<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 1996
REGISTRATION NO. 333-06261
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
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")............. 1,552,500(2) $5.0625 $ 7,859,531.25 $2,710.18
- -----------------------------------------------------------------------------------------
Common Stock Underlying
Units.................. 4,657,500 -- -- (3)
- -----------------------------------------------------------------------------------------
Series B Warrants
Underlying Units(5).... 4,657,500 -- -- (3)
- -----------------------------------------------------------------------------------------
Common Stock Issuable on
Exercise of Series B
Warrants(5)............ 4,657,500 $2.025 $ 9,431,437.50 $3,252.22
- -----------------------------------------------------------------------------------------
Underwriter's Unit
Purchase Option(4)(5).. 135,000 $.001 $100 (6)
- -----------------------------------------------------------------------------------------
Units Issuable on
Exercise of
Underwriter's Unit
Purchase Option(5)..... 135,000 $7.98125 $ 1,072,996.875 $ 370.00
- -----------------------------------------------------------------------------------------
Common Stock Underlying
Units Underlying
Underwriter's Unit
Purchase Option(5)..... 405,000 -- -- (3)
- -----------------------------------------------------------------------------------------
Series B Warrants
Underlying
Underwriter's Unit
Purchase Option(5)..... 405,000 -- -- (3)
- -----------------------------------------------------------------------------------------
Common Stock Issuable on
Exercise of Series B
Warrants Underlying
Underwriter's Unit
Purchase Option(5)..... 405,000 $2.025 $ 820,125 $ 282.80
- -----------------------------------------------------------------------------------------
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................... $20,574,190.625 $7,094.55
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee pur-
suant to Rule 457.
(2) Includes 202,500 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 135,000
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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
led pursuant to Rule 424(a)
SEC File No. 333-06261
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 7, 1996
PROSPECTUS
1,350,000 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") 1,350,000 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 $ 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 Series B Warrants become exercisable, upon
not less than 30 days prior written notice, if the last sale price of the Com-
mon 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 se-
curities comprising the Units are immediately 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 SmallCap Market ("Nasdaq") under the
symbol "FNGC." On August , 1996, the last reported sale price of the Common
Stock, as reported on Nasdaq, was $ per share. See "Price Range of Securi-
ties." Prior to this Offering, there has been no public market for the Series B
Warrants. There can be no assurance that a trading market will develop for the
Series B Warrants following this Offering. The Series B Warrants have been ap-
proved for quotation on NASDAQ under the symbol FNGCZ.
----------
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
135,000 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 202,500 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................
1,350,000 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.......
9,258,406 shares
4
<PAGE>
Nasdaq Symbols (1)................
Common Stock: FNGC Series B Warrants:
- -------- FNGCZ(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 $5.0625, approximately as follows: (i) $3,990,656
(approximately 70%) will be used to fund the Company's exploration, developmen-
tal and acquisition projects in Southern Louisiana, along the Gulf Coast of Al-
abama, Mississippi and Texas and in Garvin County, Oklahoma; (ii) $1,295,000
(approximately 23%) 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) $415,281 (approximately 7%) 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 $ .81 $ .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) $ 552
Total assets....................................... 10,414 14,820
Long-term debt..................................... 3,513 2,836
Stockholders' equity............................... 4,569 10,270
</TABLE>
- --------
(1) Gives effect to the sale of the Units hereby (assuming a per-Unit offering
price of $5.0625) 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, outstanding options to purchase
350,000 shares of Common Stock under the Stock Incentive Option Plan-1996 (the
"1996 Option Plan"), or outstanding options to purchase 12,000 shares of Common
Stock granted to outside directors on June 6, 1996, (iv) no exercise of other
outstanding warrants to purchase 890,000 shares of Common Stock (including
300,000 shares of Common Stock issuable upon exercise of the Hi-Chicago War-
rant), 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 Pro-
spectus, 385,000 options have an exercise price equal to or less than the as-
sumed per-share offering price of $1.6875. 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
$3,990,656 (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 23%) 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 $415,281 (approximately 7%) 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
9,258,406 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
4,050,000 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 890,000 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, outstanding options to purchase 350,000 shares of
Common Stock under the 1996 Option Plan, and outstanding options to purchase
12,000 shares of Common Stock granted to outside directors on June 6, 1996,
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 con-
version 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. No prediction can be made as to the effect, if any, that
future sales of such shares of Common 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 percep-
tion 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 $5.0625 and attributing no
value to the Series B Warrants included in the Units, this Offering involves
an immediate dilution of approximately $.89 per share of Common Stock (approx-
imately 45% 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 price set forth on
the cover of the Prospectus. The Series B Warrants are redeemable by the Com-
pany 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-exer-
