<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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)
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<PAGE>
(continued from previous page)
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT (1) OFFERING PRICE (1) FEE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit: 3 Shares of
Common Stock
($.01 par value)
("Common
Stock"), and 3
Series B
Redeemable
Common Stock
Purchase
Warrants
("Series B
Warrants")...... 1,380,000(2) $6.00 $ 8,280,000 $2,855.17
- -----------------------------------------------------------------------------------------
Common Stock
Underlying
Units........... 4,140,000 -- -- (3)
- -----------------------------------------------------------------------------------------
Series B Warrants
Underlying
Units(5)........ 4,140,000 -- -- (3)
- -----------------------------------------------------------------------------------------
Common Stock
Issuable on
Exercise of
Series B
Warrants(5)..... 4,140,000 $2.40 $ 9,936,000 $3,426.20
- -----------------------------------------------------------------------------------------
Underwriter's
Unit Purchase
Option(4)(5).... 120,000 $.001 $100 (6)
- -----------------------------------------------------------------------------------------
Units Issuable on
Exercise of
Underwriter's
Unit Purchase
Option(5)....... 120,000 $9.00 $ 1,080,000 $ 372.42
- -----------------------------------------------------------------------------------------
Common Stock
Underlying Units
Underlying
Underwriter's
Unit Purchase
Option(5)....... 360,000 -- -- (3)
- -----------------------------------------------------------------------------------------
Series B Warrants
Underlying
Underwriter's
Unit Purchase
Option(5)....... 360,000 -- -- (3)
- -----------------------------------------------------------------------------------------
Common Stock
Issuable on
Exercise of
Series B
Warrants
Underlying
Underwriter's
Unit Purchase
Option(5)....... 360,000 $2.40 $ 864,000 $ 297.93
- -----------------------------------------------------------------------------------------
Common Stock..... 245,000 $2.00 $ 490,000 $ 168.97
- -----------------------------------------------------------------------------------------
Common Stock
Issuable on
Exercise of
Hi-Chicago
Warrant......... 300,000 $3.00 $ 900,000 $ 310.34
- -----------------------------------------------------------------------------------------
TOTAL............ $21,550,100 $7,431.03
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee pur-
suant to Rule 457.
(2) Includes 180,000 Units subject to the Underwriter's over-allotment option.
(3) Pursuant to Rule 457(i), no registration fee is required because such se-
curities will be issued for no additional consideration.
(4) The Unit Purchase Option entitles the Underwriter to purchase 120,000
Units.
(5) Pursuant to Rule 416, this Registration Statement also covers an indeter-
minate number of additional securities issuable upon future anti-dilution
adjustments in accordance with the terms of the Series B Warrants, the Un-
derwriter's Unit Purchase Option and the securities underlying the Under-
writer's Unit Purchase Option.
(6) Pursuant to Rule 457(g), no registration fee is payable.
<PAGE>
FRONTIER NATURAL GAS CORPORATION
----------------
REGISTRATION STATEMENT ON FORM SB-2
----------------
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
FORM SB-2 ITEM NUMBER HEADING OR LOCATION IN COMPANY PROSPECTUS
--------------------- -----------------------------------------
<C> <S> <C>
1. Front of Registration
Statement and Outside Front Facing Page; Cross Reference Sheet;
Cover of Prospectus........... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus..... Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information and Risk
Factors....................... Prospectus Summary; Risk Factors
4. Use of Proceeds............... Use of Proceeds
5. Determination of Offering
Price......................... Underwriting
6. Dilution...................... Not Applicable
7. Selling Security Holders...... Selling Securityholders (Selling
Securityholder Prospectus)
8. Plan of Distribution.......... Underwriting; Plan of Distribution
(Selling Securityholder Prospectus)
9. Legal Proceedings............. Business and Properties
10. Directors, Executive Officers,
Promoters and Control
Persons....................... Management
11. Security Ownership of Certain
Beneficial Ownership and
Management.................... Principal Stockholders
12. Description of Securities..... Description of Securities
13. Interest of Named Experts and
Counsel....................... Experts; Legal Matters
14. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................... Management
15. Organization Within Last Five
Years......................... Not Applicable
16. Description of Business....... Prospectus Summary; Business and
Properties
17. Management's Discussion and
Analysis or Plan of Management's Discussion and Analysis of
Operation..................... Financial Condition and Results of
Operations
18. Description of Property....... Business and Properties
19. Certain Relationships and
Related Transactions.......... Certain Transactions
20. Market for Common Equity and
Related Stockholder Matters... Price Range of Securities; Dividend Policy
21. Executive Compensation........ Management
22. Financial Statements.......... Financial Statements of the Company
23. Changes in and Disagreements
With Accountants on Accounting
and Financial Disclosure...... Not Applicable
</TABLE>
<PAGE>
EXPLANATORY NOTE
The Registration Statement contains a prospectus (the "Company Prospectus"),
which will be used in connection with an underwritten offering of Units, each
Unit consisting of three shares of Common Stock (the "Common Stock") and three
Series B Redeemable Common Stock Purchase Warrants (the "Series B Warrants").
