furnish to the Underwriter (i) a copy of each periodic
report the Company shall be required to file with the Commission, (ii) a copy of
every press release and
14
<PAGE>
every news item and article with respect to the Company or its affairs which was
released by the Company, (iii) a copy of each Form 8-K or Schedules 13D, 13G,
14D-1 or 13E-4 received or prepared by the Company and provides to members of
its Board of Directors, (iv) a copy of monthly statements setting forth such
information regarding the Company's results of operations and financial position
(including balance sheet, profit and loss statements and data regarding
outstanding purchase orders) as is regularly prepared by management of the
Company, and (v) such additional documents and information with respect to the
Company and the affairs of any future subsidiaries of the Company as the
Underwriter may from time to time reasonably request.
3.12.2 Transfer Sheets and Weekly Position Listings. For a period of
--------------------------------------------
five years from the Closing Date, the Company will furnish to the Underwriter at
the Company's sole expense such transfer sheets and position listings of the
Company's securities as the Underwriter may request, including the daily, weekly
and monthly consolidated transfer sheets of the transfer agent of the Company
and the weekly security position listings of the Depository Trust Company.
3.13 Agreements between the Underwriter and the Company.
--------------------------------------------------
3.13.1 [Intentionally omitted]
3.13.2 [Intentionally omitted]
3.13.3 Underwriter's Purchase Option. On the Closing Date, the
-----------------------------
Company will execute and deliver the Underwriter's Purchase Option to the
Underwriter substantially in the form filed as an exhibit to the Registration
Statement.
3.14 Disqualification of Form S-1 (or other appropriate form). For a
--------------------------------------------------------
period equal to seven years from the date hereof, the Company will not take any
action or actions which may prevent or disqualify the Company's use of Form S-1
(or other appropriate form) for the registration under the Acts of the Warrants,
the Underwriter's Purchase Option and the Common Stock and Underwriter's
Warrants underlying the Underwriter's Purchase Option and the Common Stock
underlying the Underwriter's Warrants.
3.15 Payment of Expenses.
-------------------
3.15.1 General Expenses. The Company hereby agrees to pay on each of
----------------
the Closing Date and the Option Closing Date, if any, to the extent not paid at
Closing Date, all expenses incident to the performance of the obligations of the
Company under this Agreement, including but not limited to (i) the preparation,
printing, filing, delivery and mailing (including the payment of postage with
respect to such mailing) of the Registration Statement, the Prospectus and the
Preliminary Prospectuses and the printing and mailing of this Agreement and
related documents, including the cost of all copies thereof and any amendments
thereof or supplements thereto supplied to the Underwriter in quantities as may
be required by the Underwriter, (ii) the printing, engraving, issuance and
delivery of the Units, the shares of Common Stock and the Warrants included in
the Units and the Underwriter's Purchase Option, including any transfer or other
taxes payable thereon, (iii) the qualification of the Public Securities under
state or foreign securities or Blue Sky laws, including the filing fees under
such Blue Sky laws, the costs of printing and mailing the "Preliminary Blue Sky
Memorandum," and all amendments and supplements thereto, fees up to an aggregate
of $35,000 and disbursements of Underwriter's counsel, and fees and
disbursements of local counsel, if any, retained for such purpose, (iv) costs
associated with
15
<PAGE>
applications for assignments of a rating of the Public Securities by qualified
rating agencies, (v) filing fees, costs and expenses (including fees and
disbursements for the Underwriter's counsel) incurred in registering the
offering with the NASD, (vi) costs (up to $10,000) of placing "tombstone"
advertisements in The Wall Street Journal and The New York Times, (vii) fees and
----------------------- ------------------
disbursements of the transfer and warrant agent, (viii) the Company's expenses
associated with "due diligence" meetings arranged by the Underwriter (including,
but not limited to, one meeting at a hotel in New York City and one at the
offices of the Underwriter in Long Island); (ix) the preparation, binding and
delivery of four sets of transaction "bibles," in form and style satisfactory to
the Underwriter and transaction lucite cubes or similar commemorative items in a
style and quantity as requested by the Underwriter, (x) any listing of the
Public Securities on Nasdaq SmallCap Market or the National Market System, as
the case may be, any securities exchange, and any listing in Standard & Poor's,
(xi) fees and disbursements of the Company's environmental counsel, if any, and
(xii) all other costs and expenses incident to the performance of its
obligations hereunder which are not otherwise specifically provided for in this
Section 3.15.1. Since an important part of the public offering process is for
the Company to appropriately and accurately describe both the background of the
principals of the Company and the Company's competitive position in its
industry, the Company has engaged and will pay for an investigative search firm
approved by the Underwriter to conduct an investigation of principals of the
Company mutually selected by the Underwriter and the Company. The Underwriter
may deduct from the net proceeds of the offering payable to the Company on the
Closing Date, or the Option Closing Date, if any, the expenses set forth herein
to be paid by the Company to the Underwriter and/or to third parties.
3.15.2 Non-Accountable Expenses. The Company further agrees that, in
------------------------
addition to the expenses payable pursuant to Section 3.15.1, it will pay to the
Underwriter a non-accountable expense allowance equal to three percent (3%) of
the gross proceeds received by the Company from the sale of the Public
Securities, of which $50,000 has been paid to date, and the Company will pay the
balance on the Closing Date and any additional monies owed attributable to the
Option Units or otherwise on the Option Closing Date by certified or bank
cashier's check or, at the election of the Underwriter, by deduction from the
proceeds of the offering contemplated herein. If the offering contemplated by
this Agreement is not consummated for any reason whatsoever then the following
provisions shall apply: The Company's liability for payment to the Underwriter
of the non-accountable expense allowance shall be equal to the sum of the
Underwriter's actual out-of-pocket expenses (including, but not limited to,
counsel fees, "road-show" and due diligence expenses). The Underwriter shall
retain such part of the non-accountable expense allowance previously paid as
shall equal such actual out-of-pocket expenses. If the amount previously paid
is insufficient to cover such actual out-of-pocket expenses, the Company shall
remain liable for and promptly pay any other actual out-of-pocket expenses. If
the amount previously paid exceeds the amount of the actual out-of-pocket
expenses, the Underwriter shall promptly remit to the Company any such excess.
3.16 Application of Net Proceeds. The Company will apply the net proceeds
---------------------------
from the offering received by it in a manner consistent with the application
described under the caption "USE OF PROCEEDS" in the Prospectus. The Company
hereby agrees that, without the express prior written consent of the
Underwriter, the Company will not apply any net proceeds from the offering to
pay (i) any debt for borrowed funds except pursuant to the terms of the Credit
Agreement existing as of the date hereof between the Company and Bank of America
Illinois ("BOA") as such funds are payable to BOA and to no other or (ii) any
debt or obligation owed to any Insider.
16
<PAGE>
3.17 Delivery of Earnings Statements to Security Holders. The Company
---------------------------------------------------
will make generally available to its security holders as soon as practicable,
but not later than the first day of the fifteenth full calendar month following
the Effective Date, an earnings statement (which need not be certified by
independent public or independent certified public accountants unless required
by the Act or the Regulations, but which shall satisfy the provisions of Rule
158(a) under Section 11(a) of the Act) covering a period of at least twelve
consecutive months beginning after the Effective Date.
3.18 Key Person Life Insurance. The Company will maintain key person life
-------------------------
insurance in an amount no less than $1,000,000 on the life of David Berry,
naming the Company as the sole beneficiary thereof, for at least three years
following the Effective Date.
3.19 Stabilization. Neither the Company, nor, to its knowledge, any of
-------------
its employees, directors or stockholders has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result in, under the Exchange Act, or
otherwise, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Public Securities.
3.20 Internal Controls. The Company maintains and will continue to
-----------------
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance with
management's general or specific authorization, (ii) transactions are recorded
as necessary in order to permit preparation of financial statements in
accordance with generally accepted accounting principles and to maintain
accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
3.21 Accountants and Lawyers. For a period of five years from the
-----------------------
Effective Date, the Company shall retain independent public accountants and
securities lawyers acceptable to the Underwriter. Deloitte & Touche LLP is
acceptable to the Company.
3.22 Transfer Agent. For a period of five years from the Effective Date,
--------------
the Company shall retain a transfer agent for the Units, Common Stock and
Warrants acceptable to the Underwriter.
3.23 Sale of Securities. Except in accordance with the agreements
------------------
referred to in Section 2.26, the Company agrees not to permit or cause a private
or public sale or private or public offering of any of its securities (in any
manner, including pursuant to Rule 144 under the Act) owned nominally or
beneficially by the Insiders for a period of twelve months following the
Effective Date without obtaining the prior written consent of the Underwriter.
3.24 Employment Agreement. Simultaneous with the Effective Date, the
--------------------
Company will enter into a three-year employment agreement with Mr. David Berry,
the terms of which will be satisfactory to the Underwriter.
3.25 Loans to Officers, Directors and Employees. The Company will not
------------------------------------------
make any loans to the officers, directors and employees of the Company at any
time after the execution of this agreement and before the fifth anniversary of
the date of this agreement, without the written consent of the Underwriter.
17
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4. Conditions of the Underwriter's Obligations. The obligations of the
-------------------------------------------
Underwriter to purchase and pay for the Securities, as provided herein, shall be
subject to the continuing accuracy of the representations and warranties of the
Company as of the date hereof and as of each of the Closing Date and the Option
Closing Date, if any, to the accuracy of the statements of officers of the
Company made pursuant to the provisions hereof and to the performance by the
Company of its obligations hereunder and to the following conditions:
4.1 Regulatory Matters.
------------------
4.1.1 Effectiveness of Registration Statement. The Registration
---------------------------------------
Statement has been declared effective on the date of this Agreement and, at each
of the Closing Date and the Option Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for the purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Graubard Mollen & Miller, counsel to the Underwriter.
4.1.2 NASD Clearance. By the Effective Date, the Underwriter shall
--------------
have received clearance from the NASD as to the amount of compensation allowable
or payable to the Underwriter as described in the Registration Statement.
4.1.3 No Blue Sky Stop Orders. No order suspending the sale of the
-----------------------
Securities in any jurisdiction designated by you pursuant to Section 3.3 hereof
shall have been issued on either on the Closing Date or the Option Closing Date,
and no proceedings for that purpose shall have been instituted or shall be
contemplated.
4.2 Company Counsel Matters.
-----------------------
4.2.1 Effective Date Opinion of Counsel. On the Effective Date, the
---------------------------------
Underwriter shall have received the favorable opinion of Company Counsel, dated
the Effective Date, addressed to the Underwriter and in form and substance
satisfactory to Graubard Mollen & Miller, counsel to the Underwriter, to the
effect that:
(i) The Company has been duly organized and is validly
existing as a corporation and is in good standing under the laws of its state of
incorporation. The Company is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction in which its ownership or leasing
of properties or the character of its operations requires such qualification or
licensing, except where the failure to qualify would not have a material adverse
effect on the Company.
(ii) The Company has all requisite corporate power and
authority, and has all necessary authorizations, approvals, orders, licenses,
certificates and permits of and from all governmental or regulatory officials
and bodies to own or lease its properties and conduct its business as described
in the Prospectus, and the Company is and has been doing business in compliance
with all such authorizations, approvals, orders, licenses, certificates and
permits and all federal, state and local laws, rules and regulations. The
Company has all corporate power and authority to enter into this Agreement, the
Warrant Agreement and the Underwriter's Purchase Option and to carry out the
provisions and conditions hereof and thereof, and all consents, authorizations,
approvals and orders required in connection herewith and therewith have been
18
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obtained. No consents, approvals, authorizations or orders of, and no filing
with any court or governmental agency or body (other than such as may be
required under the Act and applicable Blue Sky laws), is required for the valid
authorization, issuance, sale and delivery of the Securities, and the
consummation of the transactions and agreements contemplated by this Agreement,
the Warrant Agreement and the Underwriter's Purchase Option, and as contemplated
by the Prospectus or if so required, all such authorizations, approvals,
consents, orders, registrations, licenses and permits have been duly obtained
and are in full force and effect and have been disclosed to the Underwriter.
(iii) All issued and outstanding securities of the Company have been
duly authorized and validly issued and are fully paid and non-assessable; the
holders thereof have no rights of rescission with respect thereto, and are not
subject to personal liability by reason of being such holders; and none of such
securities were issued in violation of the preemptive rights of any holders of
any security of the Company or similar contractual rights granted by the
Company. The outstanding options and warrants to purchase shares of Common
Stock constitute the valid and binding obligations of the Company, enforceable
in accordance with their terms, except (a) as such enforceability may be limited
by bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (b) as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and (c) that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought. The offers and sales by the
Company of the outstanding Common Stock and options and warrants to purchase
shares of Common Stock were at all relevant times either registered under the
Act and the applicable state securities or Blue Sky Laws or exempt from such
registration requirements. The authorized and outstanding capital stock of the
Company is as set forth under the caption "Capitalization" in the Prospectus.
(iv) The Securities have been duly authorized and, when issued and
paid for, will be validly issued, fully paid and non-assessable; the holders
thereof are not and will not be subject to personal liability by reason of being
such holders. The Securities are not and will not be subject to the preemptive
rights of any holders of any security of the Company or, to the best of such
counsel's knowledge after due inquiry, similar contractual rights granted by the
Company. All corporate action required to be taken for the authorization,
issuance and sale of the Securities has been duly and validly taken. When
issued, the Underwriter's Purchase Option, the Underwriter's Warrants and the
Warrants will constitute valid and binding obligations of the Company to issue
and sell, upon exercise thereof and payment therefor, the number and type of
securities of the Company called for thereby and such Warrants, the
Underwriter's Purchase Option, and the Underwriter's Warrants, when issued, in
each case, will be enforceable against the Company in accordance with their
respective terms, except (a) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (b) as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and (c) that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought. The certificates representing the
Securities are in due and proper form.
(v) To the best of such counsel's knowledge, after due inquiry,
except as set forth in the Prospectus, no holders of any securities of the
Company or of any options, warrants or securities of the Company exercisable for
or convertible or exchangeable into
19
<PAGE>
securities of the Company have the right to require the Company to register any
such securities of the Company under the Act or to include any such securities
in a registration statement to be filed by the Company.
(vi) To the best of such counsel's knowledge, after due inquiry, the
Units, the shares of Common Stock and the Warrants are eligible for quotation on
the Nasdaq SmallCap Market and have been approved for listing on the BSE.
(vii) This Agreement, the Warrant Agreement and the Underwriter's
Purchase Option have each been duly and validly authorized and, when executed
and delivered by the Company, will constitute valid and binding obligations of
the Company, enforceable against the Company in accordance with their respective
terms, except (a) as such enforceability may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally, (b) as enforceability of any indemnification provisions may be
limited under the federal and state securities laws, and (c) that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
(viii) The execution, delivery and performance by the Company of this
Agreement, the Underwriter's Purchase Option and the Warrant Agreement, the
issuance and sale of the Securities, the consummation of the transactions
contemplated hereby and thereby and the compliance by the Company with the terms
and provisions hereof and thereof, do not and will not, with or without the
giving of notice or the lapse of time, or both, (a) conflict with, or result in
a breach of, any of the terms or provisions of, or constitute a default under,
or result in the creation or modification of any lien, security interest, charge
or encumbrance upon any of the properties or assets of the Company pursuant to
the terms of, any material mortgage, deed of trust, note, indenture, loan,
contract, commitment or other material agreement or instrument, to which the
Company is a party or by which the Company or any of its properties or assets
may be bound, (b) result in any violation of the provisions of the Certificate
of Incorporation or the By-Laws of the Company, (c) violate any statute or any
judgment, order or decree, rule or regulation applicable to the Company of any
court, domestic or foreign, or of any federal, state or other regulatory
authority or other governmental body having jurisdiction over the Company, its
properties or assets, or (d) have a material adverse effect on any permit,
certification, registration, approval, consent, license or franchise of the
Company.
(ix) The Registration Statement, each Preliminary Prospectus and the
Prospectus and any post-effective amendments or supplements thereto (other than
the financial statements included therein, as to which no opinion need be
rendered) comply as to form in all material respects with the requirements of
the Act and Regulations. The Securities and all other securities issued or
issuable by the Company conform in all respects to the description thereof
contained in the Registration Statement and the Prospectus. The statements in
the Prospectus under "Available Information," "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Dividend Policy," "Price Range of Securities,"
"Managements' Discussion and Analysis of Financial Condition and Results of
Operations," "Business and Properties," "Management," "Certain Transactions,"
"Principal Stockholders," "Description of Securities" and "Shares Eligible for
Future Sale" have been reviewed by such counsel, and insofar as they refer to
statements of law, descriptions of statutes, licenses, rules or regulations or
legal conclusions are correct in all material respects; provided, however, such
counsel has not reviewed the statements about regulatory matters, permits and
licenses and environmental matters governed by the laws of the State of
Louisiana
20
<PAGE>
in the section "Risk Factors" and in the section "Business and Properties"
entitled "Regulation." No statute or regulation or legal or governmental
proceeding required to be described in the Prospectus is not described as
required, nor are any contracts or documents of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement not so described or filed as required.
(x) Counsel has participated in conferences with officers and other
representatives of the Company, representatives of the independent public
accountants for the Company and representatives of the Underwriter at which the
contents of the Registration Statement, the Prospectus and related matters were
discussed and although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and Prospectus (except as otherwise set
forth in this opinion), no facts have come to the attention of such counsel
which lead them to believe that either the Registration Statement or the
Prospectus nor any amendment or supplement thereto, as of the date of such
opinion, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no opinion with
respect to the financial statements and schedules and other financial and
statistical data included in the Registration Statement or Prospectus).
(xi) The Registration Statement is effective under the Act, and, to
the best of such counsel's knowledge, no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the Act or
applicable state securities laws.
(xii) Except as described in the Prospectus, the Company has good and
marketable title to, or valid and enforceable leasehold estates in, all items of
real and personal property (tangible and intangible) stated in the Prospectus to
be owned or leased by it, free and clear of all liens, encumbrances, claims,
security interests, defects and restrictions of any material nature whatsoever,
other than those referred to in the Prospectus and liens for taxes not yet due
and payable.
(xiii) To the best of Counsel's knowledge, except as described in the
Prospectus, no default exists or will exist in the due performance and
observance of any term, covenant or condition of any material license, contract,
indenture, mortgage, deed of trust, note, loan or credit agreement, or any other
material agreement or instrument evidencing an obligation for borrowed money, or
any other material agreement or instrument to which the Company is a party or by
which the Company may be bound or to which any of the properties or assets of
the Company is subject, except where such default, singly or in the aggregate,
will not have a material effect on the business or financial condition of the
Company. To the best of Counsel's knowledge, the Company is not in violation of
any term or provision of its Certificate of Incorporation or By-Laws or of any
franchise, license, permit, applicable law, rule, regulation, judgment or decree
of any governmental agency or court, domestic or foreign, having jurisdiction
over the Company or any of its properties or business, except as described in
the Prospectus.
(xiv) To the best of such counsel's knowledge, after due inquiry, the
Company owns or possesses, free and clear of all liens or encumbrances and
rights thereto or therein by third parties, other than as described in the
Prospectus, the requisite licenses or other rights to use all Intangibles and
other rights necessary to conduct its business (including, without
21
<PAGE>
limitation, any such licenses or rights described in the Prospectus as being
licensed to or owned or possessed by the Company), and there is no claim or
action by any person pertaining to, or proceeding, pending or to the best of
such counsel's knowledge after due inquiry threatened, which challenges the
exclusive rights of the Company with respect to any Intangibles used in the
conduct of the its business (including without limitation any such licenses or
rights described in the Prospectus as being owned or possessed by the Company);
to the best of such counsel's knowledge after due inquiry, the Company's current
products, services and processes do not infringe on any Intangibles held by
third parties except as discussed in the Prospectus; and the Company's
Intangibles which have been registered in the United States Patent and Trademark
Office have been fully maintained and are in full force and effect.
(xv) To the best of such counsel's knowledge, after due inquiry,
except as described in the Prospectus, the Company does not own an interest in
any corporation, partnership, joint venture, trust or other business entity.
(xvi) To the best of such counsel's knowledge, after due inquiry,
except as set forth in the Prospectus, there is no action, suit or proceeding
before or by any court of governmental agency or body, domestic or foreign, now
pending, or threatened against the Company, which might result in any material
and adverse change in the condition (financial or otherwise), business or
prospects of the Company, or might materially and adversely affect the
properties or assets thereof.
(xvii) To the best of such counsel's knowledge, after due inquiry,
neither the Company nor its officers, employees, agents or other persons acting
on their behalf has, directly or indirectly, given or agreed to give any money,
gift or similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer or supplier, any employee or agent
of a customer or supplier, any official or employee of any governmental agency
or body (domestic or foreign), any political party or candidate for office
(domestic or foreign) or any other person who was, is or may be in a position to
help or hinder the business of the Company (or assist it in connection with any
actual or proposed transaction) which (a) might subject the Company to any
damage or penalty in any civil, criminal or governmental litigation or
proceeding, (b) if not given in the past, might have had a materially adverse
effect on the assets, business or operations of the Company as reflected in the
financial statements contained in the Registration Statement or (c) if not
continued in the future, might adversely affect the assets, business, operations
or prospects of the Company. The Company's internal accounting controls and
procedures are sufficient to cause the Company to comply with the Foreign
Corrupt Practices Act of 1977, as amended.
(xviii) To the best of such counsel's knowledge, after due inquiry,
except as described in the Prospectus, there are no claims, payments, issuances,
arrangements or understandings for services in the nature of a finder's or
origination fee with respect to the sale of the Securities hereunder or
financial consulting arrangements or any other arrangements, agreements,
understandings, payments or issuances that may affect the Underwriter's
compensation, as determined by the NASD.
4.2.2 Other Counsel's Opinions. On the Effective Date, the
------------------------
Underwriter shall have received the opinion of __________________________
("Other Counsel") in form and substance satisfactory to Graubard Mollen &
Miller, counsel to the Underwriter, relating to regulatory matters, permits and
licenses and environmental matters governed by the laws of the State of
Louisiana.
22
<PAGE>
To the extent opined upon by Other Counsel, the opinion of Company Counsel shall
not be relied upon. Such opinion shall include, among other things, statements
to the effect that:
(i) Other Counsel is not aware of any federal, state or
local statute, rule or regulation relating to oil and gas production, operation,
marketing or transportation matters or environmental matters which it considers
to be material to the operations or financial condition of the Company in the
State of Louisiana other than those set forth in the Prospectus (collectively,
the "Applicable Laws and Regulations"). Other Counsel is not aware of any state
of facts which would lead it to believe that the Company is not in material
compliance with the Applicable Laws and Regulations.
(ii) Other Counsel has examined and passed upon statements
concerning the Applicable Laws and Regulations in the following sections of the
Prospectus: the section "Risk Factors" and the section in "Business and
Properties" entitled "Regulation." Such sections, insofar as they refer to the
Applicable Laws and Regulations, are accurate and complete and do not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements contained therein, in light of the
circumstances in which they were made, not misleading.
4.2.3 Interpretation. Unless the context clearly indicates
--------------
otherwise, the term "Company" as used in Sections 4.2.1 and 4.2.2 shall include
each subsidiary of the Company. The opinion of counsel for the Company and
Other Counsel's Opinion and any opinion relied upon by such counsel for the
Company shall include a statement to the effect that it may be relied upon by
counsel for the Underwriter in its opinion delivered to the Underwriter.
4.2.4 Closing Date and Option Closing Date Opinion of Counsel. On
-------------------------------------------------------
each of the Closing Date and the Option Closing Date, if any, the Underwriter
shall have received the favorable opinion of Company Counsel and the Other
Counsel, dated the Closing Date or the Option Closing Date, as the case may be,
addressed to the Underwriter and in the forms and substance satisfactory to
Graubard Mollen & Miller, counsel to the Underwriter, confirming as of the
Closing Date and, if applicable, the Option Closing Date, the statements made by
such counsel in their opinions delivered on the Effective Date.
4.2.5 Reliance. In rendering such opinions, such counsel may rely
--------
(i) as to matters involving the application of laws other than the laws of the
United States and jurisdictions in which they are admitted, to the extent such
counsel deems proper and to the extent specified in such opinion, if at all,
upon an opinion or opinions (in form and substance reasonably satisfactory to
the Underwriter's counsel) of other counsel reasonably acceptable to the
Underwriter's counsel, familiar with the applicable laws, and (ii) as to matters
of fact, to the extent they deem proper, on certificates or other written
statements of officers of departments of various jurisdiction having custody of
documents respecting the corporate existence or good standing of the Company,
provided that copies of any such statements or certificates shall be delivered
to the Underwriter's counsel if requested. Each opinion of counsel for the
Company and Other Counsel shall include a statement to the effect that it may be
relied upon by counsel for the Underwriter in its opinion delivered to the
Underwriter.
4.3 Cold Comfort Letter. At the time this Agreement is executed and at
-------------------
each of the Closing Date and the Option Closing Date, if any, you shall have
received a letter, addressed to the Underwriter and in form and substance
satisfactory in all respects (including the non-material
23
<PAGE>
nature of the changes or decreases, if any, referred to in clause (iii) below)
to you and to Graubard Mollen & Miller, counsel for the Underwriter, from
Deloitte & Touche LLP dated, respectively, as of the date of this Agreement and
as of the Closing Date and the Option Closing Date, if any:
(i) confirming that they are independent accountants with respect to
the Company within the meaning of the Act and the applicable Regulations;
(ii) stating that in their opinion the financial statements of the
Company included in the Registration Statement and Prospectus comply as to form
in all material respects with the applicable accounting requirements of the Act
and the published Regulations thereunder;
(iii) stating that, based on the performance of procedures specified
by the American Institute of Certified Public Accountants for a review of
interim financial statements as described in Statement of Accounting Standards
No. 71, Interim Financial Information, a reading of the latest available
unaudited interim financial statements of the Company (with an indication of the
date of the latest available unaudited interim financial statements), a reading
of the latest available minutes of the stockholders and board of directors and
the various committees of the board of directors, consultations with officers
and other employees of the Company responsible for financial and accounting
matters and other specified procedures and inquiries, nothing has come to their
attention which would lead them to believe that (a) the unaudited financial
statements of the Company included in the Registration Statement do not comply
as to form in all material respects with the applicable accounting requirements
of the Act and the Regulations or are not fairly presented in conformity with
generally accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements of the Company included
in the Registration Statement, (b) at a date not later than five days prior to
the Effective Date, Closing Date or Option Closing Date, as the case may be,
there was any change in the capital stock or long-term debt of the Company, or
any decrease in the stockholders' equity of the Company as compared with amounts
shown in the March 31, 1996 balance sheet included in the Registration
Statement, other than as set forth in or contemplated by the Registration
Statement, or, if there was any decrease, setting forth the amount of such
decrease, and (c) during the period from March 31, 1996 to a specified date not
later than five days prior to the Effective Date, Closing Date or Option Closing
Date, as the case may be, there was any decrease in revenues, net earnings or
net earnings per share of Common Stock, in each case as compared with the
corresponding period in the preceding year and as compared with the
corresponding period in the preceding quarter, other than as set forth in or
contemplated by the Registration Statement, or, if there was any such decrease,
setting forth the amount of such decrease;
(iv) setting forth, at a date not later than five days prior to the
Effective Date, the amount of liabilities of the Company (including a break-down
of commercial papers and notes payable to banks);
(v) stating that they have compared specific dollar amounts, numbers
of shares, percentages of revenues and earnings, statements and other financial
information pertaining to the Company set forth in the Prospectus in each case
to the extent that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records and work sheets,
of the Company and excluding any questions requiring an interpretation by legal
counsel with the results obtained from the application of specified readings,
inquiries and other appropriate procedures (which procedures do not constitute
an examination in accordance with generally accepted auditing standards) set
forth in the letter and found them to be in agreement;
24
<PAGE>
(vi) stating that they have not during the immediately preceding five
year period brought to the attention of the Company's management any reportable
condition related to internal structure, design or operation as defined in the
Statement on Auditing Standards No. 60 --"Communication of Internal Control
Structure Related Matters Noted in an Audit," in the Company's internal
controls; and
(vii) statements as to such other matters incident to the transaction
contemplated hereby as you may reasonably request.
4.4 Officers' Certificates.
----------------------
4.4.1 Officers' Certificate. At each of the Closing Date and the
---------------------
Option Closing Date, if any, the Underwriter shall have received a certificate
of the Company signed by the Chairman of the Board or the President and the
Secretary of the Company, dated the Closing Date or the Option Closing Date, as
the case may be, respectively, to the effect that the Company has performed all
covenants and complied with all conditions required by this Agreement to be
performed or complied with by the Company prior to and as of the Closing Date,
or the Option Closing Date, as the case may be, and that the conditions set
forth in Section 4.5 hereof have been satisfied as of such date and that, as of
Closing Date and the Option Closing Date, as the case may be, the
representations and warranties of the Company set forth in Section 2 hereof are
true and correct. In addition, the Underwriter will have received such other
and further certificates of officers of the Company as the Underwriter may
reasonably request.
4.4.2 Secretary's Certificate. At each of the Closing Date and the
-----------------------
Option Closing Date, if any, the Underwriter shall have received a certificate
of the Company signed by the Secretary of the Company, dated the Closing Date or
the Option Date, as the case may be, respectively, certifying (i) that the By-
Laws and Certificate of Incorporation, as amended, of the Company are true and
complete, have not been modified and are in full force and effect, (ii) that the
resolutions relating to the public offering contemplated by this Agreement are
in full force and effect and have not been modified, (iii) all correspondence
between the Company or its counsel and the Commission, (iv) all correspondence
between the Company or its counsel and the NASD concerning inclusion on Nasdaq,
(v) all correspondence between the Company or its counsel and the BSE concerning
listing on the BSE, and (vi) as to the incumbency of the officers of the
Company. The documents referred to in such certificate shall be attached to
such certificate.
4.5 No Material Changes. Prior to and on each of the Closing Date and the
-------------------
Option Closing Date, if any, (i) there shall have been no material adverse
change or development involving a prospective material change in the condition
or prospects or the business activities, financial or otherwise, of the Company
from the latest dates as of which such condition is set forth in the
Registration Statement and Prospectus, (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the Company
from the latest date as of which the financial condition of the Company is set
forth in the Registration Statement and Prospectus which is materially adverse
to the Company, taken as a whole, (iii) the Company shall not be in default
under any provision of any instrument relating to any outstanding indebtedness
which default would have a material adverse effect on the Company, (iv) no
material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus, (v)
no action suit or proceeding, at law or in equity, shall have been pending or
threatened against the Company or affecting any of its property or business
before or by any court or governmental commission, board or other administrative
agency wherein an unfavorable
25
<PAGE>
decision, ruling or finding may materially adversely affect the business,
operations, prospects or financial condition or income of the Company, except as
set forth in the Registration Statement and Prospectus, (vi) no stop order shall
have been issued under the Act and no proceedings therefor shall have been
initiated or threatened by the Commission, and (vii) the Registration Statement
and the Prospectus and any amendments or supplements thereto contain all
material statements which are required to be stated therein in accordance with
the Act and the Regulations and conform in all material respects to the
requirements of the Act and the Regulations, and neither the Registration
Statement nor the Prospectus nor any amendment or supplement thereto contains
any untrue statement of a material fact or omits to state any 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. As used
in this Section, the term "Company" shall mean the Company and its subsidiaries
taken as a whole.
4.6 Delivery of Agreements. The Company has delivered to the Underwriter
----------------------
executed copies of the Underwriter's Purchase Option.
4.7 Opinion of Counsel for the Underwriter. All proceedings taken in
--------------------------------------
connection with the authorization, issuance or sale of the Securities as herein
contemplated shall be reasonably satisfactory in form and substance to you and
to Graubard Mollen & Miller, counsel to the Underwriter, and you shall have
received from such counsel a favorable opinion, dated the Closing Date and the
Option Closing Date, if any, with respect to such of these proceedings as you
may reasonably require. On or prior to the Effective Date, the Closing Date and
the Option Closing Date, as the case may be, counsel for the Underwriter shall
have been furnished such documents, certificates and opinions as they may
reasonably require for the purpose of enabling them to review or pass upon the
matters referred to in this Section 4.7, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions herein contained.
5. Indemnification.
---------------
5.1 Indemnification of the Underwriter.
----------------------------------
5.1.1 General. Subject to the conditions set forth below, the
-------
Company agrees to indemnify and hold harmless the Underwriter, its directors,
officers, agents and employees and each person, if any, who controls the
Underwriter ("controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, against any and all loss, liability,
claim, damage and expense whatsoever (including but not limited to any and all
legal or other expenses reasonably incurred in investigating, preparing or
defending against any litigation, or any claim whatsoever commenced or
threatened, whether arising out of any action between the Underwriter and the
Company or between the Underwriter and any third-party or otherwise) to which
they or any of them may become subject under the Act, the Exchange Act or any
other statute or at common law or otherwise or under the laws of foreign
countries, arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in (i) any Preliminary Prospectus, the
Registration Statement or the Prospectus (as from time to time each may be
amended and supplemented); (ii) in any post-effective amendment or amendments or
any new registration statement and prospectus in which is included securities of
the Company issued or issuable upon exercise of the Underwriter's Purchase
Option; or (iii) any application or other document or written communication (in
this Section 5 collectively called "application") executed by the Company or
based upon written information furnished by the Company in any jurisdiction in
26
<PAGE>
order to qualify the Securities under the securities laws thereof or filed with
the Commission, any state securities commission or agency, Nasdaq or any
securities exchange; or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
unless such statement or omission was made in reliance upon, and in strict
conformity with, written information furnished to the Company with respect to
the Underwriter by or on behalf of the Underwriter expressly for use in any
Preliminary Prospectus, the Registration Statement or Prospectus, or any
amendment or supplement thereof, or in any application, as the case may be. The
Company agrees promptly to notify the Underwriter of the commencement of any
litigation or proceedings against the Company or any of its officers, directors
or controlling persons in connection with the issue and sale of the Securities
or in connection with the Registration Statement or Prospectus.
5.1.2 Procedure. If any action is brought against the Underwriter or
---------
controlling person in respect of which indemnity may be sought against the
Company pursuant to Section 5.1.1, the Underwriter shall promptly notify the
Company in writing of the institution of such action and the Company shall
assume the defense of such action, including the employment and fees of counsel
(subject to the approval of the Underwriter) and payment of actual expenses.
The Underwriter or controlling person shall have the right to employ its or
their own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of the Underwriter or such controlling person unless (i)
the employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action, or (ii) the Company shall
not have employed counsel to have charge of the defense of such action, or (iii)
such indemnified party or parties shall have reasonably concluded that there may
be defenses available to it or them which are different from or additional to
those available to the Company (in which case the Company shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events the fees and expenses of not more than one
additional firm of attorneys selected by the Underwriter and/or controlling
person shall be borne by the Company. Notwithstanding anything to the contrary
contained herein, if the Underwriter or controlling person shall assume the
defense of such action as provided above, the Company shall have the right to
approve the terms of any settlement of such action which approval shall not be
unreasonably withheld.
5.2 Indemnification of the Company. The Underwriter agrees to indemnify
------------------------------
and hold harmless the Company against any and all loss, liability, claim, damage
and expense described in the foregoing indemnity from the Company to the
Underwriter, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions made in any Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment or
supplement thereto or in any application in reliance upon, and in strict
conformity with, written information furnished to the Company with respect to
the Underwriter by or on behalf of the Underwriter expressly for use in such
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or in any such application. In case any action
shall be brought against the Company or any other person so indemnified based on
any Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or any application, and in respect of which
indemnity may be sought against the Underwriter, the Underwriter shall have the
rights and duties given to the Company, and the Company and each other person so
indemnified shall have the rights and duties given to the Underwriter by the
provisions of Section 5.1.2.
27
<PAGE>
5.3 Contribution.
------------
5.3.1 Contribution Rights. In order to provide for just and
-------------------
equitable contribution under the Act in any case in which (i) any person
entitled to indemnification under this Section 5 makes claim for indemnification
pursuant hereto but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 5 provides for indemnification in such case, or (ii) contribution
under the Act, the Exchange Act or otherwise may be required on the part of any
such person in circumstances for which indemnification is provided under this
Section 5, then, and in each such case, the Company and the Underwriter shall
contribute to the aggregate losses, liabilities, claims, damages and expenses of
the nature contemplated by said indemnity agreement incurred by the Company and
the Underwriter, as incurred, in such proportions that the Underwriter is
responsible for that portion represented by the percentage that the underwriting
discount appearing on the cover page of the Prospectus bears to the initial
offering price appearing thereon and the Company is responsible for the balance;
provided, that, no person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. Notwithstanding
the provisions of this Section 5.3, the Underwriter shall not be required to
contribute any amount in excess of the amount by which the total price at which
the Public Securities underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which the Underwriter
has otherwise been required to pay in respect of such losses, liabilities,
claims, damages and expenses. For purposes of this Section, each director,
officer and employee of the Underwriter, and each person, if any, who controls
the Underwriter within the meaning of Section 15 of the Act shall have the same
rights to contribution as the Underwriter.
5.3.2 Contribution Procedure. Within fifteen days after receipt by
----------------------
any party to this Agreement (or its representative) of notice of the
commencement of any action, suit or proceeding, such party will, if a claim for
contribution in respect thereof is to be made against another party
("contributing party"), notify the contributing party of the commencement
thereof, but the omission to so notify the contributing party will not relieve
it from any liability which it may have to any other party other than for
contribution hereunder. In case any such action, suit or proceeding is brought
against any party, and such party notifies a contributing party or its
representative of the commencement thereof within the aforesaid fifteen days,
the contributing party will be entitled to participate therein with the
notifying party and any other contributing party similarly notified. Any such
contributing party shall not be liable to any party seeking contribution on
account of any settlement of any claim, action or proceeding which was effected
by such party seeking contribution on account of any settlement of any claim,
action or proceeding effected by such party seeking contribution without the
written consent of such contributing party. The contribution provisions
contained in this Section are intended to supersede, to the extent permitted by
law, any right to contribution under the Act, the Exchange Act or otherwise
available.
6. [Intentionally Omitted].
-----------------------
7. Additional Covenants.
--------------------
7.1 Board Designee. For a period of not less than five years from the
--------------
Effective Date, the Company will recommend and use its best efforts to elect a
designee of the Underwriter, at the option of the Underwriter, either as a
member of or a non-voting advisor to the Board of
28
<PAGE>
Directors of the Company. Such designee, if elected or appointed, shall attend
meetings of the Board and receive no more or less compensation than is paid to
other non-management directors of the Company and shall be entitled to receive
reimbursement for all reasonable costs incurred in attending such meetings,
including, but not limited to, food, lodging and transportation. To the extent
permitted by law, the Company will agree to indemnify the Underwriter and its
designee for the actions of such designee as a director of the Company. In the
event the Company maintains a liability insurance policy affording coverage for
the acts of its officers and directors, it will, if possible, include each of
the Underwriter and its designee as an insured under such policy. If the
Underwriter does not exercise its option to designate a member of the Company's
Board of Directors, the Underwriter shall nevertheless have the right to send a
representative (who need not be the same individual from meeting to meeting) to
observe each meeting of the Board of Directors. The Company agrees to give the
Underwriter written notice of each such meeting and to provide the Underwriter
with an agenda and minutes of the meeting no later than it gives such notice and
provides such items to the other directors.
7.2 Form S-8 or any Similar Form. The Company shall not file a
----------------------------
Registration Statement on Form S-8 (or any similar or successor form) for the
registration of shares of Common Stock underlying stock options for a period of
one year from the Effective Date without the Underwriter's written consent.
7.3 Compensation and Other Arrangements. The Company hereby agrees that
-----------------------------------
for a period of three years from the Effective Date, all compensation and other
arrangements between the Company and its officers, directors and affiliates
shall be approved by the Underwriter.
8. Representations and Agreements to Survive Delivery. Except as the context
--------------------------------------------------
otherwise requires, all representations, warranties and agreements contained in
this Agreement shall be deemed to be representations, warranties and agreements
at the Closing Dates and such representations, warranties and agreements of the
Underwriter and Company, including the indemnity agreements contained in Section
5 hereof, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Underwriter, the Company or any
controlling person, and shall survive termination of this Agreement or the
issuance and delivery of the Securities to the Underwriter until the earlier of
the expiration of any applicable statute of limitations and the seventh
anniversary of the later of the Closing Date or the Option Closing Date, if any,
at which time the representations, warranties and agreements shall terminate and
be of no further force and effect.
9. Effective Date of This Agreement and Termination Thereof.
--------------------------------------------------------
9.1 Effective Date. This Agreement shall become effective on the
--------------
Effective Date at the time that the Registration Statement is declared
effective.