cise price of the Series B Warrants for the 20 consecutive 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 dis-
advantageous for them to do so, (ii) sell the Series 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 $5.0625, are estimated to be $5,700,937
(or $6,592,823 if the Underwriter's over-allotment option is exercised in
full). The Company intends to use such net proceeds approximately as follows:
(i) $3,990,656 (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 23%) to service the debt repayment requirements
for the 12 months subsequent to the date of this Prospectus pursuant to the
Credit Agreement; and (iii) $415,281 (approximately 7%) 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..................... $3,990,656 70%
Repayment of loan indebtedness............................ 1,295,000 23%
Working capital and general corporate purposes............ 415,281 7%
---------- ----
Total................................................... $5,700,937 100%
========== ====
</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 ......... 2 11/16 1 7/8 8 5/8 7 1/4 1/2 7/32
Third quarter (through
August 6, 1996)........ 2 1/16 1 11/16
</TABLE>
At August , 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 August , 1996 was $ . Prior to the date of this Prospectus, there
has been no public market for the Series B Warrants, and there can be no as-
surance 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 1,350,000 Units of-
fered hereby at an assumed per-Unit price of $5.0625 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 ap-
pearing 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; 9,108,406 shares as adjusted (2).. 50,584 91,084
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 13,642,816
Retained earnings (deficit) (6)................. (3,624,113) (3,624,113)
---------- -----------
Total shareholders' equity.................... 4,568,713 10,269,650
========== ===========
Total capitalization........................ $8,082,124 $13,106,061
========== ===========
</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, outstanding options to purchase 350,000
shares of Common Stock under the 1996 Option Plan or outstanding options
to purchase 12,000 shares of Common Stock granted to outside directors on
June 6, 1996, (iv) no exercise of other outstanding warrants to purchase
890,000 shares of Common Stock (including 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 Con-
vertible Preferred Stock. As of the date of this Prospectus, 385,000 op-
tions have an exercise price equal to or less than the assumed per-share
offering price of $1.6875. See "Underwriting" and "Description of Securi-
ties." See "Underwriting" and "Description of Securities."
(3) Includes the fair market value of 150,000 common shares committed for is-
suance in January 1996 and issued June 3, 1996.
(4) Value of warrants for Common Stock granted in January 1996 less amortiza-
tion since date of issue, in accordance with Financial Accounting Standard
Board No. 123.
(5) Common shares subscribed in 1993 but unpaid.
(6) Assumes that none of the proceeds of this Offering will used to pay divi-
dends on the Convertible Preferred Stock.
20
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data with re-
spect to the Company for the periods and as of the dates indicated. The finan-
cial data for the years ended December 31, 1995 and December 31, 1994 were ex-
tracted from the audited financial statements of the Company. The financial
data for the three months ended March 31, 1996 and March 31, 1995 have been
extracted from the Company's unaudited financial statements, which have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, include all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the information set forth herein.
This information is not necessarily indicative of the Company's future perfor-
mance. The financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements of the Company and the notes thereto.
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------- -------------------------
1995 1994 1996 1995
--------- -------- ------------ ------------
($ 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 $ .81 $ .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. The reserves of the proved oil and gas prop-
erties affected by the impairment represent less than 1% of the Company's es-
timated future net cash flows before income taxes at December 31, 1995.
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 $359,000 in revenues in 1994 prior to its sale,
an 8% reduction in gas prices and a 14% 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.
23
<PAGE>
The 1995 exploration costs also reflect the impairment of gas and oil leases
and investments of approximately $534,000, 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 exploration 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 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 re-
sulted 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.
Recent Developments. Based on preliminary results, gas and oil revenue and
net loss for the six months ended June 30, 1996 are expected to be approxi-
mately $1,942,000 and $991,000, respectively, as compared with approximately
$1,475,000 and $253,000, respectively, for the six month period of the previ-
ous year. Based on preliminary results, gas and oil revenue and net loss for
the three months ended June 30, 1996 are expected to be approximately $850,000
and $222,000, respectively, as compared with gas and oil revenue and net in-
come of approximately $767,000 and $133,000, respectively, for the three month
period of the previous year.
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 approximately $420,000
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 anticipates that future capital expenditures during the remainder
of 1996 to fund the Company's exploration, developmental and acquisition pro-
jects in Southern Louisiana, along the Gulf Coast of Alabama, Mississippi and
Texas and in Garvin County, Oklahoma will be approximately $3,260,000. Funding
for approximately $1,500,000 of these capital expenditures will be provided by
a financing agreement entered into in March 1996 and payable solely out of an
overriding working interest on the funded project. See "Business and Proper-
ties--Exploration 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
24
<PAGE>
drilling costs in the Starboard Prospect. After completion of the initial de-
velopment 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 parameters.