Following the Company Prospectus, there are alternate pages to be included in
a second prospectus (the "Selling Securityholder Prospectus") which will be
used by certain shareholders of the Company (the "Selling Securityholders") in
connection with an offering by them for their accounts of up to 545,000 shares
of Common Stock from time to time in open market transactions. The Selling
Securityholder Prospectus will be identical to the Company Prospectus, except
for the changes indicated by the alternate pages, including alternate cover
pages (to be substituted for the cover pages of the Company Prospectus) and an
insert to page 52, containing a section entitled "Selling Securityholders" and
a section entitled "Plan of Distribution" (to be inserted immediately follow-
ing the section entitled "Underwriting" in the Company Prospectus).
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 19, 1996
PROSPECTUS
1,200,000 UNITS
LOGO
[LOGO OF FRONTIER NATURAL GAS CORPORATION APPEARS HERE]
EACH UNIT CONSISTING OF THREE SHARES OF COMMON STOCK
AND THREE SERIES B REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Frontier Natural Gas Corporation (the "Company") hereby offers (the "Offer-
ing") 1,200,000 Units (the "Units"), each Unit consisting of three shares of
Common Stock (the "Common Stock") and three Series B Redeemable Common Stock
Purchase Warrants (the "Series B Warrants"). Each Series B Warrant entitles the
holder to purchase one share of Common Stock for $ [40% of the per-unit of-
fering price] commencing , 1997 and ending , 2001. Each Series B Warrant
is redeemable by the Company with the prior consent of Gaines, Berland Inc.
(the "Underwriter") at a price of $.01 per warrant, at any time after the Se-
ries B Warrants become exercisable, upon not less than 30 days prior written
notice, if the last sale price of the Common Stock has been at least 200% of
the then-exercise price of the Series B Warrants (initially $ ) for the 20
consecutive trading days ending on the third day prior to the date on which the
notice of redemption is given. The securities comprising the Units are immedi-
ately separable and transferable. See "Description of Securities."
The Registration Statement of which this Prospectus forms a part also regis-
ters up to 545,000 shares of Common Stock (including 300,000 shares of Common
Stock issuable upon exercise of a Common Stock purchase warrant (the "Hi-Chi-
cago Warrant")) on behalf of certain shareholders of the Company (the "Selling
Securityholders") that may be sold by them for their accounts from time to time
in open market transactions (collectively, the "Selling Securityholders'
Shares"). The Selling Securityholders' Shares are not part of the underwritten
offering. 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.
The Common Stock is traded on the Nasdaq Small Cap Market ("Nasdaq") under
the symbol "FNGC." On June 17, 1996, the last reported sale price of the Common
Stock, as reported on Nasdaq, was $2 1/8 per share. See "Price Range of Securi-
ties." Prior to this Offering, there has been no public market for the Units or
the Series B Warrants. Application will be made for the Units and the Series B
Warrants to be included on Nasdaq under the symbols FNGCU and FNGCZ, respec-
tively, and the Units, Common Stock and Series B Warrants to be included on the
Boston Stock Exchange ("BSE") under the symbols , and , respectively.
There can be no assurance that a trading market will develop for the Units or
the Series B Warrants following this Offering.
----------
THESE SECURITIES ARE SPECULATIVE IN NATURE, INVOLVE A HIGH DEGREE OF RISK
AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO
CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS."
----------
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>
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- --------------------------------------------------------------------------------------------------
<CAPTION>
PRICE UNDERWRITING DISCOUNTS PROCEEDS
TO AND TO
PUBLIC COMMISSIONS (1) COMPANY (2)(3)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit............................. $ $ $
- --------------------------------------------------------------------------------------------------
Total (3)............................ $ $ $
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include a 3% nonaccountable expense allowance which the Company
has agreed to pay to the Underwriter. The Company has also agreed to sell
to the Underwriter an option (the "Unit Purchase Option") to purchase
120,000 Units at $ per Unit and to indemnify the Underwriter against
certain liabilities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses in connection with this Offering payable by the
Company, including the Underwriter's nonaccountable expense allowance in
the amount of $ ($ if the Underwriter's over-allotment option is ex-
ercised in full), estimated at $ .
(3) The Company has granted the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 180,000 additional
Units upon the same terms and conditions as set forth above, solely to
cover over-allotments, if any. If such over-allotment option is exercised
in full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $ , $ and $ , respectively. See
"Underwriting."