9.2 Termination. You shall have the right to terminate this Agreement at
-----------
any time prior to any Closing Date, (i) if any domestic or international event
or act or occurrence has materially disrupted, or in your opinion will in the
immediate future materially disrupt, general securities markets in the United
States; or (ii) if trading on the New York Stock Exchange, the American Stock
Exchange, The Boston Stock Exchange or in the over-the-counter market shall have
been suspended, or minimum or maximum prices for trading shall have been fixed,
or maximum ranges for prices for securities shall have been fixed, or maximum
ranges for prices for securities shall have been required on the over-the-
counter market by the NASD or by order of the Commission
29
<PAGE>
or any other government authority having jurisdiction, or (iii) if the United
States shall have become involved in a war or major hostilities, or (iv) if a
banking moratorium has been declared by a New York State or federal authority,
or (v) if a moratorium on foreign exchange trading has been declared which
materially adversely impacts the United States securities market, or (vi) if the
Company shall have sustained a material loss by fire, flood, accident,
hurricane, earthquake, theft, sabotage or other calamity or malicious act which,
whether or not such loss shall have been insured, will, in your opinion, make it
inadvisable to proceed with the delivery of the Securities, or (vii) if David
Berry shall no longer serve the Company in his present capacity, or (viii) if
the Company has breached any of its representations, warranties or obligations
hereunder, or (ix) if the Underwriter shall have become aware after the date
hereof of such a material adverse change in the condition (financial or
otherwise), business, or prospects of the Company, or such adverse material
change in general market conditions as in the Underwriter's judgment would make
it impracticable to proceed with the offering, sale and/or delivery of the
Securities or to enforce contracts made by the Underwriter for the sale of the
Securities.
9.3 Notice. If you elect to prevent this Agreement from becoming
------
effective or to terminate this Agreement as provided in this Section 9, the
Company shall be notified on the same day as such election is made by you by
telephone or telecopy, confirmed by letter.
9.4 Expenses. In the event that this Agreement shall not be carried out
--------
for any reason whatsoever, within the time specified herein or any extensions
thereof pursuant to the terms herein, the obligations of the Company to pay the
expenses related to the transactions contemplated herein shall be governed by
Section 3.15 hereof.
9.5 Indemnification. Notwithstanding any contrary provision contained in
---------------
this Agreement, any election hereunder or any termination of this Agreement, and
whether or not this Agreement is otherwise carried out, the provisions of
Section 5 shall not be in any way affected by such election or termination or
failure to carry out the terms of this Agreement or any part hereof.
10. Miscellaneous.
-------------
10.1 Notices. All communications hereunder, except as herein otherwise
-------
specifically provided, shall be in writing and shall be mailed, delivered or
telecopied and confirmed
If to the Underwriter:
Gaines, Berland Inc.
950 Third Avenue
New York, New York 10022
Attention: Joseph Berland
Copy to:
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016-2097
Attention: David Alan Miller, Esq.
30
<PAGE>
If to the Company:
Frontier Natural Gas Corporation
One Benham Plaza
9400 North Broadway
Oklahoma City, Oklahoma 73114-7401
Attention: David W. Berry
Copy to:
Day Edwards Federman Propester
& Christensen, P.C.
210 Park Avenue, Suite 2900
Oklahoma City, Oklahoma 73102
Attention: Jeanette C. Timmons, Esq.
10.2 Headings. The headings contained herein are for the sole purpose of
--------
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Agreement.
10.3 Amendment. This Agreement may only be amended by a written
---------
instrument executed by each of the parties hereto.
10.4 Entire Agreement. This Agreement (together with the other agreements
----------------
and documents being delivered pursuant to or in connection with this Agreement),
constitute the entire agreement of the parties hereto with respect to the
subject matter hereof, and supersedes all prior agreements and understandings of
the parties, oral and written, with respect to the subject matter hereof.
10.5 Binding Effect. This Agreement shall inure solely to the benefit of
--------------
and shall be binding upon, the Underwriter, the Company and the controlling
persons, directors and officers referred to in Section 5 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained.
10.6 Governing Law; Jurisdiction. This Agreement shall be governed by and
---------------------------
construed and enforced in accordance with the law of the State of New York,
without giving effect to conflicts of law. The Company hereby agrees that any
action, proceeding or claim against it arising out of, relating in any way to
this Agreement shall be brought and enforced in the courts of the State of New
York or the United States District Court for the Southern District of New York,
and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company hereby waives any objection to such exclusive
jurisdiction and that such courts represent an inconvenient forum. Any such
process or summons to be served upon the Company may be served by transmitting a
copy thereof by registered or certified mail, return receipt requested, postage
prepaid, addressed to it at the address set forth in Section 10 hereof. Such
mailing shall be deemed personal service and shall be legal and binding upon the
Company in any action, proceeding or claim. The Company agrees that the
prevailing party(ies) in any such action shall be entitled to recover from the
other party(ies) all of its reasonable attorneys' fees and expenses relating to
such action or proceeding and/or incurred in connection with the preparation
therefor.
31
<PAGE>
10.7 Execution in Counterparts. This Agreement may be executed in one or
-------------------------
more counterparts, and by the different parties hereto in separate counterparts,
each of which shall be deemed to be an original, but all of which taken together
shall constitute one and the same agreement, and shall become effective when one
or more counterparts has been signed by each of the parties hereto and delivered
to each of the other parties hereto.
10.8 Waiver, Etc. The failure of any of the parties hereto to at any time
------------
enforce any of the provisions of this Agreement shall not be deemed or construed
to be a waiver of any such provision, nor to in any way effect the validity of
this Agreement or any provision hereof or the right of any of the parties hereto
to thereafter enforce each and every provision of this Agreement. No waiver of
any breach, non-compliance or non-fulfillment of any of the provisions of this
Agreement shall be effective unless set forth in a written instrument executed
by the party or parties against whom or which enforcement of such waiver is
sought; and no waiver of any such breach, non-compliance or non-fulfillment
shall be construed or deemed to be a waiver of any other or subsequent breach,
non-compliance or non-fulfillment.
If the foregoing correctly sets forth the understanding between the
Underwriter and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours,
FRONTIER NATURAL GAS CORPORATION
By:
-----------------------------------
Name: David W. Berry
Title: President
Accepted as of the date
first above written.
New York, New York
GAINES, BERLAND INC.
By:
--------------------------------
Name: Joseph Berland
Title: Chairman
32
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
FRONTIER NATURAL GAS CORPORATION
TO THE SECRETARY OF STATE
OF THE STATE OF OKLAHOMA:
Frontier Natural Gas Corporation, an Oklahoma corporation (the
"Corporation"), for the purpose of adopting an Amended and Restated Certificate
of Incorporation (the "Amended Certificate") pursuant to Section 1080 of the
Oklahoma General Corporation Act (the "Act"), hereby certifies:
1. The name of the Corporation is "Frontier Natural Gas Corporation."
2. The Certificate of Incorporation of this Corporation was filed with the
Oklahoma Secretary of State on February 1, 1993.
3. The amendment to the Certificate of Incorporation effected by this
Certificate is: (a) to correct a typographical error in Article VII which
currently reads "The number of directors of the corporation be no less than four
(4) and no less than eight (8)..." to read "The number of directors of the
----
corporation be no less than four (4) and no more than eight (8)...."
----
4. This Amended and Restated Certificate of Incorporation restates,
integrates and further amends this Certificate of Incorporation. Pursuant to a
resolution of its Board of Directors, the annual meeting of shareholders duly
called and held upon due notice to the shareholders of the Corporation of the
aforementioned proposed Amended and Restated Certificate of Incorporation, at
which meeting the necessary number of shares of Common Stock as required by
statute and the Certificate of Incorporation was voted in favor of the Amended
and Restated Certificate of Incorporation.
5. The Certificate of Incorporation of the Corporation is hereby restated
as further amended by this Certificate, to read in full, as follows:
<PAGE>
CERTIFICATE OF INCORPORATION
OF
FRONTIER NATURAL GAS CORPORATION
ARTICLE I
Name
----
The name of this Corporation is: FRONTIER NATURAL GAS CORPORATION
ARTICLE II
Registered Agent
----------------
The address of the registered office of the Corporation in the State of
Oklahoma is One Benham Place, Suite 120, 9400 North Broadway, Oklahoma City,
Oklahoma County, Oklahoma 73114, and David B. Christofferson is the registered
agent at such address.
ARTICLE III
Duration
--------
The duration of the existence of the Corporation is perpetual.
ARTICLE IV
Purposes
--------
The objectives and purposes for which the Corporation is organized are for
any lawful act or activity for which a corporation may be organized under the
general corporation law of the State of Oklahoma, now or hereafter in effect,
and to do any of such things as fully and to the same extent as natural persons
might or could do.
ARTICLE V
Authorized Capital
------------------
The total number of shares of all classes of stock which the corporation
shall have the authority to issue is 25,000,000 shares, divided into classes
designated as follows: (i) 20,000,000
<PAGE>
shares of Common Stock, par value $.01 per share (the "Common Stock"); and (ii)
5,000,000 shares of Preferred Stock, par value $.01 per share (the "Preferred
Stock").
ARTICLE VI
Attributes of Stock
-------------------
The designations, powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, for each class of stock of the corporation
shall be as follows:
Common Stock. Each share of Common Stock shall be equal to each other
------------
share of Common Stock and, when issued, shall be fully paid and non-assessable,
and the personal property of shareholders which shall not be liable for
corporate debts. Subject to any preferential rights of the holders of Preferred
Stock, the holders of Common Stock of the Corporation shall each be entitled to
share in any dividends of the Corporation ratably, if, as, and when declared by
the Board of Directors.
Preferred Stock.
---------------
Shares of Preferred Stock may be issued from time to time in one or more
series as determined by the Board of Directors. All shares of Preferred Stock
shall be of equal rank and shall be identical, except in respect of the
particulars fixed by the Board of Directors for each series as provided herein.
All shares of any one series shall be identical in all respects with all the
other shares of such series, except that shares of any one series issued at
different times may differ as to the dates from which dividends thereon shall be
cumulative.
The Board of Directors is hereby authorized, by resolution or resolutions
to provide, out of the unissued shares of Preferred Stock not then allocated to
any series of Preferred Stock, for a series of Preferred Stock. Before any
shares of any such series are issued, the Board of Directors shall fix and
determine, and is hereby expressly empowered to fix and determine, by resolution
or resolutions, the following provisions of the shares thereof:
(i) the designation of such series and the number of shares which shall
constitute such series;
(ii) the annual dividend rate payable on shares of such series, expressed
in a dollar amount per share, and the date or dates from which such
dividends shall commence to accrue and shall be cumulative;
(iii) the price or prices at which and the terms and conditions, if any,
on which shares of such series may be redeemed;
(iv) the amounts payable upon shares of such series, in the event of the
voluntary or involuntary liquidation, distribution of assets (other than
payment of dividends), dissolution, or winding up of the affairs of the
Corporation;
<PAGE>
(v) the sinking funds or mandatory redemption provisions, if any, for the
redemption or purchase of shares of such series;
(vi) the extent of the voting powers, if any, of the shares of such series;
(vii) the terms and conditions, if any, on which shares of such series may
be converted into shares of stock of the corporation of any class or
classes; and
(viii) any other preferences and relative, participating, optional or
other special rights, and any qualifications, limitations or restrictions
of such preferences or rights, of shares of such series.
ARTICLE VII
Board of Directors
------------------
The number of directors of this Corporation shall be no less than four (4)
and no more than eight (8), and such number may be determined from time to time
under the Bylaws or upon resolution of the Board of Directors. Directors and
officers need not be shareholders. In case of vacancies in the Board of
Directors, including vacancies occurring by reason of an increase in the number
of Directors, a majority of the remaining members of the Board, even though less
than a quorum, may elect directors to fill such vacancies to hold office until
the next annual meeting of the shareholders.
The Board of Directors shall be divided into three classes, as nearly equal
in number as reasonably possible, with the term of office of the first class to
expire at the annual meeting of shareholders to be held in 1994, the term of
office of the second class to expire at the annual meeting of shareholders to be
held in 1995, and the term of office of the third class to expire at the annual
meeting of shareholders to be held in 1996. At each annual meeting of
shareholders following such initial classification and election, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of shareholders
after their election.
ARTICLE VIII
Indemnification
---------------
Any person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative (whether or not by or in the right of
the Corporation) by reason of the fact that he is or was a director, officer,
incorporator, employee, or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, incorporator, employee, or
agent of another corporation, partnership, joint venture, trust, or other
enterprise (including an employee benefit plan), shall be entitled to be
indemnified by the Corporation to the full extent then permitted by law against
expenses (including attorneys' fees), judgments, fines (including excise taxes
assessed on a person with respect to an employee benefit plan), and amounts paid
<PAGE>
in settlement incurred by him in connection with such action, suit, or
proceeding; provided, however, that the Corporation shall not indemnify any such
person in relation to matters as to which he shall be adjudged in such action,
suit or proceeding to be liable for gross negligence or willful misconduct, or
to have not acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation. Such right of
indemnification shall inure whether or not the claim asserted is based on
matters which antedate the adoption of this Article VIII. Such right of
indemnification shall continue as to a person who has ceased to be a director,
officer, incorporator, employee, or agent and shall inure to the benefit of the
heirs and personal representatives of such a person. The indemnification
provided by this Article VIII shall not be deemed exclusive of any other rights
which may be provided now or in the future under any provisions currently in
effect or hereafter adopted by the Bylaws, by any agreement, by vote of
shareholders, by resolution of disinterested directors, by provision of law, or
otherwise.
ARTICLE IX
Exculpatory Provisions
----------------------
No director of the Corporation shall be liable to the Corporation or any of
its shareholders for monetary damages for breach of fiduciary duty as a
director, provided that this provision does not eliminate the liability of the
director (i) for any breach of the director's duty of loyalty to the Corporation
or its shareholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 1053 of the Oklahoma General Corporation Act, or (iv) for any
transaction from which the director derived an improper personal benefit. For
purposes of the prior sentence, the term "damages" shall, to the extent
permitted by law, include without limitation, any judgment, fine, amount paid in
settlement, penalty, punitive damages, excise or other tax assessed with respect
to an employee benefit plan, or expense of any nature (including, without
limitation, counsel fees and disbursements). Each person who serves as a
director of the Corporation while this Article IX is in effect shall be deemed
to be doing so in reliance on the provisions of this Article IX, and neither the
amendment or repeal of this Article IX, nor the adoption of any provision of
this Certificate of Incorporation inconsistent with this Article IX, shall apply
to or have in effect on the liability or alleged liability of any director or
the Corporation for, arising out of, based upon, or in connection with any acts
or omissions or such director occurring prior to such amendment, repeal, or
adoption of an inconsistent provision. The provisions of this Article IX are
cumulative and shall be in addition to and independent of any and all other
limitations on or eliminations of the liabilities of directors of the
Corporation, as such, whether such limitations or eliminations arise under or
are created by any law, rule, regulation, bylaw, agreement, vote of shareholders
or disinterested directors, or otherwise.
If the Oklahoma General Corporation Act is amended to further limit or
eliminate liability of this Corporation's directors for breach of fiduciary
duty, then a director of this Corporation shall not be liable for any such
breach to the fullest extent permitted by the Oklahoma General Corporation Act
as so amended. If the Oklahoma General Corporation Act is amended to increase
or expand liability of the Corporation's directors for breach of fiduciary duty,
no such amendment shall apply to or have any effect on the liability or alleged
liability of
<PAGE>
any director of this Corporation for or with respect to any acts or omissions of
such director occurring prior to the time of such amendment or otherwise
adversely affect any right or protection of a director of this Corporation
existing at the time of such amendment.
ARTICLE X
Compromise or Arrangement by
Corporation with Creditors or Shareholders
------------------------------------------
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
shareholders or any class of them, any court of equitable jurisdiction within
the State of Oklahoma, on the application in a summary way of this Corporation
or of any creditor or shareholder thereof or on the application of any receiver
or receivers appointed for this Corporation under the provisions of Section 1106
of the Oklahoma General Corporation Act or on the application of trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
the provisions of Section 1100 of the Oklahoma General Corporation Act, may
order a meeting of the creditors or class of creditors, and/or of the
shareholders or class of shareholders of this Corporation, as the case may be,
to be summoned in such manner as the court directs. If a majority in number
representing three-fourths (3/4) in value of the creditors or class of
creditors, and/or of the shareholders or class of shareholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the compromise or arrangement and the reorganization, if sanctioned
by the court to which the application has been made, shall be binding on all the
creditors or class of creditors, and/or on all the shareholders or class of
shareholders, of this Corporation, as the case may be, and also on this
Corporation.
ARTICLE XI
Action by Written Consent
-------------------------
Any action required or permitted to be taken by the shareholders of the
Corporation must be effected at an annual or special meeting of the shareholders
of the Corporation, and no action required to be taken or that may be taken at
any annual or special meeting of shareholders of the Corporation may be taken
without a meeting.
Signed at Oklahoma City, Oklahoma, this 29th day of July, 1996.
\s\ David W. Berry
----------------------------------
David W. Berry, President
<PAGE>
EXHIBIT 4.6
FORM OF
WARRANT AGREEMENT
Agreement made as of ___________ __, 1996, between Frontier Natural Gas
Corporation, an Oklahoma corporation with offices at One Benham Place, 9400
North Broadway, Oklahoma City, Oklahoma 73114 ("Company"), and Liberty National
Bank and Trust Company of Oklahoma, N.A., a ____________ corporation with
offices at ___________________ Oklahoma City, Oklahoma _____ (herein called
"Warrant Agent").
WHEREAS, the Company is engaged in a public offering of Units ("Public
Offering") and in connection therewith, has determined to issue and deliver up
to (i) 4,140,000 Redeemable Common Stock Purchase Warrants ("Public Warrants")
to the public investors and (ii) 360,000 Warrants to Gaines, Berland, Inc.
("Underwriter") or its designees ("Underwriter's Warrants") (together, the
Underwriter's Warrants and the Public Warrants, and referred to herein as the
"Warrant(s)"), each of such Warrants evidencing the right of the holder thereof
to purchase one share of common stock, $.01 par value per share, of the
Company's Common Stock ("Common Stock") for $_________________; and
WHEREAS, the Company has filed with the Securities and Exchange Commission
a Registration Statement, No. 333-06261 on Form SB-2 ("Registration Statement")
for the registration, under the Securities Act of 1933, as amended, of, among
others, the Warrants and the Common Stock issuable upon exercise of the
Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange, redemption and exercise of the
Warrants; and
WHEREAS, the Company desires to provide for the form and provisions of the
Warrants, the terms upon which they shall be issued and exercised, and the
respective rights, limitation of rights, and immunities of the Company, the
Warrant Agent, and the holders of the Warrants; and
WHEREAS, all acts and things have been done and performed which are
necessary to make the Warrants, when executed on behalf of the Company and
countersigned by or on behalf of the Warrant Agent, as provided herein, the
valid, binding and legal obligations of the Company, and to authorize the
execution and delivery of this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements herein contained,
the parties hereto agree as follows:
1. Appointment of Warrant Agent. The Company hereby appoints the Warrant
----------------------------
Agent to act as agent for the Company for the Warrants, and the Warrant Agent
hereby accepts such appointment and agrees to perform the same in accordance
with the terms and conditions set forth in this Agreement.
<PAGE>
2. Warrants.
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2.1. Form of Warrant. Each Warrant certificate shall be issued in
---------------
registered form only, shall be in substantially the form of Exhibit A hereto the
provisions of which are incorporated herein, and shall be signed by, or bear the
facsimile signature of, the Chairman of the Board or President and Secretary or
Assistant Secretary of the Company and shall bear a facsimile of the Company's
seal. In the event the person whose facsimile signature has been placed upon
any Warrant certificate shall have ceased to be Chairman of the Board or
President and Secretary or Assistant Secretary of the Company before such
Warrant certificate is issued, it may be issued with the same effect as if he
had not ceased to be such at the date of issuance. The Warrants represented by
a Warrant certificate may not be exercised until such certificate has been
countersigned by the Warrant Agent as provided in Section 2.3 hereof.
2.2. Effect of Countersignature. Unless and until countersigned by the
--------------------------
Warrant Agent pursuant to this Agreement, a Warrant certificate shall be invalid
and of no effect.
2.3. Events for Countersignature. The Warrant Agent shall countersign a
---------------------------
Warrant certificate only upon the occurrence of either of the following events:
(i) if the Warrant certificate is to be issued in exchange or
substitution for one or more previously countersigned Warrant certificates, as
hereinafter provided, or
(ii) if the Company instructs the Warrant Agent to do so.
2.4. Registration.
------------
2.4.1. Warrant Register. The Warrant Agent shall maintain books
----------------
("Warrant Register"), for the registration of original issuance and the
registration of transfer of the Warrants. Upon the initial issuance of the
Warrants, the Warrant Agent shall issue and register the Warrants in the names
of the respective holders thereof in such denominations and otherwise in
accordance with instructions delivered to the Warrant Agent by the Company.
2.4.2. Registered Holder. Prior to due presentment for registration
-----------------
of transfer of any Warrant certificate, the Company and the Warrant Agent may
deem and treat the person in whose name such Warrant certificate shall be
registered upon the Warrant Register ("registered holder"), as the absolute
owner of such Warrant and of each Warrant represented thereby (notwithstanding
any notation of ownership or other writing on the Warrant certificate made by
anyone other than the Company or the Warrant Agent), for the purpose of any
exercise thereof, and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary.
2.5. Detachability of Warrants. The Warrant Agent understands that the
-------------------------
Warrants are being issued as part of Units together with shares of the Company's
Common Stock and that the shares of Common Stock and the Warrants are
immediately detachable and may be traded separately.
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<PAGE>
3. Terms and Exercise of Warrants
------------------------------
3.1. Warrant Price. Each Warrant certificate shall, when countersigned by
-------------
the Warrant Agent, entitle the registered holder thereof, subject to the
provisions of such Warrant certificate and of this Warrant Agreement, to
purchase from the Company the number of shares of Common Stock stated therein,
at the price of $_____ per whole share, subject to the adjustments provided in
Section 4 hereof. The term "Warrant Price" as used in this Warrant Agreement
refers to the price per share at which Common Stock may be purchased at the time
a Warrant is exercised.
3.2. Duration of Warrants. Subject to Section 6 hereof, a Warrant may be
--------------------
exercised only during the period ("Exercise Period") commencing on ____________,
1997, and terminating on _____________, 2001 ("Expiration Date"). Each issued
and outstanding Warrant not exercised on or before its Expiration Date shall
become void, and all rights thereunder and all rights in respect thereof under
this Agreement shall cease at the close of business on its Expiration Date. The
Company in its sole discretion may extend the duration of the Warrants by
delaying the Expiration Date.
3.3. Exercise of Warrants.
--------------------
3.3.1. Payment. A Warrant, when countersigned by the Warrant Agent,
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may be exercised by the registered holder thereof by surrendering the
certificate representing such Warrant, at the office of the Warrant Agent, or at
the office of its successor as Warrant Agent, with the subscription form, as set
forth on the Warrant certificate and in substantially the form of Exhibit A
hereto, duly executed, and by paying in full, in lawful money of the United
States, in cash, good certified check or bank draft payable to the order of the
Company, the Warrant Price for each full share of Common Stock as to which the
Warrant is exercised and any and all applicable taxes due in connection with the
exercise of the Warrant, the exchange of the Warrant for the Common Stock, and
the issuance of the Common Stock.
3.3.2. Issuance of Certificates. As soon as practicable after the
------------------------
exercise of any Warrant and the clearance of the funds in payment of the Warrant
Price, the Company shall issue to the registered holder of such Warrant a
certificate or certificates for the number of full shares of Common Stock to
which he is entitled, registered in such name or names as may be directed by
him, and if such Warrant shall not have been exercised in full, a new
countersigned Warrant certificate for the number of shares as to which such
Warrant shall not have been exercised. Notwithstanding the foregoing, the
Company shall not be obligated to deliver any securities pursuant to the
exercise of a Warrant unless a registration statement under the Securities Act
of 1933 with respect to the securities is effective. Warrants may not be
exercised by, or securities issued to, any registered holder in any state in
which such exercise would be unlawful.
3.3.3. Valid Issuance. All shares of Common Stock issued upon the
--------------
proper exercise of a Warrant in conformity with this Agreement shall be validly
issued.
3.3.4. Date of Issuance. Each person in whose name any such
----------------
certificate for shares of Common Stock is issued shall for all purposes be
deemed to have become the holder
3
<PAGE>
of record of such shares on the date on which the Warrant certificate was
surrendered and payment of the Warrant Price was made, irrespective of the date
of delivery of such certificate, except that, if the date of such surrender and
payment is a date when the stock transfer books of the Company are closed, such
person shall be deemed to have become the holder of such shares at the close of
business on the next succeeding date on which the stock transfer books are open.
3.3.5. Warrant Solicitation and Warrant Solicitation Fee.
-------------------------------------------------
a. The Company has engaged the Underwriter, on a non-
exclusive basis, as its agent for the solicitation of the exercise of the
Warrants. The Company, at its cost, will (i) assist the Underwriter with respect
to such solicitation, if requested by the Underwriter and (ii) provide the
Underwriter, and direct the Company's transfer and warrant agent to deliver to
the Underwriter, lists of the record, and to the extent known, beneficial owners
of the Company's Warrants. Accordingly, the Company hereby instructs the Warrant
Agent to cooperate with the Underwriter in every respect in connection with the
Underwriter's solicitation activities, including, but not limited to, providing
to the Underwriter, at the Company's cost, a list of record and beneficial
holders of the Warrants and circulating a prospectus or offering circular
disclosing the compensation arrangements referenced in Section 3.3.5(b)
hereinbelow to holders of the Warrants at the time of exercise of the Warrants.
In addition to the conditions set forth in Section 3.3.5(b) hereinbelow, the
Underwriter shall only accept payment of the warrant solicitation fee provided
in Section 3.3.5(b) if it has provided bona fide services to the Company in
connection with the exercise of the Warrants. In addition to soliciting, either
orally or in writing, the exercise of Warrants by a Warrantholder, such services
may also include disseminating information, either orally or in writing, to
Warrantholders about the Company or the market for the Company's securities, or
assisting in the processing of the exercise of Warrants.
b. In each instance in which a Warrant is exercised, the
Warrant Agent shall promptly give written notice of such exercise to the Company
and the Underwriter ("Warrant Agent's Exercise Notice"). If, upon the exercise
of any Warrant more than one year from the Effective Date, (i) the market price
of the Company's Common Stock is greater than the Warrant Price, (ii) disclosure
of compensation arrangements was made both at the time of the original offering
and at the time of exercise (by delivery of the Prospectus or as otherwise
required by applicable law, rule or regulation), (iii) the exercise of the
Warrant was solicited by the Underwriter, (iv) the Warrant was not held in a
discretionary account, and (v) the solicitation of the exercise of the Warrant
was not in violation of Rule 10b-6 (as such rule or any successor rule may be in
effect as of such time of exercise) promulgated under the Securities Exchange
Act of 1934, then the Warrant Agent, simultaneously with the distribution of
proceeds to the Company received upon exercise of the Warrant(s) so exercised,
shall, on behalf of the Company, pay from the proceeds received upon exercise of
the Warrant(s), a fee of 5% of the Warrant Price to the Underwriter, provided
that the Underwriter delivers to the Warrant Agent within ten (10) business days
from the date on which the Underwriter has received the Warrant Agent's Exercise
Notice, a certificate that the conditions set forth in the preceding clauses
(iii), (iv) and (v) have been satisfied. The Underwriter and the Company may at
any time during business hours, examine the records of the Warrant Agent,
including its ledger of original Warrant certificates returned to the Warrant
Agent upon exercise of Warrants.
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<PAGE>
c. The provisions of this Section 3.3.5. may not be
modified, amended or deleted without the prior written consent of the
Underwriter.
4. Adjustments.
-----------
4.1. Stock Dividends - Split-Ups. If after the date hereof, and subject to
---------------------------
the provisions of Section 4.5 below, the number of outstanding shares of Common
Stock is increased by a stock dividend payable in shares of Common Stock or by a
split-up of shares of Common Stock or other similar event, then, on the
effective date thereof, the number of shares issuable on exercise of each
Warrant shall be increased in proportion to such increase in outstanding shares
and the then applicable Warrant Price shall be correspondingly decreased.
4.2. Aggregation of Shares. If after the date hereof, and subject to the
---------------------
provisions of Section 4.5, the number of outstanding shares of Common Stock is
decreased by a consolidation, combination or reclassification of shares of
Common Stock or other similar event, then, upon the effective date of such
consolidation, combination or reclassification, the number of shares issuable on
exercise of each Warrant shall be decreased in proportion to such decrease in
outstanding shares and the then applicable Warrant Price shall be
correspondingly increased.
4.3. Replacement of Securities Upon Reorganization, etc. If after the date
---------------------------------------------------
hereof any capital reorganization or reclassification of the Common Stock of the
Company, or consolidation or merger of the Company with another corporation, or
the sale of all or substantially all of its assets to another corporation or
other similar event shall be effected, then, as a condition of such
reorganization, reclassification, consolidation, merger, or sale, lawful and
fair provision shall be made whereby the Warrant holders shall thereafter have
the right to purchase and receive, upon the basis and upon the terms and
conditions specified in the Warrants and in lieu of the shares of Common Stock
of the Company immediately theretofore purchasable and receivable upon the
exercise of the rights represented thereby, such shares of stock, securities, or
assets as may be issued or payable with respect to or in exchange for the number
of outstanding shares of such Common Stock equal to the number of shares of such
stock immediately theretofore purchasable and receivable upon the exercise of
the rights represented by the Warrants, had such reorganization,
reclassification, consolidation, merger, or sale not taken place and in such
event appropriate provision shall be made with respect to the rights and
interests of the Warrant holders to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Warrant Price
and of the number of shares purchasable upon the exercise of the Warrants) shall
thereafter be applicable, as nearly as may be in relation to any share of stock,
securities, or assets thereafter deliverable upon the exercise hereof. The
Company shall not effect any such consolidation, merger, or sale unless prior to
the consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger, or the corporation purchasing such
assets, shall assume by written instrument executed and delivered to the Warrant
Agent the obligation to deliver to the Warrant holders such shares of stock,
securities, or assets as, in accordance with the foregoing provisions, such
holders may be entitled to purchase.
5
<PAGE>
4.4. Notices of Changes in Warrant. Upon every adjustment of the Warrant
-----------------------------
Price or the number of shares issuable on exercise of a Warrant, the Company
shall give written notice thereof to the Warrant Agent, which notice shall state
the Warrant Price resulting from such adjustment and the increase or decrease,
if any, in the number of shares purchasable at such price upon the exercise of a
Warrant, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Upon the occurrence of any event
specified in Sections 4.1., 4.2., or 4.3., then, in any such event, the Company
shall give written notice in the manner set forth above of the record date for
such dividend, distribution, or subscription rights, or the effective date of
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding up or issuance. Such notice shall also specify the date as
of which the holders of Common Stock of record shall participate in such
dividend, distribution, or subscription rights, or shall be entitled to exchange
their Common Stock for stock, securities, or other assets deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding up or issuance. Failure to give such notice, or any defect
therein, shall not affect the legality or validity of such event.
4.5. No Fractional Shares. Notwithstanding any provision contained in this
--------------------
Warrant Agreement to the contrary, the Company shall not issue fractional shares
upon exercise of Warrants. If, by reason of any adjustment made pursuant to
this Section 4, the holder of any Warrant would be entitled, upon the exercise
of such Warrant, to receive a fractional interest in a share, the number of
shares of Common Stock to be received shall be rounded off to the nearest whole
number.
4.6. Form of Warrant. The form of Warrant need not be changed because of
---------------
any adjustment pursuant to this Section 4, and Warrants issued after such
adjustment may state the same Warrant Price and the same number of shares as is
stated in the Warrants initially issued pursuant to this Agreement. However,
the Company may at any time in its sole discretion make any change in the form
of Warrant that the Company may deem appropriate and that does not affect the
substance thereof, and any Warrant thereafter issued or countersigned, whether
in exchange or substitution for an outstanding Warrant or otherwise, may be in
the form as so changed.
5. Transfer and Exchange of Warrants.
---------------------------------
5.1. Registration of Transfer. The Warrant Agent shall register the
------------------------
transfer, from time to time, of any outstanding Warrant upon the Warrant
Register, upon surrender of a Warrant certificate for transfer, properly
endorsed with signatures properly guaranteed and accompanied by appropriate
instructions for transfer. Upon any such transfer, a new Warrant certificate
representing an equal aggregate number of Warrants shall be issued and the old
Warrant certificate shall be cancelled by the Warrant Agent. The Warrant
certificate so cancelled shall be delivered by the Warrant Agent to the Company
from time to time upon request.
5.2. Procedure for Surrender of Warrants. Warrant certificates may be
-----------------------------------
surrendered to the Warrant Agent, together with a written request for exchange,
and thereupon the Warrant Agent shall issue in exchange therefor one or more new
Warrant certificates as requested by the registered holder of the Warrant
certificates so surrendered, representing an
6
<PAGE>
equal aggregate number of Warrants; provided, however, that in the event that a
Warrant certificate surrendered for transfer bears a restrictive legend, the
Warrant Agent shall not cancel such Warrant certificate and issue new Warrant
certificates in exchange therefor until the Warrant Agent has received an
opinion of counsel for the Company stating that such transfer may be made and
indicating whether the new Warrant certificates must also bear a restrictive
legend.
5.3. Fractional Warrants. The Warrant Agent shall not be required to
-------------------
effect any registration of transfer or exchange which will result in the
issuance of a warrant certificate for a fraction of a warrant. The number of
Warrants to be delivered shall be rounded off to the nearest whole number.
5.4. Service Charges. No service charge shall be made for any exchange or
---------------
registration of transfer of Warrants.
5.5. Warrant Execution and Countersignature. The Warrant Agent is hereby
--------------------------------------
authorized to countersign and to deliver, in accordance with the terms of this
Agreement, the Warrants required to be issued pursuant to the provisions hereof,
and the Company, whenever required by the Warrant Agent, will supply the Warrant
Agent with Warrant certificates duly executed on behalf of the Company for such
purpose.
6. Redemption.
----------
6.1. Redemption. The issued and outstanding Warrants may be redeemed, at
----------
the option of the Company, as a whole at any time, after they become exercisable
and prior to the Expiration Date, at the office of the Warrant Agent, upon the
notice referred to in Section 6.2., at the price of $.01 per Warrant
("Redemption Price"), provided that (a) the last sale price of the Common Stock
has been at least two hundred percent (200%) of the then effective exercise
price of the Warrants on each of the twenty (20) consecutive trading days ending
on the third business day prior to the date on which notice of redemption is
given, the satisfaction of which condition shall be certified by the Company and
(b) the Company has obtained the prior written consent of the Underwriter. The
provisions of this Section 6.1 may not be modified, amended or deleted without
the prior written consent of the Underwriter.
6.2. Date Fixed for, and Notice of, Redemption. In the event the Company
-----------------------------------------
shall elect to redeem the issued and outstanding Warrants, the Company shall fix
a date for the redemption. Notice of redemption shall be mailed by first class
mail, postage prepaid, by the Company or the Company's agent at its direction
not less than 30 days from the date fixed for redemption to the registered
holders of the issued and outstanding Warrants to be redeemed at their last
address as they shall appear on the registration books. Any notice mailed in
the manner herein provided shall be conclusively presumed to have been duly
given whether or not the registered holder received such notice.
6.3. Exercise After Notice of Redemption. The issued and outstanding
-----------------------------------
Warrants may be exercised in accordance with Section 3 of this Agreement at any
time after notice of redemption shall have been given by the Company pursuant to
Section 6.2. hereof and prior to the date fixed for redemption. On and after
the redemption date, the record holders of all
7
<PAGE>
the issued and outstanding Warrants shall have no further rights except to
receive, upon surrender of the issued and outstanding Warrants, the redemption
price.
7. Other Provisions Relating to Rights of Holders of Warrants.
----------------------------------------------------------
7.1. No Rights as Stockholder. A Warrant does not entitle the registered
------------------------
holder thereof to any of the rights of a stockholder of the Company, including,
without limitation, the right to receive dividends, or other distributions,
exercise any preemptive rights to vote or to consent or to receive notice as
stockholders in respect of the meetings of stockholders or the election of
directors of the Company or any other matter.
7.2. Lost, Stolen, Mutilated, or Destroyed Warrants. If any Warrant
----------------------------------------------
certificate is lost, stolen, mutilated, or destroyed, the Company and the
Warrant Agent may on such terms as to indemnity or otherwise as they may in
their discretion impose (which shall, in the case of a mutilated Warrant
certificate, include the surrender thereof), issue a new Warrant certificate of
like denomination, tenor, and date as the Warrant certificate so lost, stolen,
mutilated, or destroyed. Any such new Warrant certificate shall constitute a
substitute contractual obligation of the Company, whether or not the allegedly
lost, stolen, mutilated, or destroyed Warrant certificate shall be at any time
enforceable by anyone.
7.3. Reservation of Common Stock. The Company shall at all times reserve
---------------------------
and keep available a number of its authorized but unissued shares of Common
Stock that will be sufficient to permit the exercise in full of all outstanding
Warrants issued pursuant to this Agreement.
7.4. Registration of Common Stock. The Company agrees that prior to the
----------------------------
commencement of the Exercise Period it shall file with the Securities and
Exchange Commission a post-effective amendment to the Registration Statement, if
possible or a new registration statement, for the registration, under the
Securities Act of 1933, of the Common Stock issuable upon exercise of the
Warrants. In either case, the Company shall cause the same to become effective
at or prior to the commencement of the Exercise Period and to maintain the
effectiveness of such registration statement and keep current a prospectus
thereunder until the expiration of the Public Warrants and the Underwriter's
Warrants. The provisions of this Section 7.4 may not be modified, amended or
deleted without the prior written consent of the Underwriter.
8. Concerning the Warrant Agent and Other Matters.
----------------------------------------------
8.1. Payment of Taxes. The Company will from time to time promptly pay all
----------------
taxes and charges that may be imposed upon the Company or the Warrant Agent in
respect of the issuance or delivery of shares of Common Stock upon the exercise
of Warrants, but the Company shall not be obligated to pay any transfer taxes in
respect of the Warrants or such shares.
8.2. Resignation, Consolidation, or Merger of Warrant Agent.
------------------------------------------------------
8.2.1. Appointment of Successor Warrant Agent. The Warrant Agent, or
--------------------------------------
any successor to it hereafter appointed, may resign its duties and be discharged
from all further
8
<PAGE>
duties and liabilities (other than those incurred prior to such resignation or
discharge) hereunder after giving sixty (60) days' notice in writing to the
Company. If the office of the Warrant Agent becomes vacant by resignation or
incapacity to act or otherwise, the Company shall appoint in writing a successor
Warrant Agent in place of the Warrant Agent. If the Company shall fail to make
such appointment within a period of 30 days after it has been notified in
writing of such resignation or incapacity by the Warrant Agent or by a holder of
Warrants (who shall, with such notice, submit his Warrant for inspection by the
Company), then the holder of any Warrant may apply to the _______ Court of the
State of Oklahoma for the County of ________ for the appointment of a successor
Warrant Agent. Any successor Warrant Agent, whether appointed by the Company or
by such court, shall be a corporation organized, existing and in good standing
and authorized under the laws of the state in which it was incorporated to
exercise corporate trust powers, and subject to supervision or examination by
federal or state authority and shall be authorized to serve as Warrant Agent for
the Warrants under the Securities Exchange Act of 1934, as amended. After
appointment, any successor Warrant Agent shall be vested with all the authority,
powers, rights, immunities, duties, and obligations of its predecessor Warrant
Agent with like effect as if originally named as Warrant Agent hereunder,
without any further act or deed; but if for any reason it becomes necessary or
appropriate, the predecessor Warrant Agent shall execute and deliver, at the
expense of the Company, an instrument transferring to such successor Warrant
Agent all the authority, powers, and rights of such predecessor Warrant Agent
hereunder; and upon request of any successor Warrant Agent the Company shall
make, execute, acknowledge, and deliver any and all instruments in writing for
more fully and effectually vesting in and confirming to such successor Warrant
Agent all such authority, powers, rights, immunities, duties, and obligations.
8.2.2. Notice of Successor Warrant Agent. In the event a successor
---------------------------------
Warrant Agent shall be appointed, the Company shall give notice thereof to the
predecessor Warrant Agent and the transfer agent for the Common Stock not later
than the effective date of any such appointment.
8.2.3. Merger or Consolidation of Warrant Agent. Any corporation
----------------------------------------
into which the Warrant Agent may be merged or with which it may be consolidated
or any corporation resulting from any merger or consolidation to which the
Warrant Agent shall be a party, if it shall be eligible to serve as Warrant
Agent under Section 8.2.1, shall be the successor Warrant Agent under this
Agreement without any further act.
8.3. Fees and Expenses of Warrant Agent.
----------------------------------
8.3.1. Remuneration. The Company agrees to pay the Warrant Agent
------------
reasonable remuneration for its services as such Warrant Agent hereunder and
will reimburse the Warrant Agent upon demand for all expenditures that the
Warrant Agent may reasonably incur in the execution of its duties hereunder.
8.3.2. Further Assurances. The Company agrees to perform, execute,
------------------
acknowledge, and deliver or cause to be performed, executed, acknowledged, and
delivered all such further and other acts, instruments, and assurances as may
reasonably be required by the Warrant Agent for the carrying out or performing
of the provisions of this Agreement.