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 Agree-
ment 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 re-
quired reserve value, the Company would be required to either accelerate pay-
ment, 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 has not entered into any arrangements to obtain alternate financ-
ing, and there can be no assurance of the availability of any financing on ac-
ceptable 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
25
<PAGE>
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. Approx-
imately $430,000 of the costs reimbursed and advanced were incurred as of De-
cember 31, 1995 and included in the Company's gas and oil properties. 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 Pros-
pect. The Company anticipates it will obtain most of its financing needs for
the Starboard Prospect activities in the second and third quarters 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 "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 addi-
tional funds are not made available by Bank of America Illinois, up to 175,000
warrants 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
26
<PAGE>
swaps result in future increases 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 market 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 negotia-
tion 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 re-
gard.
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 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 antici-
pated or funds are not available under the Credit Agreement, the Company will
be required to find additional sources of capital.
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, 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, CAEX technologies and 3-D seismic surveys, with emphasis on projects
situated along the Gulf Coast and, particularly, the transition zone of South-
ern 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 County,
Oklahoma. Additional activities in 1995 included (i) the drilling of two ex-
ploratory 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 Pros-
pect is comprised of a group of four distinct high potential exploration pros-
pects, 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 Pros-
pect which included estimated proved undeveloped reserves of 11 Bcfe and esti-
mated future net revenues of over $19 million. In March 1996, the Company com-
pleted the Starboard Prospect Funding, pursuant to which affiliates of a util-
ity acquired a 48% interest in the Company's interest in the Starboard 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.
27
<PAGE>
The Company intends to fund its share of developmental drilling costs in the
prospect from borrowings under 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 the
Starboard Prospect Joint Venture. The Company is continuing to search for addi-
tional 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" 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 potentially can identify the location of commer-
cial quantities of hydrocarbons. In connection with this agreement, the Company
also entered into an agreement with Marconi, Inc. to jointly explore any pros-
pects 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 Compa-
ny; and (4) continuing evaluation of high-graded exploration prospect opportu-
nities in Southern Louisiana and other Gulf Coast areas.
CAEX TECHNOLOGY AND 3-D SEISMIC
The Company uses CAEX technology to collect and analyze geological, geophysi-
cal, engineering, production and other data obtained about a potential gas or
oil prospect. Using such technology, the Company correlates 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 pros-
pect 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 proc-
ess produces a three-dimensional image based upon seismic data obtained from
multiple horizontal and vertical points within a geological formation. The tre-
mendous number of calculations needed to process such data is made possible by
computer programs and advanced computer hardware.
While 3-D seismic and CAEX technologies have been used by large oil companies
for approximately 20 years, the method was not affordable to smaller, indepen-
dent 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 created
its own seismic processing division--Exploration Geophysical Services--for the
purpose of assisting the prospect generation efforts of the Company. The Com-
pany believes that its use of CAEX and 3-D seismic technology may provide it
with certain advantages in the exploration process over those companies that do
not use this technology. Because computer modeling generally provides clearer
and more accurate projected images of geological formations, the Company be-
lieves it is better able to identify potential locations of hydrocarbon accumu-
lations and the desirable locations for wellbores. However, the technology has
not been used extensively enough by the Company to make any conclusion regard-
ing its performance and the Company's ability to interpret and use the informa-
tion developed from the technology.
28
<PAGE>
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 began
devoting more of its energy to the Gulf Coast region. The Company initially en-
tered 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 includes
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 Prospect. The Star-
board Prospect is comprised of a group of four distinct high potential explora-
tion 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 in the Starboard 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 in-
terest in the properties comprising the Starboard Prospect of 18%-34%, depend-
ing on the zone, with associated reserves of 5.4 Bcfe and future net revenues
of approximately $9 million. Based on subsurface and currently available 2-D
seismic surveys, the Company has defined potential well locations within the
Starboard Prospect, including at least five proved undeveloped locations and
four exploratory prospects. The presence of proved undeveloped reserves within
the Starboard Prospect is expected to lower the project's overall risk. The
Company plans to conduct a 3-D seismic survey to further 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 working interest in the proved de-
veloped reserves of the Starboard Prospect. No significant acquisition of
proved developed acreage has occurred since December 31, 1995.
In March 1996, the Company completed the Starboard Prospect Funding, pursuant
to which the Soco Group (i) acquired a 48% interest in the Company's interest
in the Starboard Prospect Joint Venture, and (ii) 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 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 Prospect Joint Venture (not
taking into account the 48% working interest assignment to the Soco Group),
continues 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 Ven-
ture. The
29
<PAGE>
agreement also calls for another affiliate of the Soco Group, Interactive Ex-
ploration Solutions, Inc. of Houston, Texas, to manage the 3-D seismic data ac-
quisition, processing and interpretation. 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 10,000 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 interpreta-
tion. The Company has rights to a 50% working interest in all prospects located
pursuant to this agreement.