The Units are being offered, subject to prior sale, when, as and if delivered
to and accepted by the Underwriter and subject to the approval of certain legal
matters by counsel and to certain other conditions. The Underwriter reserves
the right to withdraw, cancel or modify the Offering and to reject any order in
whole or in part. It is expected that delivery of certificates representing the
securities comprising the Units will be made against payment therefor at the
offices of the Underwriter in New York City on or about , 1996.
GAINES, BERLAND INC.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE UNITS, COM-
MON STOCK OR SERIES B WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTIN-
UED AT ANY TIME.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance there-
with files reports and other information with the Securities and Exchange Com-
mission (the "Commission"). These reports, proxy statements and other informa-
tion concerning the Company can be inspected and copied at the public refer-
ence facilities maintained by the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549; and at the following regional offices of the
Commission: Seven World Trade Center, Suite 1300, New York, New York 10048;
and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661. Copies of such material can also be obtained from the Commission at
prescribed rates through its Public Reference Section at 450 Fifth Street,
N.W., Washington, D.C. 20549.
The Company has filed a Registration Statement on Form SB-2 (the "Registra-
tion Statement") with the Commission under the Securities Act with respect to
the securities offered hereby. As permitted by the rules and regulations of
the Commission, this Prospectus does not contain all of the information set
forth in the Registration Statement and in the exhibits and schedules thereto.
For further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement and the exhibits
thereto. Statements contained in this Prospectus concerning the provisions of
documents filed with the Registration Statement as exhibits and schedules are
necessarily summaries of such documents, and each such statement is qualified
in its entirety by reference to the copy of the applicable document filed with
the Commission. The Registration Statement, including the exhibits and sched-
ules thereto, may be inspected without charge and copied upon payment of the
charges prescribed by the Commission at the Public Reference Room of the Com-
mission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed in-
formation and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. A glossary of technical terms used in this Pro-
spectus is included on pages 9 and 10.
THE COMPANY
The Company is an independent energy company primarily engaged in the explo-
ration for natural gas and oil reserves and in the acquisition, production, de-
velopment and marketing of natural gas and oil properties. The Company's early
growth was through acquisitions of natural gas reserves, principally in the
Mid-Continent area of Arkansas, Kansas, Oklahoma and Texas. In recent years,
however, the Company's business activities have focused more on exploration and
related developmental drilling projects situated in Southern Louisiana and
along the Gulf Coast of Alabama, Mississippi and Texas. The Company's current
business strategy is to increase its reserves by drilling natural gas and oil
wells on prospects identified and developed through the use of well correla-
tions, computer-aided exploration ("CAEX") technologies and 3-D seismic sur-
veys, with emphasis on projects situated along the Gulf Coast and, particular-
ly, the transition zone of Southern Louisiana. As a supplemental part of such
strategy, the Company may also acquire producing properties as market condi-
tions and the Company's resources allow.
During 1995, as part of its refocusing activities, the Company sold to Amoco
Production Company ("Amoco") a 50% interest in one of the Company's primary ex-
ploration projects in the Mid-Continent area, a 33 square mile 3-D seismic
shoot located in Garvin County, Oklahoma. Additional activities in 1995 in-
cluded (i) the drilling of two exploratory wells in Mobile Bay, Alabama which
began production in December 1995, (ii) the execution of a joint venture agree-
ment to explore for gas and oil on prospects located in Southern Louisiana and
along the Texas Gulf Coast, and (iii) the acquisition of leasehold rights in
various prospects, including one prospect located in Terrebonne Parish, Louisi-
ana (the "Starboard Prospect"). The Starboard Prospect is comprised of a group
of four distinct high potential exploration prospects, as well as proved unde-
veloped locations. The proved undeveloped portion of the Starboard Prospect has
been evaluated by independent petroleum engineers as containing substantial
proved undeveloped reserves. The Company intends to conduct a 3-D seismic sur-
vey to further define the prospect. As of December 31, 1995, the Company and
its partners had acquired acreage in the Starboard Prospect which included es-
timated proved undeveloped reserves of 11 Bcfe and estimated future net reve-
nues of over $19 million. In March 1996, affiliates of a utility acquired a 48%
interest in the Company's interest in the Starboard Prospect, and through a
non-recourse loan to the Company is funding all of the Company's cost in ob-
taining the leasehold and seismic data on the prospect (the "Starboard Prospect
Funding"). The Company intends to fund its share of developmental drilling
costs in the prospect from its existing credit facility with Bank of America
Illinois (the "Credit Agreement"). Exploratory drilling costs will be funded
through proceeds of this Offering and/or industry partners. As of the date of
this Prospectus, the Company owns a 48% working interest in a joint venture
formed to exploit the Starboard Prospect (the "Starboard Prospect Joint Ven-
ture"). The Company is continuing to search for additional prospects in the ar-
ea. See "Business and Properties--Exploration and Development."