9
<PAGE>
8.4. Liability of Warrant Agent.
--------------------------
8.4.1. Reliance on Company Statement. Whenever in the performance of
-----------------------------
its duties under this Warrant Agreement, the Warrant Agent shall deem it
necessary or desirable that any fact or matter be proved or established by the
Company prior to taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed) may
be deemed to be conclusively proved and established by a statement signed by the
President of the Company and delivered to the Warrant Agent. The Warrant Agent
may rely upon such statement for any action taken or suffered in good faith by
it pursuant to the provisions of this Agreement.
8.4.2. Indemnity. The Warrant Agent shall be liable hereunder only
---------
for its own negligence or willful misconduct. The Company agrees to indemnify
the Warrant Agent and save it harmless against any and all liabilities,
including judgments, costs and reasonable counsel fees, for anything done or
omitted by the Warrant Agent in the execution of this Agreement except as a
result of the Warrant Agent's negligence, willful misconduct, or bad faith.
8.4.3. Exclusions. The Warrant Agent shall have no responsibility
----------
with respect to the validity of this Agreement or with respect to the validity
or execution of any Warrant (except its countersignature thereof); nor shall it
be responsible for any breach by the Company of any covenant or condition
contained in this Agreement or in any Warrant; nor shall it be responsible to
make any adjustments required under the provisions of Section 4. hereof or
responsible for the manner, method, or amount of any such adjustment or the
ascertaining of the existence of facts that would require any such adjustment;
nor shall it by any act hereunder be deemed to make any representation or
warranty as to the authorization or reservation of any shares of Common Stock to
be issued pursuant to this Agreement or any Warrant or as to whether any shares
of Common Stock will when issued be valid and fully paid and nonassessable.
8.5. Acceptance of Agency. The Warrant Agent hereby accepts the agency
--------------------
established by this Agreement and agrees to perform the same upon the terms and
conditions herein set forth and among other things, shall account promptly to
the Company with respect to Warrants exercised and concurrently account for, and
pay to the Company, all moneys received by the Warrant Agent for the purchase of
shares of the Company's Common Stock through the exercise of Warrants.
9. Miscellaneous Provisions.
------------------------
9.1. Successors. All the covenants and provisions of this Agreement by or
----------
for the benefit of the Company or the Warrant Agent shall bind and inure to the
benefit of their respective successors and assigns.
9.2. Notices. Any notice, statement or demand authorized by this Warrant
-------
Agreement to be given or made by the Warrant Agent or by the holder of any
Warrant to or by the Company shall be sufficiently given or made if sent by
certified mail, or private courier service, postage prepaid, addressed (until
another address is filed in writing by the Company with the Warrant Agent), as
follows:
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<PAGE>
Frontier Natural Gas Corporation
One Benham Place
9400 North Broadway
Oklahoma City, Oklahoma 73114
Attention: David W. Berry
with a copy to each of:
Day Edwards Federman Propester & Christensen, P.C.
210 Park Avenue, Suite 2900
Oklahoma City, Oklahoma 73102
Attention: Jeanette C. Timmons, Esq.
and
Graubard Mollen & Miller
600 Third Avenue - 31st Floor
New York, New York 10016
Attention: David Alan Miller, Esq.
Any notice, statement or demand authorized by this Agreement to be given or made
by the holder of any Warrant or by the Company to or on the Warrant Agent shall
be sufficiently given or made if sent by certified mail or private courier
service, postage prepaid, addressed (until another address is filed in writing
by the Warrant Agent with the Company), as follows:
Liberty National Bank and Trust Company
of Oklahoma City, N.A.
_________________________________
_________________________________
_________________________________
9.3. Applicable law; Jurisdiction. The validity, interpretation, and
----------------------------
performance of this Agreement and of the Warrants shall be governed in all
respects by the law of the State of Oklahoma, without giving effect to
principles of conflicts of law. Except as set forth below, the Company hereby
agrees that any action, proceeding or claim against it arising out of or
relating in any way to this Agreement shall be brought and enforced in the
courts of the State of Oklahoma or the United States District Court for the
________ District of Oklahoma, and irrevocably submits to such jurisdiction,
which jurisdiction shall be exclusive. Notwithstanding all of the foregoing,
the Company agrees that any action proceeding or claim against it arising out of
or related in any way to this Agreement and the rights thereunder of the
Underwriter shall be brought and enforced in the courts of the State of New York
or the United States District Court for the Southern District of New York and
irrevocably submits to such jurisdiction in respect of such matters; which
jurisdiction shall be exclusive. The Company hereby waives any objection to
such exclusive jurisdictions and that such courts represent an inconvenient
forum. Any such process or summons to be served upon the Company may be served
by transmitting a copy thereof by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in Section
9.2
11
<PAGE>
hereof. Such mailing shall be deemed personal service and shall be legal and
binding upon the Company in any action, proceeding or claim.
9.4. Persons Having Rights Under This Agreement. Nothing in this Agreement
------------------------------------------
expressed and nothing that may be implied from any of the provisions hereof is
intended, or shall be construed, to confer upon, or give to, any person or
corporation other than the parties hereto and the registered holders of the
Warrants and, for the purposes of Sections 3.3.5, 6.1 through 6.3 and 7.4
hereof, the Underwriter, any right, remedy, or claim under or by reason of this
Warrant Agreement or of any covenant, condition, stipulation, promise, or
agreement hereof. Underwriter shall be deemed to be a third-party beneficiary
of this Agreement with respect to such Sections. All covenants, conditions,
stipulations, promises, and agreements contained in this Warrant Agreement shall
be for the sole and exclusive benefit of the parties hereto (and the Underwriter
to the extent set forth above) and their successors and assigns and of the
registered holders of the Warrants.
9.5. Examination of the Warrant Agreement. A copy of this Agreement shall
------------------------------------
be available at all reasonable times at the office of the Warrant Agent in
Oklahoma City, Oklahoma, for inspection by the registered holder of any Warrant.
The Warrant Agent may require any such holder to submit his or her Warrant for
inspection by it.
9.6. Counterparts. This Agreement may be executed in any number of
------------
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
9.7. Effect of Headings. The Section headings herein are for convenience
------------------
only and are not part of this Warrant Agreement and shall not affect the
interpretation thereof.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto under their respective corporate seals as of the day and year first above
written.
Attest: FRONTIER NATURAL GAS COMPANY
______________________________ By:______________________________
Name: Name: David W. Berry
Title: Title: President
LIBERTY NATIONAL BANK AND TRUST
COMPANY OF OKLAHOMA CITY, N.A.
Attest:
______________________________ By:______________________________
Name: Name:
Title: Title:
12
<PAGE>
EXHIBIT 4.7
VOID AFTER 5 P.M. (C.S.T.), , 2001
No. W WARRANTS
[LOGO OF FRONTIER NATURAL GAS CORPORATION APPEARS HERE]
SERIES B REDEEMABLE COMMON STOCK PURCHASE WARRANT CERTIFICATE
(SERIES B WARRANT)
This Certifies that
, for value received, the registered holder, or registered assigns, of this
Series B Warrant Certificate is the owner of the number of Series B Warrants set
forth in the upper right-hand corner hereof, and is entitled to purchase
commencing 1997, subject to the terms and conditions hereof and of the Waraant
Agency Agreement (the "Warrant Agreement") between the Company and Liberty Bank
and Trust Company of Oklahoma City, N.A. (the "Warrant Agent"), one share of the
Common Stock of Frontier Natural Gas Corporation, an Oklahoma corporation, (the
"Company") for every Series B Warrant exercised at the exercise price of $
per share, and to receive a certificate for the Common Stock so purchased. At
any time after the Series B Warrants become exercisable, the Series B Warrants
may be redeemed by the Company, with the prior consent of Gaines, Berland Inc.,
at a price of $.01 per Series B Warrant upon not less than 30 days prior written
notice, if the last sale price of the Common Stock has been at least 200% of the
then-exercise price of the Series B Waraants, for the 20 consecutive trading
days ended on the third day prior to the date on which the notice of redemption
is given. The exercise price and number of shares purchasable upon exercise are
subject to certain adjustments as set forth in the Series B Warrant Agreement.
The registered holder thereof may exercise the Series B Warrants
evidenced hereby on or before 5:00 p.m. (C.S.T.), on , or such later
date established by the Board of Directors of the Company (the "Effective
Period"), but not thereafter, upon presentation and surrender to the Warrant
Agent. Such exercise must be made by payment in full of the purchase price of
each share purchased either in cash or by certified or bank cashier's check
payable to the order of the Company, with the subscription form on the reverse
of this Series B Warrant duly completed and signed.
Unless exercised during and prior to the close of the Exercise Period,
this Series B Warrant will become void and the subscription right will
terminate. The Company will not issue fractional shares nor will it make cash
payments in lieu thereof.
This Series B Warrant is one of a duly authorized issue of Warrants, and
is subject to the terms of the provisions contained in the Warrant Agreement. A
copy of the Warrant Agreement may be obtained for inspection upon request by the
registered holder hereof from the Warrant Agent. The registered holder of this
Warrant Certificate hereby consents to the terms and provisions of the Warrant
Agreement by his or her acceptance hereof.
In witness wherof the Company has caused this Series B Warrant to be
executed by the signatures of its duly authorized officers and the coporate seal
hereunto affixed.
FRONTIER NATURAL GAS CORPORATION Countersigned:
By: /s/ LIBERTY BANK AND TRUST
---------------------------- COMPANY OF OKLAHOMA CITY,N.A.
Warrant Agent
President
By:
_______________________
Attest: /s/
------------------------------ Authorized Signature
Secretary
[SEAL]
<PAGE>
FRONTIER NATURAL GAS CORPORATION
ASSIGNMENT
For value received
----------------------------------------------------------
hereby sells, assigns and transfers unto
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
the Warrant and the rights represented thereby to purchase Common Shares in
accordance with the terms and conditions thereof, and does hereby irrevocably
constitute and appoint Liberty Bank and Trust Company of Oklahoma City, N.A.,
Oklahoma City, Oklahoma as attorney to transfer this Warrant on the books of the
Corporation, with full power of substitution.
Dated this day of , 199
---------- ----------------- -----
----------------------------------------
----------------------
ELECTION TO EXERCISE
(To be executed upon exercise of Warrant prior to the close of business on the
Expiration Date)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant, to purchase shares of Common Stock
---------------
(the "Shares") and herewith tenders payment for the Shares in the amount of
$ in accordance with the terms hereof. The undersigned requests that
------------
a certificate representing the Shares be registered in the name of
- -------------------------------------------------------------------------------
whose address is
---------------------------------------------------------------
and that such certificate be delivered to
- -------------------------------------------------------------------------------
whose address is
----------------------------------------------------------------
if said number of Shares is fewer than all the Shares purchasable hereunder, the
undersigned requests that a new Warrant evidencing the right to purchase the
balance of the Shares to be registered in the name of
- -------------------------------------------------------------------------------
whose address is
----------------------------------------------------------------
and delivered to
- -------------------------------------------------------------------------------
whose address is
----------------------------------------------------------------
Dated: , 199
---------------------- ----
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
- ---------------------------------------------------------
| |
- ---------------------------------------------------------
Name of registered holder of Warrant:
-------------------------------------------
(Please Print)
Address:
------------------------------------------------------------------------
Signature:
----------------------------------------------
NOTE: The above signature must correspond with
the name as written upon the face of this
Warrant in every particular without alteration
or enlargement or any change whatever.
X
----------------------------------------------
(SIGNATURE)
NOTICE:
THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRES-
POND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE -->
CERTIFICATE IN EVERY PARTICU- X
LAR WITHOUT ALTERATION ---------------------------------------------
OR ENLARGEMENT OR ANY (SIGNATURE)
CHANGE WHATEVER.
--------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
"ELIGIBLE GUARANTOR INSTITUTION" AS DEFINED
IN RULE 17Ad-15 UNDER THE SECURITIES AND
EXCHANGE ACT OF 1934, AS AMENDED.
--------------------------------------------
SIGNATURE(S) GUARANTEED BY:
-------------------------------------------
<PAGE>
Exhibit 4.10
================================================================================
WARRANT AGREEMENT
Between
FRONTIER NATURAL GAS CORPORATION
and
WEISSER, JOHNSON & CO.
Dated effective as of January 12, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1. Definitions; Accounting Terms and
Determinations.......................................1
SECTION 2. Purchase and Sale of Warrants.........................5
2.01 Authorization and Issuance of Shares and
Warrants.............................................5
2.02 Initial Purchase of Warrants..........................5
2.03 Representations and Warranties of the
Investor..............................................6
2.04 Securities Act Compliance.............................6
SECTION 3. Representations and Warranties........................7
3.01 Existence; Qualification..............................7
3.02 No Breach.............................................7
3.03 Corporate Action......................................7
3.04 Approvals.............................................8
3.05 Investment Company Act................................8
3.06 Public Utility Holding Company Act....................8
3.07 Capitalization........................................8
3.08 Private Offering......................................9
3.09 No Litigation.........................................9
SECTION 4. Restrictions on Transferability.......................9
4.01 Transfers Generally...................................9
4.02 Transfers of Restricted Securities Pursuant
to Registration Statements, Rule 144 and
Rule 144A............................................9
4.03 Notice of Certain Transfers...........................9
4.04 Restrictive Legends..................................10
4.05 Termination of Restrictions..........................11
SECTION 5. Certain Dispositions of Securities
5.01 Certain Dispositions of Securities...................11
SECTION 6. Holders' Rights......................................12
6.01 Delivery Expenses....................................12
6.02 Taxes................................................12
6.03 Replacement of Instruments...........................12
6.04 Certain Restrictions.................................13
6.05 Certain Covenants....................................13
6.06 Indemnification......................................13
6.07 Financial Statements.................................14
SECTION 7. Miscellaneous........................................15
7.01 Waiver...............................................15
7.02 Notices..............................................15
7.03 Expenses, Etc........................................16
-i-
<PAGE>
7.04 Amendments, Etc....................................16
7.05 Successors and Assigns.............................17
7.06 Survival...........................................17
7.07 Captions...........................................17
7.08 Counterparts.......................................17
7.09 Governing Law......................................17
7.10 Severability.......................................17
Annex 1 - Form of Warrant
Annex 2 - Form of Registration Rights Agreement
-ii-
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT (this "Agreement") dated effective as of January 12,
---------
1996, between FRONTIER NATURAL GAS CORPORATION, a corporation duly organized and
validly existing under the laws of the State of Oklahoma ("Frontier"), and
--------
WEISSER, JOHNSON & CO., a Delaware corporation (the "Investor").
--------
Frontier and Weisser, Johnson & Co., a Delaware corporation (the "Adviser")
are parties to an agreement dated as of May 10, 1995 (as amended January 12,
1996, the "Advisory Agreement"), providing, subject to the terms and conditions
------------------
thereof, for financial advisory services. To induce the Investor to accept
Frontier common stock in lieu of cash fees for arranging a Financing, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Frontier has agreed to issue Warrants (as hereinafter
defined) to the Investor, as the designee of the Advisor, providing for the
purchase of shares of Common Stock (as hereinafter defined) of Frontier, in the
manner hereinafter provided. Accordingly, the parties hereto agree as follows:
SECTION 1. Definitions; Accounting Terms and Determinations.
------------------------------------------------
(a) Except as expressly provided herein, terms defined in the Credit
Agreement dated January 3, 1996 between Frontier and Bank of America Illinois,
an Illinois banking corporation, are used herein as defined therein.
(b) In addition, as used herein:
"Affiliate" shall mean, as to any Person, any other Person which directly
---------
or indirectly controls, or is under common control with, or is controlled by,
such Person and, if such Person is an individual, any member of the immediate
family (including parents, spouse and children) of such individual and any trust
whose principal beneficiary is such individual or one or more members of such
immediate family and any Person who is controlled by any such member or trust.
As used in this definition, "control" (including the correlative terms
"controlled by" and "under common control with") shall mean possession, directly
or indirectly, of the power to direct or cause the direction of the management
or policies of a Person (whether through ownership of securities or partnership
or other ownership interests, by contract or otherwise), provided that, in any
--------
event, any Person which owns directly or indirectly 40% or more of the
securities having ordinary voting power for the election of directors or other
governing body of a corporation or 40% or more of the partnership or other
ownership interests of any other Person will be deemed to control such
corporation or other Person. Notwithstanding the foregoing, (i) no individual
shall be deemed to be an Affiliate of a corporation solely by reason of his
<PAGE>
or her being an officer or director of such corporation, and (ii) neither the
Investor nor any of its affiliates shall be deemed to be an Affiliate of
Frontier.
"Commission" shall mean the Securities and Exchange Commission or any
----------
other similar or successor agency of the Federal government administering the
Securities Act and/or the Exchange Act or any successor statutes.
"Common Stock" shall mean Frontier's authorized Common Stock, par value
------------
$.01 per share, as constituted on the date hereof, and any stock into which such
common stock may thereafter by converted or changed, and also shall include any
other stock of Frontier of any other class that is not preferred as to dividends
or distributions in liquidation over any other stock of Frontier.
"Control" shall mean, with respect to any Person, the power to
-------
exercise, directly or indirectly, a controlling influence over the management or
policies of such Person.
"Advisory Agreement" shall have the meaning set forth in the preamble
------------------
of this Agreement.
"Date of Issuance" shall have the meaning assigned to such term in the
----------------
form of Warrant attached as Annex 1 hereto.
-------
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, or any successor Federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Exercise Price" shall have the meaning assigned to such term in the
--------------
form of Warrant attached as Annex 1 hereto.
-------
"Expiration Date" shall have the meaning assigned to such term in the
---------------
form of Warrant attached as Annex 1 hereto.
-------
"Frontier" shall have the meaning set forth in the preamble of this
--------
agreement.
"Governmental Authority" shall mean any nation or government, any state
----------------------
or other political subdivision thereof, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions or pertaining
to government, and any corporation or other entity owned or controlled (whether
through ownership of securities or other ownership interests, by contract or
otherwise) by any of the foregoing.
-2-
<PAGE>
"Holder" shall mean any Person who acquires Warrants or Warrant Stock
------
pursuant to the provisions of this Agreement, including any transferees of
Warrants or Warrant Stock.
"include" and "including" shall be construed as if followed by the phrase
------- ---------
"without being limited to".
"Investor" shall have the meaning set forth in the preamble of this
--------
Agreement.
"Lien" shall mean, with respect to any asset, any mortgage, lien, pledge,
----
charge, security interest or encumbrance of any kind in respect of such asset.
For purposes of this Agreement, a Person shall be deemed to own subject to a
Lien any asset which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement relating to such asset.
"Majority Warrant Stockholders" shall mean the Holders of a majority of the
-----------------------------
Warrant Stock issuable upon exercise of the Warrants issuable under this
Agreement.
"Person" shall mean a corporation, an association, a partnership, a limited
------
liability company, a joint venture, an organization, a business, an individual
or a Governmental Authority.
"Preferred Stock" shall mean Frontier's authorized Preferred Stock, par
---------------
value $10.00 per share, as constituted on the date hereof.
"Registration Rights Agreement" shall mean the Registration Rights
-----------------------------
Agreement of even date herewith, between Frontier and the Investor, relating to
the registration of the Registrable Securities (as defined therein) under and
pursuant to the Securities Act, which shall be in substantially the form
attached as Annex 2 hereto, as said Registration Rights Agreement shall be
-------
modified and supplemented and in effect from time to time.
"Restricted Certificate" shall mean a certificate for shares of Warrant
Stock or Warrants bearing or required to bear the restrictive legend set forth
in Section 4.04.
------------
"Restricted Securities" shall mean Restricted Stock and Restricted
---------------------
Warrants.
"Restricted Stock" shall mean Warrant Stock required pursuant to Section
----------------
4.04 to be evidenced by a Restricted Certificate.
-3-
<PAGE>
"Restricted Warrants" shall mean Warrants required pursuant to Section 4.04
------------------- ------------
to be evidenced by a Restricted Certificate.
"Rule 144" shall mean Rule 144 promulgated by the Commission under the
--------
Securities Act (or any successor or similar rule then in force).
"Rule 144A" shall mean Rule 144A promulgated by the Commission under the
---------
Securities Act (or any successor or similar rule then in force).
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
--------------
successor Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Significant Holder" shall mean, as at any date, a Holder of 33 1/3% of the
------------------
then outstanding Warrants and shares of Warrant Stock.
"Stockholder" shall mean any Person who directly or indirectly owns any
-----------
shares of Common Stock or securities convertible into, or exchangeable or
exercisable for, Common Stock (including any shares of Warrant Stock).
"Stock Unit" shall have the meaning assigned to such term in the form of
----------
Warrant attached as Annex 1 hereto.
-------
"Warrants" shall have the meaning assigned to such term in Section 2.01.
-------- ------------
"Warrant Stock" shall mean (i) the shares of Common Stock purchased or
-------------
purchasable by the Holders of the Warrants upon the exercise thereof, including
any other stock into which such Common Stock may thereafter be changed or
converted, and (ii) any additional shares of Common Stock or other securities
issued or distributed by way of a dividend, stock split or other distribution in
respect of the Common Stock referred to in clause (i) above, or acquired by way
of any rights offering or similar offering made in respect of the Common Stock
referred to in clause (i) above.
(c) References herein and in the Warrants to the Common Stock outstanding
"on a fully diluted basis" at any time shall mean the number of shares of Common
Stock then issued and outstanding, assuming full conversion, exercise and
exchange of all warrants, options and rights to purchase Common Stock and all
securities of any type that shall be (or may become) exchangeable for, or
exercisable or convertible into, Common Stock, including the Warrants.
-4-
<PAGE>
(d) Except as otherwise may be expressly provided herein, all
accounting terms used herein shall be interpreted, and all financial statements
and certificates and reports as to financial matters required to be delivered to
the Holders hereunder and under the Warrants shall be prepared, in accordance
with generally accepted accounting principles consistently applied. All
calculations made for the purposes of determining compliance with the terms of
this Agreement and the Warrants shall (except as otherwise may be expressly
provided herein) be made by application of generally accepted accounting
principles consistently applied.
SECTION 2. Purchase and Sale of Warrants.
-----------------------------
2.01 Authorization and Issuance of Shares and Warrants. Frontier has
-------------------------------------------------
authorized: (a) the issuance of warrant certificates covering the purchase of
Stock Units representing, as of January 12, 1996, 250,000 shares of Common Stock
in the form of Annex 1 to this agreement (such certificates, together with the
-------
rights to purchase Common Stock provided thereby and all warrant certificates
covering such stock issued upon transfer, division or combination of, or in
substitution for, any thereof, sometimes called the "Warrants") for issuance to
--------
the Investor pursuant to this Agreement; and (b) the issuance, and has reserved
for such issuance, of such number of shares of Common Stock as shall permit
compliance by Frontier with its obligations to issue Common Stock pursuant to
the Warrants.
2.02 Initial Purchase of Warrants.
----------------------------
(a) On the Date of Issuance, Frontier shall issue to the Investor,
against the payment of $.001 per Stock Unit (for a total of $250), Warrants
covering such number of Stock Units as is equal to 250,000 shares of Common
Stock.
(b) On the Date of Issuance, Frontier shall issue to the Investor a
single certificate for the Warrants to be acquired by the Investor hereunder,
registered in the name of the Investor, expect that, if the Investor shall
notify Frontier in writing prior to such issuance that it desires certificates
for some or all of such Warrants to be issued in other denominations or
registered in the name or names of any Affiliate, nominee or nominees of the
Investor for its or their benefit, then the certificates for such Warrants shall
be issued to the Investor in the denominations and registered in the name or
names specified in such notice; provided, that prior to the issuance of any such
--------
certificates, each such Affiliate or nominee of the Investor shall confirm in
writing for the benefit of Frontier that the representations set forth in
Sections 2.03 and 2.04 are true, complete and correct with respect to such
- ------------- ----
Affiliate or nominee, and each such Affiliate or nominee acknowledges and agrees
in writing, to accept the benefits of, and to be bound by the terms and
conditions applicable to, Holders in
-5-
<PAGE>
this Agreement, in the Warrants and in the Registration Rights Agreement.
(c) On the Date of Issuance, Frontier shall deliver to the Investor
a legal opinion from counsel to Frontier in form and substance reasonably
acceptable to Frontier.
2.03 Representations and Warranties of the Investor. The Investor
----------------------------------------------
represents and warrants to Frontier as follows:
(a) Purchase for Own Account. The Warrants and Warrant Stock, as
------------------------
the case may be, to be received by the Investor will be acquired for investment
for the Investor's own account and not with a present view to the distribution
of any part thereof, and the Investor has no present intention of selling,
granting any participation in, or otherwise distributing the same in a manner
contrary to the Securities Act or applicable state securities laws, provided,
--------
that, the Investor at all times retains the right to control, deal with and sell
all of its property, including the Warrants.
(b) Disclosure of Information; Due Diligence. The Investor
----------------------------------------
represents that it has had an opportunity to ask questions of and receive
answers from Frontier regarding Frontier and the terms and conditions of the
offering of the Warrants and Warrant Stock, as the case may be, offered hereby
and to obtain additional information necessary to verify the accuracy of
the information supplied or to which it had access.
(c) Investment Experience; Accredited Investor Status. The Investor
-------------------------------------------------
is able to bear the economic risk of its investment and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment in the Warrants and the Warrant Stock
issuable thereunder. The Investor understands that neither the Warrants nor the
Warrant Stock issuable thereunder have been registered under the Securities Act
or under the securities laws of any jurisdiction by reason of reliance upon
certain exemptions, and that the reliance of Frontier on such exemptions is
predicated upon the accuracy of the Investor's representations and warranties in
this Section 2.03. The Investor is familiar with Regulation D promulgated under
------------
the Securities Act and is an "accredited investor" as defined therein.
2.04 Securities Act Compliance. The Investor agrees that neither the
-------------------------
Warrants nor the Warrant Stock shall be sold or transferred or offered for sale
or transfer without registration under the Securities Act or the availability of
an exemption therefrom, and in accordance with the terms and conditions and
legends set forth in Section 4.
---------
-6-
<PAGE>
SECTION 3. Representations and Warranties.
------------------------------
Frontier represents and warrants to the Investor as follows:
3.01 Existence; Qualification. Frontier is a corporation duly
------------------------
organized, validly existing and in good standing under the laws of the State of
Oklahoma. Frontier has duly qualified and is authorized to do business and is
in good standing as a foreign-corporation in every jurisdiction where the
failure to be so qualified would have a material adverse effect on Frontier's
ability to enter into and perform all of its obligations under this Agreement,
the Warrants and the Registration Rights Agreement.
3.02 No Breach. The execution, delivery and performance of this
---------
Agreement, the Warrants and the Registration Rights Agreement by Frontier and
the consummation of the transactions contemplated hereby and thereby will not
(a) violate the articles of incorporation or by-laws of Frontier, (b) violate
any loan or credit agreement to which Frontier is a party or is bound, or result
in a breach of or default under any other instrument or agreement to which
Frontier is a party or is bound which is material to the business or properties
of Frontier taken as a whole, (c) violate any judgment, order, injunction,
decree or award against or binding upon Frontier, the violation of which would
have a material adverse effect on the business or properties of Frontier taken
as a whole, (d) result in the creation of any material Lien upon any of the
properties or assets of Frontier, or (e) violate any law, rule or regulation
applicable to or binding-upon Frontier.
3.03 Corporate Action. Frontier has all necessary corporate power
----------------
and authority to execute, deliver and perform its obligations under this
Agreement, the Warrants and the Registration Rights Agreement; the execution,
delivery and performance by Frontier of this Agreement, the Warrants and the
Registration Rights Agreement have been duly authorized by all necessary
corporate action (including all stockholder action if required) on the part of
Frontier; this Agreement and the Registration Rights Agreement have been duly
executed and delivered by Frontier and constitute legal, valid and binding
obligation of Frontier, enforceable against Frontier in accordance with their
respective terms; each of the Warrants, when executed, issued and delivered
pursuant to this Agreement will constitute the legal, valid and binding
obligation of Frontier, enforceable against Frontier in accordance with its
terms; the Warrant Stock initially covered by the Warrants will be duly and
validly authorized and reserved for issuance and shall, when paid for, issued
and delivered in accordance with the terms of the Warrants, be duly and validly
issued, fully paid and nonassessable and free and clear of any Liens; and none
of the Warrant Stock issued pursuant to the terms hereof shall be in violation
of any preemptive rights of any Stockholder.
-7-
<PAGE>
3.04 Approvals. Based in part upon the representations set forth in
---------
Section 2.03, except in connection with the registration of the Warrant Stock
- ------------
pursuant to the Registration Rights Agreement, no authorizations, approvals or
consents of, and no filings or registrations with, any Governmental Authority or
any other Person are necessary for the execution, delivery or performance by
Frontier of this Agreement, the Warrants or the Registration Rights Agreement or
for the validity or enforceability thereof. Any such action required to be
taken as a condition to the execution and delivery of this Agreement and the
Registration Rights Agreement, or the issuance and delivery of the Warrants, has
been (or prior to such issuance and delivery will be) duly taken by all such
Governmental Authorities or other Persons, as the case may be.
3.05 Investment Company Act. Frontier is not an "investment
----------------------
company", or a company "controlled by" an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
3.06 Public Utility Holding Company Act. Frontier is not a "holding
----------------------------------
company," or an "affiliate" of a "holding company" or a "subsidiary company" of
a "holding company," within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
3.07 Capitalization.
--------------
(a) On the date hereof, the total number of shares of capital stock
which Frontier has authority to issue is (i) 20,000,000 shares of Common Stock,
par value $.01 per share, of which 5,208,406 shares are issued and outstanding,
and (ii) 5,000,000 shares of Preferred Stock, par value $10.00 per share, of
which 85,961 shares are issued and outstanding. Frontier does not have, and
upon the issuance of the Warrants under this Agreement, Frontier shall not
(except for the Warrants) have, outstanding any stock or securities exercisable
or convertible into or exchangeable for any shares of capital stock of Frontier
nor shall it have outstanding any rights to subscribe for or to purchase, or any
options for the purchase of, or any agreements providing for the issuance
(contingent or otherwise) of, or any calls, commitments or claims of any
character relating to, any capital stock of Frontier or stock or securities
exercisable or convertible into or exchangeable for any capital stock of
Frontier other than the Warrants to be issued pursuant to this Agreement.
(b) There is not in effect on the date hereof any agreement by
Frontier pursuant to which any holders of securities of Frontier have a right to
cause Frontier to register such securities under the Securities Act other than
the Registration Rights Agreement.
-8-
<PAGE>
3.08 Private Offering.
----------------
(a) Assuming the truth and accuracy of the Investor's
representations and warranties contained in Section 2.03, the issuance and sale
------------
of the Warrants to the Investor hereunder are exempt from the registration and
prospectus delivery requirements of the Securities Act as presently in effect.
(b) Frontier agrees that neither Frontier nor any Person acting on
its behalf has offered or will offer the Warrants or shares of Warrant Stock or
any part thereof or any similar securities for issue or sale to, or has
solicited or will solicit any offer to acquire any of the same from, any Person
so as to bring the issuance and sale of the Warrants or shares of Warrant Stock
within the provisions of the registration and prospectus delivery requirements
of the Securities Act.
3.09 No Litigation. There is no action, suit, proceeding or
-------------
investigation pending or, to the best of Frontier's knowledge after due inquiry,
threatened against Frontier before any court or administrative agency seeking to
enjoin the transactions contemplated by this Agreement, the Warrants or the
Registration Rights Agreement or that is reasonably likely to (i) prohibit or
limit in any way the performance by Frontier of its obligations under the
Warrant Agreement, the Warrants or the Registration Rights Agreement or (ii)
affect the legality, validity, enforceability or binding nature of the Warrant
Agreement, the Warrants or the Registration Rights Agreement.
SECTION 4. Restrictions on Transferability.
-------------------------------
4.01 Transfers Generally. Except as otherwise provided in Section 5,
------------------- ---------
the Restricted Securities shall only be transferable upon the conditions
specified in this Section 4 and in the Registration Rights Agreement, which
---------
conditions are intended to insure compliance with the provisions of the
Securities Act and applicable state securities laws in respect of the transfer
of any Restricted Securities.
4.02 Transfers of Restricted Securities Pursuant to Registration
-----------------------------------------------------------
Statements, Rule 144 and Rule 144A. The Restricted Securities may be offered or
- ----------------------------------
sold by the Holder thereof pursuant to (a) an effective registration statement
under the Securities Act, or (b) to the extent applicable, Rule 144 or Rule
144A.
4.03 Notice of Certain Transfers. If any Holder of any Restricted
---------------------------
Security desires to transfer such Restricted Security other than pursuant to an
effective registration statement under the Securities Act or pursuant to Rule
144 or Rule 144A, then such Holder shall deliver to Frontier a notice with
respect to the proposed transfer, together with a written representation
(together
-9-
<PAGE>
with such factual information in respect thereof as Frontier may reasonably
request) from such Holder in substance reasonably satisfactory to Frontier to
the effect that an exemption from registration under the Securities Act and
applicable state securities laws is available.
4.04 Restrictive Legends.
-------------------
(a) Until otherwise permitted by Section 4.05, each certificate for
------------
Warrants issued under this Agreement, each certificate for any Warrants issued
to any subsequent transferee of any such certificate, each certificate for any
Warrant Stock issued upon exercise of any Warrant and each certificate for any
Warrant Stock issued to any subsequent transferee of any such certificate, shall
be stamped or otherwise imprinted with one or more legends in substantially the
following form:
THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR
HAVE ANY OF THEM BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES OR
BLUE SKY LAWS OF ANY STATE. NEITHER THIS CERTIFICATE NOR THE SECURITIES
ISSUABLE UPON EXERCISE HEREOF, NOR ANY INTEREST OR PARTICIPATION HEREIN
OR THEREIN MAY BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED, ENCUMBERED OR
IN ANY OTHER MANNER TRANSFERRED OR DISPOSED OF, EXCEPT IN COMPLIANCE
WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE RULES
AND REGULATIONS THEREUNDER AND APPLICABLE STATE SECURITIES AND BLUE SKY
LAWS.
THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
SUBJECT TO THE CONDITIONS SPECIFIED IN THAT CERTAIN WARRANT AGREEMENT
DATED AS OF January 12, 1996 (THE "WARRANT AGREEMENT"), BETWEEN FRONTIER
NATURAL GAS CORPORATION, AN OKLAHOMA CORPORATION (THE "CORPORATION"),
AND WEISSER, JOHNSON & CO., AS THE WARRANT AGREEMENT MAY BE MODIFIED AND
SUPPLEMENTED AND IN EFFECT FROM TIME TO TIME, AND NO TRANSFER OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE SHALL BE VALID OR EFFECTIVE
UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED. A COPY OF THE FORM OF THE
WARRANT AGREEMENT IS ON FILE AND MAY BE INSPECTED AT THE PRINCIPAL
EXECUTIVE OFFICE OF THE CORPORATION. THE HOLDER OF THIS CERTIFICATE, BY
ACCEPTANCE OF THIS CERTIFICATE, AGREES TO BE BOUND BY THE PROVISIONS OF
THE WARRANT AGREEMENT.
(b) In addition, each certificate for any Warrant Stock issued upon
exercise of any Warrant, and each certificate for any Warrant Stock issued to
any subsequent transferee of any such certificate shall be stamped or otherwise
imprinted with the following legends:
-10-
<PAGE>
THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR
HAVE ANY OF THEM BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES OR
BLUE SKY LAWS OF ANY STATE. NEITHER THIS CERTIFICATE NOR THE SECURITIES
ISSUABLE UPON EXERCISE HEREOF, NOR ANY INTEREST OR PARTICIPATION HEREIN
OR THEREIN MAY BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED, ENCUMBERED OR
IN ANY OTHER MANNER TRANSFERRED OR DISPOSED OF, EXCEPT IN COMPLIANCE
WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE RULES
AND REGULATIONS THEREUNDER AND APPLICABLE STATE SECURITIES OR BLUE SKY
LAWS.
(c) In addition, each such certificate shall be stamped or otherwise
imprinted with any legend required under state securities laws.
4.05 Termination of Restrictions. All the restrictions imposed by
---------------------------
this Section 4 upon the transferability of the Restricted Securities shall cease
---------
and terminate as to any particular Restricted Security when such Restricted
Security shall have been effectively registered under the Securities Act and
applicable state securities laws and sold by the Holder thereof in accordance
with such registration or sold under and pursuant to Rule 144 or is eligible to
be sold under and pursuant to paragraph (k) of Rule 144. Whenever the
restrictions imposed by this Section 4 shall terminate as to any Restricted
---------
Security as hereinabove provided, the Holder thereof shall be entitled to
receive from Frontier, without expense, a new certificate evidencing such
Restricted Security not bearing the restrictive legend otherwise required to be
borne by a certificate evidencing such Restricted Security.
SECTION 5. Certain Dispositions of Securities.
----------------------------------
5.01 Certain Dispositions of Securities.
----------------------------------
(a) Notwithstanding anything in this Agreement (including Section 4
---------
other than Section 4.05) or the Warrants to the contrary, but subject to
------------
compliance with the Securities Act, any applicable state securities laws and the
requirement as to legending of the certificates for Restricted Securities
specified in Section 4.04, any Holder shall have the right to transfer any or
------------
all of its Restricted Securities:
(i) to any Person who at the time owns (directly or
indirectly) at least a majority of the shares of such Holder; or
(ii) to any Person at least a majority of whose shares shall
at the time be owned (directly or indirectly)
-11-
<PAGE>
by such Holder or by any Person who owns (directly or indirectly) at
least a majority of the shares of such Holder.
SECTION 6. Holders' Rights.
---------------
6.01 Delivery Expenses. If any Holder surrenders any certificate for
-----------------
Warrants or Warrant Stock to Frontier or a transfer agent of Frontier for
exchange for instruments of other denominations or registered in another name or
names, subject to the terms and conditions of Section 4, Frontier shall cause
---------
such new instruments to be issued and shall pay the costs associated with the
preparation and issuance of any new instruments and the cost of delivering to
the office of such Holder from Frontier or its transfer agent, duly insured, the
surrendered instrument and any new instruments issued in substitution or
replacement for the surrendered instrument.
6.02 Taxes. Frontier shall pay all taxes (other than Federal, state
-----
or local income taxes) which may be payable in connection with the execution and
delivery of this Agreement or the Registration Rights Agreement or the issuance
of the Warrants and Warrant Stock hereunder, or in connection with any
modification of this Agreement, the Registration Rights Agreement or the
Warrants and shall hold each Holder harmless without limitation as to time
against any and all liabilities with respect to all such taxes. Frontier shall
not, however, be required to pay any tax, with respect to any Warrant which may
be payable in respect of any transfer involved in the issuance and delivery of
Warrants or of shares of Common Stock in a name other than that in which such
Warrant or Common Stock is registered, and no such issue or delivery shall be
made unless and until the Person requesting such issue has paid to Frontier the
amount of any such tax, or has established, to the satisfaction of Frontier,
that such tax has been paid. The obligations of Frontier under this Section 6.02
------------
shall survive any redemption, repurchase or acquisition of Warrants or Warrant
Stock by Frontier, any termination of this Agreement or the Registration Rights
Agreement, and any cancellation or termination of the Warrants.
6.03 Replacement of Instruments. Upon receipt by Frontier of
--------------------------
evidence reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of any certificate or instrument evidencing any
Warrants or Warrant Stock, and
(a) in the case of loss, theft or destruction, of indemnity
reasonably satisfactory to it, or
(b) in the case of mutilation, upon surrender thereof, Frontier, at
its expense, shall cancel such certificate or instrument and execute, register
and deliver, in lieu thereof, a
-12-
<PAGE>
new certificate or instrument for (or covering the purchase of) an equal number
of Warrants or Warrant Stock.
6.04 Certain Restrictions. Frontier shall not at any time enter into
--------------------
an agreement or other instrument (other than the Credit Agreement) limiting in
any manner its ability to perform its obligations under this Agreement, the
Registration Rights Agreement or the Warrants, or making such performance or the
issuance of shares of Common Stock upon the exercise of any Warrant a default
under any such agreement or instrument.
6.05 Certain Covenants. At all times prior to the Expiration Date:
-----------------
(a) Frontier shall retain a nationally recognized independent
accounting firm as its auditors.
(b) Frontier shall afford the Investor or its Affiliates (or
Significant Holder), or their respective authorized agents, access, at
reasonable times, upon reasonable prior notice, (i) to inspect the books and
records of Frontier, (ii) to discuss with management of Frontier the
nonconfidential business and affairs of Frontier and its Subsidiaries, and (iii)
to inspect the properties of Frontier.
(c) Each Holder and its authorized agents shall have the right to
attend all meetings of shareholders of Frontier.
(d) Frontier shall provide the Investor with all notices set forth
in Sections 6.01, 6.02 and 6.03 of the Warrant pursuant to the respective terms
------------- ---- ----
thereof.