Garvin County, Oklahoma
In January 1992, the Company began conducting extensive subsurface geological
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 res-
ervoir sandstones referred to as the "Simpson Group Sands." Where trapping oc-
curs in conjunction with these sands, small geological features may yield sig-
nificant reserves of oil. The geological traps in this area containing hydro-
carbons have been historically difficult to find with conventional exploration
techniques because of their complexity and size.
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 com-
pleted three exploratory wells in Garvin County. Test results indicate initial
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 partici-
pate 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-Con-
tinent 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 reserves gen-
erally available for acquisition were at unusually high costs. As a result and
in reaction to the market conditions, the Company divested selected proved pro-
ducing natural gas and oil properties to take advantage of the relatively
higher prices being paid for such properties, and refocused most of its 1994
and 1995 activities on its exploration program. However, the Company will con-
tinue to evaluate properties for acquisition if they meet the Company's acqui-
sition criteria, and as resources permit.
30
<PAGE>
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 acquisition
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 con-
tracts may involve a prepayment of a portion or all of the purchase price. Be-
cause sales not made under fixed-price contracts may result in fluctuating rev-
enues to the Company depending upon the market price of gas, the Company may
enter into various hedging agreements to minimize the fluctuations and the ef-
fect 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 production
per month for $1.566 per MMBtu for the period beginning April 1, 1996 and end-
ing 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-sensitive
or spot price contracts. The Company's revenues from oil sales fluctuate de-
pending upon the market price of oil.
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 Waldorf
agreement amounted to approximately 63% 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 Com-
pany 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 proper-
ties 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
31
<PAGE>
provided by the Company. In determining the estimates of the reserve quantities
that are economically recoverable, the Engineers used selling prices and esti-
mated development and production costs in effect as of the dates of its report
and, where no prior sales existed, selling prices and production costs of com-
parable 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 December
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, regarding es-
timated 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.
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 develop-
mental 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.
32
<PAGE>
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 $ .81 $ .76 $ .49
</TABLE>
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
33
<PAGE>
minimum projected return on investment. 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 competitive. 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 local
authorities. In particular, gas and oil production operations and economics 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 interpreta-
tions 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 reasons. Numerous reg-
ulatory authorities, federal, state and local, issue rules and regulations
binding on the gas and oil industry, some of which carry substantial penalties
for failure to comply. The regulatory burden on the gas and oil industry in-
creases 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 Company and its prop-
erties and operations, the violation of which would have a material adverse ef-
fect 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 otherwise 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 in-
cludes (i) requiring permits for the drilling of wells; (ii) maintaining bond-
ing 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 aban-
doning of wells and the disposal of fluids used in connection with well opera-
tions. The Company's operations are also subject to various conservation regu-
lations. These include the regulation of the size of drilling and spacing
units, the density of wells which may be drilled, and the unitization or pool-
ing of gas and oil properties. In addition, state conservation laws establish
maximum rates of production from gas and oil wells, generally prohibiting the
venting or flaring of gas and impose certain requirements regarding the rata-
bility 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. Recently enacted legis-
lation and/or regulatory action in Texas and Oklahoma is intended to reduce the
total production of natural gas in those states. Although such restrictions
have not had a material impact on the Company's operations to date, the extent
of any future impact therefrom cannot be predicted. The Company's drilling ac-
tivities 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 regulations 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 intrastate
commerce. Administration and enforcement of the NGPA ceiling prices are dele-
gated to the Federal Energy Regulatory Commission (the "FERC"). As a result 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 Decontrol Act
provides that price and non-price controls are eliminated upon contract termi-
nation 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 Decontrol Act will
have a significant impact on the prices received by the Company for gas produc-
tion in the near future.
34
<PAGE>
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 pipelines'
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 services. Order No.
636 may also increase transportation costs and tariffs on interstate pipelines
and cause interstate pipelines to seek to renegotiate or terminate certain of
their existing purchase contracts, but ultimately may enhance gas marketing op-
portunities and available transportation. The rules contained in Order No. 636,
as amended by Order No. 636-A (issued in August 1992) and Order No. 636-B (is-
sued in November 1992) are far reaching and complex. In addition, several pro-
visions of Order No. 636 are currently subject to court challenges. Although
the ultimate outcome of these challenges under Order No. 636 cannot be pre-
dicted with certainty, the Company does not believe the Order No. 636 will ad-
versely affect its operations. Nevertheless, the Order has resulted 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 en-
vironmental 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.