In addition to 3-D seismic, the Company makes extensive use of 2-D seismic
reprocessing and CAEX enhancement technologies to delineate "bright spot" seis-
mic anomalies. The Mobile Bay wells, which began production in December 1995,
were located by identification of such "bright spot" seismic anomalies, deline-
ated by the Company through reprocessing and enhancement of existing 2-D seis-
mic data. The Company plans to commence drilling on its third Mobile Bay area
"bright spot"-delineated prospect by October 1996. The Company believes that
additional drilling prospects in the Gulf Coast area may be identified through
delineation of such "bright spot" seismic anomalies. In September 1995, the
Company entered into an agreement to acquire, reprocess and interpret up to
1,600 miles of 2-D seismic data in the shallow offshore Gulf Coast area. The
reprocessing and interpretation of such data is designed to identify "bright
spot" gas accumulations which
3
<PAGE>
potentially can identify the location of commercial quantities of hydrocarbons.
The Company entered into an agreement with Marconi, Inc. to jointly explore any
prospects thus identified.
The Company plans to continue to expand its exploration activities in the
Gulf Coast area through a number of current activities, including the (1) gen-
eration of prospects with its existing partners; (2) identification of "bright
spot" seismic anomalies; (3) continuing acquisition of acreage on additional
potential Southern Louisiana exploration projects identified by the Company;
and (4) continuing evaluation of high-graded exploration prospect opportunities
in Southern Louisiana and other Gulf Coast areas.
Certain statements contained herein that set forth management's intentions,
hopes, plans, beliefs, expectations or predictions of the future are forward-
looking statements. It is important to note that actual results could differ
materially from those projected in such forward-looking statements. The risks
and uncertainties include but are not limited to potential unfavorable or un-
certain results of 3-D seismic surveys not yet completed, drilling cost and op-
erational uncertainties, risks associated with quantities of total reserves and
rates of production from existing gas and oil reserves and product pricing, po-
tential delays in the timing of planned operations, competition and other risks
associated with permitting seismic surveys and with leasing gas and oil proper-
ties, potential cost overruns, the availability of capital to fund planned ex-
penditures and general industry and market conditions. See "Risk Factors."
The Company was incorporated under the laws of the State of Oklahoma in 1988.
The Company's principal office is located at One Benham Place, 9400 North
Broadway, Oklahoma City, Oklahoma 73114, and its telephone number is (405) 478-
4455.
THE OFFERING
Securities offered................ 1,200,000 Units, each Unit consisting
of three shares of Common Stock and
three Series B Warrants. Each Series B
Warrant entitles the holder to purchase
one share of Common Stock for $ dur-
ing the four-year period commencing one
year from the date of this Prospectus.
Each Series B Warrant is redeemable by
the Company at a price of $.01 per war-
rant at any time after the Series B
Warrants become exercisable, upon not
less than 30 days prior written notice,
if the last sale price of the Common
Stock on Nasdaq has been at least 200%
of the then-exercise price of the Se-
ries B Warrants (initially $ ) for
the 20 consecutive trading days ending
on the third day prior to the date on
which the notice of redemption is giv-
en. The securities comprising the Units
are immediately separable and transfer-
able. See "Description of Securities."
Common Stock outstanding.......... 5,208,406 shares
Shares of Common Stock to be out-
standing after the Offering....... 8,808,406 shares
Nasdaq Symbols (1)................ Common Stock: FNGC; Units: FNGCU (Pro-
posed)(2)(3); Series B Warrants: FNGCZ
(Proposed)(2)
- --------
(1) The Company's Convertible Preferred Stock and Series A Warrants are listed
on the Nasdaq Small Cap Market under the symbols FNGCP and FNGCW.
(2) Quotation on Nasdaq provides no assurance that a trading market will
develop for the Units or Series B Warrants or that such a market, if devel-
oped, will be maintained.
4
<PAGE>
(3) The Company may terminate the quotation of the Units on the Nasdaq Small
Cap Market at any time commencing on the 30th day after the date of this
Prospectus without notice to the Company's security holders, upon not less
than 15 days' notice to Nasdaq. This will not affect the quotation on
Nasdaq of the Common Stock or the Series B Warrants.