6.06 Indemnification. Frontier shall indemnify and hold harmless
---------------
each of the Investor and the Holders and each of their respective directors,
officers, employees, stockholders, Affiliates and agents, and the Investor and
the Holders shall indemnify and hold harmless Frontier and its directors,
officers, employees, stockholders, Affiliates and agents (each, an "indemnified
-----------
person") on demand from and against any and all losses, claims, damages,
- ------
liabilities (or actions or other proceedings commenced or threatened in respect
thereof) and expenses that arise out of, result from, or in any way relate to
the breach of any representation, warranty or covenant by the indemnifying party
contained in this Agreement, the Warrants, the Registration Rights Agreement or
any other agreement, document or instrument executed and delivered in connection
with the transactions contemplated hereby or thereby, and reimburse each
indemnified person, upon its demand, for any reasonable legal or other expenses
incurred in connection with investigating, defending or participating in the
defense of any such loss, claim, damage, liability, action or other proceeding
(whether or not such indemnified person is a party to
-13-
<PAGE>
any action or proceeding out of which any such expenses arise), other than any
of the foregoing claimed by any indemnified person to the extent incurred by
reason of the gross negligence or willful misconduct of such indemnified person.
No indemnified person shall be responsible or liable to any Person for any
consequential damages which may be alleged as a result of or relating to this
Agreement, the Warrants, the Registration Rights Agreement or in connection with
the other transactions contemplated hereby and thereby.
6.07 Financial Statements. Frontier shall deliver the information
specified below to the Investor and each Significant Holder until the earlier of
(i) the Expiration Date and (ii) the date on which Registrable Securities (as
such term is defined in the Registration Rights Agreement) shall no longer be
held by the Investor or any Significant Holder:
(a) as soon as available and in any event within 60 days
after the end of each of the first three Fiscal Quarters of each Fiscal
Year of Frontier, balance sheets of Frontier and its consolidated
Subsidiaries as of the end of such Fiscal Quarter and statements of
operations and cash flow of Frontier and its consolidated Subsidiaries
for such Fiscal Quarter and for period commencing at the end of the
previous Fiscal Year and ending with the end of such Fiscal Quarter,
certified by the chief financial Authorized Officer of Frontier;
(b) as soon as available end in any event within 120 days
after the end of each Fiscal Year of Frontier, a copy of the annual
audit report for such Fiscal Year for Frontier, including therein the
balance sheet of Frontier and its consolidated Subsidiaries as of the
end of such Fiscal Year and statements of operations and cash flow of
Frontier and its consolidated Subsidiaries for such Fiscal Year, in each
case certified (without any Impermissible Qualification) in a manner
reasonably acceptable to the Investor by an independent public
accountant acceptable to the Investor, together with a report from such
accountants to the effect that, in making the examination necessary for
the signing of such annual report by such accountants, they have not
become aware of any Default that has occurred and is continuing, or, if
they have become aware of such Default, describing such Default and the
steps, if any, being taken to cure it; provided, that such compliance
--------
shall not be required to be shown for calendar year 1995;
(c) promptly after (1) the sending or filing thereof, copies
of all reports which Frontier sends to any of its security holders, (2)
the sending or filing thereof, all reports and registration statements
which the Borrower
-14-
<PAGE>
files with the Securities and Exchange Commission or any national
securities exchange, (3) the filing thereof, copies of all tariff and
rate cases and other material reports filed with any regulatory
authority, and (4) receipt thereof, copies of all notices received from
any regulatory authority concerning noncompliance by Frontier with any
applicable regulations; and
(d) such other information respecting the condition or
operations, financial or otherwise, of Frontier as the Investor may from
time to time reasonably request.
SECTION 7. Miscellaneous.
-------------
7.01 Waiver. No failure on the part of either party to exercise
and no delay in exercising, and no course of dealing with the respect to, any
right, power or privilege under this Agreement, the Warrants or the
Registration Rights Agreement shall operate as a waiver thereof, nor shall any
single or partial exercise of any right, power or privilege under this Agreement
or the Registration Rights Agreement preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The remedies
provided herein are cumulative and not exclusive of any remedies provided by
law.
7.02 Notices.
-------
(a) All notices, requests and other communications provided for
herein and the Warrants (including any waivers or consents under, this Agreement
and the Warrants) shall be given or made in writing,
(i) if to Frontier:
One Benham Place
9400 North Broadway Extension
Oklahoma City, Oklahoma 73114
Attn: General Counsel
Fax No.: (405) 478-4456
Phone No.: (405) 478-4455
(ii) if to the Investor:
Weisser, Johnson & Co.
1 Houston Center
Suite 3175
1221 McKinney
Houston, Texas 77010-2009
-15-
<PAGE>
Attn: Scott W. Johnson
Fax No.: (713) 659-4600
Phone No.: (713) 659-6020
with a copy to:
Weisser, Johnson & Co.
1 Houston Center
Suite 3175
1221 McKinney
Houston, Texas 77010-2009
Attn: Frank M. Weisser
Fax No.: (212) 572-6356
Phone No.: (212) 572-6436
(iii) if to any other Person who is the registered Holder of any
Warrants or Warrant Stock, to the address for such Holder as it appears
in the stock or warrant ledger of Frontier;
or, in the case of any Holder, at such other address as shall be designated by
such party in a notice to Frontier; or, in the case of Frontier, at such other
address as Frontier may designate in a notice to the Investor and all other
Holders.
(b) All such notices, requests and other communications shall be: (i)
personally delivered, sent by courier guaranteeing overnight delivery, sent by
facsimile or other telecommunication device capable of transmitting or creating
a written record, or sent by registered or certified mail, return receipt
requested, postage prepaid, in each case given or addressed as aforesaid; and
(ii) effective upon receipt.
7.03 Expenses, Etc. Frontier agrees to pay or reimburse the Investor
-------------
all reasonable costs and expenses of the Investor (including reasonable legal
fees and expenses of counsel) in connection with (i) any default by Frontier
hereunder or under the Warrants or the Registration Rights Agreement or any
enforcement proceedings resulting therefrom, and (ii) the enforcement of this
Section 7.03.
- ------------
7.04 Amendments, Etc. Except as otherwise expressly provided in this
---------------
Agreement, any provision of this Agreement may be amended or modified only by an
instrument in writing signed by (a) Frontier and (b) the Majority Warrant Stock-
holders; provided, however, that no such amendment or waiver shall, without the
-------- -------
-16-
<PAGE>
written consent of all holders of Warrant Stock and Warrants at the time
outstanding, amend the Section 7.04.
------------
7.05 Successors and Assigns. Subject to the terms and conditions of
----------------------
Section 4, this Agreement shall be binding upon and inure to the benefit of the
- ---------
parties hereto and their respective successors and permitted transferees and
assigns.
7.06 Survival.
--------
(a) All representations and warranties made by Frontier herein or in
any certificate or other instrument delivered by it or on its behalf under this
Agreement or the Registration Rights Agreement shall survive the issuance of the
Warrants or the Warrant Stock. All statements in any such certificate or other
instrument so delivered shall constitute representations and warranties by
Frontier hereunder.
(b) All representations and warranties made by the Investor herein
shall survive the issuance to the Investor of the Warrants or the Warrant Stock
regardless of any investigation.
7.07 Captions. The captions and section headings appearing herein are
--------
included solely for convenience of reference and are not intended to affect the
interpretation of any provision of this Agreement.
7.08 Counterparts. This Agreement may be executed on counterpart
------------
signature pages or in any number of counterparts, all of which taken together
shall constitute one and the same instrument and any of the parties hereto may
execute this Agreement by signing any such counterpart signature page or
counterpart.
7.09 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the substantive law of the State of Texas applicable to
contracts executed in and to be fully performed in such State.
7.10 Severability. If any one or more of the provisions contained
------------
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable, the validity, respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
-17-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Warrant
Agreement as of the date first above written.
FRONTIER NATURAL GAS CORPORATION
By:
-----------------------------
Name:
Title:
WEISSER, JOHNSON & CO.
By:
-----------------------------
Name:
Title:
-18-
<PAGE>
Annex 1
to
Warrant Agreement
WARRANT
THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE NOT BEEN
REGISTERED OR QUALIFIED UNDER THE SECURITIES OR BLUE SKY LAWS OF ANY STATE.
NEITHER THIS CERTIFICATE NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF, NOR
ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN, MAY BE SOLD, ASSIGNED, PLEDGED,
HYPOTHECATED, ENCUMBERED OR IN ANY OTHER MANNER TRANSFERRED OR DISPOSED OF,
EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND THE
APPLICABLE RULES AND REGULATIONS THEREUNDER AND APPLICABLE STATE SECURITIES OR
BLUE SKY LAWS.
THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE
CONDITIONS SPECIFIED IN THAT CERTAIN WARRANT AGREEMENT DATED EFFECTIVE AS OF
JANUARY 12, 1996 (THE "WARRANT AGREEMENT"), BETWEEN FRONTIER NATURAL GAS
-----------------
CORPORATION, AN OKLAHOMA CORPORATION (THE "CORPORATION"), AND WEISSER, JOHNSON &
-----------
CO., AS THE WARRANT AGREEMENT MAY BE MODIFIED AND SUPPLEMENTED AND IN EFFECT
FROM TIME TO TIME, AND NO TRANSFER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE SHALL BE VALID OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE BEEN
FULFILLED. A COPY OF THE FORM OF THE WARRANT AGREEMENT IS ON FILE AND MAY BE
INSPECTED AT THE PRINCIPAL EXECUTIVE OFFICE OF THE CORPORATION. THE HOLDER OF
THIS CERTIFICATE, BY ACCEPTANCE OF THIS CERTIFICATE, AGREES TO BE BOUND BY THE
PROVISIONS OF THE WARRANT AGREEMENT.
[ANY OTHER LEGEND REQUIRED UNDER STATE SECURITIES LAWS]
<PAGE>
No. of Stock Units: 250,000 Warrant No.
WARRANT
to Purchase Common Stock of
FRONTIER NATURAL GAS CORPORATION
Expiring January 12, 2001
THIS IS TO CERTIFY THAT WEISSER, JOHNSON & CO., or registered assigns, is
entitled to purchase in whole or in part from time to time from FRONTIER NATURAL
GAS CORPORATION, an Oklahoma corporation ("Frontier"), on or after the Date of
--------
Issuance (as hereinafter defined), but not later than 5:00 p.m., New York time,
on January 12, 2001 (the "Expiration Date"), 250,000 Stock Units (as hereinafter
---------------
defined and subject to adjustment as provided herein) at a purchase price per
Stock Unit equal to the Exercise Price (as hereinafter defined), subject to the
terms and conditions hereinbelow provided.
SECTION 1. Certain Definitions.
-------------------
(a) Each capitalized term used herein without definition shall have the
meaning ascribed thereto in the Warrant Agreement (as hereinafter defined).
(b) As used in this Warrant, unless the context otherwise requires:
"Additional Shares of Common Stock" shall mean all shares of Common Stock
---------------------------------
issued by Frontier on or after the Date of Issuance, other than (i) the Warrant
Stock, (ii) the shares of Common Stock described as being issued and outstanding
on the Date of Issuance in Section 3.07 of the Warrant Agreement, and (iii)
------------
shares of Common Stock issued or to be issued to employees, directors, advisors
or consultants of Frontier in connection with equity incentive plans.
"Common Stock Value", per share of Common Stock, shall mean $2.00 per
------------------
share.
"Convertible Securities" shall mean evidences of indebtedness, shares of
----------------------
stock or other securities which are convertible into, or exercisable or
exchangeable for, Additional Shares of Common Stock, either immediately or upon
the arrival of a specified date or the happening of a specified event.
-2-
<PAGE>
"Current Adjustment Price," per share of Common Stock, for the purposes of
------------------------
any provision of this Warrant at the date herein specified, shall be deemed to
be the average of the daily market prices on such date and the five (5)
consecutive trading days immediately prior to such date. The market price for
each such trading day shall be (a) if the Common Stock is traded on a national
securities exchange, its last bid price on such trading day or, if there was no
bid on that day, the last bid price on the next preceding trading day on which
there was a bid, all as made available over the Consolidated Last Sale Reporting
System of the CTA Plan or, if the Common Stock is not then eligible for
reporting over such System, its last bid price on such trading day on such
national securities exchange or, if there was no bid on that day, on the next
preceding trading day on which there was a bid on such national securities
exchange or (b) if the principal market for the Common Stock is the
over-the-counter market, (i) its last bid price on such trading day or, if there
was no bid on that day, the last bid price on the next preceding trading day on
which there was a bid, all as made available over the Consolidated Last Sale
Reporting System of the CTA Plan, or (ii) if the Common Stock is not then
eligible for reporting over the Consolidated Last Sale Reporting System of the
CTA Plan a the Common Stock is quoted on the National Association of Securities
Dealers Automated Quotations System ("NASDAQ"), the last bid price reported on
------
NASDAQ on such trading day or, if there was no bid on that day, the last bid
price on the next preceding trading day on which there was a bid or (iii) if the
Common Stock is not reported or quoted on NASDAQ, the closing bid quotations as
quoted in each of The Wall Street Journal, the National Quotation Bureau pink
sheets, the Salomon Brothers quotation sheets, quotation sheets of registered
marketmakers, as applicable, and, if necessary, dealers' telephone quotations.
If the Current Adjustment Price per share of Common Stock cannot be ascertained
by any of the foregoing methods, the Current Adjustment Price per share of
Common Stock shall be deemed to be the Fair Value per share of Common Stock.
"Current Warrant Price," per share of Common Stock, for the purpose of any
---------------------
provision of this Warrant at the date herein specified, shall mean the amount
equal to the quotient resulting from dividing the Exercise Price per Stock Unit
in effect on such date by the number of shares (including any fractional share)
of Common Stock comprising a Stock Unit on such date.
"Date of Issuance" shall mean January 12, 1996.
----------------
"Exercise Price" per Stock Unit shall mean the dollar amount that is 100%
--------------
of the Common Stock Value per share of Common Stock.
"Expiration Date" shall have the meaning set forth in the preamble of this
---------------
Warrant.
-3-
<PAGE>
"Fair Value" per share of Common Stock (or other property as the case
----------
may be) shall mean the price that could be obtained from an independent third
party for all of the issued and outstanding shares of Common Stock of Frontier
in and arm's length transaction in which the seller would not be under any
compulsion to sell and the purchaser would not be under any compulsion to
purchase. Fair Value shall be determined as follows: Frontier and the Holders of
Warrants entitled to purchase a majority of the Stock Units covered by all the
Warrants shall each designate a representative, and such representatives will
meet and use their best efforts to reach and agreement on the Fair Value. If the
representatives designated by Frontier and such Holders are unable to reach such
and agreement, then the Holders of Warrants entitled to purchase a majority of
the Stock Units covered by all the Warrants will submit a list of at least three
Independent Appraisers. Frontier shall select one of the Independent Appraisers
set forth on such list. The Independent Appraiser so selected by Frontier will
determine the Fair Value of a share of Common Stock (or other property, as the
case may be) and its determination thereof will be final and binding on all
parties concerned, absent manifest error. Frontier will provide the Independent
Appraiser so selected by Frontier with all information about Frontier and its
Subsidiaries which such Independent Appraiser reasonably deems necessary for
determining the Fair Value. The fees and expenses of the appraisal process
(including those of the Independent Appraiser) will be paid by Frontier.
Frontier may require that the Independent Appraiser keep confidential any non-
public information received as a result of this paragraph pursuant to reasonable
confidentiality arrangements.
"include" and "including" shall be construed as if followed by the
------- ---------
phrase ", without being limited to,".
"Independent Appraiser" shall mean an appraiser which is a nationally
---------------------
recognized independent expert experienced in valuing businesses similar to the
principal business of Frontier and its Subsidiaries.
"Non-Transferable Rights" shall have the meaning assigned to such term
-----------------------
in the definition of Rights Plan.
"Frontier" shall have the meaning set forth in the preamble of this
--------
Warrant.
"Registrable Securities" shall have the meaning assigned to such term
----------------------
in the Registration Rights Agreement.
"Registration Rights Agreement" shall have the meaning assigned to such
-----------------------------
term in the Warrant Agreement.
"Requested Registration" shall have the meaning assigned to such term in
----------------------
the Registration Rights Agreement.
-4-
<PAGE>
"Rights Certificate" shall have the meaning assigned to such term in the
------------------
definition of Rights Plan.
"Rights Plan" shall mean a shareholder rights plan implemented by Frontier to
-----------
deter a hostile acquisition, pursuant to which holders of shares of Common Stock
(a) are issued rights that are not initially exercisable or transferable apart
from such shares of Common Stock ("Non-Transferable Rights") and (b) are to be
-----------------------
issued rights certificates exercisable and transferable apart from such shares
of Common Stock ("Rights Certificates") in certain circumstances to purchase
-------------------
Additional Shares of Common Stock upon certain acquisitions of stock or assets
of or business combinations involving Frontier by a Person in a transaction or
transactions not approved by the board of directors of Frontier as specified in
the Rights Plan.
"Stock Unit" shall mean one share of Common Stock on the Date of Issuance,
----------
and thereafter such number of shares (including any fractional shares) of Common
Stock and other securities, cash or other property as shall result from the
adjustments specified in Section 4 and Section 5.
--------- ---------
"Warrant Agreement" shall mean the Warrant Agreement dated as of January 12,
-----------------
1996, between Frontier and Weisser, Johnson & Co. as such Warrant Agreement
shall be modified and supplemented and in effect from time to time.
"Warrants" shall mean the Warrants dated as of the Date of Issuance,
--------
originally issued by Frontier pursuant to the Warrant Agreement, evidencing
rights to purchase up to an aggregate of 250,000 Stock Units, and all Warrants
issued upon transfer, division or combination of, or in substitution for, any
thereof.
(c) References in this Warrant to the Common Stock outstanding "on a fully
diluted basis" at any time shall mean the number of shares of Common Stock then
issued and outstanding, assuming full conversion, exercise and exchange of all
warrants, options and rights to purchase Common Stock and all securities of any
type that shall be (or may become) exchangeable or exercisable for, or
convertible into, Common Stock, including the Warrants.
SECTION 2. Exercise of Warrant.
-------------------
In order to exercise this Warrant, in whole or in part, the Holder hereof
shall deliver to Frontier, at its office maintained for such purpose pursuant to
Section 11.01, (a) a written notice of such Holder's election to exercise this
- -------------
Warrant, which notice shall specify the number of Stock Units to be purchased,
(b) a certified or cashier's check or checks payable to Frontier in an aggregate
amount equal to the aggregate Exercise Price for the number of Stock Units as to
which this Warrant is being exercised (unless the
-5-
<PAGE>
holder by written notice has elected the conversion option for such stock units
set forth in Section 12), and (c) this Warrant. Such notice shall be in
substantially the form of the "Form of Exercise" set out at the end of this
Warrant. Upon receipt thereof, Frontier shall, as promptly as practicable and in
any event within seven days thereafter (unless such exercise shall be in
connection with an underwritten public offering of shares of Common Stock
subject to this Warrant, in which event concurrently with such exercise), cause
to be executed and delivered to such Holder a stock certificate or certificates
representing the aggregate number of duly and validly issued, fully paid and
nonassessable shares of Warrant Stock issuable upon such exercise, free and
clear of any Liens.
The stock certificate or certificates for Warrant Stock so delivered shall
be in such denominations as may be specified in such notice and shall be
registered in the name of such holder or such other name or names as shall be
designated in such notice, provided that such holder shall have complied with
--------
the requirements set forth in the proviso of Section 2.02(b) of the Warrant
---------------
Agreement. To the extent permitted by law, such stock certificate or
certificates shall be deemed to have been issued and such Holder or any other
Person so designated to be named therein shall be deemed to have become a holder
of record of such shares, including the right to vote such shares or to consent
or to receive notice as a stockholder, as of the time such notice and payment is
received by Frontier as aforesaid. If this Warrant shall have been exercised
only in part, Frontier shall, at the time of delivery of said stock certificate
or certificates, execute and deliver to such Holder a new Warrant, dated the
original date of issuance, evidencing the rights of such Holder to purchase the
remaining Stock Units called for by this Warrant, which new Warrant shall in all
other respects be identical with this Warrant, or, at the option of Frontier,
appropriate notation may be made on this Warrant and the same returned to such
Holder.
All shares of Common Stock issuable upon the exercise of this Warrant
shall, upon payment therefor in accordance herewith, be duly and validly issued,
fully paid and nonassessable and free and clear of any Liens.
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. With respect to any fraction of a
share called for upon any exercise hereof, Frontier shall pay to the Holder an
amount in cash equal to such fraction multiplied by the Current Adjustment Price
per share of Common Stock.
SECTION 3. Transfer, Division and Combination.
----------------------------------
-6-
<PAGE>
Subject to Section 11.04, this Warrant and all rights hereunder are
-------------
transferable, in whole or in part, on the books of Frontier to be maintained for
such purpose, upon surrender of this Warrant at the office of Frontier
maintained for such purpose pursuant to Section 11.01, together with a written
-------------
assignment of this Warrant (in substantially the form of the "Form of
Assignment" annexed hereto) duly executed by the Holder hereof or its agent or
attorney and payment of funds sufficient to pay any stock transfer taxes payable
hereunder by the Holder hereof upon the making of such transfer. Upon such
surrender and payment Frontier shall, subject to Section 11.04 and the
-------------
immediately following sentence, execute and deliver a new Warrant or Warrants
(with the same Exercise Price or Exercise Prices as contained in the Warrant or
Warrants so surrendered, respectively) in the name of the assignee or assignees
and in the denominations specified in such instrument of assignment, and this
Warrant shall promptly be canceled. If and when this Warrant is assigned in
blank (in case the restrictions on transferability referred to in Section 11.04
-------------
shall have been terminated), Frontier may (but shall not be obliged to) treat
the bearer hereof as the absolute owner of this Warrant for all purposes and
Frontier shall not be affected by any notice to the contrary. This Warrant, if
properly assigned in compliance with this Section 3 and Section 11.04, may be
--------- -------------
exercised by an assignee for the purchase of shares of Common Stock without
having a new Warrant or Warrants issued.
This Warrant may, subject to Section 11.04, be divided or combined with
-------------
other Warrants upon presentation at the aforesaid office of Frontier, together
with a written notice specifying the names and denominations in which new
Warrants are to be issued, signed by the Holder hereof or its authorized agent
or attorney. Subject to compliance with the next preceding paragraph and with
Section 11.04, as to any transfer which may be involved in such division or
- -------------
combination, Frontier shall execute and deliver a new Warrant or Warrants (with
the same Exercise Price or Exercise Prices as contained in the Warrant or
Warrants so transferred, respectively) in exchange for the Warrant or Warrants
to be divided or combined in accordance with such notice.
Frontier shall maintain at its aforesaid office books for the registration
and transfer of the Warrants.
SECTION 4. Adjustment of Stock Unit.
------------------------
The number of shares of Common Stock comprising a Stock Unit shall be
subject to adjustment from time to time as set forth in this Section 4. Frontier
---------
shall not take any action with respect to its Common Stock of any class
requiring an adjustment pursuant to any Section 4.01, 4.02, 4.08 or 5.01 without
------------ ---- ---- ----
at the same time taking like action with respect to its Common Stock of each
other class; and Frontier shall not create any class of Common Stock
-7-
<PAGE>
which carries any rights to dividends or assets differing in any respect from
the rights of the Common Stock on January 3, 1996.
4.01 Stock Dividends, Subdivisions and Combinations. In case at any time or
----------------------------------------------
from time on or after January 3, 1996, Frontier shall
(1) take a record of the holders of its Common Stock for the purpose of
entitling them to receive a dividend payable in, or other distribution of,
Additional Shares of Common Stock, or
(2) subdivide its outstanding shares of Common Stock into a larger number of
shares of Common Stock, or
(3) combine its outstanding shares of Common Stock into a smaller number of
shares of Common Stock, then the number of shares of Common Stock comprising a
Stock Unit immediately after the happening of any such event shall be adjusted
so as to consist of the number of shares of Common Stock which a record holder
of the number of shares of Common Stock comprising a Stock Unit immediately
prior to the happening of such event would own or be entitled to receive after
the happening of such event.
4.02 Certain Other Dividends and Distributions. In case at any time or from
-----------------------------------------
time to time on or after January 12, 1996, Frontier shall take a record of the
holders of its Common Stock for the purpose of entitling them to receive any
dividend or other distribution of,
(1) cash (other than a cash distribution made as a dividend and payable out
of earnings or earned surplus legally available for the payment of dividends
under the laws of the jurisdiction of incorporation of Frontier, to the extent,
but only to the extent, that the aggregate of all such dividends paid or
declared after the date hereof, does not exceed the consolidated net income of
Frontier and its consolidated Subsidiaries earned subsequent to the date hereof
determined in accordance with generally accepted accounting principles
consistently applied), or
(2) any evidence of its indebtedness (other than Convertible Securities),
any shares of its stock (other than Additional Shares of Common Stock) or any
other securities or property of any nature whatsoever (other than cash and other
than Convertible Securities or Additional Shares of Common Stock), or
(3) any options, warrants or other rights to subscribe for or purchase any
evidences of its indebtedness (other than (A) Convertible Securities and (B)
Non-Transferable Rights issued pursuant to a Rights Plan), any shares of its
stock (other than Additional Shares of Common Stock) or any other securities or
property of any nature whatsoever (other than cash and other than
-8-
<PAGE>
Convertible Securities of Additional Shares of Common Stock), then the number of
shares of Common Stock thereafter comprising a Stock Unit shall be adjusted to
that number determined by multiplying the number of shares of Common Stock
comprising a Stock Unit immediately prior to such adjustment by a fraction
(i) the numerator of which shall be the Current Adjustment Price per share of
Common Stock at the date of taking such record, and (ii) the denominator of
which shall be such Current Adjustment Price per share of Common Stock minus the
amount of any and all such cash and the Fair Value of any and all such evidences
of indebtedness, shares of stock, other securities or property, or options,
warrants or other subscription or purchase rights, so distributable in respect
of one share of Common Stock. A reclassification of the Common Stock into shares
of Common Stock and shares of any other class of stock shall be deemed a
distribution by Frontier to the holders of its Common Stock of such shares of
such other class of stock within the meaning of this Section 4.02 and, if the
------------
outstanding shares of Common Stock shall be changed into a larger or smaller
number of shares of Common Stock as a part of such reclassification, shall be
deemed a subdivision or combination, as the case may be, of the outstanding
shares of Common Stock within the meaning of Section 4.01.
------------
4.03 Issuance of Additional Shares of Common Stock. In case at any time or
---------------------------------------------
from time to time on or after January 12, 1996, Frontier shall (except as
hereinafter provided) issue to any Person any Additional Shares of Common Stock
for a consideration per share less than (a) in the case of a public offering of
Common Stock under the Securities Act, the greater of (i) the consideration per
share determined by the managing underwriter (in the event of an underwritten
public offering) and (ii) 90% of the Current Adjustment Price on the effective
------------------------
date of the registration statement with respect to such public offering, (b) in
the case of the issuance of Common Stock by Frontier in connection with the
acquisition of assets and/or securities of any Person, the greater of (i) the
consideration per share determined by the Board of Directors of Frontier as set
forth in the binding agreement pursuant to which such acquisition is being
effected and (ii) 90% of the Current Adjustment Price per share of Common Stock
------------------------
as of the date for which the pricing of Common Stock in connection with such
issuance is determined in accordance with such binding agreement or (c) in all
other circumstances, 95% of the Current Adjustment Price, then the number of
------------------------
shares of Common Stock thereafter comprising a Stock Unit shall be adjusted to
that number determined by multiplying the number of shares of Common Stock
comprising a Stock Unit immediately prior to such adjustment by a fraction
(a) the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such Additional Shares of
Common Stock plus the number of such Additional Shares of Common Stock so
issued, and (b) the denominator of which shall be the number of shares of Common
Stock
-9-
<PAGE>
outstanding immediately prior to the issuance of such Additional Shares of
Common Stock plus the number of shares of Common Stock which the aggregate
consideration for the total number of such Additional Shares of Common Stock so
issued would purchase at the Current Adjustment Price. For purposes of the
------------------------
Section 4.03, and subject to the foregoing sentence, the date as of which the
- ------------
Current Adjustment Price shall be conputed shall be the earlier of (i) the date
- ------------------------
on which Frontier shall enter into a firm contract for the issuance of such
Additional Shares of Common Stock and (ii) the date of actual issuance of such
Additional Shares of Common Stock. This Section 4.03 shall not apply to any
------------
issuance of Additional Shares of Common Stock for which an adjustment is
provided under Section 4.01. No adjustment of the number of shares of Common
------------
Stock comprising a Stock unit shall be made under the Section 4.03 upon the
------------
issuance of any Additional Shares of Common Stock which are issued pursuant to
the exercise of any options, warrants or other subscription or purchase rights
or pursuant to the exercise of any conversion or exchange rights in any
Convertible Securities described in Section 4.04 or 4.05 (it being understood
------------ ----
that full adjustment shall be made, without duplication, in respect of all
Additional Shares of Common Stock issuable at the time any Rights Certificates
issued pursuant to a Rights Plan become exercisable by the holders of Common
Stock). No adjustment of the number of shares of Common Stock comprising a
Stock Unit shall be made under the Section 4.03 upon the issuance of any
------------
Additional Shares of Common Stock which are issued for a consideration greater
than that described in the first sentence of this Section 4.03.
------------
4.04 Issuance of Options, Warrants or Other Rights. In case at any time
---------------------------------------------
or from time on or after January 12, 1996, Frontier shall issue to any Person,
any options, warrants or other rights to subscribe for or purchase any
Additional Shares of Common Stock or any Convertible Securities (other than Non-
Transferable Rights issued pursuant to a Rights Plan) and the consideration per
share for which Additional Shares of Common Stock may at any time thereafter be
issuable pursuant to such options, warrants or other rights or pursuant to the
terms of such Convertible Securities (other than Non-Transferable Rights issued
pursuant to a Rights Plan) shall be less than the Current Adjustment Price, then
------------------------
the number of shares of Common Stock thereafter comprising a Stock Unit shall be
adjusted as provided in Section 4.03 on the basis that
------------
(1) the maximum number of Additional Shares issuable pursuant to all
such options, warrants or other rights or necessary to effect the conversion or
exchange of all such Convertible Securities shall be deemed to have been issued
as of (and, accordingly, the date as of which the Current Adjustment Price shall
-----------------------
be computed shall be) the computation date specified in the last sentence of
this Section 4.04, and
------------
-10-
<PAGE>
(2) the aggregate consideration for such maximum number of Additional Shares
of Common Stock shall be deemed to be the minimum consideration received and
receivable by Frontier for the issuance of such Additional Shares of Common
Stock pursuant to such options, warrants or other rights or pursuant to the
terms of such Convertible Securities (it being understood that full adjustment
shall be made, without duplication, in respect of all Additional Shares of
Common Stock issuable at the time any Rights Certificates issued pursuant to a
Rights Plan become exercisable by the holders of Common Stock). For purposes of
this Section 4.04, the computation date for clause (1) above shall be the
------------ ----------
earliest of (i) the date on which Frontier shall take a record of the holders of
its Common Stock for the purpose of entitling them to receive any such options,
warrants or other rights, (ii) the date on which Frontier shall enter into a
firm contract for the issuance of such options, warrants or other rights, and
(iii) the date of actual issuance of such options, warrants or other rights.
4.05 Issuance of Convertible Securities. In case at any time or from time
----------------------------------
to time on or after January 12, 1996, Frontier shall issue to any Person any
Convertible Securities and the consideration per share for which Additional
Shares of Common Stock may at any time thereafter be issuable pursuant to the
terms of such Convertible Securities shall be less than the Current Adjustment
------------------
Price, then the number of shares of Common Stock thereafter comprising a Stock
- -----
Unit shall be adjusted as provided in Section 4.03 on the basis that (a) the
------------
maximum number of Additional Shares of Common Stock necessary to effect the
conversion or exchange of all such Convertible Securities shall be deemed to
have been issued as of (and accordingly, the date as of which the Current
-------
Adjustment Price shall be computed shall be) the computation date specified in
- ----------------
the next following sentence of this Section 4.05, and (b) the aggregate
------------
consideration for such maximum number of Additional Shares of Common Stock shall
be deemed to be the minimum consideration received and receivable by Frontier
for the issuance of such Additional Shares of Common Stock pursuant to the terms
of such convertible Securities. For purposes of this Section 4.05, the
------------
computation date for clause (a) above shall be the earliest of (i) the date on
----------
which Frontier shall take a record of the holders of its Common Stock for the
purpose of entitling them to receive any such Convertible Securities, (ii) the
date on which Frontier shall enter into a firm contract for the issuance of such
Convertible Securities, and (iii) the date of actual issuance of such
Convertible Securities. No adjustment of the number of shares of Common Stock
comprising a Stock Unit shall be made under this Section 4.05 upon the issuance
------------
of any Convertible Securities which are issued pursuant to the exercise of any
warrants or other subscription or purchase rights therefor, if any such
adjustment shall previously have been made upon the issuance of such warrants or
other rights pursuant to Section 4.04. No adjustment of the number of Shares of
------------
Common Stock comprising a Stock Unit shall be
-11-
<PAGE>
made under this Section 4.05 upon the issuance of any Additional Shares of
------------
Common Stock which are issued for a consideration greater than that described in
the first sentence of this Section 4.05.
------------
4.06 Superseding Adjustment of Stock Unit. If, at any time on or after
------------------------------------
January 12, 1996, any adjustment of the number of shares of Common Stock
comprising a Stock Unit shall have been made pursuant to Section 4.04 or 4.05
------------ ----
on the basis of the issuance of other Convertible Securities, or any new
adjustment of the number of shares of Common Stock comprising a Stock Unit shall
have been made pursuant to this Section 4.06,
------------
(1) such options, warrants or rights or the right of conversion or exchange
in such other Convertible Securities shall expire, and a portion of such
options, warrants or rights, or the right of conversion, exercise or exchange
in respect of a portion of such other Convertible Securities, as the case may
be, shall not have been exercised, or
(2) the consideration per share, for which Additional Shares of Common Stock
are issuable pursuant to such options, warrants or rights or the terms of such
other Convertible Securities, shall be increased solely by virtue of provisions
therein contained for an automatic increase in such consideration per share upon
the arrival of a specified date or the happening of a specified event,
such previous adjustment shall be rescinded and annulled and the Additional
Shares of Common Stock which were deemed to have been issued by virtue of the
computation made in connection with the adjustment so rescinded and annulled
shall no longer be deemed to have been issued by virtue of such computation.
Thereupon, a recomputation shall be made of the effect of such options, warrants
or rights or other Convertible Securities on the basis of
(A) treating the number of Additional Shares of Common Stock, if any,
theretofore actually issued or issuable pursuant to the previous exercise of
such options, warrants or rights or such right of conversion or exchange, as
having been issued on the date or dates of such issuance of Additional Shares of
Common Stock as determined for purposes of such previous adjustment and for the
consideration actually received and receivable therefore, and
(B) treating any such options, warrants or rights or any such other
Convertible Securities which then remain outstanding as having been granted or
issued immediately after the time of such increase of the consideration per
share for such Additional Shares of Common Stock as are issuable under such
options, warrants or rights or other Convertible Securities, and, if and to the
extent called for by the foregoing provisions of this Section 4 on the basis
---------
aforesaid, a new adjustment of the number of shares of Common
-12-
<PAGE>
Stock comprising a Stock Unit shall be made, made which new adjustment shall
supersede the previous adjustment so rescinded and annulled.
4.07 Other Provisions Applicable to Adjustments Under this Section 4.
---------------------------------------------------------------
The following provisions shall be applicable to the making of adjustments of the
number of shares of Common Stock comprising a Stock Unit hereinbefore provided
for in this Section 4:
---------
(1) Treasury Stock. The sale or other disposition of any issued shares
--------------
of Common Stock owned or held by or for the account of Frontier shall be deemed
an issuance thereof for purposes of the Section 4.
---------
(2) Computation of Consideration. To the extent that any Additional
----------------------------
Shares of Common Stock or any Convertible Securities or any options, warrants or
other rights to subscribe for or purchase any Additional Shares of Common Stock
or any Convertible Securities shall be issued for a cash consideration, the
consideration received by Frontier therefor shall be deemed to be the amount of
cash received be Frontier therefor, or, if such Additional Shares of Common
Stock or Convertible Securities are offered by Frontier for subscription, the
subscription price, or, if such Additional Shares of Common Stock or Convertible
Securities are sold to underwriters of dealers for public offering without a
subscription offering, the initial public offering price, in any such case
excluding any amounts paid or receivable for accrued interest or accrued
dividends and without deduction of any compensation, discounts or expenses paid
or incurred by Frontier for and in the underwriting of, or otherwise in
connection with, the issue thereof. To the extent that such issuance shall be
for consideration other than cash, then, except as herein otherwise expressly
provided, the amount of such consideration shall be deemed to be the Fair Value
of such consideration at the time of such issuance. The consideration for any
Additional Shares of Common Stock issuable pursuant to any options, warrants or
other rights to subscribe for or purchase the same shall be the rights to
subscribe for or purchase the same shall be the rights to subscribe for or
purchase the same shall be the consideration received or receivable by Frontier
for issuing such options, warrants or other rights, plus the additional
consideration payable to Frontier upon the exercise of such options, warrants or
other rights. The consideration for any Additional Shares of Common Stock
issuable pursuant to the terms of any Convertible Securities shall be the
consideration received or receivable by Frontier for issuing any options,
warrants of other rights to subscribe for or purchase such Convertible
Securities, plus the consideration paid or payable to Frontier in respect of the
subscription for or purchase of such Convertible Securities, plus the additional
consideration, if any, payable to Frontier upon the exercise of the right of
conversion, exercise of exchange in such Convertible Securities. In case of the
issuance at any time of Additional Shares of Common Stock or Convertible
Securities
-13-
<PAGE>
in payment or satisfaction of any dividend upon any class of stock other than
Common Stock, Frontier shall be deemed to have received for such Additional
Shares of Common Stock or Convertible Securities consideration equal to the
amount of such dividend so paid or satisfied.
(3) When Adjustments to be Made. The adjustment required by the foregoing
---------------------------
provisions of this Section 4 shall be made whenever and as often as any
---------
specified event requiring an adjustment shall occur, except that no adjustment
of the number of shares of Common Stock comprising a Stock Unit that would
otherwise be required shall be made (except in the case of a subdivision or
combination of shares of the Common Stock, as provided for in Section 4.01)
------------
unless and until such adjustment, either by itself or with other adjustments not
previously made, adds or subtracts at least 1/20th of a share to or from the
number of shares of Common Stock comprising a Stock Unit immediately prior to
the making of such adjustment. Any adjustment representing a change of less than
such minimum amount (except as aforesaid) shall be carried forward and made as
soon as such adjustment, together with other adjustments required by this
Section 4 and not previously made, would result in a minimum adjustment. For the
- ---------
purpose of any adjustment, any specified event shall be deemed to have occurred
at the close of business on the date of its occurrence.
(4) Fractional Interests. In computing adjustments under this Section 4,
-------------------- ---------
fractional interests in Common Stock shall be taken into account to the nearest
one-thousandth of a share.
(5) Deferral of Issuance or Payment. In any case in which Section 4 shall
------------------------------- ---------
require that an adjustment in the shares of Common Stock comprising a Stock Unit
be made effective as of a record date, Frontier may elect to defer until the
occurrence of such event by (i) issuing to the Holder, if this Warrant is
exercised after such record date, the shares of Common Stock, if any, issuable
upon such exercise over and above the shares of Common Stock or other capital
stock of Frontier, if any, issuable upon such exercise on the basis of the
number of shares of Common Stock comprising a Stock Unit in effect prior to such
adjustment and (ii) paying to the Holder any amount of cash in lieu of the
issuance of fractional shares pursuant to Section 4; provided, however, that
--------- -------- -------
Frontier shall deliver to such Holder a due bill or other appropriate instrument
evidencing such Holder's right to receive such additional shares or such cash
upon the occurrence of such event.
(6) When Adjustment Not Required. If Frontier shall take a record of the
----------------------------
holders of its Common Stock for the purpose of entitling them to receive a
dividend or distribution or subscription or purchase rights and shall,
thereafter and before the distribution thereof to stockholders, legally abandon
its plan
-14-
<PAGE>
to pay or deliver such dividend, distribution, subscription or purchase rights,
then thereafter no adjustment shall be required by reason of the taking of such
record and any such adjustment previously made in respect thereof shall be
rescinded and annulled.
4.08 Other Action Affecting Common Stock. In case at any time or
-----------------------------------
from time to time Frontier shall take any action affecting its Common Stock,
other than an action described in any of the foregoing Sections 4.01 through
-------------
4.07 (inclusive), or in Section 5, then, unless in the reasonable opinion of the
- ---- ---------
Board of Directors of Frontier such action will not have a material adverse
effect upon the rights of the Holders of the Warrants or an adverse effect on
the number of shares of Common Stock comprising a Stock Unit shall be adjusted
in such manner and at such time as the Board may reasonably determine in good
faith to be equitable in the circumstances to fairly protect the purchase rights
represented by this Warrant in accordance with the essential intent and
principles in such sections thereof.
SECTION 5. Consolidation, Merger, etc.