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 oper-
ations, 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 dif-
ferent from those of comparable gas and oil companies operating in similar geo-
graphic areas. Nevertheless, no assurance can be given that environmental laws
will not, in the future, result in a curtailment of production or material in-
creases in the cost of production, development or exploration or otherwise ad-
versely affect the Company's operations and financial condition. Although the
Company maintains liability insurance coverage against certain liabilities from
pollution, such environmental risks generally are not fully insurable.
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 transferred
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 trans-
ferring party will continue to have liability for the costs of restoration of
the site. In the event the parties to a transfer elect to establish a site-spe-
cific trust account pursuant to the statute, the Louisiana Department of Natu-
ral Resources ("DNR") requires an oil field site restoration assessment to be
made at the time of the transfer or within one year thereafter, to determine
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 thereaf-
ter be the responsible party to the state, except that the failure of a
35
<PAGE>
transferring party to make a good faith disclosure of all oil field site condi-
tions 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 bal-
ance 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 affili-
ate 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 virtually
all remaining producing gas and oil properties to secure repayment under 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 forma-
tions and environmental hazards such as oil spills, gas leaks, ruptures or dis-
charges of toxic gases, the occurrence of any of which could result in substan-
tial 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.
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 Company
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 believes these
policies are customary in the industry, they do not provide complete coverage
against all operating risks. An uninsured or partially insured claim, if suc-
cessful and of sufficient magnitude, could have a material adverse effect on
the Company and its financial condition. If the Company experiences significant
claims or losses, the Company's insurance premiums could be increased which may
adversely affect the Company and its financial condition or limit the ability
of the Company to obtain coverage. Any difficulty in obtaining coverage may im-
pair 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 an-
nual rent of $106,656. The current lease expires August 31, 1996. The Company
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 agree-
ment 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 Company.
The Company believes its relations with its employees and contractors are good.
No employees of the Company are represented by a union. As previously dis-
cussed, 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 relocate, or
will
36
<PAGE>
not be offered the opportunity to join the Company in such relocation. The Com-
pany believes that, if the need arises, it will be able to hire individuals
with similar credentials and upon similar terms in the Houston market to re-
place 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 Produc-
tion Corporation ("Frontier"), a subsidiary of the Company, as plaintiff to
quiet title to leases it owns in the Mobile Bay area in Mobile County, Alabama.
The original defendant, The Offshore Group, Inc. ("TOG"), filed various coun-
terclaims pursuant to which, inter alia, it (i) claimed an ownership interest
in the Mobile Bay area wells drilled by the Company and (ii) sought recovery 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 principals for fraudu-
lently asserting such claims. On June 6, 1996, the summary judgment was ap-
pealed. The Company does not believe TOG's appeal or the remaining claim have
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 lia-
bility 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 vig-
orously. The Company believes it has adequate net operating losses incurred in
1992 and subsequent years to offset any potential tax liability.
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 incorporation
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 Petroleum As-
sociation of America.
DAVID B. CHRISTOFFERSON has served as General Counsel, Secretary and a direc-
tor 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 Univer-
sity 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.
37
<PAGE>
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 Bach-
elor of Science degree from Louisiana State University in 1971. From 1991, un-
til 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 Loui-
siana Independent Oil and Gas Association and a past vice president of the In-
dependent Petroleum Association of America.
MICHAEL A. BARNES joined the Company on May 15, 1996 as Vice President of Ex-
ploration and Production. From March 1991 until his employment with the Compa-
ny, Mr. Barnes served as Exploration Manager--Gulf Coast for Great Western Re-
sources, 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 Mas-
ter of Business Administration degree from Oklahoma City University. Prior to
joining the Company, Mr. Harris was employed as an accountant with Matthews Ex-
ploration Company, a gas and oil exploration company. Mr. Harris has indicated
that he will not continue with the Company after the relocation of its princi-
pal offices to Houston, Texas and will cease his employment on or about the
date of the move.
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 Bachelor of Arts degree
from Stanford University in 1963 and a Master of Business Administration degree
from Columbia University in 1965. His background includes public accounting
with the firm of Price Waterhouse, as well as executive senior management du-
ties for major health care providers. Mr. Elliott also serves as a director of
LTC Properties, a publicly traded real estate investment 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 Uni-
versity. Mr. Orgill has 25 years of experience in the gas and oil industry.
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 seven.
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 directors. The
Board is continuing to search for a qualified and available nominee 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
38
<PAGE>
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 payment 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 pe-
riods. The Company anticipates that it will resume dividend payments prior to
an aggregate of six quarterly dividend payments being in arrears. 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:
<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"), 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.