USE OF PROCEEDS
The Company intends to use the net proceeds from this Offering, assuming a
per-Unit offering price of $6.00, as follows: (i) approximately $4,214,000 (ap-
proximately 70%) will be used to fund the Company's exploration, developmental
and acquisition projects in Southern Louisiana, along the Gulf Coast of Ala-
bama, Mississippi and Texas and in Garvin County, Oklahoma; (ii) approximately
$1,295,000 (approximately 22%) to service the debt repayment requirements for
the 12 months subsequent to the date of this Prospectus pursuant to the Credit
Agreement; and (iii) approximately $511,000 (approximately 8%) for working cap-
ital and general corporate purposes (which may include the payment of dividends
on the Convertible 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 War-
rant. See "Use of Proceeds."
RISK FACTORS
This Offering involves a substantial degree of risk including, among others,
the Company's net operating losses, limited history of exploration activity,
reliance on CAEX and 3-D seismic technology, the inherent uncertainties in es-
timating proved gas and oil reserves, the speculative nature of gas and oil ex-
ploration, the uncertainties of leasing gas and oil mineral rights and ob-
taining the necessary permits to conduct seismic surveys over such leases, the
uncertainties of gas and oil prices, the existence of mortgages on the
Company's gas and oil properties, and the existence of certain anti-takeover
provisions. See "Risk Factors."
5
<PAGE>
SUMMARY--GAS AND OIL RESERVE DATA
The following table sets forth summary information, as estimated by Hofmann &
Assoc. Engineering Co. and Atwater Consultants, Ltd., independent petroleum en-
gineers, as stated in their reports dated February 13, 1996 and March 21, 1996,
respectively, regarding gas and oil reserves at December 31, 1995. See "Risk
Factors--Uncertainty of Estimates of Gas and Oil Reserves," "Business and Prop-
erties--Natural Gas and Oil Reserves," and "Business and Properties--Acquisi-
tions and Divestments."
<TABLE>
<CAPTION>
GAS
GAS OIL EQUIVALENT
(MCF) (BBL) (MCFE) (1)
---------- ------- ----------
<S> <C> <C> <C>
Proved developed reserves...................... 7,307,717 72,515 7,742,807
Proved undeveloped reserves (2)................ 11,256,424 206,986 12,498,340
Total proved reserves (2)...................... 18,564,141 279,501 20,241,147
</TABLE>
--------
(1) Oil production is converted to Mcfe at the rate of six Mcf of natural
gas per Bbl of oil, based upon the approximate energy content of natu-
ral gas and oil.
(2) Subsequent to December 31, 1995, the Company reduced its working inter-
est in the Starboard Prospect Joint Venture from 100% to 48%. As a re-
sult of the transactions, the Company's proved undeveloped reserves
were reduced by 5,806,783 Mcfe. After giving effect to the transac-
tions, the Company's proved undeveloped reserves and total proved re-
serves at December 31, 1995 would have been 6,691,557 Mcfe and
14,434,364 Mcfe, respectively.
SUMMARY--GAS AND OIL PRODUCTION INFORMATION
The following table sets forth certain information regarding the production
volumes, average prices received and average production costs associated with
the Company's sale of gas and oil for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
-------------------------------- ENDED
1995 1994 1993 MARCH 31, 1996
---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Net production:
Oil (Bbl).................... 23,244 30,528 29,717 2,142
Gas (Mcf).................... 1,146,696 1,482,264 1,516,947 483,051
Gas equivalent (Mcfe)........ 1,286,160 1,665,432 1,695,249 495,903
Average sales price realized:
Oil ($ per Bbl).............. $ 17.36 $ 15.25 $ 17.23 $ 18.17
Gas ($ per Mcf).............. $ 1.58 $ 1.72 $ 1.87 $ 2.05
Average lease operating
expenses and taxes
($ per Mcfe).................. $ .84 $ .78 $ .76 $ .49
</TABLE>
6
<PAGE>
SUMMARY--ESTIMATE OF FUTURE NET REVENUE FROM PROVED RESERVES
The following table sets forth summary information, as estimated by Hofmann &
Assoc. Engineering Co. and Atwater Consultants, Ltd., independent petroleum en-
gineers, as stated in their reports dated February 13, 1996 and March 21, 1996,
respectively, regarding estimated future net revenue and the present value of
future net revenue from net proved reserves as of December 31, 1995.
<TABLE>
<CAPTION>
12/31/95
-----------
<S> <C>
Estimated total future net revenue(1)(2).................... $31,265,445
Present value of future net revenue(2)(3)................... $20,049,726
</TABLE>
- --------
(1) Estimated future net revenue represents estimated future gross revenue to
be generated from the production of proved reserves, net of estimated pro-
duction and future development costs, using prices and costs in effect as
of the date indicated. The amounts shown do not give effect to non-property
related expenses, such as general and administrative expenses, debt service
and future income tax expense or to depreciation, depletion and amortiza-
tion.