---------------------------
5.01 Consolidation, Merger, etc. In case a consolidation or merger
---------------------------
of Frontier shall be effected with another Person on or after January 12, 1996,
or the sale, lease or other transfer of all or substantially all its assets to
another Person shall be effected on or after January 12, 1996, then, as a
condition of such consolidation, merger, sale, lease or other transfer provision
shall be made whereby the Holder of this Warrant shall thereafter have the right
to purchase and receive upon the basis and upon the terms and conditions
specified herein and in lieu of each Stock Unit immediately theretofore
purchasable and receivable upon the exercise of each of the Warrants, such
shares of stock, securities, cash or other property receivable upon such
consolidation, merger, sale, lease or transfer by the Holder of the number of
shares of Common Stock comprising a Stock Unit immediately prior to such event.
In any such case, appropriate and equitable provision also shall be made with
respect to the rights and interests of the Holder of this Warrant to the end
that the provisions hereof (including Section 4) and of the Warrant Agreement
---------
and the Registration Rights Agreement shall thereafter be applicable, as nearly
as may be, in relation of any shares of stock, securities, cash or other
property thereafter deliverable upon the exercise of any Warrants. Frontier
shall not effect any such consolidation, merger, sale, lease or transfer unless
prior to or simultaneously with the consummation thereof the successor Person
(if other than Frontier or a wholly-owned subsidiary of Frontier) resulting from
such consolidation or merger or the Person purchasing, leasing or otherwise
acquiring such assets shall expressly assume, by written instrument mailed to
the Investor and any Significant Holder at its last address appearing on the
books of Frontier, the due and punctual observance and performance of each and
every covenant and
-15-
<PAGE>
condition of this Warrant to be performed and observed by Frontier and all of
the obligations and liabilities hereunder, subject to such modification as shall
be necessary to provide for adjustments of Stock Units which shall be as nearly
equivalent as practicable to the adjustments provided for in Section 4;
---------
provided, however, that Frontier shall not be required to effect (or mail) such
- -------- -------
express assumption in respect of any transaction pursuant to which such
obligations are transferred by operation of law and such Person acknowledges the
same in a writing that is retained and made available for inspection by any
holder of Warrants. The above provisions of this Section 5.01 shall similarly
------------
apply to successive consolidations, mergers, sales, leases or other transfers.
SECTION 6. Notice to Warrant Holders.
-------------------------
6.01 Notice of Adjustment of Stock Unit or Exercise Price. Whenever
----------------------------------------------------
the number of shares of Common Stock comprising a Stock Unit shall be adjusted
pursuant to Section 4, Frontier shall forthwith obtain a certificate signed by
---------
independent accountants of recognized national standing, setting forth, in
reasonable detail, the event requiring the adjustment and the method by which
such adjustment was calculated (including a statement of the Fair Value of any
evidences of indebtedness, shares of stock, other securities or property or
warrants or other subscription or purchase rights referred to in Section 4.02,
------------
4.07(2) or Section 5) and specifying the number of shares of Common Stock
- ------- ---------
comprising a Stock Unit and (if such adjustment was made pursuant to Section
-------
4.08 or Section 5) describing the number and kind of any other securities
- ---- ---------
comprising a Stock Unit, and any change in the purchase price or prices thereof,
after giving effect to such adjustment or change. Frontier shall promptly, and
in any case within 20 days after the making of such adjustment, cause a signed
copy of such certificate to be delivered to each Holder of a Warrant in
accordance with Section 11.02. Frontier shall keep at its office or agency,
-------------
maintained for the purpose pursuant to Section 11.01, copies of all such
-------------
certificates and cause the same to be available for inspection at said office
during normal business hours by any Holder of a Warrant or any prospective
permitted purchaser of a Warrant designated by a Holder thereof. The Holder of
Warrants entitled to purchase a majority of the Stock Units covered by all the
Warrants shall have the right to challenge any such adjustment of the number of
shares of Common Stock comprising a Stock Unit contained in such certificate is
delivered to the Holders. In the event the Holders give Frontier written
notice of such challenge within such 30-day period, such Holders and Frontier
shall thereupon promptly attempt in good faith to reach agreement on such
adjustment, and failing such agreement, shall appoint a mutually acceptable
nationally recognized independent accounting firm to determine such adjustment,
whose determination shall be final and binding on Frontier and the Holders,
absent manifest error. The costs
-16-
<PAGE>
incurred by the Holders and Frontier and the fees and expenses of such
independent accounting firm shall be paid by (a) the Holders if Frontier's
adjustment in the certificate was accurate to within 1/20th of a share to or
from the number of shares of Common Stock comprising a Stock Unit by such
independent accounting firm or if such independent accounting firm's adjustment
results in the Holders' being entitled to receive fewer shares of Common Stock
per Stock Unit than under the adjustment determined by Frontier and (b)
otherwise by Frontier.
6.02 Notice of Certain Corporate Action. In case Frontier shall
----------------------------------
propose (a) to pay any dividend to the holders of its Common Stock or to make
any other distribution to the holders of its Common Stock, or (b) to offer to
the holders of its Common Stock rights to subscribe for or to purchase any
Additional Shares of Common Stock or shares of stock of any class or any other
securities, rights or options, or (c) to effect any reclassification of its
Common Stock (other than a reclassification involving only the subdivision, or
combination, of outstanding shares of Common Stock), or (d) to effect any
capital reorganization, or (e) to effect any consolidation, merger or sale,
lease, transfer or other disposition of all or substantially all of its
property, assets or business, or (f) to effect the liquidation, dissolution or
winding up of Frontier, then, in each such case, Frontier shall give to each
Holder of a Warrant, in accordance with Section 11.02, a notice of such proposed
-------------
action, which shall specify the date on which a record is to be taken for the
purposes of such stock dividend, distribution or rights, or the date on which
such reclassification, reorganization, consolidation, merger, sale, lease,
transfer, disposition, liquidation, dissolution or winding up is to take place
and the date of participation therein by the holders of Common Stock, if any
such date is to be fixed, and shall also set forth such facts with respect
thereto as shall be reasonably necessary to indicate the effect of such action
on the Common Stock and the number and kind of any other shares of stock which
will comprise a Stock Unit, and the purchase price or prices thereof, after
giving effect to any adjustment which will be required as a result of such
action. Such notice shall be so given in the case of any action covered by
clause (a) or (b) above at least 10 days prior to the record date for
- ---------- ---
determining holders of the Common Stock for purposes of such action, and in the
case of any other such action, at least 10 days prior to the date of the taking
of such proposed action or the date of participation therein by the holders of
Common Stock, whichever shall be the earlier.
6.03 Notice of Expiration Date. Frontier shall give to each Holder
-------------------------
of a Warrant notice of the Expiration Date. Such notice may be given by
Frontier not less than 30 days but not more than 60 days prior to the
Expiration Date.
-17-
<PAGE>
SECTION 7. Reservation and Authorization of Common Stock; Registration with
----------------------------------------------------------------
or Approval of any Governmental Authority.
- -----------------------------------------
Frontier shall at all times reserve and keep available for issue upon
the exercise of Warrants such number of its authorized but unissued shares of
Common Stock as shall be sufficient to permit the exercise in full of all
outstanding Warrants. All shares of Common Stock which shall be so issuable,
when issued upon exercise of any Warrant and payment of the applicable Exercise
Price therefor shall be duly and validly issued, fully paid and nonassessable
and free and clear of any Liens (caused directly or indirectly by Frontier or
its affiliates).
Before taking any action which would result in an adjustment in the
number of shares of Common Stock comprising a Stock Unit or which would cause an
adjustment reducing the Current Warrant Price per share of Common Stock below
the then par value, if any, of the shares of Common Stock issuable upon exercise
of the Warrants, Frontier shall take any corporate action which is necessary in
order that Frontier may validly and legally issue fully paid and nonassessable
shares of Common Stock free and clear of any Liens (caused directly or
indirectly by Frontier or its affiliates) upon the exercise of all the Warrants
immediately after the taking of such action.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock comprising a Stock Unit or in the Current
Warrant Price per share of Common Stock, Frontier shall obtain all such
authorizations or exemptions thereof, or consents thereto, as may be necessary
from any public regulatory body or bodies having jurisdiction thereof.
If any shares of Common Stock required to be reserved for issue upon
exercise or conversion of Warrants require registration with any Governmental
Authority under any Federal or state law (otherwise than any law that applies to
a Holder specifically because of its status as a regulated entity or in
connection with a registration under the Securities Act or applicable state
securities laws) before such shares may be so issued, Frontier shall in good
faith and as expeditiously as reasonably possible and at its expense endeavor to
cause such shares to be duly registered.
SECTION 8. Taking of Record; Stock and Warrant Transfer Books.
--------------------------------------------------
(a) In the case of all dividends or other distributions by Frontier
to the holders of its Common Stock with respect to which any provision of
Section 4 refers to the taking of a record of such holders, Frontier shall in
- ---------
each such case take such a record as of the close of business on a business day
or as otherwise provided by or permitted under the corporation laws of
Frontier's then jurisdiction of incorporation.
-18-
<PAGE>
(b) Frontier shall not at any time, except upon complete dissolution,
liquidation or winding up, close its stock transfer books or Warrant transfer
books so as to result in preventing or delaying the exercise, conversion or
transfer of any Warrant, unless otherwise required by any Governmental Authority
or by any applicable federal, state or local law.
SECTION 9. Expenses, Transfer Taxes and Other Charges.
------------------------------------------
Frontier shall pay any and all expenses, transfer taxes and other
charges as provided in Section 6 of the Warrant Agreement.
---------
SECTION 10. No Voting or Other Rights.
-------------------------
This Warrant shall not entitle the Holder hereof to any voting or other
rights as a stockholder of Frontier either at law or at equity, and the rights
of a holder of this Warrant are limited to those expressly set forth herein.
SECTION 11. Miscellaneous.
-------------
11.01 Office of Frontier. So long as any of the Warrants remains
------------------
outstanding, Frontier shall maintain an office in the continental United States
of America where the Warrants may be presented for exercise, transfer, division
or combination as in this Warrant provided. Such office shall be at Frontier
Natural Gas Corporation, One Benham Place, 9400 North Broadway Extension,
Oklahoma City, Oklahoma 73114, unless and until Frontier shall designate and
maintain some other office for such purposes and give notice thereof to the
Holders of all outstanding Warrants.
11.02 Notices Generally. Any notices and other communications pursuant
-----------------
to the provisions hereof shall be sent in accordance with Section 7.02 of the
------------
Warrant Agreement.
11.03 Amendments. The terms of the Warrants may be amended, and the
----------
observance of any term therein may be waived, upon the written consent of the
holders of Warrants for a majority of the total number of Stock Units at the
time purchasable upon the exercise of all then outstanding Warrants. For the
purposes of determining whether the holders of outstanding Warrants entitled to
purchase a requisite number of Stock Units at any time have taken any action
authorized by this Warrant, any Warrants owned by Frontier or any Affiliate of
Frontier shall be deemed not to be outstanding.
11.04 Restrictions on Transferability. The Warrants and the Warrant
-------------------------------
Stock shall be transferable only upon compliance with the conditions specified
in Section 4 of the Warrant Agreement and in the Registration Rights Agreement
---------
therein referred to, which conditions are intended to ensure compliance with the
provisions of
-19-
<PAGE>
the Securities Act and applicable state securities laws in respect of the
transfer of any Warrant or any Warrant Stock, and any holder of this Warrant
shall be bound by the provisions of (and entitled to the benefits of) said
Section 4 and in said Registration Rights Agreement.
11.05 Governing Law. This Warrant shall be governed by, and construed in
-------------
accordance with, the substantive law of the State of Texas applicable to
contracts executed in and to be fully performed in such State.
11.06 Limitation of Liability. No provision hereof, in the absence of
-----------------------
affirmative action by the Holder hereof to purchase shares of Common Stock, and
no mere enumeration herein of the rights or privileges of the Holder hereof,
shall give rise to any liability of such holder for the Exercise Price or as a
stockholder of Frontier, whether such liability is asserted by Frontier, by any
creditor of Frontier or any other Person.
SECTION 12. Conversion of Warrants.
----------------------
Each Stock Unit subject to this Warrant may be converted at the option of the
Holder into the number of shares of common stock equal to the remainder of (a)
the number of shares of Common Stock comprising a Stock Unit at the time of such
conversion, multiplied by the Current Adjustment Price per share of Common Stock
------------------------
at the time of such conversion minus (b) the Exercise Price at the time of such
conversion, divided by (c) the Current Adjustment Price per share of Common
------------------------
Stock at the time of such conversion.
IN WITNESS WHEREOF, Frontier has duly executed this Warrant.
Dated as of January 12, 1996.
FRONTIER NATURAL GAS CORPORATION
By
------------------------------
Name:
Title:
-20-
<PAGE>
FORM OF EXERCISE
----------------
(To be executed by the registered holder hereof)
The undersigned hereby exercises this Warrant to subscribe for and purchase
___________ Stock Units of Frontier Natural Gas Corporation covered by the
within certificate and herewith makes payment therefor in full. Kindly issue
certificates and/or other instruments covering Stock Units in accordance with
the instructions given below. A new Warrant for the unexercised balance of the
Stock Units covered by the within certificate, if any, will be registered in
the name of the undersigned.
Dated:
------------------
-----------------------------
Instructions for registration
of Stock Units
- ------------------------
Name (please print)
Social Security or Other Identifying
Number:
-----------------
Address:
- ------------------------
Street
- ------------------------
City, State and Zip Code
-21-
<PAGE>
FORM OF ASSIGNMENT
------------------
(To be executed by the registered holder hereof)
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers all
the rights of the undersigned under the within certificate with respect to the
purchase of up to the number of Stock Units covered thereby set forth
hereinbelow unto and does hereby irrevocably constitute and appoint
_______________, Attorney, to transfer the same on the books of Frontier, with
full power of substitution in the premises:
<TABLE>
<CAPTION>
Number of
Name of Assignee Address Stock Units
- ---------------- ------- -----------
<S> <C> <C>
</TABLE>
Dated:
--------------------------
--------------------------------------
(Signature of Registered Owner)
--------------------------------------
(Guaranteed Signature)
Notice: The signature to this Form of Assignment must correspond with the name
as written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever, and must be guaranteed by a
bank or trust company having an office or correspondent in New York, New York,
or by a firm having membership on the New York Stock Exchange.
-22-
<PAGE>
Exhibit 4.11
Annex 2
to
Warrant Agreement
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated effective as of January 12, 1996,
between FRONTIER NATURAL GAS CORPORATION, a corporation duly organized and
validly existing under the laws of the State of Oklahoma ("Frontier"), and
--------
WEISSER, JOHNSON & CO., a Delaware corporation (the "Investor").
--------
Frontier and the Investor are parties to a Warrant Agreement of even
date herewith (as modified and supplemented and in effect from time to time, the
"Warrant Agreement"), providing for the issuance by Frontier of Warrants (as
-----------------
hereinafter defined) which entitle the Investor to purchase from Frontier prior
to January 12, 2001, 250,000 Stock Units (as defined in the Warrants) as
provided in the Warrant Agreement and the Warrants. In that connection, Frontier
wishes to afford the Investor certain registration rights in respect of the
Common Stock issued or issuable upon exercise of the Warrants. Accordingly, the
parties hereto agree as follows:
SECTION 1. Definitions.
------------
Each capitalized term used herein without definition shall have the
meaning ascribed thereto in the Warrant Agreement. As used in this Agreement the
following terms have the following meanings:
"Commission" means the Securities and Exchange Commission (or any
----------
successor or similar governmental agency or authority) administering the
Securities Act and/or the Exchange Act.
"Common Stock" has the meaning set forth in the Warrant Agreement.
------------
"Cutback Registration" means any registration in which the Managing
--------------------
Underwriter advises Frontier, and Frontier in turn notifies the holders of
Registrable Securities requested to be included therein in accordance with
Section 5.02, that marketing factors require a limitation of the number of
- ------------
shares of Common Stock to be underwritten in such registration.
"Effective Period" has the meaning set forth in Section 5.01 (b).
---------------- ----------------
<PAGE>
"Electing Holder" means any holder of shares of Common Stock, other than
---------------
Frontier or holders of Registrable Securities (in their respective capacities
as such), who have requested inclusion of shares of Common Stock held by such
holder in a registration.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
------------
any similar Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Frontier" shall have the meaning set forth in the preamble of this
--------
Agreement.
"Indemnifying Party" has the meaning set forth in Section 6.03.
------------------ ------------
"Investor" shall have the meaning set forth in the preamble of this
--------
Agreement.
"Long-Form Requested Registration" shall mean any Requested Registration
--------------------------------
that is a registration on a Form S-1 under the Securities Act or any successor
form or similar long-form registration.
"Managing Underwriter" means, with respect to any registration, the
--------------------
underwriter or underwriters managing such registration.
"NASDAQ" has the meaning set forth in Section 12.
------ ----------
"Original Requesting Holder" has the meaning set forth in Section
--------------------------
3.01(a).
- -------
"Other Requesting Holder" has the meaning set forth in Section 3.01(a).
----------------------- ---------------
"Person" means any individual, corporation, association, joint venture,
------
limited liability company, partnership, trust, business or other entity or
organization, and shall include any government or political subdivision, or any
agency or instrumentality thereof.
"Piggyback Registration" means any registration which is not a Requested
----------------------
Registration, other than (a) any registration on a Form S-8 under the Securities
Act (or any successor thereto); (b) any registration relating to an offering to
be made solely to employees (including management or employee incentive plans);
(c) any registration relating to an offering of securities made by Frontier
solely (except in respect of fractional shares in exchange for securities of
Frontier other than Common Stock including,
-2-
<PAGE>
without limitation, notes or other debt instruments of Frontier); or (d) any
registration on a Form S-4 (or any successor thereto or other comparable form).
"Public Offering" means any offering of Common Stock to the public,
---------------
either on behalf of Frontier or any of its Stockholders, pursuant to an
effective registration statement under the Securities Act.
"Register," "registered" and "registration" refer to a registration of
-------- ---------- ------------
Common Stock or other securities of Frontier effected by preparing and filing a
registration statement in compliance with the Securities Act and the declaration
or ordering of the effectiveness of such registration statement.
"Registrable Securities" means (i) shares of Common Stock issued or
----------------------
issuable upon exercise of any Warrants, including without limitation any Common
Stock into which such Common Stock may thereafter be changed or converted, and
(ii) any additional shares of Common Stock or other securities issued or
distributed by way of a dividend, stock split or other distribution in respect
of the Common Stock referred to in clause (i) above, or acquired by way of any
rights offering or similar offering made in respect of the Common Stock
referred to in clause (i) above; provided, however, that, as to any such shares
----------- -------- -------
of Common Stock so issued or issueable, such shares will cease to be Registrable
Securities when such shares have been sold to the public pursuant to a
registration or pursuant to Rule 144.
"Registration Agreements" means the Agreements described in Exhibit A
----------------------- ---------
hereto.
"Requested Registration" means a registration requested by holders of
----------------------
Registrable Securities pursuant to Section 3.
---------
"Requesting Holder" means any of the original Requesting Holder and the
-----------------
other Requesting Holders.
"Rule 144" means the Rule 144 promulgated by the Commission under the
--------
Securities Act (or any successor or similar rule then in force).
"Rule 144A" means Rule 144A promulgated by the Commission under the
---------
Securities Act (or any successor or similar rule then in force).
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
similar Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
-3-
<PAGE>
"Short-Form Registration" means a registration of the Common Stock of
-----------------------
Frontier on Form S-2 or Form S-3 under the Securities Act or any successor form
or similar short-form registration.
"Stockholder" has the meaning set forth in the Warrant Agreement.
-----------
"Stock Units" has the meaning set forth in the Warrants.
-----------
"Warrant Agreement" has the meaning set forth in the preamble of this
-----------------
Agreement.
"Warrants" has the meaning set forth in the Warrant Agreement.
--------
"Withdrawing Holder" has the meaning set forth in Section 3.02.
------------------ ------------
SECTION 2. Piggyback Registration.
----------------------
If at any time or from time to time after the date hereof Frontier
proposes to effect a Piggyback Registration for its account or for the account
of a security holder or holders (other than holders of Registrable Securities),
then Frontier shall:
(a) promptly give to each holder of Registrable Securities notice
thereof (which notice shall include a list of the jurisdictions in which
Frontier intends to attempt to qualify such securities under or otherwise
comply with the applicable blue sky or other state securities laws); and
(b) include in such Piggyback Registration (and any related
qualification under or other compliance with blue sky or other state securities
laws), and in any underwriting involved therein, all the Registrable Securities
specified in a request, made within 15 days after receipt of such notice from
Frontier, by any holder of Registrable Securities; provided, however, that
-------- -------
Frontier shall not be required to include any securities of holders of
Registrable Securities in such registration unless such holders accept the
terms of the underwriting as agreed upon between Frontier and the underwriters
selected by it; and provided, further, that if such Piggyback Registration is a
-------- -------
Cutback Registration, then: (i) if such Piggyback Registration is a primary
registration on behalf of Frontier, Frontier shall register in such registration
(A) first, the shares of Common Stock that Frontier proposes to sell in such
registration, and (B) second, shares of Common Stock held by each holder of
Registrable Securities and the Electing Holders, on a pro rata basis, based upon
--- ----
the number of shares of Common Stock the holders of Registrable Securities and
any Electing Holders originally sought to include in such registration; and
(ii) if such Piggyback Registration is a
-4-
<PAGE>
secondary registration on behalf of holders of Common Stock (other than of
Registrable Securities), Frontier shall register in such registration (A) first,
the shares of Common Stock held by the holders requesting such secondary
registration, on a pro rata basis, based on the number of shares of Common Stock
--- ----
such holders originally sought to include in such registration, and (B) second,
the shares of Common Stock held by each holder of Registrable Securities and the
Electing Holders (other than any holder under clause (A) above), on a pro rata
---------- --- ----
basis, based upon the number of shares of Common Stock the holders of
Registrable Securities and any Electing Holders originally sought to include in
such registration:
If the Piggyback Registration became such pursuant to clause (iii) of
------------
Section 3.01(a), then upon the request of the Managing Underwriter, Frontier
- ---------------
shall effect a stock split in respect of the Common Stock by means of a stock
dividend of the Common Stock or a subdivision of the Common Stock, or a
combination of the Common Stock, such split or combination to be in form, scope
and substance satisfactory to the Managing Underwriter or such holders, as the
case may be.
SECTION 3. Requested Registration.
----------------------
3.01 Request for Registration.
------------------------
(a) If after the date Frontier shall receive a request from any
holder of Registrable Securities (including Warrants) that Frontier effect any
registration under the Securities Act to which such holder is entitled under
this Section 3 (including without limitation any related qualification under
---------
compliance with blue sky or other state securities laws) with respect to all or
a part of the Registrable Securities owned by such holder, then Frontier shall
promptly give notice of such request to each other holder of Registrable
Securities, and Frontier shall thereupon promptly use its best efforts
diligently to effect such Requested Registration and related qualifications and
compliances within 120 days after receiving such request for registration
(including without limitation the execution of an undertaking to file
post-effective amendments and appropriate qualifications under or other
compliance with the applicable blue sky or other state securities laws) as may
be reasonably requested by the holder of Registrable Securities who made the
original request (the "Original Requesting Holder") and by the holders of
--------------------------
Registrable Securities who make requests to Frontier within 15 days after the
giving of the aforesaid notice by Frontier (each of the foregoing an "Other
-----
Requesting Holder") and as would permit or facilitate the sale and distribution
- -----------------
of all or such portion of the Registrable Securities as are specified in any
such request; provided, however, that Frontier shall not be obligated to take
-------- -------
any action to effect a Requested Registration or any related qualification or
compliance pursuant to this Section 3:
---------
-5-
<PAGE>
(i) if the Requesting Holders do not request to include in such
registration Registrable Securities (issued or issuable on exercise of the
Warrants) having an aggregate Current Adjustment Price (as defined in the
Warrant), determined as of the date of the notice from the Original Requesting
Holder under Section 3.01(a) of (A) at least $750,000 for the holders' first
---------------
Requested Registration or (B) at least $250,000 for the holders' second
Requested Registration;
(ii) if Frontier shall have already effected two Long-Form Requested
Registrations on behalf of the holders of Registrable Securities pursuant to
this Section 3.01, each of which Requested Registrations (A) has been declared
------------
or ordered effective (including without limitation qualification under or other
compliance with state blue sky or securities laws requested) and which
effectiveness has not been suspended or stopped by any governmental or judicial
authority, and (B) remains continuously effective for a period of time not less
than the Effective Period; or
(iii) if, within 30 days after receipt of the initial request of the
Original Requesting Holder pursuant to this Section 3.01, Frontier shall elect
------------
to include in such registration Common Stock for its own account, whereupon
Frontier shall notify each Requesting Holder that Frontier has elected to effect
a Piggyback Registration and shall thereafter diligently proceed to do so,
including therein the Registrable Securities as to which notice was given by the
Requesting Holders pursuant to this Section 3.01, but subject to the limitations
------------
set forth in Section 2(b)(i) (it being understood, however, that such
---------------
registration shall not be deemed to be a Requested Registration for the purposes
of Sections 3.01(a)(ii) or 3.01(c)).
----------- -------
(iv) Notwithstanding the forgoing, (A) Frontier shall not be
obligated to effect a registration pursuant to this Section 3 during the period
---------
starting with the date 60 days prior to Frontier's good faith estimated date of
filing of, and ending on a date 120 days following the effective date of, a
registration statement pertaining to an underwritten public offering of
securities for the account of Frontier, provided that
--------
Frontier is at all times during such period diligently pursuing such
registration, (B) Frontier shall not be obligated to effect a registration of
Registrable Securities pursuant to this Section 3 pursuant to any request of
---------
Holders of Registrable Securities if such request is received after the receipt
by Frontier of a request for registration pursuant to one of the Registration
Agreements, and any such registration pursuant to this
-6-
<PAGE>
Section 3 would likely result in a registration statement being declared
---------
effective prior to the date that is 90 days after the effective date of
any such registration effected pursuant to the Registration Agreement,
and (C) Frontier shall not be obligated to effect a registration
pursuant to this Section 3 and shall have the right to defer such filing
---------
for a period of not more than 120 days after receipt of the request of
holders of Registrable Securities, if Frontier shall furnish to such
holders a certificate signed by the President of Frontier stating that
in the good faith judgment of the Board of Directors of Frontier, it
would be seriously detrimental to Frontier and its shareholders for such
registration statement to be filed and it is therefore essential to
defer the filing of such registration statement; provided, however,
-------- -------
that, subject to the limitation set forth in the proviso in Section
-------
3.01(a)(ii), if Frontier shall no longer be eligible to effect a Short
----------
Form Requested Registration following the deferral of registration
pursuant to this paragraph, then the holders of Registrable Securities
shall, subject to Section 3.01(a)(ii), be entitled to a Long-Form
-------------------
Requested Registration for each such deferral.
(v) If at any time after the holders' initial Requested
Registration, a request of the holders of Registrable Securities for a
Requested Registration shall be denied by Frontier solely because the
aggregate Current Adjustment Price of such Registrable Securities sought
to be included in such registration is below the requisite dollar amount
specified in Section 3.01(a)(i)(B), then at the election of the holders
---------------------
of a majority of the then outstanding Registrable Securities, and in
exchange for the right of the holders to request a second Requested
Registration under this Section 3, the holders shall be entitled to
---------
convert their Registrable Securities represented by Warrants (having an
aggregate Current Adjustment Price for all holders of not more than
$250,000) pursuant to Section 12 of the Warrant.
----------
(b) If a Requested Registration becomes a Cutback Registration and
the number of shares of Registrable Securities actually sold in such Requested
Registration is not at least a majority of the number of shares of Registrable
Securities requested to be included in such registration, then (A) such
Requested Registration shall not be deemed to be a Requested Registration for
the purposes of Section 3.01(a)(ii); and (B) notwithstanding that such Requested
-------------------
Registration is a Cutback Registration, Frontier shall continue to use its best
efforts diligently to comply with all its obligations (including without
limitation payment of expenses) under this Agreement with respect to such
Requested Registration. The registration statement filed
-7-
<PAGE>
pursuant to the request of holders of Registrable Securities may, subject to the
provisions of Section 3.01(c), include other shares of Common Stock of Frontier,
---------------
which are held by persons who, by virtue of agreements with Frontier, are
entitled to include their securities in any such registration, and Frontier
shall have the right to include shares of Common Stock in such registration for
its own account as provided therein.
(c) If a Requested Registration becomes a Cutback Registration,
Frontier shall register in such registration (i) first, the shares of Common
Stock held by Requesting Holders of Registrable Securities, on a pro rata basis,
--- ----
based on the number of shares of Registrable Securities such Requesting Holders
originally sought to include in such Requested Registration, (ii) second, the
shares of Common Stock held by the Electing Holders (including any holder of
Registrable Securities that is not a Requesting Holder), on a pro rata basis,
--- ----
based upon the number of shares of Common Stock such holders of Registrable
Securities and the Electing Holders originally, sought to include in such
registration and (iii) third, any shares of Common Stock sought to be included
by Frontier in such registration.
3.02 Underwriting. If Requesting Holders intend to distribute the
------------
Registrable Securities covered by such request by means of an underwriting, the
Requesting Holders shall so advise Frontier as a part of the request made
pursuant to this Section 3, and in such event, the Requesting Holders shall
---------
negotiate in good faith with an underwriter or underwriters proposed by Frontier
to act as the Managing Underwriter in connection with the underwriting of the
Requested Registration; provided, however, that if those Requesting Holders who
-------- -------
hold at least a majority of the Registrable Securities to be included in such
Requested Registration have not agreed with such underwriter or underwriters as
to the terms and conditions of such underwriting within 20 days following
commencement of such negotiations, then the Requesting Holders may select an
underwriter or underwriters of their choice to be the Managing Underwriter,
which choice shall be subject to the approval of the Board of Directors of
Frontier (such approval not to be unreasonably withheld or delayed, taking into
account Frontier's agreements with underwriters then in effect). Frontier and
the Requesting Holders shall enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting (it
being understood that (i) all expenses customarily paid for by the issuer of
securities pursuant to such an underwriting agreement shall be paid for by
Frontier, and (ii) all indemnification obligations which are customarily those
of the issuer of securities under such underwriting agreement shall be the
obligations of Frontier). If a Requesting Holder disapproves of the terms of an
underwriting (the "Withdrawing Holder"), the Withdrawing Holder may elect to
------------------
withdraw therefrom by notice to Frontier and the Managing underwriter; and each
of the remaining
-8-
<PAGE>
Requesting Holders shall be entitled to increase the number of shares
Registrable Securities being registered to the extent of the shares withdrawn by
the Withdrawing Holder in the proportion which the number of shares of
Registrable Securities being registered by such remaining Requesting Holder
bears to the total number of shares being registered by all such remaining
Requesting Holders; provided, however, that the requirements contained in
-------- -------
Section 3.01(a)(i) shall then be met.
- ------------------
3.03 Stock Split; Combination. Upon the request of the Managing
------------------------
Underwriter, Frontier shall effect a stock split in respect of the Common Stock
by means of a stock dividend on the common Stock or a subdivision of the Common
Stock, or a combination of the Common Stock, such stock split or combination to
be in form, scope and substance satisfactory to the Managing Underwriter or such
Requesting Holders, as the case may be.
SECTION 4. Expenses of Registration.
------------------------
Except as otherwise provided herein, (a) in the case of Requested
Registrations pursuant to Section 3, all expenses incurred by Frontier or the
---------
Holders in connection with any registration, qualification or compliance
effected pursuant to this Agreement, including without limitation all
registration, filing and qualification fees, printing expenses, fees and
disbursements of counsel for Frontier and for the holders of Registrable
Securities, and the expenses of any audits required by such registration, shall
be borne by Frontier and (b) in the case of Piggyback Registrations pursuant to
Section 2 (other than a primary registration by Frontier), all of the
- ---------
incremental expenses incurred by Frontier (and not otherwise reimbursed) shall
be borne by the holders of Registrable Securities included in any registration
pursuant to the terms hereof; provided, however, that Frontier shall not be
-------- -------
required to pay: (i) the underwriters' fees, discounts or commissions relating
to Registrable Securities; or (ii) the fees and disbursements of more than a
single law firm for all holders of a majority of such Registrable Securities
participating in a Requested Registration pursuant to Section 3.
---------
Notwithstanding the forgoing, Frontier shall not be required to pay for any
expenses of any registration proceeding begun pursuant to Section 3 if the
---------
request for registration is subsequently withdrawn at the request of the holders
of a majority of the Registrable Securities to be registered therein (which
holders shall bear such expenses), unless the holders of a majority of the
Registrable Securities agree that such registration shall be deemed to
constitute a Requested Registration for purposes of the limitation set forth in
the proviso of Section 3.01(a)(ii); provided, however, that if (a) between the
------------------- -------- -------
date of such request for registration is made and the date of such withdrawal,
there has occurred a material adverse change in the condition, business or
prospects of Frontier (or a material
-9-
<PAGE>
adverse change occurring prior to such request is first publicly disclosed) and
(b) such withdrawal shall have occurred prior to the effective date of the
applicable registration statement (it being understood that the holders shall
only have the right to withdraw a Requested Registration prior to such effective
date), then the holders shall not be required to pay any of such expenses and no
Requested Registration shall be deemed to have occurred pursuant to Section 3.
---------
SECTION 5. Registration Procedures.
-----------------------
5.01 In the case of each registration, qualification or compliance
effected by Frontier pursuant to this Agreement, Frontier shall, by notice to
each holder of Registrable Securities included in such registration, keep such
holder advised in writing as to the initiation, progress and effective date of
each registration, qualification and compliance, and, at the expense of
Frontier, Frontier will:
(a) prepare and file with Commission a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective as soon as reasonably practicable
thereafter; and before filing a registration statement or prospectus or any
amendments or supplements thereto, furnish to the Investor (provided Registrable
Securities held by the Investor are covered by such registration statement) and
the underwriter or underwriters, if any, copies of all such documents proposed
to be filed, including without limitation documents incorporated by reference in
the prospectus and, if requested by such holders of Registrable Securities, the
exhibits incorporated by reference, and such holders shall have the opportunity
to object to any information pertaining to such holders that is contained
therein and Frontier will make the corrections reasonably requested by an
underwriter or such holders with respect to such information prior to filing any
registration statement or amendment thereto or any prospectus or any supplement
thereto;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
a period (the "Effective Period") of not less than 180 days, or such shorter
--------- ------
period as is necessary to complete the distribution of the securities covered by
such registration statement and comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such registration
statement during such period in accordance with the intended methods of
disposition by the seller thereof set forth in such registration statement;
(c) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and
-10-
<PAGE>
supplement thereto, the prospectus included in such registration statement
(including without limitation each preliminary prospectus) and such other
documents as such seller may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by such seller;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdiction
as any seller reasonably requests and take such other steps which may be
necessary or advisable in the reasonable judgment of the managing underwriter
(and at the reasonable request of such managing underwriter) to enable such
seller to consummate the disposition in such jurisdictions of the Registrable
Securities owned by such seller (provided that Frontier will not be required to
(i) qualify to do business in any jurisdiction where it would not otherwise be
required to qualify but for this clause (d), (ii) subject itself to taxation in
any such jurisdiction, or (iii) consent to general service of process in any
such jurisdiction);
(e) notify the Investor and each seller of such Registrable Securities at
any time that is a Significant Holder when a prospectus relating thereto is
required to be delivered under the Securities Act, of the occurrence of any
event as a result of which the prospectus included in such registration
statement contains an untrue statement of a material fact or omits any fact
necessary to make the statements therein not misleading, and, at the request of
any such seller, Frontier shall prepare a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus shall not contain an untrue statement
of a material fact or omit to state any fact necessary to make the statements
therein not misleading;
(f) in the case of an underwritten offering, cause to be delivered to the
sellers of Registrable Securities and the underwriters, if any, opinions of
counsel to Frontier in customary form, covering such matters as are customarily
covered by opinions for an underwritten public offering as the underwriters may
reasonably request and addressed to the underwriters and such sellers;
(g) make available for inspection by any seller of Registrable Securities
that is a Significant Holder, any underwriter participating in any disposition
pursuant to such registration statement, and any attorney, accountant or other
agent retained by any seller or underwriter, all financial and other records,
pertinent corporate documents and properties of Frontier, and cause Frontier's
officers, directors, employees and independent accountants to supply all
information reasonably requested by any
-11-
<PAGE>
such seller, underwriter, attorney, accountant or agent in connection with such
registration statement;
(h) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(i) cause to be delivered, immediately prior to the effectiveness of the
registration statement (and, in the case of an underwritten offering, at the
time of delivery of any Registrable Securities sold pursuant thereto), letters
from Frontier's independent certified public accountants addressed to each
seller that is a Significant Holder and each underwriter, if any, stating that
such accountants are independent public accountants within the meaning of the
Securities Act and the applicable published rules and regulations thereunder,
and otherwise in customary form and covering such financial and accounting
matters as are customarily covered by letters of the independent certified
public accountants delivered in connection with primary or secondary
underwritten public offerings, as the case may be;
(j) make generally available to the holders of Registrable Securities a
consolidated earnings statement (which need not be audited) for the 12 months
beginning after the effective date of a registration statement as soon as
reasonably practicable after the end of such period, which earnings statement
shall satisfy Section 11(a) of the Securities Act and Rule 158 thereunder; and
(k) promptly notify the Investor and any Significant Holder selling
Registrable Securities in such registration and the underwriter or underwriters,
if any:
(i) when the registration statement, any pre-effective amendment,
the prospectus or any prospectus supplement or post-effective amendment to
the registration statement has been filed and, with respect to the
registration statement or any post-effective amendment, when the same has
become effective;
(ii) of any written request by the Commission for post-effective
amendments or supplements to the registration statement or prospectus;
(iii) of the notification to Frontier by the Commission of its
initiation of any proceeding with respect to the issuance by the Commission
of, or the issuance by the Commission of, any stop order suspending the
effectiveness of the registration statement; and
-12-
<PAGE>
(iv) of the receipt by Frontier of any notification with respect
to the suspension of the qualification of any Registrable Securities for sale
under the applicable securities or blue sky laws of any jurisdiction.
5.02 As soon as possible following receipt of notice from the Managing
Underwriter that a particular registration is a Cutback Registration, Frontier
will notify the Investor and each of the holders of Registrable Securities that
is a Significant Holder requested to be included therein that such registration
is a Cutback Registration and of the effect thereof on the ability of such
holders to include their shares in such registration.
5.03 Frontier will use its best efforts to become (and thereafter to
remain) eligible to effect Short-Form Registrations.
SECTION 6. Indemnification; Contribution.
-----------------------------
6.01 With respect to any registration, qualification or compliance
effected or to be effected pursuant to this Agreement, Frontier shall indemnify
each holder of Registrable Securities whose securities are included or are to be
included therein, each such holder's directors, officers, employees,
stockholders, Affiliates and agents, each underwriter (as defined in the
Securities Act) of the securities sold by such holder and each Person who
controls (within the meaning of the Securities Act) any such holder or
underwriter, from and against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on:
(i) any untrue statement (or alleged untrue statement) of a
material fact contained in any prospectus, offering circular or other
document (including without limitation any related registration statement,
notification or the like), or any amendment thereof or supplement thereto,
incident to any such registration, qualification or compliance;
(ii) any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading; or
(iii) any violation by Frontier of the Securities Act, the
Exchange Act or any rule or regulation promulgated thereunder applicable to
Frontier, or of any blue sky or other state securities laws or any rule or
regulation promulgated thereunder applicable to Frontier,
and will reimburse each such Person entitled to indemnity under this Section
-------
6.01 for all legal and other expenses reasonably incurred, as the same are
- ----
incurred, in connection with
-13-
<PAGE>
investigating or defending any such claim, loss, damage, liability or action;
provided, however, that the foregoing indemnity and reimbursement obligation
- -------- -------
shall not be applicable to the extent that any such claim, loss, damage or
liability arises out of or is based on any untrue statement (or alleged untrue
statement) or omission (or alleged omission) or violation made in reliance upon
and in conformity with written information furnished to Frontier by such holder
specifically for use in such prospectus, offering circular, other document,
amendment or supplement.
6.02 With respect to any registration, qualification or compliance effected
or to be effected pursuant to this Agreement, each holder of Registrable
Securities which are included or are to be included in such registration,
qualification or compliance shall indemnify Frontier, its directors, officers,
employees, stockholders, Affiliates and agents, each underwriter (as defined in
the Securities Act) of the securities of such holder, each Person who controls
(within the meaning of the Securities Act) Frontier or any such underwriter from
and against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on:
(i) any untrue statement (or alleged untrue statement) of a material
fact contained in any prospectus, offering circular or other document
(including without limitation any related registration statement,
notification or the like), or any amendment thereof or supplement thereto,
incident to any such registration, qualification or compliance;
(ii) any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading; or
(iii) any violation by such holder of the Securities Act, the Exchange
Act or any rule or regulation promulgated thereunder applicable to such
holder, or of any blue sky or other state securities law or any rule or
regulation promulgated thereunder applicable to such holder, and will
reimburse each such Person entitled to indemnity under this Section 6.02 for
------------
any legal and other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, expense, liability
or action, but in each case only to the extent that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) or violation is
made in such prospectus, offering circular, other document, amendment or
supplement in reliance upon and in conformity with written information
furnished to Frontier by such holder specifically for use in such prospectus,
offering circular, other document, amendment or supplement.