(2) Represents accrued liabilities of the Company pursuant to deferred compen-
sation benefits payable to the individual officers.
(3) Mr. Orgill resigned as Vice President of Exploration and Production effec-
tive 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 exer-
cise 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 under
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 mar-
ket value of the Common Stock on
39
<PAGE>
the date of the grant. Each year directors 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 addi-
tional 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 Janu-
ary 1996, the Board of Directors discontinued the Incentive Plan, and amended
the directors' compensation to grant non-employee directors an automatic an-
nual grant of 6,000 Common Stock purchase 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 $2.125 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.
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>
40
<PAGE>
- --------
(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. Chris-
tofferson ("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 agree-
ments, Mr. Berry currently receives an annual salary of $120,000 and Mr. Chris-
tofferson currently receives an annual salary of $100,000. In addition, each
Employee is entitled to receive deferred compensation, provided he remains em-
ployed by the Company until expiration of the initial term of his agreement and
has not been terminated for cause thereunder. The deferred compensation 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, 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 compensation
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 pursu-
ant to the Employee's disability will be reduced by the amount of any employer
paid insurance which pays disability payments to Employee. "Cause" for termina-
tion 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 em-
ployment 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 compara-
ble 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. Gor-
don Reese, Jr. Mr. Barnes' agreement, which commenced May 15, 1996 and expires
on December 31, 1997, automatically renews for successive one-year terms each
December 31st unless terminated by either the Company or Mr. Barnes. Under 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 additional 50,000 op-
tions 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 agree-
ment effective May 1, 1996. However, Mr. Orgill continues to serve as a direc-
tor 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 pros-
pect 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 commenc-
ing 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 consulting agree-
ment 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 prohibiting for
one year subsequent to termination of employment the disclosure to third par-
ties of proprietary information relating to the Company.
41
<PAGE>
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 provisions 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 appropriate
circumstances, to seek equitable remedies such as injunctive or other forms of
non-monetary relief. Such remedies may not be effective in all cases.
The 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 indem-
nified if the Board of Directors determines such director or officer acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interest of the Company. The Certificate and the OGCA further provide
that such indemnification is not exclusive of any other rights to which such
individuals 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 advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
CERTAIN TRANSACTIONS
From December 1992 through December 1995 the Company was a party to a Consul-
tant's Agreement with Federman Associates, Inc. ("Federman Associates"), pursu-
ant to which Federman Associates agreed to provide financial consulting serv-
ices 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 Associates was
engaged to advise the Company relative to general financing matters. These mat-
ters include structural and other issues involved in the Company's private
placement in February 1993 (the "Private Placement"), its initial public offer-
ing in November 1993 and future financing needs. Mr. Federman is either the fa-
ther 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 Con-
vertible 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 Company 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 exercisable through the ear-
lier 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
60 consecutive trading days. The Settlement Shares are "restricted securities"
within the meaning of Rule 144 under the Securities Act and the Company has
granted certain demand and "piggyback" registration 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 ad-
ditional shares of the Company's stock if the Company does not register the
Settlement Shares promptly upon demand by the Hi-Chicago Trust. The Company re-
corded a loss of $96,093 related to this settlement in 1995.
42
<PAGE>
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 $46,516, respectively,
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 in-
terest at a rate of 8.28%, and advances of $12,485, which carry no interest 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 $160,560 and $36,060 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 $604,681 in
1994 for its share of the actual cost of such activities. At December 31, 1994
and 1995, the Partnership owed the Company $153,000 and $137,787, respectively.
At March 31, 1996, the Partnership 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 favora-
ble 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 1,350,000 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 Common
Stock. Unless otherwise indicated, the beneficial owner has sole voting and in-
vestment 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% 7.4%
Jeffrey R. Orgill* (2)(4).. 592,500 11.3% 6.4%
David B. Christofferson*
(2)(5).................... 212,000 4.0% 2.3%
Neal M. Elliott* (2)(6).... 74,750 1.4% .8%
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% 7.0%(11)
All executive officers and
directors as a group
(7 persons)(10)........... 1,575,620 29% 16.7%
</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 pursu-
ant to options granted under the 1996 Option Plan which become exercis-
able 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 exercis-
able under the Incentive Stock Option Plan and 24,000 shares issuable
pursuant to options immediately exercisable under the Incentive
43
<PAGE>
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 future.
(6) Includes 4,000 shares issuable pursuant to options immediately exercis-
able under the Incentive Plan and excludes 6,000 shares issuable pursuant
to options granted on June 6, 1996 which become exercisable in the fu-
ture.
(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 pres-
ently exercisable at $3.00 per share, 4,000 shares issuable upon conver-
sion 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.
(9) Address is Two North LaSalle Street, Chicago, Illinois 60602.