(2) Subsequent to December 31, 1995, the Company reduced its working interest
in the Starboard Prospect Joint Venture from 100% to 48%. As a result of
the transactions, the Company's estimated total future net revenue and the
present value of the future net revenue were reduced by $10,217,817 and
$5,971,265, respectively. After giving effect to the transactions, the
Company's estimated total future net revenue and the present value of the
future net revenue at December 31, 1995 would have been $21,047,628 and
$14,078,461, respectively.
(3) Present value is calculated by discounting estimated future net revenue by
10% annually.
SUMMARY--CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth summary consolidated financial information
concerning the Company for each of the two fiscal years ended December 31, 1995
and 1994, derived from the audited consolidated financial statements of the
Company and its subsidiaries, and the three months ended March 31, 1996 and
1995, prepared by the Company, appearing elsewhere in this Prospectus, and
should be read in conjunction with such Consolidated Financial Statements, in-
cluding the Notes thereto. See "Selected Consolidated Financial Data" and "Man-
agement's Discussion and Analysis of Financial Condition and Results of Opera-
tions."
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------ --------------------
1995 1994 1996 1995
-------- -------- --------- ---------
($ IN THOUSANDS) ($ IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................ $ 4,654 $ 5,465 $ 1,250 $ 1,196
Costs and expenses.................. 6,249 6,707 2,019 1,584
Net income (loss) before taxes...... (1,595) (1,242) (769) (388)
Net income (loss)................... (1,595) (869) (769) (388)
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(1)(2)
------- -----------------
($ IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.................................... $ (481) $ 648
Total assets....................................... 10,414 15,139
Long-term debt..................................... 3,513 2,836
Stockholders' equity............................... 4,569 10,589
</TABLE>
- --------
(1) Gives effect to the sale of the Units hereby (assuming a per-Unit offering
price of $6.00) and the application of the estimated net proceeds there-
from. See "Use of Proceeds" and "Capitalization."
(2) Assumes that none of the proceeds of this Offering will used to pay divi-
dends on the Convertible Preferred Stock.
Unless otherwise indicated, the information included in this Prospectus as-
sumes (i) no exercise of the Series B Warrants offered hereby, the Underwrit-
er's over-allotment option or the Unit Purchase Option, (ii) no conversion of
the Company's outstanding 12% cumulative convertible preferred stock (the "Con-
vertible Preferred Stock") into an aggregate of 171,922 shares of Common Stock
and 171,922 Series A Common Stock Purchase Warrants (the "Series A Warrants"),
assuming a conversion rate of two shares of Common Stock for each share of Con-
vertible Preferred Stock, (iii) no exercise of outstanding options to purchase
108,000 shares of Common Stock under the Management Incentive Stock Plan (the
"Incentive Plan"), outstanding options to purchase 180,000 shares of Common
Stock under the Incentive Stock Option Plan or outstanding options to purchase
350,000 shares of Common Stock under the Stock Incentive Option Plan-1996 (the
"1996 Option Plan"), (iv) no exercise of other outstanding warrants to purchase
890,000 shares of Common Stock (including 300,000 shares of Common Stock issua-
ble upon exercise of the Hi-Chicago Warrant), and (v) no exercise of outstand-
ing Series A Warrants to purchase 1,578,078 shares of Common Stock or the Se-
ries A Warrants which may be issued upon conversion of the Convertible Pre-
ferred Stock. As of the date of this Prospectus, 505,000 options have an exer-
cise price equal to or less than the assumed per-share offering price of $2.00.
See "Underwriting" and "Description of Securities."
8
<PAGE>
GLOSSARY
As used in this Prospectus, the terms defined below have the meanings as-
signed them in this section.
BBL. One stock tank barrel, or 42 U.S. gallons liquid volume, used in refer-
ence to crude oil or other liquid hydrocarbons.
BCF. Billion cubic feet of gas.
BCFE. Billion cubic feet of gas equivalent.
BTU. British thermal unit, which is the heat required to raise the tempera-
ture of a one-pound mass of water from 58.5 to 59.5 degrees fahrenheit.
CAEX. COMPUTER AIDED EXPLORATION TECHNOLOGY. Technology used to collect and
analyze geological, geophysical, engineering, production and other data ob-
tained about a potential prospect for the purpose of, among other things, cor-
relating density and sonic characteristics of subsurface formations obtained
from well logs and/or two-dimensional seismic surveys with like data from sim-
ilar properties to determine the likely geological composition of a prospect,
locate potential areas of hydrocarbon accumulation in the prospect and formu-
late models.
CARRIED INTEREST. An agreement under which one party (the "carrying party")
agrees to pay for a portion or for all of the drilling, development and oper-
ating costs of another party (the "carried party") on a property in which both
own a portion of the working interest.