-14-
<PAGE>
6.03 Each Person entitled to indemnification under this Section 6 (an
---------
"Indemnified Party") shall give notice to the party required to provide
-----------------
indemnification (the "Indemnifying Party") promptly after the Indemnified Party
------------------
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided, however, that:
-------- -------
(i) counsel for the Indemnifying Party who shall conduct the
defense of any such claim or any litigation shall be approved by the
Indemnified Party (which approval shall not be unreasonably withheld or
delayed);
(ii) the Indemnified Party may participate in such defense at the
Indemnified Party's expense; provided, however, that the Indemnified Party
-------- -------
or Indemnified Parties shall have the right to employ a single law firm and
a single local counsel law firm to represent it or them if, in the
reasonable judgment of the Indemnified Party or Indemnified Parties, it is
advisable for it or them to be represented by separate counsel by reason of
having legal defenses which are different from or in addition to those
available to the Indemnifying Party, and in that event the reasonable fees
and expenses of one such law firm and one such local law firm shall be paid
by the Indemnifying Party; and
(iii) failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under
this Section 6.
---------
No Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of the Indemnified Party to which such claim or
litigation relates, consent to entry of any judgment or enter into any
settlement unless such settlement relieves the Indemnified Party of any and all
liability. Each Indemnified Party shall furnish such information regarding
itself for the claim in question as an Indemnifying Party may reasonably request
in writing and as shall be reasonably required in connection with defense of
such claim in litigation resulting therefrom.
6.04 If the indemnity and reimbursement obligation provided for in each of
Section 6.01 and Section 6.02 is unavailable or insufficient to hold harmless
- ------------ ------------
an Indemnified Party in respect of any claims, losses, damages or liabilities
(or actions in respect thereof) referred to therein, then the Indemnifying Party
shall contribute to the amount paid or payable by the Indemnified Party as a
result of such claims, losses, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative fault of
the Indemnifying
-15-
<PAGE>
Party, on the one hand, and the Indemnified Party, on the other hand, in
connection with statements or omissions which resulted in such claims, losses,
damages or liabilities, as well as any other relevant equitable considerations.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Indemnifying Party or the Indemnified Party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The parties hereto agee that it would
not be just and equitable if contributions pursuant to this Section 6.04 were to
be determined by pro rata allocation or by any other method of allocation which
--- ----
does not take account of the equitable considerations referred to in the first
sentence of this Section 6.04. The amount paid by an Indemnified Party as a
------------
result of the losses, claims, damages or liabilities referred to in the first
sentence of this Section 6.04 shall be deemed to include any legal and other
------------
expenses reasonably incurred by such Indemnified Party in connection with
investigating or defending any claim, loss, damage, liability or action which is
the subject of this Section 6.04.
------------
No Indemnified Party guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from the Indemnifying Party if the Indemnifying Party was not
guilty of such fraudulent misrepresentation.
The provisions of this Section 6 shall be in addition to any other rights
---------
to indemnification or contribution which an indemnified party may have pursuant
to law, equity, contract or otherwise and shall remain in full force and effect
regardless of any investigation made by or on behalf of an Indemnified Party and
shall survive the transfer of the shares of Common Stock or other stock or
securities which may be issued upon exercise of the Warrants.
SECTION 7. Information by Holders.
----------------------
If Registrable Securities owned by a holder are included in any
registration, such holder shall furnish to Frontier such information regarding
itself and the distribution proposed by such holder as Frontier may reasonably
request and as shall otherwise be required in connection with any registration,
qualification or compliance referred to in this Agreement.
-16-
<PAGE>
SECTION 8. Rule 144 Reporting; Rule 144A Sales.
-----------------------------------
With a view to making available to each holder of Registrable Securities
the benefits of certain rules and regulations of the Commission which may permit
the sale of the Registrable Securities to the public without registration,
Frontier agrees that until the earlier of (a) the date on which no holder owns
any Registrable Securities or (b) the Expiration Date:
(a) Frontier shall, at any time after any of Frontier's securities
are registered under the Securities Act or the Exchange Act: (i) make and keep
available public information, as those terms are contemplated by Rule 144; (ii)
timely file with the Commission all reports and other documents required to be
filed under the Securities Act and the Exchange Act; (iii) furnish to each
holder of Registrable Securities forthwith upon request a written statement by
Frontier as to its compliance with the reporting requirements of the Securities
Act and the Exchange Act, and a copy of the most recent annual or quarterly
report of Frontier; and (iv) comply with all rules and regulations of the
Commission applicable in connection with the use of Rule 144 and take such other
actions and furnish such holder with such other public information as such
holder may reasonably request in order to assist such holder in availing itself
of any rule or regulation of the Commission allowing such holder to sell any
Registrable Securities without registration; and
(b) each holder of Registrable Securities and each prospective holder
of Registrable Securities who may consider acquiring Registrable Securities in
reliance upon Rule 144A shall have the right to request from Frontier, and
Frontier will provide upon request, such public information regarding Frontier
and its business, assets and properties, if any, as such holder may reasonably
request so as to assist such holder in the transfer of Registrable Securities to
such prospective holder in reliance upon Rule 144A.
SECTION 9. Other Registration Rights.
-------------------------
9.01 Frontier represents and warrants to the Investor that there is not in
effect on the date hereof any agreement by Frontier (other than this Agreement
and the other Registration Agreements) pursuant to which any holders of
securities of Frontier have a right to cause Frontier to register or qualify
such securities under the Securities Act or any applicable state securities
laws. Frontier covenants to the holders of Registrable Securities that, in the
event Frontier is advised by the managing underwriter under the Registration
Agreements that a cutback in the shares sought to be registered thereunder is
required, Frontier shall register in
-17-
<PAGE>
such registration (a) first, the Registrable Securities held by any holder of
any rights under any Registration Agreement, (b) second, the Registrable
Securities held by the holders hereunder and the Electing Holders (other than
any holder under clause (a) above), on a pro rata basis, based on the number of
--- ----
shares of Registrable Securities such holders originally sought to include in
such registration and (c) third, any shares of Common Stock sought to be
included by Frontier in such registration.
9.02 So long as any Registrable Securities shall be outstanding,
(a) Frontier shall not amend or permit the amendment of the Registration
Agreements in any manner that is inconsistent with this Registration Rights
Agreement or which adversely affect the rights of any holder of Registrable
Securities without the prior written consent of the holders of a majority of the
then outstanding Registrable Securities and (b) Frontier shall send any notice
in respect of a registration to be delivered by Frontier to any holder of any
rights under any of the Registration Agreements to the Investor and any
Significant Holders of Registrable Securities. So long as any Registrable
Securities shall be outstanding, prior to the Expiration Date (as defined in the
Warrant) Frontier shallnot agree with the holders of any securities issued or to
be issued by Frontier to register or qualify such securities under the
Securities Act or any applicable state securities laws unless such agreement
(including any Registration Agreement) specifically provides that: (a) such
holder of such securities may not participate in any Piggyback Registration
except as provided in Section 2; and (b) the holder of such securities may not
---------
participate in any Requested Registration except as provided in Section 3.
---------
SECTION 10. Holdback Agreements. Frontier hereby agrees that after April 30,
-------------------
1996 it will not make or facilitate any sale or distribution of its equity
securities or any securities convertible or exercisable into or exchangeable for
such equity securities, directly or indirectly, during the seven (7) days prior
to or within 120 days following the effective date of the registration statement
relating to any underwritten Requested Registration (except pursuant to
registrations on Form s-8 or any successor form), unless the Managing
Underwriter or, if there be none, the holders of a majority of the Registrable
Securities to be included in such Requested Registration otherwise agrees.
SECTION 11. Miscellaneous.
-------------
11.01 Successors and Assigns. Subject to the provisions of Section 13,
---------------------- ----------
this Agreement shall inure to the benefit of and shall be binding upon the
parties hereto, all the holders of Registrable Securities and their repective
legal representatives, successors and assigns.
-18-
<PAGE>
11.02 Severability. If any terms or provision of this Agreement, or
------------
the application thereof to any Person or circumstance, shall, to any extent, be
invalid or unenforceable, the remaining terms and provisions of this Agreement
or application to Persons and circumstances shall not be invalidated thereby,
and each term and provision hereof to effect the intent of the parties hereto to
the fullest extent permitted by law.
11.03 Notices. All notices, requests and other communications provided
-------
for herein (including without limitation any waivers or consents under this
Agreement) shall be sent in accordance with Section 7.02 of the Warrant
------------
Agreement.
11.04 Certain Terms. As used herein, the neuter gender shall also be
-------------
deemed to denote both the masculine and feminine genders. Unless the context
otherwise requires, the words "hereof", "herein", "hereto" and "hereunder", and
words of similar import, when used in this Agreement shall refer to this
Agreement as a whole and not to any particular term of provision of this
Agreement. Whenever the context requires, the singular form of any noun,
pronoun or verb includes the comparable plural form thereof, and vice versa.
11.05 Counterparts. This Agreement may be executed with counterpart
------------
signature pages or in several counterparts which, when executed and delivered by
all parties hereto, shall be binding on all parties hereto and shall constitute
one Agreement, notwithstanding that all parties have not signed the same
signature page or the same counterpart.
11.06 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
-------------
ACCORDANCE WITH, AND SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF TEXAS
APPLICABLE TO CONTRACTS EXECUTED IN AND TO BE FULLY PERFORMED IN SUCH STATE.
11.07 Captions. The headings in this Agreement are for purposes of
--------
reference only and will not be considered in construing the Agreement.
11.08 Amendments, Waivers, etc. This Agreement may be amended only by
------------------------
a written instrument (which may be executed in any number of counterparts)
signed by Frontier and the holders of a majority of the Registrable Securities
voting as a class; provided, however, that no such amendment, without the
-------- -------
consent of all holders of Registrable Securities at the time outstanding, shall
amend this Section 11.08. Subject to Section 11.09, no provision of this
------------- -------------
Agreement may be waived except by a written instrument signed by the party
hereto sought to be bound. No failure or delay by any party hereto in
exercising any right or remedy hereunder or under applicable law will operate as
a waiver thereof, and a waiver of a
-19-
<PAGE>
particular right or remedy on one occasion will not be deemed a waiver of any
other right or remedy, or a waiver on any subsequent occasion.
11.09 Consents of Holders of Registrable Securities. Any consent of
---------------------------------------------
the holders of Registrable Securities pursuant to this Agreement, and any waiver
by such holders of any provision of this Agreement, shall be in writing (which
may be executed in any number of counterparts) and may be given or taken by the
holders of a majority of the Registrable Securities voting as a class; provided,
--------
however, that no such consent or waiver, without the consent of all holders of
- -------
Registrable Securities at the time outstanding, shall amend this Section 11.09;
-------------
and any such consent or waiver so given or taken will be binding on all the
holders of Registrable Securities.
11.10 Recapitalization, Exchanges, etc., Affecting Frontier's Capital
---------------------------------------------------------------
Stock. The provisions of this Agreement shall apply, to the full extent set
- -----
forth herein with respect to any and all shares of capital stock of Frontier or
any successor or assign of Frontier (whether by merger, consolidation, sale of
assets of otherwise) which may be issued in respect of, in exchange for or in
substitution of, the Registrable Securities and shall be appropriately adjusted
for any stock dividends, splits, reverse splits, combinations, recapitalizations
and the like occurring after the date hereof.
11.11 Delay of Registration. No holder of Registrable Securities shall
---------------------
have any right to obtain or seek an injuction restraining or otherwise delaying
any such registration as the result of any controversy that might arise with
respect to the interpretation or implementation of this Agreement.
SECTION 12. Listing on Securities Exchanges, etc.
------------------------------------
Frontier shall, promptly after the registration and sale thereof, use
its best efforts to cause any Registrable Securities (a) to be listed on a
national securities exchange and on each additional national securities exchange
on which similar securities of Frontier are listed, if the listing is then
permitted under the rules of such exchange, of (b) to be designated as National
Association of Securities Dealers Automated Quotation System ("NASDAQ")
------
"national market system securities" within the meaning of Rule 11A2-1 under the
Exchange Act or failing that, Frontier shall use best efforts to secure NASDAQ
authorization for such securities and, without limiting the generality of the
foregoing, Frontier shall use best efforts to cause at least two reputable
broker-dealers to register as market makers with respect to such securities with
the National Association of Securities Dealers, Inc.
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<PAGE>
SECTION 13. Limitation on Registration Rights.
---------------------------------
Notwithstanding anything to the contrary contained herein, (a) the rights of
a holder of Registrable Securities under Section 3 hereof shall be terminated on
---------
the fifth anniversary of the date hereof, (b) the rights of a holder of
Registrable Securities under Section 2 hereof shall be terminated on the eighth
---------
anniversary of the date hereof, (c) prior to such time registration rights under
Sections 2 and 3 may be transferred only to transferees that, together with
- ---------- -
their respective Affiliates, are Significant Holders (after giving effect to all
such transfers) and (d) no transfer of registration rights under Sections 2 and
----------
3 may be made except in accordance with the terms and conditions set forth
- -
herein, in the Warrant, and in the Warrant Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Registration
Rights Agreement as of the date first written above.
FRONTIER NATURAL GAS CORPORATION
By
------------------------------
Name:
Title:
WEISSER, JOHNSON & CO.
By
------------------------------
Name:
Title:
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<PAGE>
EXHIBIT A
to
Registration Rights Agreement
<TABLE>
<CAPTION>
============================================================================================================================
Warrants Owner Exp. Date Outstanding
-------- ----- --------- -----------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
1. IPO warrant to purchase one Publicly held 11/12/98 or may be redeemed by 1,578,078
share of common stock ar $6.00 Company for $0.25 at any time Warrants
per share upon 30 days notice
- -----------------------------------------------------------------------------------------------------------------------------
2. Warrant to purchase one share of Energy Finance 11/12/98 One warrant to
common stock at $4.00 per share purchase 25,000
shares
- -----------------------------------------------------------------------------------------------------------------------------
3. Warrant to purchase common Hi-Chicago Trust 12/8/2000 or 30 days after closing One warrant to
stock at $3.00 per share bid price of common stock purchase
equals or exceed $6.00 per share 300,000 shares
for 60 consecutive trading days
- -----------------------------------------------------------------------------------------------------------------------------
4. Warrant to purchase original IPO Paulson Investments 11/12/97 One warrant to
Units (one common share, two purchase 27,500
preferred shares and one warrant) units
for $28.92 per unit
- -----------------------------------------------------------------------------------------------------------------------------
5. Warrant to purchase one share of Allan Turner 2,500 warrants per quarter 30,000
common stock at $4.00 per share --------------------------
beginning 1/1/97
----------------
- ----------------------------------------------------------------------------------------------------------------------------
6. Warrant to purchase one share of LaSalle Street 1/1/01 250,000
common stock at 150% of the Natural Resources ------
highest 30 consecutive trading day Corporation
average closing bid price between
1/1/96 and 6/30/96
============================================================================================================================
</TABLE>
-23-
<PAGE>
Exhibit 4.18
July 24, 1996
Gaines, Berland Inc.
950 Third Avenue
27th Floor
New York, New York 10022
Frontier Natural Gas Corporation
One Benham Place
9400 North Broadway Place
Oklahoma City, OK 73114-7431
Gentlemen:
The undersigned shareholder and/or security holder, officer and/or director
of Frontier Natural Gas Corporation ("Company"), in consideration of the
underwriting of a public offering ("Offering") of securities of the Company by
Gaines, Berland Inc. ("GBI"), hereby agrees that, without the prior written
consent of GBI, for a period of twelve (12) months from the effective date
("Effective Date") of the Company's Registration Statement which relates to the
Offering of its securities to be underwritten by GBI, the undersigned will not
offer, sell, transfer or otherwise dispose of any securities of the Company now
owned or hereafter acquired, whether beneficially* or of record, by the
undersigned, including, but not limited to shares of Common Stock acquired upon
exercise of options or warrants or acquired upon conversion of any other
securities owned by the undersigned (collectively, the "Securities"), except by
means of a private transaction in connection with which the proposed transferee
agrees in writing to be bound by all of the provisions of this agreement prior
to the consummation of such private transaction; provided that the foregoing
shall not apply to shares of Common Stock acquired by the undersigned in the
Offering or to Securities acquired by the undersigned in the after market after
the closing date of the Offering.
- ---------------------------
* It is agreed that, for purposes of this letter, the undersigned
beneficially owns, among other shares, any shares owned by (i) if the
undersigned is an individual, members of his or her family and (ii) any
person or entity controlled by the undersigned or under common control with
the undersigned.
<PAGE>
Gaines, Berland Inc. July 24, 1996
Frontier Natural Gas Corporation
The undersigned acknowledges that it will cause:
1. A copy of this Agreement to be available for the Company or the
Company's transfer agent, if any, upon request and without charge;
2. A notice to be placed on the face of each certificate for the
Securities stating that the transfer of the Securities is restricted
in accordance with the conditions set forth on the reverse side of the
certificate; and
3. A typed legend to be placed on the reverse side of each certificate
representing the Securities which states that the sale or transfer of
the Securities is subject to certain restrictions pursuant to an
agreement between the security holder, the Company and GBI, which
agreement is on file with the Company and the stock transfer agent, if
any, from which a copy is available upon request and without charge.
Notwithstanding anything to the contrary in the Agreement, this Agreement
shall terminate if the Offering is not consummated prior to September 30, 1996.
Very truly yours,
--------------------------------
David W. Berry
2
<PAGE>
July 24, 1996
Gaines, Berland Inc.
950 Third Avenue
27th Floor
New York, New York 10022
Frontier Natural Gas Corporation
One Benham Place
9400 North Broadway Place
Oklahoma City, OK 73114-7431
Gentlemen:
The undersigned shareholder and/or security holder, officer and/or director
of Frontier Natural Gas Corporation ("Company"), in consideration of the
underwriting of a public offering ("Offering") of securities of the Company by
Gaines, Berland Inc. ("GBI"), hereby agrees that, without the prior written
consent of GBI, for a period of twelve (12) months from the effective date
("Effective Date") of the Company's Registration Statement which relates to the
Offering of its securities to be underwritten by GBI, the undersigned will not
offer, sell, transfer or otherwise dispose of any securities of the Company now
owned or hereafter acquired, whether beneficially* or of record, by the
undersigned, including, but not limited to shares of Common Stock acquired upon
exercise of options or warrants or acquired upon conversion of any other
securities owned by the undersigned (collectively, the "Securities"), except by
means of a private transaction in connection with which the proposed transferee
agrees in writing to be bound by all of the provisions of this agreement prior
to the consummation of such private transaction; provided that the foregoing
shall not apply to shares of Common Stock acquired by the undersigned in the
Offering or to Securities acquired by the undersigned in the after market after
the closing date of the Offering.
- ---------------------------
* It is agreed that, for purposes of this letter, the undersigned
beneficially owns, among other shares, any shares owned by (i) if the
undersigned is an individual, members of his or her family and (ii) any
person or entity controlled by the undersigned or under common control with
the undersigned.
<PAGE>
Gaines, Berland Inc. July 24, 1996
Frontier Natural Gas Corporation
The undersigned acknowledges that it will cause:
1. A copy of this Agreement to be available for the Company or the
Company's transfer agent, if any, upon request and without charge;
2. A notice to be placed on the face of each certificate for the
Securities stating that the transfer of the Securities is restricted
in accordance with he conditions set forth on the reverse side of the
certificate; and
3. A typed legend to be placed on the reverse side of each certificate
representing the Securities which states that the sale or transfer of
the Securities is subject to certain restrictions pursuant to an
agreement between the security holder, the Company and GBI, which
agreement is on file with the Company and the stock transfer agent, if
any, from which a copy is available upon request and without charge.
Notwithstanding anything to the contrary in the Agreement, this Agreement
shall terminate if the Offering is not consummated prior to September 30, 1996.
Very truly yours,
------------------------------
David B. Christofferson
2
<PAGE>
July 24, 1996
Gaines, Berland Inc.
950 Third Avenue
27th Floor
New York, New York 10022
Frontier Natural Gas Corporation
One Benham Place
9400 North Broadway Place
Oklahoma City, OK 73114-7431
Gentlemen:
The undersigned shareholder and/or security holder, officer and/or director
of Frontier Natural Gas Corporation ("Company"), in consideration of the
underwriting of a public offering ("Offering") of securities of the Company by
Gaines, Berland Inc. ("GBI"), hereby agrees that, without the prior written
consent of GBI, for a period of twelve (12) months from the effective date
("Effective Date") of the Company's Registration Statement which relates to the
Offering of its securities to be underwritten by GBI, the undersigned will not
offer, sell, transfer or otherwise dispose of any securities of the Company now
owned or hereafter acquired, whether beneficially* or of record, by the
undersigned, including, but not limited to shares of Common Stock acquired upon
exercise of options or warrants or acquired upon conversion of any other
securities owned by the undersigned (collectively, the "Securities"), except by
means of a private transaction in connection with which the proposed transferee
agrees in writing to be bound by all of the provisions of this agreement prior
to the consummation of such private transaction; provided that the foregoing
shall not apply to shares of Common Stock acquired by the undersigned in the
Offering or to Securities acquired by the undersigned in the after market after
the closing date of the Offering.
- ---------------------------
* It is agreed that, for purposes of this letter, the undersigned
beneficially owns, among other shares, any shares owned by (i) if the
undersigned is an individual, members of his or her family and (ii) any
person or entity controlled by the undersigned or under common control with
the undersigned.
<PAGE>
Gaines, Berland Inc. July 24, 1996
Frontier Natural Gas Corporation
The undersigned acknowledges that it will cause:
1. A copy of this Agreement to be available for the Company or the
Company's transfer agent, if any, upon request and without charge;
2. A notice to be placed on the face of each certificate for the
Securities stating that the transfer of the Securities is restricted
in accordance with he conditions set forth on the reverse side of the
certificate; and
3. A typed legend to be placed on the reverse side of each certificate
representing the Securities which states that the sale or transfer of
the Securities is subject to certain restrictions pursuant to an
agreement between the security holder, the Company and GBI, which
agreement is on file with the Company and the stock transfer agent, if
any, from which a copy is available upon request and without charge.
Notwithstanding anything to the contrary in the Agreement, this Agreement
shall terminate if the Offering is not consummated prior to September 30, 1996.
Very truly yours,
-------------------------------
Jeffrey R. Orgill
2
<PAGE>
July 24, 1996
Gaines, Berland Inc.
950 Third Avenue
27th Floor
New York, New York 10022
Frontier Natural Gas Corporation
One Benham Place
9400 North Broadway Place
Oklahoma City, OK 73114-7431
Gentlemen:
The undersigned shareholder and/or security holder, officer and/or director
of Frontier Natural Gas Corporation ("Company"), in consideration of the
underwriting of a public offering ("Offering") of securities of the Company by
Gaines, Berland Inc. ("GBI"), hereby agrees that, without the prior written
consent of GBI, for a period of twelve (12) months from the effective date
("Effective Date") of the Company's Registration Statement which relates to the
Offering of its securities to be underwritten by GBI, the undersigned will not
offer, sell, transfer or otherwise dispose of any securities of the Company now
owned or hereafter acquired, whether beneficially* or of record, by the
undersigned, including, but not limited to shares of Common Stock acquired upon
exercise of options or warrants or acquired upon conversion of any other
securities owned by the undersigned (collectively, the "Securities"), except by
means of a private transaction in connection with which the proposed transferee
agrees in writing to be bound by all of the provisions of this agreement prior
to the consummation of such private transaction; provided that the foregoing
shall not apply to shares of Common Stock acquired by the undersigned in the
Offering or to Securities acquired by the undersigned in the after market after
the closing date of the Offering.
- ---------------------------
* It is agreed that, for purposes of this letter, the undersigned
beneficially owns, among other shares, any shares owned by (i) if the
undersigned is an individual, members of his or her family and (ii) any
person or entity controlled by the undersigned or under common control with
the undersigned.
<PAGE>
Gaines, Berland Inc. July 24, 1996
Frontier Natural Gas Corporation
The undersigned acknowledges that it will cause:
1. A copy of this Agreement to be available for the Company or the
Company's transfer agent, if any, upon request and without charge;
2. A notice to be placed on the face of each certificate for the
Securities stating that the transfer of the Securities is restricted
in accordance with he conditions set forth on the reverse side of the
certificate; and
3. A typed legend to be placed on the reverse side of each certificate
representing the Securities which states that the sale or transfer of
the Securities is subject to certain restrictions pursuant to an
agreement between the security holder, the Company and GBI, which
agreement is on file with the Company and the stock transfer agent, if
any, from which a copy is available upon request and without charge.
Notwithstanding anything to the contrary in the Agreement, this Agreement
shall terminate if the Offering is not consummated prior to September 30, 1996.
Very truly yours,
----------------------------------
Kenneth R. Hutto
2
<PAGE>
July 24, 1996
Gaines, Berland Inc.
950 Third Avenue
27th Floor
New York, New York 10022
Frontier Natural Gas Corporation
One Benham Place
9400 North Broadway Place
Oklahoma City, OK 73114-7431
Gentlemen:
The undersigned shareholder and/or security holder, officer and/or director
of Frontier Natural Gas Corporation ("Company"), in consideration of the
underwriting of a public offering ("Offering") of securities of the Company by
Gaines, Berland Inc. ("GBI"), hereby agrees that, without the prior written
consent of GBI, for a period of twelve (12) months from the effective date
("Effective Date") of the Company's Registration Statement which relates to the
Offering of its securities to be underwritten by GBI, the undersigned will not
offer, sell, transfer or otherwise dispose of any securities of the Company now
owned or hereafter acquired, whether beneficially* or of record, by the
undersigned, including, but not limited to shares of Common Stock acquired upon
exercise of options or warrants or acquired upon conversion of any other
securities owned by the undersigned (collectively, the "Securities"), except by
means of a private transaction in connection with which the proposed transferee
agrees in writing to be bound by all of the provisions of this agreement prior
to the consummation of such private transaction; provided that the foregoing
shall not apply to shares of Common Stock acquired by the undersigned in the
Offering or to Securities acquired by the undersigned in the after market after
the closing date of the Offering.
- ---------------------------
* It is agreed that, for purposes of this letter, the undersigned
beneficially owns, among other shares, any shares owned by (i) if the
undersigned is an individual, members of his or her family and (ii) any
person or entity controlled by the undersigned or under common control with
the undersigned.
<PAGE>
Gaines, Berland Inc. July 24, 1996
Frontier Natural Gas Corporation
The undersigned acknowledges that it will cause:
1. A copy of this Agreement to be available for the Company or the
Company's transfer agent, if any, upon request and without charge;
2. A notice to be placed on the face of each certificate for the
Securities stating that the transfer of the Securities is restricted
in accordance with he conditions set forth on the reverse side of the
certificate; and
3. A typed legend to be placed on the reverse side of each certificate
representing the Securities which states that the sale or transfer of
the Securities is subject to certain restrictions pursuant to an
agreement between the security holder, the Company and GBI, which
agreement is on file with the Company and the stock transfer agent, if
any, from which a copy is available upon request and without charge.
Notwithstanding anything to the contrary in the Agreement, this Agreement
shall terminate if the Offering is not consummated prior to September 30, 1996.
Very truly yours,
------------------------------
Michael A. Barnes
2
<PAGE>
July 24, 1996
Gaines, Berland Inc.
950 Third Avenue
27th Floor
New York, New York 10022
Frontier Natural Gas Corporation
One Benham Place
9400 North Broadway Place
Oklahoma City, OK 73114-7431
Gentlemen:
The undersigned shareholder and/or security holder, officer and/or director
of Frontier Natural Gas Corporation ("Company"), in consideration of the
underwriting of a public offering ("Offering") of securities of the Company by
Gaines, Berland Inc. ("GBI"), hereby agrees that, without the prior written
consent of GBI, for a period of twelve (12) months from the effective date
("Effective Date") of the Company's Registration Statement which relates to the
Offering of its securities to be underwritten by GBI, the undersigned will not
offer, sell, transfer or otherwise dispose of any securities of the Company now
owned or hereafter acquired, whether beneficially* or of record, by the
undersigned, including, but not limited to shares of Common Stock acquired upon
exercise of options or warrants or acquired upon conversion of any other
securities owned by the undersigned (collectively, the "Securities"), except by
means of a private transaction in connection with which the proposed transferee
agrees in writing to be bound by all of the provisions of this agreement prior
to the consummation of such private transaction; provided that the foregoing
shall not apply to shares of Common Stock acquired by the undersigned in the
Offering or to Securities acquired by the undersigned in the after market after
the closing date of the Offering.
- ---------------------------
* It is agreed that, for purposes of this letter, the undersigned
beneficially owns, among other shares, any shares owned by (i) if the
undersigned is an individual, members of his or her family and (ii) any
person or entity controlled by the undersigned or under common control with
the undersigned.
<PAGE>
Gaines, Berland Inc. July 24, 1996
Frontier Natural Gas Corporation
The undersigned acknowledges that it will cause:
1. A copy of this Agreement to be available for the Company or the
Company's transfer agent, if any, upon request and without charge;
2. A notice to be placed on the face of each certificate for the
Securities stating that the transfer of the Securities is restricted
in accordance with he conditions set forth on the reverse side of the
certificate; and
3. A typed legend to be placed on the reverse side of each certificate
representing the Securities which states that the sale or transfer of
the Securities is subject to certain restrictions pursuant to an
agreement between the security holder, the Company and GBI, which
agreement is on file with the Company and the stock transfer agent, if
any, from which a copy is available upon request and without charge.
Notwithstanding anything to the contrary in the Agreement, this Agreement
shall terminate if the Offering is not consummated prior to September 30, 1996.
Very truly yours,
-----------------------------
S. Gordon Reese
2
<PAGE>
July 24, 1996
Gaines, Berland Inc.
950 Third Avenue
27th Floor
New York, New York 10022
Frontier Natural Gas Corporation
One Benham Place
9400 North Broadway Place
Oklahoma City, OK 73114-7431
Gentlemen:
The undersigned shareholder and/or security holder, officer and/or director
of Frontier Natural Gas Corporation ("Company"), in consideration of the
underwriting of a public offering ("Offering") of securities of the Company by
Gaines, Berland Inc. ("GBI"), hereby agrees that, without the prior written
consent of GBI, for a period of twelve (12) months from the effective date
("Effective Date") of the Company's Registration Statement which relates to the
Offering of its securities to be underwritten by GBI, the undersigned will not
offer, sell, transfer or otherwise dispose of any securities of the Company now
owned or hereafter acquired, whether beneficially* or of record, by the
undersigned, including, but not limited to shares of Common Stock acquired upon
exercise of options or warrants or acquired upon conversion of any other
securities owned by the undersigned (collectively, the "Securities"), except by
means of a private transaction in connection with which the proposed transferee
agrees in writing to be bound by all of the provisions of this agreement prior
to the consummation of such private transaction; provided that the foregoing
shall not apply to shares of Common Stock acquired by the undersigned in the
Offering or to Securities acquired by the undersigned in the after market after
the closing date of the Offering.
- ---------------------------
* It is agreed that, for purposes of this letter, the undersigned
beneficially owns, among other shares, any shares owned by (i) if the
undersigned is an individual, members of his or her family and (ii) any
person or entity controlled by the undersigned or under common control with
the undersigned.
<PAGE>
Gaines, Berland Inc. July 24, 1996
Frontier Natural Gas Corporation
The undersigned acknowledges that it will cause:
1. A copy of this Agreement to be available for the Company or the
Company's transfer agent, if any, upon request and without charge;
2. A notice to be placed on the face of each certificate for the
Securities stating that the transfer of the Securities is restricted
in accordance with he conditions set forth on the reverse side of the
certificate; and
3. A typed legend to be placed on the reverse side of each certificate
representing the Securities which states that the sale or transfer of
the Securities is subject to certain restrictions pursuant to an
agreement between the security holder, the Company and GBI, which
agreement is on file with the Company and the stock transfer agent, if
any, from which a copy is available upon request and without charge.
Notwithstanding anything to the contrary in the Agreement, this Agreement
shall terminate if the Offering is not consummated prior to September 30, 1996.
Very truly yours,
-------------------------------
Neal M. Elliott
2
<PAGE>
July 24, 1996
Gaines, Berland Inc.
950 Third Avenue
27th Floor
New York, New York 10022
Frontier Natural Gas Corporation
One Benham Place
9400 North Broadway Place
Oklahoma City, OK 73114-7431
Gentlemen:
The undersigned shareholder and/or security holder, officer and/or director
of Frontier Natural Gas Corporation ("Company"), in consideration of the
underwriting of a public offering ("Offering") of securities of the Company by
Gaines, Berland Inc. ("GBI"), hereby agrees that, without the prior written
consent of GBI, for a period of twelve (12) months from the effective date
("Effective Date") of the Company's Registration Statement which relates to the
Offering of its securities to be underwritten by GBI, the undersigned will not
offer, sell, transfer or otherwise dispose of any securities of the Company now
owned or hereafter acquired, whether beneficially* or of record, by the
undersigned, including, but not limited to shares of Common Stock acquired upon
exercise of options or warrants or acquired upon conversion of any other
securities owned by the undersigned (collectively, the "Securities"), except by
means of a private transaction in connection with which the proposed transferee
agrees in writing to be bound by all of the provisions of this agreement prior
to the consummation of such private transaction; provided that the foregoing
shall not apply to shares of Common Stock acquired by the undersigned in the
Offering or to Securities acquired by the undersigned in the after market after
the closing date of the Offering.
- ---------------------------
* It is agreed that, for purposes of this letter, the undersigned
beneficially owns, among other shares, any shares owned by (i) if the
undersigned is an individual, members of his or her family and (ii) any
person or entity controlled by the undersigned or under common control with
the undersigned.
<PAGE>
Gaines, Berland Inc. July 24, 1996
Frontier Natural Gas Corporation
The undersigned acknowledges that it will cause:
1. A copy of this Agreement to be available for the Company or the
Company's transfer agent, if any, upon request and without charge;
2. A notice to be placed on the face of each certificate for the
Securities stating that the transfer of the Securities is restricted
in accordance with he conditions set forth on the reverse side of the
certificate; and
3. A typed legend to be placed on the reverse side of each certificate
representing the Securities which states that the sale or transfer of
the Securities is subject to certain restrictions pursuant to an
agreement between the security holder, the Company and GBI, which
agreement is on file with the Company and the stock transfer agent, if
any, from which a copy is available upon request and without charge.
Notwithstanding anything to the contrary in the Agreement, this Agreement
shall terminate if the Offering is not consummated prior to September 30, 1996.
Very truly yours,
---------------------------------
Allen Sweeney
2
<PAGE>
Exhibit 4.19
July 30, 1996
Gaines, Berland Inc.
950 Third Avenue
27th Floor
New York, New York 10022
Frontier Natural Gas Corporation
One Benham Place
9400 North Broadway Place
Oklahoma City, OK 73114-7431
Gentlemen:
The undersigned shareholder and/or security holder of Frontier Natural Gas
Corporation ("Company"), in consideration of the underwriting of a public
offering ("Offering") of securities of the Company by Gaines, Berland Inc.
("GBI"), hereby agrees that, without the prior written consent of GBI, for a
period of twelve (12) months from the effective date ("Effective Date") of the
Company's Registration Statement which relates to the Offering of its securities
to be underwritten by GBI (provided that the effective date occur no later than
9/30/96), the undersigned will not offer, sell, transfer or otherwise dispose of
any securities of the Company now owned by the undersigned, including, but not
limited to shares of Common Stock acquired upon exercise of options or warrants
or acquired upon conversion of any other securities owned by the undersigned
(collectively, the "Securities"), except by means of a private transaction in
connection with which the proposed transferee agrees in writing to be bound by
all of the provisions of this agreement prior to the consummation of such
private transaction; provided that the foregoing shall not apply to shares of
Common Stock acquired by the undersigned in the Offering or to Securities
acquired by the undersigned in the after market after the closing date of the
Offering.
- ---------------------------
* It is agreed that, for purposes of this letter, the undersigned
includes successors, assignees and transferees of the warrant.
<PAGE>
Gaines, Berland Inc. July 30, 1996
Frontier Natural Gas Corporation
The undersigned acknowledges that it will cause:
1. A copy of this Agreement to be available for the Company or the
Company's transfer agent, if any, upon request and at the company's
expense;
2. If the warrants are exercised and the stock certificates issued, a
notice to be placed on the face of each certificate for the
Securities stating that the transfer of the Securities is restricted
in accordance with he conditions set forth on the reverse side of the
certificate; and
3. If the warrants are exercised and the stock certificates issued, a
typed legend to be placed on the reverse side of each certificate
representing the Securities which states that the sale or transfer of
the Securities is subject to certain restrictions pursuant to an
agreement between the security holder, the Company and GBI, which
agreement is on file with the Company and the stock transfer agent, if
any, from which a copy is available upon request and without charge.
Notwithstanding anything to the contrary in the Agreement, this Agreement
shall terminate if the Offering is not consummated prior to September 30, 1996.
Very truly yours,
LASALLE STREET NATURAL
RESOURCES CORPORATION
/s/ Richard A. Bernardy
------------------------------------
Name: Richard A. Bernardy
-------------------------------
Its: Vice President
--------------------------------
2
<PAGE>
Exhibit 4.20
July 24, 1996
Gaines, Berland Inc.
950 Third Avenue
27th Floor
New York, New York 10022
Frontier Natural Gas Corporation
One Benham Place
9400 North Broadway Place
Oklahoma City, OK 73114-7431
Gentlemen:
The undersigned shareholder and/or security holder of Frontier Natural Gas
Corporation ("Company"), in consideration of the underwriting of a public
offering ("Offering") of securities of the Company by Gaines, Berland Inc.
("GBI"), hereby agrees that, without the prior written consent of GBI, for a
period of twelve (12) months from the effective date ("Effective Date") of the
Company's Registration Statement which relates to the Offering of its securities
to be underwritten by GBI, the undersigned will not offer, sell, transfer or
otherwise dispose of any securities of the company now owned or hereafter
acquired, whether beneficially or of record, by the undersigned, including, but
not limited to shares of Common Stock acquired upon exercise of options or
warrants or acquired upon conversion of any other securities owned by the
undersigned (collectively, the "Securities"), except by means of a private
transaction in connection with which the proposed transferee agrees in writing
to be bound by all of the provisions of this agreement prior to the consummation
of such private transaction; provided that the foregoing shall not apply to
shares of Common Stock acquired by the undersigned in the offering or to
Securities acquired by the undersigned in the after market after the closing
date of the Offering. Notwithstanding the foregoing, the undersigned may sell
certain shares of Common Stock of the company as follows:
(a) the undersigned may sell up to 75,000 shares of Common Stock,
registered on the Registration Statement which relates to the shares
of Common Stock of the Company underwritten by GBI ("Registration
Statement"), at any time and from time to time after the effective
date of the Registration Statement ("Effective Date");
(b) the undersigned may sell up to 300,000 shares of Common Stock
purchasable upon exercise of certain warrants issued to the
undersigned on December 8, 1995, which bear an exercise price of $3.00
and expiration date of December 8, 2000
("Settlement Warrants") at or after the earlier of (i) the six month
anniversary of
<PAGE>
Gaines, Berland Inc. July 24, 1996
Frontier Natural Gas Corporation
the Effective Date or (ii) the date on which the closing bid price as
reported by The Nasdaq Stock Market, Inc. of a share of Common Stock
of the Company has equaled or exceeded $4.00 for not less than 15
consecutive trading days after the Effective Date; and
(c) the undersigned may sell up to 292,200 shares of Common Stock
(Previously Owned Shares) which are currently outstanding and
registered on a Registration Statement on Form S-3 declared effective
on May 16, 1995, as follows: (i) 97,400 shares may be sold on or
after the 30th day anniversary of the Effective Date, (ii) 97,400
additional shares may be sold on or after the 60th day anniversary of
the Effective Date and (iii) 97,400 additional shares may be sold on
or after the 90th day anniversary of the Effective Date; provided,
however, if the closing bid price as reported by The Nasdaq Stock
Market Inc. of a share of Common Stock of the Company has equaled or
exceeded $4.00 for not less than 10 consecutive trading days after the
Effective Date, then the undersigned may sell all 292,200 of the
Previously Owned Shares.
The undersigned acknowledges that it will cause:
1. A copy of this Agreement to be available from the Company or the
Company's transfer agent, if any, upon request and without charge;
2. A notice to be placed on the face of each certificate for the
Securities stating that the transfer of the Securities is restricted
in accordance with the conditions set forth on the reverse side of the
certificate; and
3. A typed legend to be placed on the reverse side of each certificate
representing the Securities which states that the sale or transfer of
the Securities is subject to certain restrictions pursuant to an
agreement between the security holder, the Company and GBI, which
agreement is on file with the Company and the stock transfer agent, if
any, from which a copy is available upon request and without charge.