(10) Includes 88,000 shares issuable pursuant to options immediately exercis-
able under the Incentive Plan and 132,000 shares issuable pursuant to op-
tions immediately exercisable under the Incentive Stock Option Plan; and
excludes 4,000 shares issuable pursuant to options granted under the In-
centive 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) 3.2% 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 immediately de-
tachable 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 di-
rectors standing for election. Subject to preferences that may be applicable 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 enti-
tled to share ratably in all assets of the Company that are legally available
for distribution, after payment of all debts and other liabilities and subject
to the prior rights of holders of any class of preferred stock then outstand-
ing. The holders of Common Stock have no preemptive, subscription, redemption
or conversion rights. The rights, preferences and privileges of holders of Com-
mon Stock are subject to the rights of the holders of shares of any series of
preferred stock that the Company may issue in the future.
44
<PAGE>
SERIES B WARRANTS
Each Series B Warrant entitles the registered holder to purchase one share of
Common Stock at the price per share set forth on the cover of the Prospectus,
subject to adjustment in certain 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 war-
rant 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 War-
rants (the "Redemption Threshold") for the 20 consecutive trading days ending
on the third day prior to the notice of redemption to warrant holders. The war-
rant 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 Bank and Trust Company of Oklahoma
City, N.A. as Warrant Agent. Reference is made to such Warrant Agreement (which
has been filed as an exhibit to the Registration Statement of which this Pro-
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 qual-
ified 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 Certifi-
cate 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 Company)
for the number of Series B Warrants being exercised. The Company has reserved
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 War-
rant may be effected by delivery of the Warrant, duly endorsed for exercise 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 is-
sued and paid for in the manner contemplated by the Series B Warrants, fully
paid and non-assessable. The warrant holders do not have the rights or privi-
leges 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 exer-
cise 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 offered
and to maintain a current prospectus relating thereto until the expiration 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 rec-
ord by it, the Company will pay to such warrant holder, in lieu of the issuance
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 trad-
ing 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 secu-
rities on terms more favorable than those provided for by the Series B War-
rants.
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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).
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
46
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preventing a change in control of the Company. Currently, the Company has out-
standing 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) automatically,
if the last reported sales price of the Convertible Preferred Stock as reported
on Nasdaq (or as reported on any national securities exchange on which the Con-
vertible 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 divi-
dends are paid after 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 issu-
ance 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 subscribe for or purchase Common Stock at a price less than
current market price; or the distribution to all holders of Common Stock of ev-
idences of indebtedness of the Company, cash (excluding ordinary cash divi-
dends), other assets or rights or warrants to subscribe for or purchase any se-
curities (other than those referred to above). No adjustment of the Conversion
Price will be required 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 Con-
vertible 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 le-
gally 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 Convert-
ible Preferred Stock and are payable to holders of record as they appear 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 Com-
mon Stock or any other series or class of the Company's stock hereafter issued
that ranks junior as to dividends to the Convertible Preferred Stock) may be
declared, paid or set apart for payment on, and no purchase, redemption or
other acquisition may be made by the Company of, any Common 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 Con-
vertible Preferred Stock dividends have been paid since April 30, 1995. The
amount of dividends payable per share of Convertible Preferred Stock for each
quarterly dividend period is computed by dividing the annual dividend amount by
four. No interest is payable in respect of any dividend payment on the Convert-
ible Preferred Stock which may be in arrears. Under the terms of the Credit
Agreement, the Company is prohibited from making any dividend payments with re-
spect to any class of its capital stock unless it meets certain Restricted Pay-
ment 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 of-
fice of all directors so elected will terminate immediately upon such payment
or setting apart for payment.
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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, preferences,
qualifications, limitations or restrictions of the Convertible Preferred 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) autho-
rize, issue, or increase the authorized amount of any additional class or se-
ries of stock, or any security convertible into stock of such class or series,
ranking on a parity with the Convertible Preferred Stock as to dividends or
liquidation and having superior voting rights, or (ii) incur indebtedness 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 se-
ries, ranking on parity with the Convertible Preferred Stock as to dividend or
liquidation rights if, immediately following such event, Adjusted 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 balance sheet, in-
creased 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 mar-
ket 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 Directors,
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 management.
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 con-
sent in of lieu of a meeting. The Company's Bylaws provide that, unless other-
wise proscribed by law, special meetings of stockholders can only be held pur-
suant 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 no-
tice is given in the case of director nominations.
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<PAGE>
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 soliciting
proxies for the election of the proposed nominee (including such person's writ-
ten 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 consummation of the trans-
action 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 combination is approved by the
Board of Directors and by the affirmative vote of at least 66 2/3% of the out-
standing voting stock which is not owned by the interested stockholder. A
"business combination" includes mergers, asset sales and other transactions re-
sulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, 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 Company.