DEVELOPMENT WELL. A well drilled as an additional well to the same reservoir
as other producing wells on a lease, or drilled on an offset lease not more
than one location away from a well producing from the same reservoir.
DRY HOLE. A well found to be incapable of producing either gas or oil in
quantities sufficient to justify completion as an gas or oil well.
EXPLORATORY WELL. A well drilled to find and produce gas or oil in an un-
proved area, to find a new reservoir in a field previously found to be produc-
tive of gas or oil in another reservoir, or to extend a known reservoir.
FORMATION. A succession of sedimentary beds that were deposited under the
same general geologic conditions.
GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may be, in
which a working interest is owned.
LEASE. A lease is an agreement whereby the grantee receives for a period of
time the full or partial interest in gas and/or oil properties, gas and oil
mineral rights, fee rights, or other rights of grantor, and which gives the
grantee the right to drill for, produce and sell gas and oil upon payment of
rentals, bonuses and/or royalties.
MMBTU. One million Btu's.
MCF. One thousand cubic feet.
MCFE. One thousand cubic feet of gas equivalent.
NET ACRES OR NET WELLS. The sum of the fractional working interests owned in
gross acres or gross wells.
PRESENT VALUE. When used with respect to gas and oil reserves, present value
means the estimated future gross revenue to be generated from the production
of proved reserves, net of estimated production and future
9
<PAGE>
development costs, using prices and costs, without giving effect to non-prop-
erty related expenses such as general and administrative expenses, debt serv-
ice and future income tax expense or to depreciation, depletion and amortiza-
tion, discounted using an annual discount rate of 10%.
PRODUCTIVE WELL. A well that is producing gas or oil or that is capable of
production.
PROSPECT. A specified area, upon which one or more potential drill sites
have been identified, containing possible accumulations of gas and/or oil de-
posits.
PROVED DEVELOPED RESERVES. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
PROVED RESERVES. The estimated quantities of crude oil, natural gas and nat-
ural gas liquids which geological and engineering data demonstrate with rea-
sonable certainty to be recoverable in future years from known reservoirs un-
der existing economic and operating conditions, i.e., using prices and costs
as of the date the estimate is made and any price changes provided for by ex-
isting contracts.
PROVED UNDEVELOPED RESERVES. Reserves that are expected to be recovered from
new wells on undrilled acreage, or from existing wells where a relatively ma-
jor expenditure is required for recompletion.
ROYALTY INTEREST. An interest in a gas and oil property entitling the owner
to a share of gas or oil production free of costs of production.
2-D SEISMIC. A process for mapping geologic structures on a perpendicular
plane using seismic energy waves and observing the arrival time of the waves
reflected from acoustic-impedance contrasts.
SWAP. An agreement between a producer and a broker in which a swap or strike
price is established on the agreement date for a commodity such as gas or oil.
If the market price at the settlement date is above the swap price, the pro-
ducer pays the broker the difference, and vice versa if the market price is
below the strike price.
3-D SEISMIC. A process which produces a three-dimensional image based upon
seismic data obtained from multiple horizontal and vertical points within a
geological formation.
WORKING INTEREST. The operating interest under a gas or oil lease which
gives the owner the right to drill, produce and conduct operating activities
on the property and a share of production, subject to all royalties, overrid-
ing royalties and other cost burdens.
10
<PAGE>
RISK FACTORS
An investment in the securities being offered hereby involves substantial
risk. Prospective investors should carefully consider the following factors,
in addition to the other information set forth in this Prospectus.
HISTORY OF LOSSES; ACCUMULATED AND WORKING CAPITAL DEFICITS
For the years ended December 31, 1994 and 1995 and for the three months
ended March 31, 1996, the Company had net losses of $868,576, $1,595,478 and
$769,226, respectively. At March 31, 1996, the Company had an accumulated def-
icit of $3,624,113 and working capital deficit of $480,928. The Company antic-
ipates that it will continue to have net losses for the fiscal year ending De-
cember 31, 1996 and thereafter until it acquires or develops enough additional
gas and oil properties to achieve profitability and generate cash flow. There
can be no assurance that it will be able to do so. See "Management's Discus-
sion and Analysis of Financial Condition and Results of Operations."
LIMITED OPERATING HISTORY; RELIANCE ON CAEX AND 3-D SEISMIC TECHNOLOGY
The Company, through its predecessor, commenced operations in August 1988.