All shares registered as part of this offering (File No.333-06261) and a
part of the Form S-3, previously mentioned, (File No. 33-88346) are considered
to have satisfied the requirements of the Registration Rights Agreement dated
December 8, 1995, between the Company and Hi-Chicago Trust as it relates to the
registered shares.
Notwithstanding anything to the contrary in the Agreement, this Agreement
shall terminate if the Offering is not consummated prior to December 1, 1996.
2
<PAGE>
Gaines, Berland Inc. July 24, 1996
Frontier Natural Gas Corporation
Very truly yours,
HI-CHICAGO TRUST
----------------------------------
Name:
-----------------------------
Its:
------------------------------
3
<PAGE>
Exhibit 4.21
July 24, 1996
Gaines, Berland Inc.
950 Third Avenue
27th Floor
New York, New York 10022
Frontier Natural Gas Corporation
One Benham Place
9400 North Broadway Place
Oklahoma City, OK 73114-7431
Gentlemen:
The undersigned shareholder and/or security holder, of Frontier Natural Gas
Corporation ("Company"), in consideration of the underwriting of a public
offering ("Offering") of securities of the Company by Gaines, Berland Inc.
("GBI"), hereby agrees that, without the prior written consent of GBI, for a
period of twelve (12) months from the effective date ("Effective Date") of the
Company's Registration Statement which relates to the Offering of its securities
to be underwritten by GBI, the undersigned will not offer, sell, transfer or
otherwise dispose of any securities of the Company now owned or hereafter
acquired, whether beneficially or of record, by the undersigned, including, but
not limited to shares of Common Stock acquired upon exercise of options or
warrants or acquired upon conversion of any other securities owned by the
undersigned (collectively, the "Securities"). Notwithstanding the foregoing,
GBI agrees that the undersigned may sell at any time and from time to time up to
170,000 shares of Common Stock of the Company, registered in the name of the
undersigned on the date hereof, after the 60th day anniversary of the effective
date of the Registration Statement relating to the Offering.
The undersigned acknowledges that it will cause:
1. A copy of this Agreement to be available for the Company or the
Company's transfer agent, if any, upon request and without charge;
2. A notice to be placed on the face of each certificate for the
Securities stating that the transfer of the Securities is restricted
in accordance with he conditions set forth on the reverse side of the
certificate; and
3. A typed legend to be placed on the reverse side of each certificate
representing the Securities which states that the sale or transfer of
the Securities is subject to certain restrictions pursuant to an
agreement between the security holder, the Company and GBI, which
agreement is on file with the Company and the stock
<PAGE>
transfer agent, if any, from which a copy is available upon request
and without charge.
All shares registered as part of this Offering are considered to have
satisfied the requirements of the Registration Rights Agreement dated effective
January 12, 1996 between the Company and Weisser, Johnson & Co. Capital
Corporation as it relates to the registered shares.
Notwithstanding anything to the contrary in the Agreement, this Agreement
shall terminate if the Offering is not consummated prior to August 31, 1996.
Very truly yours,
WEISSER, JOHNSON & CO.
-------------------------------
Nam:
---------------------------
Its:
---------------------------
<PAGE>
EXHIBIT 4.22
THE REGISTERED HOLDER OF THIS PURCHASE OPTION, BY ITS ACCEPTANCE HEREOF, AGREES
THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE OPTION EXCEPT AS HEREIN
PROVIDED.
NOT EXERCISABLE PRIOR TO ______________, 1997. VOID AFTER 5:00 P.M. EASTERN
TIME, ___________, 2001.
FORM OF
UNIT PURCHASE OPTION
FOR THE PURCHASE OF
120,000 UNITS
OF
FRONTIER NATURAL GAS CORPORATION
(AN OKLAHOMA CORPORATION)
1. Purchase Option.
---------------
THIS CERTIFIES THAT, in consideration of one hundred dollars ($100.00)
duly paid by or on behalf of [FILL IN NAME OF HOLDER] ("Holder"), as registered
owner of this Purchase Option, to Frontier Natural Gas Corporation ("Company"),
Holder is entitled, at any time or from time to time at or after ___________,
1997 ("Commencement Date"), and at or before 5:00 p.m., Eastern Time,
___________, 2001 ("Expiration Date"), but not thereafter, to subscribe for,
purchase and receive, in whole or in part, up to 120,000 Units of securities of
the Company ("Units"). Each Unit consists of three (3) shares of Common Stock
of the Company, $.01 par value ("Common Stock") and three (3) Common Stock
Purchase Warrants, each Warrant to purchase one share of Common Stock
("Warrant(s)") during the period commencing on one year and expiring five years
from the effective date ("Effective Date") of the registration statement on Form
SB-2 (File No. 333-06261) ("Registration Statement") pursuant to which the
Company has registered Units, shares of Common Stock and Warrants to purchase
common stock. Each Warrant is the same as the warrants that have been
registered for sale to the public ("Public Warrants") pursuant to the
Registration Statement. The Units, shares of Common Stock and Warrants are
sometimes collectively referred to herein as the "Securities." If the
Expiration Date is a day on which banking institutions are authorized by law to
close, then this Purchase Option may be exercised on the next succeeding day
which is not such a day in accordance with the terms herein. During the period
ending on the Expiration Date, the Company agrees not to take any action that
would terminate the Purchase Option. This Purchase Option is initially
exercisable at $___________ [154% OF THE UNIT PRICE] per Unit purchased;
provided, however, that, upon the occurrence of any of the events specified in
Section 6 hereof, the rights granted by this Purchase Option, including the
exercise price and the number of Units to be received
<PAGE>
upon such exercise, shall be adjusted as therein specified. The term "Exercise
Price" shall mean the initial exercise price or the adjusted exercise price,
depending on the context.
2. Exercise.
--------
2.1 Exercise Form. In order to exercise this Purchase Option, the
-------------
exercise form attached hereto must be duly executed and completed and delivered
to the Company, together with this Purchase Option and payment of the Exercise
Price in cash or by certified check or official bank check for the Securities
being purchased. If the subscription rights represented hereby shall not be
exercised at or before 5:00 p.m., Eastern time, on the Expiration Date, this
Purchase Option shall become and be void without further force or effect, and
all rights represented hereby shall cease and expire.
2.2 Cashless Exercise.
-----------------
2.2.1 Determination of Amount. In lieu of the payment of the
-----------------------
Exercise Price in the manner required by Section 2.1, the Holder shall have the
right (but not the obligation) to pay the Exercise Price for the Securities
being purchased with this Purchase Option upon exercise by the surrender to the
Company of any exercisable but unexercised portion of this Purchase Option
having a "Value" (as defined below), at the close of trading on the last trading
day immediately preceding the exercise of this Purchase Option, equal to the
Exercise Price multiplied by the number of Units being purchased upon exercise
("Cashless Exercise Right"). The sum of (a) the number of Units being purchased
upon exercise of the non-surrendered portion of this Purchase Option pursuant to
this Cashless Exercise Right and (b) the number of Units underlying the portion
of this Purchase Option being surrendered, shall not in any event be greater
than the total number of Units purchasable upon the complete exercise of this
Purchase Option if the Exercise Price were paid in cash. The "Value" of the
portion of the Purchase Option being surrendered shall equal the remainder
derived from subtracting (a) the Exercise Price multiplied by the number of
Units underlying the portion of this Purchase Option being surrendered from (b)
the Market Price of the Units multiplied by the number of Units underlying the
portion of this Purchase Option being surrendered. As used herein, the term
"Market Price" at any date shall be deemed to be the addition of the Common
Stock and Public Warrants on such date, or, in case no such reported sales take
place on such day, the average of the last reported sale prices for the
immediately preceding three trading days, in either case as officially reported
by the principal securities exchange on which the Common Stock and Public
Warrants are listed or admitted to trading, or, if the Common Stock and Public
Warrants are not listed or admitted to trading on any national securities
exchange or if any such exchange on which the Common Stock and Public Warrants
are listed is not their respective principal trading market, the last reported
sale prices as furnished by the NASD through the Nasdaq National Market or
SmallCap Market, or, if applicable, the OTC Bulletin Board, or if the Common
Stock and Public Warrants are not listed or admitted to trading on the Nasdaq
National Market or SmallCap Market or OTC Bulletin Board or similar
organization, as determined in good faith by resolution of the Board of
Directors of the Company, based on the best information available to it.
2.2.2 Mechanics of Cashless Exercise. The Cashless Exercise Right
------------------------------
may be exercised by the Holder on any business day on or after the Commencement
Date and not later
2
<PAGE>
than the Expiration Date by delivering the Purchase Option with a duly executed
exercise form attached hereto with the cashless exercise section completed to
the Company, exercising the Cashless Exercise Right and specifying the total
number of Units the Holder will purchase pursuant to such Cashless Exercise
Right.
3. Transfer.
--------
3.1 General Restrictions. The registered Holder of this Purchase Option,
--------------------
by its acceptance hereof, agrees that it will not sell, transfer or assign or
hypothecate this Purchase Option prior to the Commencement Date to anyone other
than (i) an officer of Gaines, Berland Inc. ("Underwriter") or an officer or
partner of any Selected Dealer or member of the underwriting syndicate in
connection with the Company's public offering with respect to which this
Purchase Option has been issued, or (ii) any Selected Dealer or member of the
underwriting syndicate. On and after the Commencement Date, transfers to others
may be made subject to compliance with or exemptions from applicable securities
laws. In order to make any permitted assignment, the Holder must deliver to the
Company the assignment form attached hereto duly executed and completed,
together with the Purchase Option and payment of all transfer taxes, if any,
payable in connection therewith. The Company shall immediately transfer this
Purchase Option on the books of the Company and shall execute and deliver a new
Purchase Option or Purchase Options of like tenor to the appropriate assignee(s)
expressly evidencing the right to purchase the aggregate number of Units
purchasable hereunder or such portion of such number as shall be contemplated by
any such assignment.
3.2 Restrictions Imposed by the Act. This Purchase Option and the
-------------------------------
Securities underlying this Purchase Option shall not be transferred unless and
until (i) the Company has received the opinion of counsel for the Holder that
this Purchase Option or the Securities, as the case may be, may be transferred
pursuant to an exemption from registration under the Act and applicable state
law, the availability of which is established to the reasonable satisfaction of
the Company (the Company hereby agreeing that the opinion of Graubard Mollen &
Miller shall be deemed satisfactory evidence of the availability of an
exemption), or (ii) a registration statement relating to such Purchase Option or
Securities, as the case may be, has been filed by the Company and declared
effective by the Securities and Exchange Commission and is current and
compliance with applicable state law.
4. New Purchase Options to be Issued.
---------------------------------
4.1 Partial Exercise or Transfer. Subject to the restrictions in Section
----------------------------
3 hereof, this Purchase Option may be exercised or assigned in whole or in part.
In the event of the exercise or assignment hereof in part only, upon surrender
of this Purchase Option for cancellation, together with the duly executed
exercise or assignment form and funds sufficient to pay the Exercise Price, the
Company shall cause to be delivered to the Holder without charge a new Purchase
Option of like tenor to this Purchase Option in the name of the Holder
evidencing the right of the Holder to purchase the aggregate number of Units
purchasable hereunder as to which this Purchase Option has not been exercised or
assigned.
4.2 Lost Certificate. Upon receipt by the Company of evidence
----------------
satisfactory to it of the loss, theft, destruction or mutilation of this
Purchase Option and of reasonably satisfactory
3
<PAGE>
indemnification, the Company shall execute and deliver a new Purchase Option of
like tenor and date. Any such new Purchase Option executed and delivered as a
result of such loss, theft, mutilation or destruction shall constitute a
substitute contractual obligation on the part of the Company.
5. Registration Rights.
-------------------
5.1 Demand Registration.
-------------------
5.1.1 Grant of Right. The Company, upon written demand ("Initial
--------------
Demand Notice") of the Holder(s) of at least 51% of the Purchase Options and/or
the underlying Units ("Majority Holders"), agrees to register on one occasion,
all or any portion of the Purchase Options requested by the Majority Holders in
the Initial Demand Notice and all of the Securities underlying such Purchase
Options, including the Units, the Common Stock, the Warrants and the Common
Stock underlying the Warrants (collectively the "Registrable Securities"). On
such occasion, the Company will file a Registration Statement covering the
Registrable Securities within sixty days after receipt of the Initial Demand
Notice and use its best efforts to have such registration statement declared
effective promptly thereafter. Should this registration or the effectiveness
thereof be delayed by the Company, the exercisability of the Purchase Options
shall be extended for a period of time equal to the delay in registering the
Registrable Securities; provided, however, that such extension date shall not
extend beyond five years from the Effective Date. Moreover, if the Company
fails to comply with the provisions of this Section 5.1.1, the Company shall, in
addition to any other equitable or other relief available to the Holder(s), be
liable for any and all incidental, special and consequential damages sustained
by the Holder(s). The demand for registration may be made at any time during a
period of four years beginning one year from the Effective Date. The Company
covenants and agrees to give written notice of its receipt of any Initial Demand
Notice by any Holder(s) to all other registered Holders of the Purchase Options
and/or the Registrable Securities within ten days from the date of the receipt
of any such Initial Demand Notice.
5.1.2 Terms. The Company shall bear all fees and expenses attendant
-----
to registering the Registrable Securities, but the Holders shall pay any and all
underwriting commissions and the expenses of any legal counsel selected by the
Holders to represent them in connection with the sale of the Registrable
Securities. The Company agrees to use its best efforts to cause the filing
required herein to become effective promptly and to qualify or register the
Registrable Securities in such states as are reasonably requested by the
Holder(s); provided, however, that in no event shall the Company be required to
register the Registrable Securities in a state in which such registration would
cause (i) the Company to be obligated to register or license to do business in
such state, or (ii) the principal stockholders of the Company to be obligated to
escrow their shares of capital stock of the Company. The Company shall cause
any registration statement filed pursuant to the demand rights granted under
Section 5.1.1 to remain effective for a period of at least nine consecutive
months from the date that the Holders of the Registrable Securities covered by
such registration statement are first given the opportunity to sell all of such
securities.
4
<PAGE>
5.2 "Piggy-Back" Registration.
-------------------------
5.2.1 Grant of Right. In addition to the demand right of
--------------
registration, the Holders of the Purchase Options shall have the right for a
period of six years commencing one year from the Effective Date, to include the
Registrable Securities as part of any other registration of securities filed by
the Company (other than in connection with a transaction contemplated by Rule
145(a) promulgated under the Act or pursuant to Form S-8).
5.2.2 Terms. The Company shall bear all fees and expenses attendant
-----
to registering the Registrable Securities, but the Holders shall pay any and all
underwriting commissions and the expenses of any legal counsel selected by the
Holders to represent them in connection with the sale of the Registrable
Securities. In the event of such a proposed registration, the Company shall
furnish the then Holders of outstanding Registrable Securities with not less
than thirty days written notice prior to the proposed date of filing of such
registration statement. Such notice to the Holders shall continue to be given
for each registration statement filed by the Company until such time as all of
the Securities have been sold by the Holder. The holders of the Securities
shall exercise the "piggy-back" rights provided for herein by giving written
notice, within thirty (30) days of the receipt of the Company's notice of its
intention to file a registration statement. The Company shall cause any
registration statement filed pursuant to the above "piggyback" rights to remain
effective for at least nine months from the date that the Holders of the
Securities are first given the opportunity to sell all of such securities.
5.3 General Terms.
-------------
5.3.1 Indemnification. The Company shall indemnify the Holder(s) of
---------------
the Securities to be sold pursuant to any registration statement hereunder and
each person, if any, who controls such Holders within the meaning of Section 15
of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended
("Exchange Act"), against all loss, claim, damage, expense or liability
(including all reasonable attorneys' fees and other expenses reasonably incurred
in investigating, preparing or defending against any claim whatsoever) to which
any of them may become subject under the Act, the Exchange Act or otherwise,
arising from such registration statement but only to the same extent and with
the same effect as the provisions pursuant to which the Company has agreed to
indemnify the Underwriter contained in Section 5 of the Underwriting Agreement
between the Underwriter and the Company, dated the Effective Date. The
Holder(s) of the Securities to be sold pursuant to such registration statement,
and their successors and assigns, shall severally, and not jointly, indemnify
the Company, against all loss, claim, damage, expense or liability (including
all reasonable attorneys' fees and other expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Act, the Exchange Act or otherwise, arising
from information furnished by or on behalf of such Holders, or their successors
or assigns, in writing, for specific inclusion in such registration statement to
the same extent and with the same effect as the provisions contained in Section
5 of the Underwriting Agreement pursuant to which the Underwriter has agreed to
indemnify the Company.
5.3.2 Exercise of Warrants. Nothing contained in this Purchase
--------------------
Option shall be construed as requiring the Holder(s) to exercise their Purchase
Options or Warrants prior to or after the initial filing of any registration
statement or the effectiveness thereof.
5
<PAGE>
5.3.3 Exclusivity. The Company shall not permit the inclusion of any
-----------
securities other than the Registrable Securities to be included in any
registration statement filed pursuant to Section 5.1 hereof without the prior
written consent of the Majority Holders of the Securities.
5.3.4 Documents Delivered to Holders. The Company shall furnish to
------------------------------
each Holder participating in any of the foregoing offerings and to each
underwriter of any such offering, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under any underwriting agreement related thereto), and (ii) a "cold
comfort" letter dated the effective date of such registration statement (and, if
such registration includes an underwritten public offering, a letter dated the
date of the closing under the underwriting agreement) signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities. The Company shall also deliver promptly to each Holder
participating in the offering requesting the correspondence and memoranda
described below and to the managing underwriter copies of all correspondence
between the Commission and the Company, its counsel or auditors and all
memoranda relating to discussions with the Commission or its staff with respect
to the registration statement and permit each Holder and underwriter to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules of the National
Association of Securities Dealers, Inc. ("NASD"). Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors, all to such
reasonable extent and at such reasonable times and as often as any such Holder
shall reasonably request.
5.3.5 Underwriting Agreement. Upon a request for registration
----------------------
pursuant to Section 5.1, the Company shall enter into an underwriting agreement
with the managing underwriter(s) selected by any Holders whose Registrable
Securities are being registered pursuant to this Section 5. Such agreement
shall be reasonably satisfactory in form and substance to the Company, each
Holder and such managing underwriters, and shall contain such representations,
warranties and covenants by the Company and such other terms as are customarily
contained in agreements of that type used by the managing underwriter. The
Holders shall be parties to any underwriting agreement relating to an
underwritten sale of their Securities and may, at their option, require that any
or all the representations, warranties and covenants of the Company to or for
the benefit of such underwriters shall also be made to and for the benefit of
such Holders. Such Holders shall not be required to make any representations or
warranties to or agreements with the Company or the underwriters except as they
may relate to such Holders, their shares and their intended methods of
distribution.
5.3.6 Documents to be Delivered by Holder(s). Each of the Holder(s)
--------------------------------------
participating in any of the foregoing offerings shall furnish to the Company a
completed and
6
<PAGE>
executed questionnaire provided by the Company requesting information
customarily sought of selling securityholders.
6. Adjustments.
-----------
6.1 Adjustments to Exercise Price and Number of Securities. The Exercise
------------------------------------------------------
Price and the number of Units underlying the Purchase Option shall be subject to
adjustment from time to time as hereinafter set forth:
6.1.1 Stock Dividends - Split-Ups. If after the date hereof, and
---------------------------
subject to the provisions of Section 6.2 below, the number of outstanding shares
of Common Stock is increased by a stock dividend payable in shares of Common
Stock or by a split-up of shares of Common Stock or other similar event, then,
on the effective date of such stock dividend or split-up, the number of Units
purchasable hereunder shall be increased in proportion to such increase in
outstanding shares.
6.1.2 Aggregation of Shares. If after the date hereof, and subject
---------------------
to the provisions of Section 6.2, the number of outstanding shares of Common
Stock is decreased by a consolidation, combination or reclassification of shares
of Common Stock or other similar event, then, upon the effective date of such
consolidation, combination or reclassification, the number of Units purchasable
hereunder shall be decreased in proportion to such decrease in outstanding
shares.
6.1.3 Adjustments in Exercise Price. Whenever the number of Units
-----------------------------
purchasable upon the exercise of this Purchase Option is adjusted, as provided
in this Section 6.1, the Exercise Price shall be adjusted (to the nearest cent)
by multiplying such Exercise Price immediately prior to such adjustment by a
fraction (x) the numerator of which shall be the number of Units purchasable
upon the exercise of this Purchase Option immediately prior to such adjustment,
and (y) the denominator of which shall be the number of Units so purchasable
immediately thereafter.
6.1.4 Replacement of Securities Upon Reorganization, etc. If after
---------------------------------------------------
the date hereof any capital reorganization or reclassification of the Common
Stock of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation or other similar event shall be effected, then, as a condition of
such reorganization, reclassification, consolidation, merger, or sale, lawful
and fair provision shall be made whereby the Holders shall thereafter have the
right to purchase and receive, upon the basis and upon the terms and conditions
specified in the Purchase Option and in lieu of the securities of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented thereby, such shares of stock, securities, or assets as may
be issued or payable with respect to or in exchange for the number of securities
equal to the number of securities immediately theretofore purchasable and
receivable upon the exercise of the rights represented by the Purchase Option,
had such reorganization, reclassification, consolidation, merger, or sale not
taken place and in such event appropriate provision shall be made with respect
to the rights and interests of the Holders to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Exercise Price
and of the number of Units purchasable upon the exercise of the Purchase Option)
shall thereafter be applicable,
7
<PAGE>
as nearly as may be in relation to any share of stock, securities, or assets
thereafter deliverable upon the exercise hereof. The Company shall not effect
any such consolidation, merger, or sale unless prior to the consummation thereof
the successor corporation (if other than the Company) resulting from such
consolidation or merger, or the corporation purchasing such assets, shall assume
by written instrument executed and delivered to the Holders evidencing its
obligation to deliver such shares of stock, securities, or assets as, in
accordance with the foregoing provisions, such Holders may be entitled to
purchase.
6.1.5 Changes in Form of Purchase Option. This form of Purchase
----------------------------------
Option need not be changed because of any change pursuant to this Section, and
Purchase Options issued after such change may state the same Exercise Price and
the same number of Units as are stated in the Purchase Options initially issued
pursuant to this Agreement. The acceptance by any Holder of the issuance of new
Purchase Options reflecting a required or permissive change shall not be deemed
to waive any rights to a prior adjustment or the computation thereof.
6.2 Elimination of Fractional Interests. The Company shall not be
-----------------------------------
required to issue certificates representing fractions of Units, shares of Common
Stock or Warrants upon the exercise or transfer of the Purchase Option, nor
shall it be required to issue scrip or pay cash in lieu of any fractional
interests, it being the intent of the parties that all fractional interests
shall be eliminated by rounding any fraction up or down to the nearest whole
number of Warrants, shares of Common Stock or other securities, properties or
rights.
7. Reservation and Listing. The Company shall at all times reserve and keep
-----------------------
available out of its authorized shares of Common Stock, solely for the purpose
of issuance upon exercise of the Purchase Options, Units or the Warrants, such
number of shares of Common Stock or other securities, properties or rights as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Purchase Options and payment of the Exercise Price
therefor, all shares of Common Stock and other securities issuable upon such
exercise shall be duly and validly issued, fully paid and non-assessable and not
subject to preemptive rights of any stockholder. The Company further covenants
and agrees that upon exercise of the Warrants underlying the Units included in
this Purchase Option and payment of the respective Warrant exercise price
therefor, all shares of Common Stock and other securities issuable upon such
exercises shall be duly and validly issued, fully paid and non-assessable and
not subject to preemptive rights of any stockholder. As long as the Purchase
Options shall be outstanding, the Company shall use its best efforts to cause
all (i) Units, (ii) Common Stock and (iii) Warrants, issuable upon exercise of
the Purchase Options to be listed (subject to official notice of issuance) on
all securities exchanges (or, if applicable on Nasdaq) on which the Units,
Common Stock or the Public Warrants issued to the public in connection herewith
are then listed and/or quoted.
8. Certain Notice Requirements.
---------------------------
8.1 Holder's Right to Receive Notice. Nothing herein shall be construed as
--------------------------------
conferring upon the Holders the right to vote or consent or to receive notice as
a stockholder for the election of directors or any other matter, or as having
any rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Purchase Options and their exercise, any of the
events described in Section 8.2 shall occur, then, in one or more of said
events, the Company shall give written notice of such event at least fifteen
days prior to the
8
<PAGE>
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to such dividend, distribution,
conversion or exchange of securities or subscription rights, or entitled to vote
on such proposed dissolution, liquidation, winding up or sale. Such notice
shall specify such record date or the date of the closing of the transfer books,
as the case may be.
8.2 Events Requiring Notice. The Company shall be required to give the
-----------------------
notice described in this Section 8 upon one or more of the following events: (i)
if the Company shall take a record of the holders of its shares of Common Stock
for the purpose of entitling them to receive a dividend or distribution payable
otherwise than in cash, or a cash dividend or distribution payable otherwise
than out of retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company, or (ii) the Company shall
offer to all the holders of its Common Stock any additional shares of capital
stock of the Company or securities convertible into or exchangeable for shares
of capital stock of the Company, or any option, right or warrant to subscribe
therefor, or (iii) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business shall be proposed.
8.3 Notice of Change in Exercise Price. The Company shall, promptly after
----------------------------------
an event requiring a change in the Exercise Price pursuant to Section 6.1
hereof, send notice to the Holders of such event and change ("Price Notice").
The Price Notice shall describe the event causing the change and the method of
calculating same and shall be certified as being true and accurate by the
Company's President and Chief Financial Officer.
8.4 Transmittal of Notices. All notices, requests, consents and other
----------------------
communications under this Purchase Option shall be in writing and shall be
deemed to have been duly made on the date of delivery if delivered personally or
sent by overnight courier, with acknowledgement of receipt to the party to which
notice is given, or on the fifth day after mailing if mailed to the party to
whom notice is to be given, by registered or certified mail, return receipt
requested, postage prepaid and properly addressed as follows: (i) if to the
registered Holder of the Purchase Option, to the address of such Holder as shown
on the books of the Company, or (ii) if to the Company, to its principal
executive office.
9. Miscellaneous.
-------------
9.1 Amendments. The Company and the Underwriter may from time to time
----------
supplement or amend this Purchase Option without the approval of any of the
Holders in order to cure any ambiguity, to correct or supplement any provision
contained herein which may be defective or inconsistent with any other
provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Underwriter may deem
necessary or desirable and which the Company and the Underwriter deem shall not
adversely affect the interest of the Holders. All other modifications or
amendments shall require the written consent of the party against whom
enforcement of the modification or amendment is sought.
9
<PAGE>
9.2 Headings. The headings contained herein are for the sole purpose of
--------
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Purchase Option.
9.3 Entire Agreement. This Purchase Option (together with the other
----------------
agreements and documents being delivered pursuant to or in connection with this
Purchase Option) constitutes the entire agreement of the parties hereto with
respect to the subject matter hereof, and supersedes all prior agreements and
understandings of the parties, oral and written, with respect to the subject
matter hereof.
9.4 Binding Effect. This Purchase Option shall inure solely to the
--------------
benefit of and shall be binding upon, the Holder and the Company and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Purchase Option or any provisions
herein contained.
9.5 Governing Law; Submission to Jurisdiction. This Purchase Option shall
-----------------------------------------
be governed by and construed and enforced in accordance with the law of the
State of New York, without giving effect to principles of conflicts of law. The
Company hereby agrees that any action, proceeding or claim against it arising
out of, or relating in any way to this Purchase Option shall be brought and
enforced in the courts of the State of New York or the United States District
Court for the Southern District of New York, and irrevocably submits to such
jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives
any objection to such exclusive jurisdiction and that such courts represent an
inconvenient forum. Any process or summons to be served upon the Company may be
served by transmitting a copy thereof by registered or certified mail, return
receipt requested, postage prepaid, addressed to it at the address set forth in
Section 8 hereof. Such mailing shall be deemed personal service and shall be
legal and binding upon the Company in any action, proceeding or claim. The
Company agrees that the prevailing party(ies) in any such action shall be
entitled to recover from the other party(ies) all of its reasonable attorneys'
fees and expenses relating to such action or proceeding and/or incurred in
connection with the preparation therefor.
9.6 Waiver, Etc. The failure of the Company or the Holder to at any time
-----------
enforce any of the provisions of this Purchase Option shall not be deemed or
construed to be a waiver of any such provision, nor to in any way affect the
validity of this Purchase Option or any provision hereof or the right of the
Company or any Holder to thereafter enforce each and every provision of this
Purchase Option. No waiver of any breach, non-compliance or non-fulfillment of
any of the provisions of this Purchase Option shall be effective unless set
forth in a written instrument executed by the party or parties against whom or
which enforcement of such waiver is sought; and no waiver of any such breach,
non-compliance or non-fulfillment shall be construed or deemed to be a waiver of
any other or subsequent breach, non-compliance or non-fulfillment.
9.7 Execution in Counterparts. This Purchase Option may be executed in
-------------------------
one or more counterparts, and by the different parties hereto in separate
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same agreement, and shall become
effective when one or more counterparts has been signed by each of the parties
hereto and delivered to each of the other parties hereto.
10
<PAGE>
9.8 Exchange Agreement. As a condition of the Holder's receipt and
------------------
acceptance of this Purchase Option, Holder agrees that, at any time prior to the
complete exercise of this Purchase Option by Holder, if the Company and the
Underwriter enter into an agreement ("Exchange Agreement") pursuant to which
they agree that all outstanding Purchase Options will be exchanged for
securities or cash or a combination of both, then Holder shall agree to such
exchange and become a party to the Exchange Agreement.
IN WITNESS WHEREOF, the Company has caused this Purchase Option to be
signed by its duly authorized officer as of the ____ day of ______________,
1996.
FRONTIER NATURAL GAS CORPORATION
By:__________________________
Name: David W. Berry
Title: President
11
<PAGE>
Form to be used to exercise Purchase Option:
Frontier Natural Gas Corporation
One Benham Place
9400 North Broadway
Oklahoma City, Oklahoma 73114
Date:_________________, 19__
The undersigned hereby elects irrevocably to exercise the within
Purchase Option and to purchase ____ Units of Frontier Natural Gas Corporation
and hereby makes payment of $____________ (at the rate of $_________ per Unit in
payment of the Exercise Price pursuant thereto). Please issue the Common Stock
and Warrants comprising the Units as to which this Purchase Option is exercised
in accordance with the instructions given below.
or
--
The undersigned hereby elects irrevocably to exercise the within
Purchase Option and to purchase _________ Units of Frontier Natural Gas
Corporation by surrender of the unexercised portion of the within Purchase
Option (with a "Value" of $__________ based on a "Market Price" of
$___________). Please issue the Common Stock and Warrants comprising the Units
in accordance with the instructions given below.
______________________________
Signature
______________________________
Signature Guaranteed
NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE WITHIN PURCHASE OPTION IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
12
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF DAY, EDWARDS, FEDERMAN, PROPESTER & CHRISTENSEN, P.C.]
July 30, 1996
Frontier Natural Gas Corporation
One Benham Place
9400 North Broadway
Oklahoma City, Oklahoma 73114-7401
Gentlemen:
We have acted as counsel to Frontier Natural Gas Corporation, an Oklahoma
corporation (the "Company"), and have, for the limited purpose of rendering this
opinion, acted as counsel for certain selling shareholders (the "Selling
Shareholders"), in connection with the filing by the Company with the Securities
and Exchange Commission of a Registration Statement on Form SB-2 (File No. 333-
06261) (the "Registration Statement") (certain terms capitalized herein and not
otherwise defined having the meaning given them in the Registration Statement),
for the purpose of registering under the Securities Act of 1933, as amended (the
"Act"), the following securities (collectively, the "Securities"):
(1) 1,200,000 Units (the "Units"), each of which consists of three shares
of Common Stock (the "Common Stock") and three Series B Redeemable Common Stock
Purchase Warrants (the "Series B Warrants"), plus up to 180,000 additional Units
which may be issued pursuant to the Underwriter's over-allotment option;
(2) 545,000 shares of Common Stock on behalf of the Selling Securityholders
that may be sold by them for their accounts from time to time in open market
transactions (collectively the "Selling Securityholders' Shares"); and
(3) 120,000 Units which may be issued to the Underwriter upon exercise of
an option to purchase such units (the "Unit Purchase Option").
We have examined originals, or copies certified or otherwise identified to
our satisfaction, of such documents and corporate and public records as we
deemed necessary as a basis for the opinions hereinafter expressed. In such
examination, we have assumed the genuineness of all signatures, the authenticity
of all documents presented to us as originals, the conformity to the originals
of all documents presented to us as copies, and the authenticity of the
originals of such latter documents. In rendering such opinions, we have relied
as to factual matters upon certificates of officers of the Company and
certificates of public officials.
Based upon the foregoing, we are of the opinion that:
(1) The Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Oklahoma;
<PAGE>
DAY, EDWARDS, FEDERMAN, PROPESTER & CHRISTENSEN, P.C.
July 30, 1996
Page 2
(2) Upon issuance, delivery, and payment for the Units in accordance with
the terms of the Underwriting Agreement, and upon exercise of any of
the Series B Warrants in accordance with the terms of the Warrant
Agreement, the shares of Common Stock so issued shall be validly
issued, fully paid, and nonassessable;
(3) Upon issuance, delivery, and payment for the Unit Purchase Option in
accordance with the terms of the Underwriting Agreement and upon
exercise of any of the Unit Purchase Option in accordance with its
terms, the shares of Common Stock so issued shall be validly issued,
fully paid, and nonassessable; and
(4) The Selling Securityholders' Shares have been duly authorized, and are
validly issued, fully paid and non-assessable.
We are attorneys licensed to practice law in the State of Oklahoma. The
opinions expressed herein are limited solely to the laws of the State of
Oklahoma and we express no opinion under the laws of any other jurisdiction.
This opinion is delivered to you solely in connection with the filing of
the Registration Statement with respect to the Securities, and this letter and
the opinions stated herein may not be relied upon for any other purpose or by
any persons other than the directors and officers of the Company.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" contained in the prospectus which is included in the Registration
Statement.
Very truly yours,
DAY, EDWARDS, FEDERMAN, PROPESTER & CHRISTENSEN, P.C.
JCT/lrr
<PAGE>
EXHIBIT 10.23
OFFICE LEASE
at
ALLEN CENTER ONE
Between
ALLEN CENTER COMPANY (LANDLORD)
And
FRONTIER NATURAL GAS CORPORATION (TENANT)
DATED: July 16, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE ONE - BASIC LEASE PROVISIONS ..................................... 1
1.01 Basic Lease Provisions ................................... 1
1.02 Enumeration of Exhibits .................................. 1
1.03 Definitions .............................................. 1
ARTICLE TWO - PREMISES, TERM AND FAILURE TO GIVE POSSESSION............... 3
2.01 Lease of Premises ........................................ 3
2.02 Term ..................................................... 3
2.03 Failure to Give Possession ............................... 3
2.04 Condition of Premises .................................... 4
ARTICLE THREE - RENT ..................................................... 4
ARTICLE FOUR - RENT ADJUSTMENT ........................................... 4
4.01 Rent Adjustment .......................................... 4
4.02 Procedure ................................................ 4
4.03 Books and Records ........................................ 4
ARTICLE FIVE - SECURITY DEPOSIT .......................................... 5
ARTICLE SIX - SERVICES ................................................... 5
6.01 Landlord's General Services .............................. 5
6.02 Electrical Services ...................................... 5
6.03 Additional and After-Hour Services ....................... 6
6.04 Telephone Services ....................................... 6
6.05 Delays in Furnishing Services ............................ 6
ARTICLE SEVEN - POSSESSION, USE AND CONDITION OF PREMISES ................ 6
7.01 Possession And Use of Premises ........................... 6
7.02 Landlord Access to Premises .............................. 7
7.03 Outlet Enjoyment ......................................... 7
7.04 Entry Cards .............................................. 7
ARTICLE EIGHT - MAINTENANCE .............................................. 8
8.01 Landlord's Maintenance ................................... 8
8.02 Tenant's Maintenance ..................................... 8
ARTICLE NINE - ALTERATIONS AND IMPROVEMENTS .............................. 8
9.01 Tenant's Alterations ..................................... 8
9.02 Liens .................................................... 8
ARTICLE TEN - ASSIGNMENT AND SUBLETTING .................................. 9
10.01 Assignment and Subletting ................................ 9
10.02 Recapture ................................................ 9
10.03 Excess Rent .............................................. 9
10.04 Tenant Liability ......................................... 9
10.05 Assumption and Attornment ................................ 10
ARTICLE ELEVEN - DEFAULT AND REMEDIES .................................... 10
11.01 Events of Default ........................................ 10
11.02 Landlord's Remedies ...................................... 10
11.03 Attorney's Fees .......................................... 11
11.04 Bankruptcy ............................................... 11
ARTICLE TWELVE - SURRENDER OF PREMISES ................................... 11
12.01 In General ............................................... 11
12.02 Landlord's Rights ........................................ 11
ARTICLE THIRTEEN - HOLDING OVER .......................................... 11
ARTICLE FOURTEEN - DAMAGE BY FIRE OR OTHER CASUALTY ...................... 12
14.01 Substantial Untenantability .............................. 12
14.02 Insubstantial Untenantability ............................ 12
14.03 Rent Abatement ........................................... 12
ARTICLE FIFTEEN - EMINENT DOMAIN ......................................... 12
15.01 Taking of Whole or Substantial Part ...................... 12
15.02 Taking of Part ........................................... 12
15.03 Compensation ............................................. 12
ARTICLE SIXTEEN - INSURANCE .............................................. 13
16.01 Tenant's Insurance ....................................... 13
16.02 Form of Policies ......................................... 13
16.03 Landlord's Insurance ..................................... 13
16.04 Waiver of Subrogation .................................... 13
16.05 Notice of Casualty ....................................... 14
ARTICLE SEVENTEEN - WAIVER OF CLAIMS AND INDEMNITY ....................... 14
17.01 Waiver of Claims ......................................... 14
17.02 Indemnity by Tenant ...................................... 14
ARTICLE EIGHTEEN - RULES AND REGULATIONS ................................. 14
18.01 Rules .................................................... 14
18.02 Enforcement .............................................. 14
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<PAGE>
ARTICLE NINETEEN - LANDLORD'S RESERVED RIGHTS........................ 14
19.01 Reserved Rights...................................... 14
ARTICLE TWENTY - ESTOPPEL CERTIFICATE................................ 15
20.01 In General........................................... 15
20.02 Enforcement.......................................... 15
ARTICLE TWENTY-ONE - RELOCATION OF TENANT............................ 15
ARTICLE TWENTY-TWO - REAL ESTATE BROKERS............................. 15
ARTICLE TWENTY-THREE - MORTGAGEE PROTECTION.......................... 15
23.01 Subordination and Attornment......................... 15
23.02 Mortgagee Protection.............................. 15
ARTICLE TWENTY-FOUR - NOTICES........................................ 16
ARTICLE TWENTY-FIVE - MISCELLANEOUS.................................. 16
25.01 Late Charges......................................... 16
25.02 Waiver of Jury Trial................................. 16
25.03 Default Under Other Lease............................ 16
25.04 Option............................................... 16
25.05 Tenant Authority..................................... 16
25.06 Entire Agreement..................................... 16
25.07 Modification of Lease for Benefit of Mortgagee....... 17
25.08 Exculpation.......................................... 17
25.09 Accord and Satisfaction.............................. 17
25.10 Landlord's Obligations on Sale of Building........... 17
25.11 Binding Effect....................................... 17
25.12 Captions............................................. 17
25.13 Applicable Law....................................... 17
25.14 Abandonment.......................................... 17
25.15 Landlord's Right to Perform Tenant's Duties.......... 17
<PAGE>
OFFICE LEASE
ARTICLE ONE
BASIC LEASE PROVISIONS
1.01 BASIC LEASE PROVISION - 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: Allen Center Company, a Texas joint venture.
(3) TENANT:
(a) Name: Frontier Natural Gas Corporation
(b) State of incorporation or partnership: Oklahoma
(4) DATE OF LEASE: July 16, 1996
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(5) LENGTH OF LEASE TERM: approximately sixty (60) months.
(6) PROJECTED COMMENCEMENT DATE: September 1, 1996
(7) PROJECTED EXPIRATION DATE: August 31, 2001
(8) BASE RENT:
Period from/to Monthly Annually Rate/SF of Rentable Area
---------------- ------- -------- ------------------------
September 1, 1996/ $8,834.00 $106,008.00 $14.00
August 31, 2001
(9) PREMISES: SUITE No. 2920
7,572 SQUARE FEET OF RENTABLE AREA (approx.)
6,365 SQUARE FEET OF USABLE AREA (approx.)
(10) SECURITY DEPOSIT: $0.00
(11) TENANT'S USE OF PREMISES: General office use.
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. Moving Allowance
EXHIBIT G. Renewal Option
EXHIBIT H. Right of First Refusal
EXHIBIT I. Satellite Dish
1.03 DEFINITIONS
For purposes hereof, the following terms shall have the following meanings:
(1) 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.