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 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 9,258,406 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 4,050,000 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 890,000 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,
outstanding options to purchase 350,000 shares of Common Stock under the 1996
Option Plan and outstanding options to purchase 12,000 shares of Common Stock
granted to outside directors on June 6, 1996, 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
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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 Re-
stricted 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 af-
filiate of the Company, is entitled to sell, within any three month period, a
number of shares that does not exceed the greater of (i) 1% of the then out-
standing 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 subject to certain manner-of-sale provi-
sions and notice requirements, and to the availability of current public infor-
mation about the Company. A person who is not an affiliate, has not been an af-
filiate within 90 days prior to sale and who beneficially owns Restricted Secu-
rities 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 Underwriter
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 securities
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 registra-
tion 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 regis-
tration 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 obliga-
tions 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 interfere
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 ex-
ercisable, 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.
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UNDERWRITING
Gaines, Berland Inc. (the "Underwriter") has agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company
1,350,000 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.
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 $ per Unit, of which not in excess of $ 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 202,500 additional Units at
the public offering price set forth on the cover page of this Prospectus, less
the underwriting discounts and commissions and the nonaccountable expense al-
lowance, for the sole purpose of covering over-allotments, 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 regis-
tering the Offering with the NASD, including fees and expenses of counsel re-
tained for such purposes by the Underwriter and the costs of investigatory
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 135,000 Units (the "Unit Purchase Option"). The Unit Pur-
chase Option is exercisable at $ per Unit (157% of the initial public of-
fering 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 Op-
tion 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 ef-
forts to cause a designee of the Underwriter who is reasonably satisfactory 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 designate 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 Direc-
tors. Such representative will be entitled to the same notices and communica-
tions sent by the Company to its directors and to attend directors' meetings,
but will not be entitled to vote thereat. The Underwriter's designee or repre-
sentative, 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 either a nominee for election
to full board membership or such non-voting representative.
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 ex-
tent not inconsistent with the guidelines of the NASD and the rules and regula-
tions 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 exer-
cise price, the Series B Warrants are held in a discretionary account, the
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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 Un-
derwriter will be prohibited from engaging in any market-making activities or
solicited brokerage activities with regard to the Company's securities unless
the Underwriter has waived its right to receive a fee for the exercise of the
Series B Warrants.
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., 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 Prospectus
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 accounting 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. Engineer-
ing and Atwater Consultants, Ltd., independent petroleum engineers, as stated
in their reports dated February 13, 1996 and March 21, 1996, respectively.
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' Equi-
ty..................... 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 (unau-
dited)
Consolidated Balance
Sheets (unaudited)..... F-22
Consolidated Statements
of Income (unaudited).. F-23
Consolidated Statements
of Cash Flows (unau-
dited)................. 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
[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 AUGUST 7, 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")
1,350,000 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 August
, 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 3.2%
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
[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............ $ 7,440.95
NASD fees...................................................... 2,655.01
Underwriter's non-accountable expense allowance................ 205,031.00
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.................................................. 12,873.04
-----------
TOTAL EXPENSES............................................... $450,000.00
===========
</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
Registrant 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 indemnifi-
cation 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 as-
serted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
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.
2 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
August 7, 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:
NAME TITLE DATE
* /s/ David B. Christofferson Chairman of the
- ------------------------------------- Board of Directors; August 7, 1996
DAVID W. BERRY President and Chief
Executive Officer
/s/ David B. Christofferson General Counsel;
- ------------------------------------- Executive Vice August 7, 1996
DAVID B. CHRISTOFFERSON President;
Secretary; Chief
Financial Officer;
Director
* /s/ David B. Christofferson Vice President--Gulf
- ------------------------------------- Coast Region and August 7, 1996
S. GORDON REESE, JR. Director
* /s/ David B. Christofferson Vice President of
- ------------------------------------- Exploration and August 7, 1996
MICHAEL A. BARNES Production
* /s/ David B. Christofferson Treasurer and
- ------------------------------------- Controller August 7, 1996
JAMES R. HARRIS, JR.
* /s/ David B. Christofferson Director
- ------------------------------------- August 7, 1996
NEAL M. ELLIOTT
II-7
<PAGE>
NAME TITLE DATE
* /s/ David B. Christofferson Director
- ------------------------------------- August 7, 1996
JEFFREY R. ORGILL
* /s/ David B. Christofferson Director
- ------------------------------------- August 7, 1996
ALLEN H. SWEENEY
*By: /s/ David B. Christofferson
----------------------------------
ATTORNEY-IN-FACT
II-8
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 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
August 6, 1996