(2) ALLOWANCE: "Allowance" shall mean an amount equal to the product of
$15.00 times the number of square feet of Rentable Area included in the
Premises. Tenant may, by notifying Landlord of its election in
writing not later than the Commencement Date, elect to have Landlord
increase the Allowance by up to $2.00 per square foot of Rentable Area
of the Premises (such that the total Allowance could be as much as
$17.00 per square foot of Rentable Area of the Premises). The amount of
the increase in the Allowance shall be referred to as the "Allowance
Increase". In the event that Tenant elects to receive an Allowance
Increase, then the Base Rent for the Premises would increase by an
amount equal to the product of the Allowance Increase multiplied by
eleven and one half percent (11.5%) per annum, amortized over the Term
of the Lease. For example, if the Allowance increase is $2.00, then the
Base Rent will increase by $0.52. The failure of Tenant to exercise this
option for Allowance Increase prior to the Commencement Date shall
constitute a waiver and termination of such option.
(3) BUILDING: The "Building" shall mean the office building located upon the
Land.
(4) CENTRE: "Project" shall mean the Allen Center project located on the
tracts of Land described on Exhibit "A", together with that certain
----------
elevated pedestrian walkway between 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 the 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 advises that portions of the Project are
not owned by Landlord.
(5) COMMENCEMENT DATE: The date specified in Section 1.01(6) as the
Projected Commencement Date, unless changed by operation of Article
Two.
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<PAGE>
(6) 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.
(7) 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.
(8) DEFAULT RATE: The maximum interest rate permitted by law.
(9) 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.
(10) 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 1996.
(11) EXPIRATION DATE: The date specified in Section 1.01(7) unless changed
by operation of Article Two.
(12) 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 or 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.
(13) 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.
(14) 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.
(15) 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". If no Workletter is attached
-----------
hereto, no Initial improvements are being provided; and Tenant is taking
the Premises "AS IS".
(16) LAND: The parcels of real estate on which the Building is located, as
legally described in Exhibit "A" attached hereto.
----------
(17) LANDLORD WORK: The construction or installation of improvements to the
Premises, to be furnished by Landlord, specifically described in the
Workletter or exhibits attached hereto.
(18) 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.
(19) LEASE: This instrument and all exhibits and riders attached hereto, as
may be amended from time to time.
(20) LEASE YEAR: The twelve month period beginning on the first day of the
first month following the Commencement Date (unless the Commencement
Date is the first day or a calendar month in which case beginning on the
Commencement Date), and each subsequent twelve month, or shorter, period
until the Expiration Date.
(21) MONTHLY BASE RENT: The monthly rent specified in Section 1.01(8).
(22) MORTGAGEE: Any holder of a mortgage, deed of trust or other security
instrument encumbering the Property.
(23) NATIONAL HOLIDAYS: New Year's Day, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day and other holidays
recognized by the Landlord.
(24) 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 all
operating expenses of the Exterior Common Areas (defined below) 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)
and all streets, sidewalks, walkways, and landscaped areas.
(25) PREMISES: The space located in the Building, described in Section
1.01(9) and depicted on Exhibit "B" attached hereto.
-----------
(26) 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.
(27) REAL PROPERTY: The Property excluding any personal property.
(28) 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.
(29) RENTABLE AREA OF THE BUILDING (existing as of the date of this Lease):
993,238 square feet.
(30) RENTABLE AREA OF THE PREMISES: The amount of square footage set forth
in Section 1.01(9), which represents the sum of (1) 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
-2-
<PAGE>
separating the Premises from Common Areas) plus (2) 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 (Section 1.01(9) and in the Building (Section 1.03(29) may be
revised at Landlord's election if Landlord's election if Landlord's
architect determines such estimate to be inaccurate in any material
degree after examination of the final "as built" drawing of the Premises
and the Building, and Base Rental shall be adjusted accordingly, based
upon the rate per square foot of Rentable Area specified in Section
1.01(8) hereof.
(31) 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.
(32) 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.
(33) 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).
(34) SHELL IMPROVEMENTS: "Shell Improvements" shall mean (i) lay-in
acoustical ceiling grid with acoustical ceiling grid with acoustical
ceiling title in the Premises; (ii) central air conditioning and heating
ducts and diffusers in a placement deemed typical by Landlord and (iii)
lay-in fluorescent light fixtures in a placement deemed typical by
Landlord.
(35) SUBSTANTIALLY COMPLETE: The completion of the Initial Improvements,
except for minor insubstantial details of construction, decoration or
mechanical adjustments which remain to be done.
(36) 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.
(37) 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.
(38) TENANT DELAY: Any event or occurrence caused by Tenant which delays the
completion of the initial Improvements, as described in the Workletter.
(39) TERM: The term of this Lease commencing on the Commencement Date and
expiring on the Expiration Date.
(40) TERMINATION DATE: The Expiration Date or such earlier date this Lease
terminates or Tenant's right to possession of the Premises terminates.
(41) WORKLETTER: The Agreement regarding the manner of completion of the
initial improvements, attached hereto as Exhibit "C".
-----------
ARTICLE TWO
PREMISES, TERM AND FAILURE TO GIVE POSSESSION
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:
(1) 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:
(i) the Projected Commencement Date; or
(ii) the date Tenant first occupies all or part of the
Premises for the conduct of business; or
(2) 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: (i) the Building has not
been sufficiently completed to make the Premises ready for occupancy, (ii) the
initial improvements are not Substantially Complete, (iii) the holding over or
retention of possession of any tenant,
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<PAGE>
tenants or occupants, or (iv) 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 covenented to be paid herein shall not
commence until the Premises are made available to Tenant by Landlord, and no
such failure to give possession on the Projected Commencement Date shall affect
the validity of this Lease or the obligation 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 (i) Substantial Completion of the Initial Improvements, or (ii) 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" 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.
ARTICLE THREE
RENT
Tenant agrees to pay to Landlord at the property management office specified in
Section 24(b)(1), 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, 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 the following provisions:
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 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. 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
demand to be less than the Expense Stop, it being the intent of Landlord and
Tenant that Tenant shall as all times be responsible for the payment of, and
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 Lease Term shall be
determined as follows:
(i) The Expense Stop shall be prorated based upon the number of months
in 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 (A) 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 (B)
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's 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.
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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 in which the Property is
located) 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 three (3) business days in advance. 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.
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
reasonably projects would have been incurred had the Building been occupied to
the extent of ninety-five percent (95%) 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 (i) the actual
Operating Expenses incurred during any portion of such calendar year in which
the Building is occupied to the extent of ninety-five percent (95%) or more of
the Rentable Area therein, plus (ii) the Operating Expenses which would have
been incurred had the Building been occupied to the extent of ninety-five
percent (95%) 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
(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:
(1) 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;
(2) tempered and cold water for use in lavatories in common with other
tenants from the regular supply of the Building:
(3) customary cleaning and janitorial services in the Premises five (5) days
per week, excluding National Holidays;
(4) washing of the outside windows in the Premises weather permitting at
intervals determined by Landlord;
(5) 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;
(6) 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
(7) 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.
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 (4) watts per square foot of
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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 (6) watts per square foot of Usable Area within the Premises
("Standard Building Capacity"). The electrical costs component of Basic Costs is
calculated on the basis of the Standard Building Capacity.
(b) The electrical facilities in the Building available for Tenant's
use are (i) 277/480 volts, 3 phase, for large equipment loads and florescent
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 at 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 judgement, 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.
(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 shall deliver to Landlord a written
request for such additional services or utilities prior to 2:00 P.M. on Monday
through Friday (except National Holidays) for service on those days, and prior
to 2:00 P.M. on the last business day prior to Saturday, Sunday or a National
Holiday. For 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 Tenants 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 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 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
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. In such event, Landlord will reduce
Tenant's Base Rent by an amount which Landlord deems to be fair and reasonable.
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, not 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
hereof. Should any equipment or machinery furnished by Landlord break down or
for any cause cease to function properly, Landlord
<PAGE>
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.
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 when the
Landlord Work is Substantially Complete. 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: (1) is
unlawful or in violation of any Law or Environmental Law; (2) 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; (3) 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 (4) would tend to create or
continue 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 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 attorney's 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.
(c) Landlord and Tenant acknowledge that the Americans With Disabilities
Act of 1990 (42 U.S.C (S)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: (1) whether tenant's business is deemed a
"public accommodation" or "commercial facility", (2) whether such requirements
are "readily achievable", and (3) whether a given alteration affects a "primary
function area" or triggers "path of travel" requirements. The parties hereby
agree that: (a) Landlord shall be responsible for implementing ADA Title III
compliance in the Common Areas as part of Operating Expenses, except as provided
below, (b) 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, (c) 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 (d) 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: (1) 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 Work Letter 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
(2) 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.
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 shall not be 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 accord 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 judgement 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.
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(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 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
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Tenant with up to, but not in excess of, twenty (20) 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 $100.00 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.
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 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'S ALTERATIONS
(a) Except for completion of the Initial Improvements pursuant to the
Workletter, the following provisions shall apply to the completion of any Tenant
Alterations:
(1) 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 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.
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(2) Tenant shall pay the cost of all Tenant Alterations and the cost of
decorating the Premises and nay 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
contractor's 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 reasonable requested by Landlord or
Mortgages.
(3) 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 workman like 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 b 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(a)(3)(i) and (ii) above or impose any
liability upon Landlord in connection with the performance of such work.
(b) 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.
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 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 b 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, 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, b 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 judgement with respect to such
proposed subtenant or assignee at least sixty (60) 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 reasonable 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 thirty (30) 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.
Tenant shall submit for Landlord's approval (which approval shall not be
unreasonable 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 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 an 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
unreasonable 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 reasonable require to evidence such
subtenant 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.
<PAGE>
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
subject 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, seventy-five percent (75%) 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; (i) 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 (ii) the following costs and
expenses for the subletting or assignment of such space: (1) brokerage
commissions and attorney's fees and expenses, (2) advertising for subtenants or
assignees; (3) the actual costs paid in making any improvements or substitutions
in the Premises required by any sublease or assignment; and (4) "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, 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
assignee, 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 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:
(1) Tenant fails to pay any installment or other payment of Rent including
without limitation Rent Adjustment within three (3) days after the date when
due; provided, however, Landlord agrees with respect to monetary defaults to
give Tenant not more than two (2) "warning notices" (as hereinafter defined)
during any consecutive twelve (12) month period during the Lease Term, in either
of which events Tenant shall be entitled to a two (2) day cure period and
Landlord agrees not to commence any enforcement actions against Tenant until the
expiration of such cure period (a "warning notice" for these purposes shall be
in writing, delivered in any ny manner permitted by paragraph 34, and may be
sent at any time after payment is due and before payment of the full delinquent
amount has been received); a warning notice will be effective on, and the two
(2) day cure period shall be counted from, the date the notice is first sent; in
addition, tenant shall be entitled to only one (1) warning notice per calendar
month;
(2) 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 bee cured forthwith);
(3) the interest of Tenant in this Lease is levied upon under execution or
other legal process;
(4) a petition is filed by or against Tenant to declare Tenant bankrupt or
seeking a plan or 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;
(5) Tenant is declared insolvent by law or any assignment of Tenant's property
is made for the benefit of creditors;
(6) a receiver is appointed for Tenant or Tenant's property, which appointment
is not discharged within thirty (30) days;
(7) 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;
(8) upon the dissolution of Tenant; or
(9) 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
<PAGE>
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, 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, 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.
11.03 ATTORNEY'S FEES
Tenant shall pay upon demand, all costs and expenses, including reasonable
attorney's 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 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.
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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.
ARTICLE THIRTEEN
HOLDING OVER
Tenant shall pay Landlord the greater of (i) double the monthly Rent payable for
the month immediately preceding the holding over (including increases for Rent
Adjustments which Landlord may reasonably estimate) or, (ii) 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 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, reasonably 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 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.
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14.03 RENT ABATEMENT
Except for the negligence or wilful 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.
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 (i) to terminate this Lease or (ii) 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 charged 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.
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 (i) name Landlord and the Indemnitees as additional insureds, (ii)
be issued by one or more responsible insurance companies licensed to do business
in Texas reasonably satisfactory to Landlord, (iii) where applicable, provide
for deductible amounts satisfactory to Landlord and not permit co-insurance,
(iv) shall provide that such insurance may not be canceled or amended without
thirty (30) days' prior written notice to the Landlord, and (v) 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 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 not 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 wilful misconduct.
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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.
(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 orherwise 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 by Tenant's insurance,
notwithstanding that such loss or damage may result form 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 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 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 Landlords 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
therfor 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, 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 Additions or repairs to the Premises, form 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, paid to Landlord
under insurance covering such claims or liabilities. In case of any action or
proceeding brought against the Indemnitee by reason or any such claim, upon
notice from Landlord, Tenant covenants to defend such action or proceeding
by counsel reasonably satisfactory to Landlord.
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ARTICLE EIGHTEEN
RULES AND REGULATIONS
18.01 RULES
Tenant agrees for itself and for its subtenants, employees, agents, 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.
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: (1) To change the Building's name or street address upon thirty (30)
days' prior written notice to Tenant; (2) To install, affix and maintain all
signs on the exterior and/or interior of the Building; (3) 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; (4) Upon reasonable notice to Tenant,
to display the Premises to prospective tenants at reasonable hours during the
last twelve (12) months of the Term; (5) 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; (6) To change the arrangement
and/or location of entrances or passageways, doors, 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; (7) To have access for Landlord and other tenants of the Building
to any mail chutes and boxes located in or the Premises as required by any
applicable rules of the United States Post Office; and (8) 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.
ARTICLE TWENTY
ESTOPPEL CERTIFICATE
20.1 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 (i) 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; (ii) the dates to which Rent has
been paid; (iii) that Tenant is in the possession of the Premises if that is the
case; (iv) that Landlord is not in default under this Lease, or, if Tenant
believes Landlord is in default, the nature thereof in detail; (v) 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 of defenses, a full and
complete explanation thereof); (vi)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; (vii) that 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; (viii) that Tenant will give to the Mortgagee
copies of all notices required or permitted to be given by Tenant to Landlord;
and (ix) to any other information reasonably requested.
20.2 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 the date of this Lease, Landlord may substitute for the
Premises, other premises in the Building (the "New Premises"), in which event
the New Premises shall be deemed to the Premises for all purposes under this
Lease, provided that (i) the New Premises shall be substantially similar to the
Premises in area and configuration; (ii) if Tenant is then occupying the
Premises, Landlord shall pay the actual and reasonable expenses of physically
moving Tenant, its property and equipment to the New Premises; (iii) Landlord
shall give Tenant not less than sixty (60) days' prior written notice of such
substitution; and (iv) Landlord, at its expense, shall improve the New Premises
with improvements substantially similar to those in the Premises at the time of
such substitution, if the Premises are then improved.
ARTICLE TWENTY-TWO
REAL ESTATE BROKERS
Tenant represents that, except for Yancey-Hausman & Associates, 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 Promisese to Tenant. Tenant herby 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 the broker, if any, specified in this Article.
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ARTICLE TWENTY-THREE
MORTGAGEE PROTECTION
23.01 SUBORDINATION AND ATTORNMENT
This Lease is and shall be expressly subject and subordinate at all times to (i)
any ground or underlying lease of the Real Property, now or hereafter existing,
and all amendments, renewals and modifications to any such lease, and (ii) 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 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 the 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
is such default cannot be cured within that time, that 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.
(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
in the same in accordance with this Section, addressed to the parties hereto at
their respective addresses listed below:
(1) Notices to Landlord shall be addressed:
Transwestern Property Company
Attn: Property Manager
1200 Smith Street
Suite 2600
Houston, Texas 77002
with a copy to the following:
Metropolitan Life Insurance Company
Attn: Assistant Vice-President
5420 LBJ Freeway, Suite 1310
Dallas, Texas 75240
(2) Notices to Tenant shall be addressed:
One Allen Center
500 Dallas, Suite 2920
Houston, Texas 77002
Attention: Chief Financial Officer
-----------------------
(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
Adressee 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.
<PAGE>
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 or 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.
25.06 ENTIRE AGREEMENT
This Lease, the Exhibits attached hereto and the Workletter contain the entire
agreement between Landlord and Tenant concerning the Premises and there are no
other agreements, either oral or written. This Lease shall not be modified
except by a writing executed by Landlord and Tenant.
25.07 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.
25.08 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.
25.09 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.
25.10 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.
25.11 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.
25.12 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.
25.13 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.
25.14 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 (i) have
the right to enter into the Premises in order to show the space to prospective
tenants, (ii) 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 (iii) 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.
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25.15 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.
NOTICE OF INDEMNIFICATION: THE PARTIES TO THIS LEASE HEREBY ACKNOWLEDGE AND
- -------------------------
AGREE THAT THIS LEASE (AND ATTACHED EXHIBITS) CONTAINS CERTAIN INDEMNIFICATION
PROVISIONS.
IN WITNESS WHEREOF, this Lease has been executed as of the date set forth in
Section 1.01(4) hereof.
LANDLORD: TENANT:
ALLEN CENTER COMPANY
By: METROPOLITAN LIFE INSURANCE FRONTIER NATURAL GAS CORPORATION
COMPANY, general partner
By: /s/ David G. Rogers By: /s/ David Christopherson
------------------------------- ------------------------------------
David G. Rogers
Asst. Vice-President Name: David Christopherson
----------------------------------
Title: E V P
----------------------------------
Date: 7-16-96 Date: 7-12-96
------------------------------ ----------------------------------
-18-
<PAGE>
EXHIBIT "A"
-----------
TO
OFFICE LEASE BETWEEN
ALLEN CENTER COMPANY,
AS LANDLORD, AND
FRONTIER NATURAL GAS 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 32degrees51'57" 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 57degrees08'03" East, 619.84 feet along the centerline of said
Dallas Avenue to a point North 57degrees08'03" West, 40.00 feet from the
centerline intersect of Smith Street (80 feet wide);
THENCE, South 32degrees51'57" 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 32degrees51'57" West, 221.00 feet along the northwesterly
right-of-way line of Smith Street to a point for most southerly corner;
THENCE, North 57degrees08'03" West, 372.00 feet to a point for most westerly
corner;
THENCE, North 32degrees51'57" East, 221.00 feet to a point on the southwesterly
right-of-way line of Dallas Avenue for most northerly corner;
THENCE, South 57degrees08'03" 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 164-04-0852. 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 87degrees36'57" 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 = 13degrees21'05", Radius=458.22
feet, Chord = North 85degrees42'30" West, 106.54 feet) to a point of non-
tangency;
THENCE, continuing along said northerly right-of-way line, North 63degrees33'06"
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 108-84-0547;
THENCE, along the boundary common to said tracts the following seven courses;
Departing said north right-of-way line, North 16degrees35'07" 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 = 18degrees58'09", Radius = 433.22 feet, Chord = South
82degrees53'58" East, 142.77 feet) to a 5/8-inch iron rod set for point
of tangency;
Tangent to said curve, North 87degrees36'57" East, 10.28 feet to a
5/8-inch iron rod set for corner;
North 57degrees08'03" West, 219.67 feet;
North 32degrees51'57" East, 196.42 feet;
South 57degrees08'03" East, 129.15 feet;
North 32degrees51'57" East, 90.00 feet to a point for corner in the
southwesterly line of ONE ALLEN CENTER 1.887 acre tract;
THENCE, South 57degrees08'03" 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;
EXHIBIT "A" TO OFFICE LEASE - Page 1
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<PAGE>
THENCE, South 32'51'57" 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 of 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 87' 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 Angie = 54'
45' 36", Radius = 141.81 feet, Chord = North 60' 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 Angie = 10'54' 11", Radius -
665.00 feet, Chord = North 38' 18' 56" East, 126.36 feet);
THENCE, South 32' 51' 57" West, 172.98 feet;
THENCE, South 57' 08' 03" East, 20.62 feet;
THENCE, North 77' 51' 57" East, 45.24 feet;
THENCE, South 57' 08' 03" East, 121.23 feet;
THENCE, North 32' 51' 57" East, 27.13 feet;
THENCE, North 77' 51' 57" East, 7.07 feet;
THENCE, South 57' 08' 03" East, 126.44 feet;
THENCE, South 32' 51' 57" West, 90.00 feet;
THENCE, North 57' 08' 03" West, 129.15 feet;
THENCE, South 32' 51' 57" West, 196.42 feet;
THENCE, South 57' 08' 03" East, 219.67 feet;
THENCE, South 87' 36' 57" West, 10.28 feet to the beginning a tangent curve to
the right;
THENCE, 143.43 feet westerly along the arc of said curve (Delta Angie = 18' 58'
09", Radius = 433.22 feet, Chord = North 82' 53' 58" West, 142.77 feet;
THENCE, South 16' 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 = 53' 04' 18", Radius =
448.22 feet, Chord = North 15' 46' 05" West, 93.12 feet) to a point on a
cut-back 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 = 09' 09' 01", Radius =
583.72 feet, Chord = North 15' 46' 05" West, 93.12 feet) to a point on a
cut-back to the right;
THENCE, North 38' 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.
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 A 89'45'00"
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 0'15'00" 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 89'45'29" E - 247.30' along the south right-of-way line of said West
Dallas to a point for corner;
THENCE S 00'15' E - 557.76' to a 3/8" iron rod for corner;
THENCE S 89'45'07 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 00'21'53" W - 100.04 to a point,
N 06'24'16" E - 30.20' to a point,
N 00'15' W - 200' to a point,
N 01'26'42" W - 27.76 to a point,
N 00'15' W - 200'
EXHIBIT "A" TO OFFICE LEASE - Page 2
<PAGE>
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 referred to the Texas Coordinated System, South Central
Zone:
BEGINNING at 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 = 11 degrees 17'02",
Radius = 683.72 feet, Chord = South 14 degrees 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 = 29 degrees
36'05", Radius = 548.22 feet, Chord = South 35 degrees 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 02 degrees 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 = 30 degrees 44'32", Radius = 410.00 feet,
Chord = South 13 degrees 14'49" West, 217.36 feet) to a point of tangency;
THENCE, South 02 degrees 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 42 degrees 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 said
Andrews Street (60 feet wide);
THENCE, South 87 degrees 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 85 degrees 38'14" West, 34.46 feet, continued along the
north right-of-way line of said Andrews Street to a nail set in concrete for
southwest corner;
THENCE, North 02 degrees 22'27" West, 99.98 feet to an "X" cut in concrete
for an angle point;
THENCE, North 02 degrees 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 87 degrees 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.
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 containes 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 57 degrees 08'01" East;
THENCE, North 32 degrees 51'57" East, 950.00 feet along the centerline of
said Smith Street;
THENCE, departing said centerline at a right angle, North 57 degrees 08'03"
West, 89.73 feet to a 5/8-inch iron rod (x=3,151,348.89, 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 02 degrees 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 87 degrees 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 02 degrees 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 87 degrees 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 87 degrees 52'33" East, 17.50 feet to the centerline of said
Frederick Street;
THENCE, North 02 degrees 07'27" West, 54.49 feet along said centerline to the
south right-of-way line of said Clay Avenue;
THENCE, South 65 degrees 48'22" East, 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;
EXHIBIT "A" TO OFFICE LEASE - Page 3
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<PAGE>
THENCE, 81.46 feet southeasterly along the arc of said curve and southwesterly
right-of-way line (Radius = 538.22 feet, Delta = 8 degree 40'19", Chord = South
61 degree 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 57 degree 08'03" East, 50.78 feet to the POINT OF BEGINNING,
containing a computed area of 27,402 square feet of land.
EXHIBIT "A" TO OFFICE LEASE - Page 4
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<PAGE>
EXHIBIT "B"
-----------
TO
OFFICE LEASE BETWEEN
ALLEN CENTER COMPANY,
AS LANDLORD, AND
FRONTIER NATURAL GAS,
AS TENANT
PLAN OF PREMISES
----------------
[ARCHITECTURAL DRAWING APPEARS HERE]
EXHIBIT "B" TO OFFICE LEASE - Page Solo
- ---------------------------
<PAGE>
EXHIBIT "C"
-----------
TO
OFFICE LEASE BETWEEN
ALLEN CENTER COMPANY,
AS LANDLORD, AND
FRONTIER NATURAL GAS CORPORATION,
AS TENANT
WORK LETTER
-----------
(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 the Work Letter, the
following terms (when delineated with initial capital letters) shall have the
respective meaning indicated for each as follows:
(a) 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.
(b) 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.
(c) 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.
(d) Tenant's Architect shall mean Gensler & Associates, who is an
------------------ --------------------
architect licensed to practice in the State of Texas.
(e) 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.
(f) 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.
(g) 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.
(h) Tenant's Costs shall mean that portion of the Cost of the Work in
--------------
excess of Landlord's Costs.
(i) 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.
(j) 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 Landlord's sign criteria.
The design drawings shall set forth the requirement 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
EXHIBIT"C" TO OFFICE LEASE - Page 1
- -------------------------
<PAGE>
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.
(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.
Upon completion of the initial Improvements, 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 Specification 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. 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 if 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 ten (10) 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 up to five percent (5%) of the
--------
Allowance 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 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 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 shall be solely the property
of Landlord, not Tenant.
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 one and one-half percent (1.5%) 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 or 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 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.
EXHIBIT "C" TO OFFICE LEASE - Page 2
- ---------------------------
<PAGE>
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.
EXHIBIT "C" TO OFFICE LEASE - Page 3
- ---------------------------
<PAGE>
EXHIBIT "D"
-----------
TO
OFFICE LEASE BETWEEN
ALLEN CENTER COMPANY,
AS LANDLORD, AND
FRONTIER NATURAL GAS 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.
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.
5. Landlord shall have the power to prescribe the weight and position of
heavy equipment or objects which may overstress any portion of the floor. All
damage done to the Building by the improper placing of such heavy items will be
repaired at the sole expense of the responsible Tenant.
6. A Tenant shall notify the Building manager when safes or other heavy
equipment are to be taken in 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 their
leased premises neat and clean.
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, motor cycles 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.
18. No additional locks shall be placed upon any doors without the prior
written consent of Landlord. All necessary keys shall be furnished by landlord,
and the same shall be surrendered upon termination of this lease, and Tenant
shall then give Landlord or his agent an explanation of the combination of all
locks on the doors or vaults. Tenant shall initially be given two (2) keys to
the leased premises by landlord. No duplicates of such keys shall be made by
Tenants. 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.
EXHIBIT "D" TO OFFICE LEASE - Page 1
- ---------------------------
<PAGE>
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 unapproved lighting, 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. Tenants shall provide plexiglass or other pads for all chairs mounted
on rollers or casters.
26. 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.
EXHIBIT "D" TO OFFICE LEASE - Page 2
- ---------------------------
<PAGE>
EXHIBIT "E"
-----------
TO
OFFICE LEASE BETWEEN
ALLEN CENTER COMPANY,
AS LANDLORD, AND
FRONTIER NATURAL GAS CORPORATION,
AS TENANT
PARKING
-------
This Exhibit "E" ("Parking Exhibit") describes and specifies Tenant's
----------
non-exclusive right to use zero (0) reserved parking spaces and ten (10)
unreserved parking spaces (collectively, "Spaces") located on such levels inside
the Allen Center Parking Garage (as defined below) 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 meaning in this Parking Exhibit.
2. Grant and Rental Fee. Provided no event of default has occurred and is
--------------------
continuing under the Lease, Tenant shall be permitted the non-exclusive use of
the Space during the 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) Space for each seven hundred fifty
(750) square feet of Rentable Area within the Premises.
3. Tenant's Failure to Use Spaces. In the event that Tenant (after the
------------------------------
Commencement Date and at any time during the Term) fails to utilize all or any
of the Spaces, Landlord shall have no further obligation to make available to
Tenant the Spaces not utilized. The failure, for any reason, of Landlord to
provide or make available such Spaces to Tenant or the inability of Tenant to
utilize all or any portion of the Spaces shall under no circumstances be deemed
a default by Landlord under the Lease so as to permit Tenant to terminate the
Lease, in whole or in part.
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
Agreement.
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 Paragraph
6(f)). Landlord agrees to provide to Tenant eight (8) 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 Paragraph 6(f) of the Lease shall also be applicable and
in the event of a conflict with the provisions of this Parking Exhibit, the
provisions of Paragraph 6(f) shall control. In the event Tenant, its agents 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 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.
EXHIBIT "E" TO OFFICE LEASE - Page Solo
- ---------------------------
<PAGE>
SCHEDULE 1
----------
TO
EXHIBIT "E"
-----------
TO
OFFICE LEASE BETWEEN
ALLEN CENTER COMPANY,
AS LANDLORD, AND
FRONTIER NATURAL GAS CORPORATION,
AS TENANT
ALLEN CENTER PARKING GARAGE
---------------------------
RESERVED SPACES
CURRENT MONTHLY
---------------
NO. OF SPACES PRICE PER SPACE
------------- ---------------
0 $0.00 (plus tax)
TOTAL RESERVED SPACES 0
==========
UNRESERVED SPACES
CURRENT MONTHLY
---------------
NO. OF SPACES PRICE PER SPACE
------------- ---------------
8 $85.00 (plus tax)
TOTAL UNRESERVED SPACES 8
==========
SCHEDULE 1 TO EXHIBIT "E" TO OFFICE LEASE - Page Solo
- -----------------------------------------
<PAGE>
EXHIBIT "F"
-----------
TO
OFFICE LEASE BETWEEN
ALLEN CENTER COMPANY,
AS LANDLORD AND
FRONTIER NATURAL GAS CORPORATION,
AS TENANT
MOVING ALLOWANCE
----------------
As an inducement to Tenant to enter into this Lease, Landlord shall
provide to Tenant a moving allowance of up to $3.50 per square foot of Rentable
Area within the Premises for costs incurred by Tenant in moving its corporate
headquarters from Oklahoma City, Oklahoma to the Premises, including but not
limited to the costs of computer cabling, the installation (but not the
purchase) of a telephone system, moving van and stationery; such allowance shall
be paid to Tenant with thirty (30) days after the later to occur of (i) the
Commencement Date and (ii) the delivery to Landlord of invoices detailing the
moving costs actually incurred by Tenant.
EXHIBIT "F" TO OFFICE LEASE - Page Solo
- ------- --- -- ------ -----
<PAGE>
EXHIBIT "G"
-----------
TO
OFFICE LEASE BETWEEN
ALLEN CENTER COMPANY,
AS LANDLORD, AND
FRONTIER NATURAL GAS CORPORATION,
AS TENANT
RENEWAL OPTION
--------------
This Exhibit "G" ("Renewal Exhibit") describes and specifies the option,
granted by Landlord to Tenant to extend and renew this Lease. Provided that, at
the time in question, this Lease is then in full force and effect and there is
no uncured event of default under this Lease, Tenant shall have the option
("Option") to renew this Lease as follows:
1. Defined Terms. For purposes of this Renewal Exhibit, all terms defined
--------------
in the Lease will be utilized herein without further definition. Terms
specifically applicable to this Renewal Exhibit shall have the meaning
specified in this Renewal Exhibit and shall be delineated by initial capital
letters.
2. Exercise of Option. Tenant may, by notifying Landlord of its election
------------------
in writing not less than nine (9) months nor more than twelve (12) months prior
to the end of the Term, renew this Lease for an additional term ("Second Term")
beginning on the date next following the expiration date of the Term and
continuing for sixty (60) months thereafter. The renewal of this Lease will be
upon the same terms, covenants, and conditions applicable during the Term, as
provided in the Lease, except that (a) the Base Rent payable during the Second
Term shall be an amount equal to the existing "market rental rate" (as defined
below) as of the date on which the Second Term commences, (b) the defined term
"Term" shall be deemed to include the "Second Term", (c) no free rent,
allowances, option, parking concessions, construction obligations or special
rent concession, if any, which was applicable to the original Term apply during
the Second Term and (d) no further renewal option shall apply to the Second
Term. In addition, Base Rent shall continue to be adjusted as provided in
Article Four of the Lease. As used herein, the phrase "market rental rate" shall
mean the rate of base rental being charged by Landlord to new tenants having a
financial condition comparable to that of Tenant for comparable space within the
Building for a term comparable to the Second Term (but not less than the Base
Rent payable with respect to the final year of the Term).
3. Termination of Option. The failure of Tenant to exercise the Option
---------------------
herein granted within the time period set forth herein shall constitute a waiver
and termination of such Option. In addition, any termination of this Lease
during the Term or any assignment, subletting, or other transfer by Tenant,
whether or not with the approval of Landlord, shall terminate the Option
contained in this Renewal Exhibit.
EXHIBIT "G" TO OFFICE LEASE - Page 1
<PAGE>
EXHIBIT "H"
----------
TO
OFFICE LEASE BETWEEN
ALLEN CENTER COMPANY,
AS LANDLORD AND
FRONTIER NATURAL GAS CORPORATION
AS TENANT
RIGHT OF FIRST REFUSAL
----------------------
This Exhibit "H" ("Refusal Exhibit") describes and specifies the right
-------
of first refusal hereby granted by Landlord to Tenant with respect to the space
within the Building described below, which right of first refusal is being
granted upon the following terms and conditions:
1. Defined Terms. For purposes of this Refusal Exhibit, all terms
------- -----
defined in the Lease will be utilized herein without further definition. Terms
specifically applicable to this Refusal Exhibit shall have the meanings
specified in this Refusal Exhibit and shall be delineated by initial capital
letters.
2. Grant of Right of First Refusal. Landlord hereby grants to
----- -- ----- -- -------------
Tenant a right of first refusal ("Refusal Right") with respect to approximately
3,000 square feet of Rentable Area located on level twenty-nine (29) of the
Building which is described on Schedule 1 attached hereto and incorporated
-------- -
herein by reference for all purposes plus or minus twenty percent (20%) as
determined by Landlord ("Refusal Space") during the period commencing on the
Commencement Date and ending as of July 31, 2001. Notwithstanding the
---- --- ----
foregoing, the Refusal Right shall not be applicable during any time when there
is an uncured event of default under the Lease. Notwithstanding anything to the
contrary in the foregoing, the Refusal Right shall be subject to the rights of
any tenants presently occupying space in the Building.
3. Exercise of Refusal Right. In the event that Refusal Space in the
-------- -- ------- -----
Building becomes available, availability, for purposes hereof, to be at the sole
determination of Landlord, and Landlord receives a bona fide offer from a third
party to lease all or a part of the Refusal Space which Landlord desires to
accept, Landlord shall so notify Tenant and shall include in such notice the
rental rate for the subject Refusal Space, expense stop, and any lease
concessions to be granted. Tenant shall have ten (10) days from the receipt of
such notice to notify Landlord in writing of the exercise by Tenant of Tenant's
Refusal Right with respect to the subject Refusal Space, which shall be on the
same terms and with respect to the entire space specified in Landlord's notice.
In the event that Tenant fails to so notify Landlord within such ten (10) day
period, Tenant shall be deemed to have irrevocably waived its Refusal Right with
respect to the subject Refusal Space; and Landlord shall have the right to enter
into a lease with any party with respect to that Refusal Space. In the event
that Tenant elects to exercise its Refusal Right with respect to the subject
Refusal Space and does in fact exercise such Refusal Right in the manner and
within the time period specified herein, Landlord and Tenant shall, within
thirty (30) days after Tenant delivers to Landlord notice of its election, enter
into a written amendment modifying and supplementing the Lease and containing
such other terms and provisions as Landlord may deem appropriate. In the event
that Tenant fails to enter into said amendment within such thirty (30) day
period, Tenant shall be deemed to have irrevocably waived its Refusal Right with
respect to the subject Refusal Space; and Landlord shall have the right to enter
into a lease with any party with respect to that Refusal Space. Except as may be
specifically modified in such amendment and except with respect to the rental,
expense stop, and lease concessions applicable to the subject Refusal Space, as
herein specified, the terms and provisions of the Lease shall, on the day of
delivery of the subject Refusal Space to Tenant, automatically apply and become
applicable to the subject Refusal Space; and the subject Refusal Space, as of
the date of such delivery, shall automatically and without the necessity of
further documentation, become and be deemed to be a part of the Premises. The
term with respect to the Refusal Space shall be coterminous with the Term.
Effective as of the date of delivery of the subject Refusal Space to Tenant, the
Rentable Area within the subject Refusal Space shall be included within the
determination of Tenant's prorata share of Excess, as provided in Article Four
of this Lease.
4. Delivery of Refusal Space. Any Refusal Space shall be delivered to
-------------------------
Tenant vacant and unoccupied and "as is" without benefit of improvements (except
Shell Improvements, if any) unless the refusal notice specifies that an
allowance is to be granted for the improvement or refurbishment of the subject
Refusal Space, in which event Tenant will receive the allowance specified in
Landlord's notice. In the event that any improvements or restoration work is to
be incorporated into the Premises, the amendment shall contain provisions
reflecting the agreement of Landlord and Tenant with respect thereto. Landlord
shall use reasonable diligence to deliver the subject Refusal Space on the date
specified in Landlord's notice of its availability, but in no event shall
Landlord have any liability for the failure to deliver the subject Refusal Space
to Tenant on such date, nor shall any such failure impair the validity of the
Lease, extend the Term, or impair any obligations of Tenant under the Lease, it
being understood that the Rent applicable to the subject Refusal Space shall be
abated until possession is delivered to Tenant in full settlement of all claims
that Tenant might otherwise have against Landlord by reason of the failure to
deliver possession of the subject Refusal Space to Tenant.
5. Termination of Refusal Right. The Refusal Right shall automatically
----------------------------
terminate upon (a) the termination of the Term, whether by Landlord upon the
occurrence of an event of default or otherwise, (b) the expiration of the time
period specified in Paragraph 2 above, (c) the failure of Tenant to exercise the
Refusal Right with respect to any Refusal Space as and within the time period
specified in Paragragh 3 above, but only with respect to the subject Refusal
Space, and (d) upon the assignment, subletting, or other transfer by Tenant,
whether or not with the approval of Landlord.
<PAGE>
SCHEDULE 1
----------
TO
EXHIBIT "H"
-----------
TO
OFFICE LEASE BETWEEN
ALLEN CENTER COMPANY,
AS LANDLORD,
AND
FRONTIER NATURAL GAS,
AS TENANT
REFUSAL SPACE
-------------
[ART APPEARS HERE]
SCHEDULE 1 TO EXHIBIT "H" TO OFFICE LEASE - Page Solo
- -----------------------------------------
<PAGE>
EXHIBIT "1"
-----------
TO
OFFICE LEASE BETWEEN
ALLEN CENTER COMPANY,
AS LANDLORD,
AND
FRONTIER NATURAL GAS CORPORATION,
AS TENANT
SATELLITE DISH
--------------
1. Defined Terms. Terms defined in the Lease and delineated herein by
-------------
initial capital letters shall have the same meaning ascribed thereto in the
Lease, except to the extent that the meaning of such term is specifically
modified by the provisions hereof. In addition, other terms not defined in the
Lease but defined herein will, when delineated with initial capital letters,
have the meanings ascribed thereto in this exhibit. Terms and phrases which are
not delineated by initial capital letters shall have the meanings commonly
ascribed thereto.
2. License. During the Lease Term Tenant is hereby granted a revocable
-------
licence to install on the roof of the Building not more than one (1) "receive
only" communications satellite dish no greater than one (1) meter in diameter,
provided that (a) the location, and manner of installation of such satellite
dish shall be determined at Landlord's sole discretion, which discretion shall
take into consideration the functional requirements of such equipment subject to
standards of architectural integrity with respect to the Building (and in that
regard, the satellite dish shall be located so as not to be visible except from
above the Building), (b) no such satellite dish shall be affixed to the roof of
the Building by nail, bolt, screw or other device which penetrates the roof, and
(c) Tenant shall bear all costs and liability incurred with respect to the
installation, operation, maintenance, removal, and insuring of any such
satellite dish and any related wiring.
3. Access to Roof. Tenant shall not have access to the roof without
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having first obtained Landlord's written approval at least 24 hours in advance,
except in case of emergencies such prior notice period may be reduced at
Landlord's discretion.
4. Indemnification. Tenant hereby covenants and agrees to indemnify,
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defend and otherwise hold harmless Landlord, its respective partners, venturers,
affiliates, subsidiaries, parent corporations, related partnerships and
corporations, and all of their respective past, present and future shareholders,
officers, directors, agents, attorneys, servants and employees, and each of
their respective heirs, legal representatives, successors and assigns, and all
those at interest therewith, from any and all losses, claims, demands, actions
and causes of action of whatever nature, and any and all liability, accrued or
unaccrued, known or unknown, fixed or contingent, on account of, arising from
or in any manner growing out of or otherwise resulting from the process of
installing the satellite dish, from Tenant's satellite dish being on the roof of
the Building including any related wiring, and from any damage occurring to said
satellite dish or wiring. The indemnities contained in this paragraph shall
survive the expiration or termination of the Lease.
EXHIBIT "1" TO OFFICE LEASE - Page Solo
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EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-06261 of Frontier Natural Gas Corporation on Form SB-2 of our report dated
March 22, 1996, appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
Oklahoma City, Oklahoma
July 30, 1996