The principal activity of the Company has evolved since its inception from the
acquisition, production and marketing of natural gas and oil reserves to a
greater emphasis upon exploration and development. The Company's strategy for
discovering natural gas and oil reserves depends upon the effective use of
CAEX technology and 3-D seismic surveys to accurately define detailed and com-
plex geologic features, which requires greater pre-drilling expenditures than
traditional drilling strategies. Although the Company believes that its use of
CAEX technology and 3-D seismic surveys will increase the probability of suc-
cess of its exploration wells and will reduce average finding costs through
the elimination of prospects that might otherwise be drilled solely on the ba-
sis of conventional 2-D seismic data and other traditional methods, there can
be no assurance as to the success of the Company's drilling program. Although
the individual members of the Company's management have extensive experience
in gas and oil exploration, to date the Company has drilled only 18 wells, 12
of which have been productive. The Company used CAEX technology or 3-D seismic
surveys in 11 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 combi-
nation of internally generated funds, equity and long-term debt financing, and
short-term financing arrangements. Based on its current operations, the Com-
pany anticipates that the net proceeds from the Offering, together with its
cash flow from operations, the availability of credit under the Credit Agree-
ment 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 Com-
pany 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 alter-
nate financing, and there can be no assurance of the availability of any fi-
nancing on acceptable terms. See "Use of Proceeds" and "Management's Discus-
sion 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
The Company's intended use of proceeds is based on its current business
plan, which is subject to change. The Company has allocated approximately
$4,214,000 (approximately 70%) to fund the Company's exploration, developmen-
tal and acquisition projects in Southern Louisiana, along the Gulf Coast of
Alabama, Mississippi and Texas and in Garvin County, Oklahoma, over which the
Company will have broad discretion. Additionally, the Company has allocated
approximately $1,295,000 (approximately 22%) to service the debt repayment re-
quirements for the 12 months subsequent to the date of this Prospectus pursu-
ant to the Credit Agreement, and approximately $511,000 (approximately 8%) for
working capital and general corporate purposes (which may include the payment
of dividends on the Convertible Preferred Stock). Although the Company has no
plans other than as stated for utilization of the net proceeds of this Offer-
ing, events subsequent to the date of this Prospectus may make desirable or
necessary an alternative use of such proceeds, for which the Company retains
broad discretion. See "Use of Proceeds."
DIVIDEND POLICY
The Company does not currently pay cash dividends on its Common Stock and
does not anticipate paying such dividends in the near future. Holders of
shares of the Company's Convertible Preferred Stock are entitled to receive
cumulative cash dividends at the rate of 12% per annum when, as and if de-
clared by the Board of Directors of the Company out of funds at the time le-
gally available therefor. If not declared, dividends cumulate from quarter to
quarter without interest until declared and paid. No dividends on the Convert-
ible Preferred Stock have been paid since April 1995. As of May 31, 1996, the
accumulated but undeclared and unpaid dividends equaled $111,749, representing
four quarterly dividend periods.
The Company is also restricted under the terms of the Credit Agreement from
making distributions of any type with respect to any class of its capital
stock unless it meets certain financial requirements (the "Restricted Payment
Tests"), including the maintenance of a current ratio of not less than 1.1:1
and maintenance of tangible net worth in excess of $5,000,000, after giving
effect to the proposed distribution. The Company currently does not meet all
of the Restricted Payment Tests and, accordingly, is restricted under the
terms of the Credit Agreement from making any dividend payments or other dis-
tribution with respect to any class of its capital stock. See "Dividend Poli-
cy."
RIGHT OF HOLDERS OF CONVERTIBLE PREFERRED STOCK TO ELECT TWO ADDITIONAL BOARD
MEMBERS
Whenever dividends on the Convertible Preferred Stock have not been paid in
an aggregate amount equal to at least six quarterly dividends on such shares
(whether or not consecutive), the number of directors of the Company will be
increased by two. The holders of the Convertible Preferred Stock, voting sepa-
rately as a class, will be entitled to elect such two additional directors to
the Board of Directors at any meeting of stockholders of the Company at which
directors are to be elected held during the period such dividends remain in
arrears. Such voting right will terminate when all such dividends accrued and
in default have been paid in full or set apart for payment, and the term of
office of all directors so elected will terminate immediately upon such pay-
ment or setting apart for payment. The existence of the Restricted Payment
Tests under the Credit Agreement, to the
14
<PAGE>
extent that they operate to prevent the Company from declaring and paying div-
idends on the Convertible Preferred Stock, increases the likelihood that hold-
ers of Convertible Preferred Stock may be able to elect two additional direc-
tors to the Board by late 1996. The Company intends to seek a waiver of the
Restricted Payment Tests in order to resume dividend payments on the Convert-
ible Preferred Stock prior to an aggregate of six quarterly dividend payments
being in arrears. There can be no assurance, however, that the Company will be
able to obtain such a waiver. See "Management--The Board of Directors" and
"Description of Securities--Preferred Stock."
RELIANCE ON KEY PERSONNEL.
The Company depends upon the efforts of David W. Berry, Chairman of the
Board and President, David B. Christofferson, Executive Vice President, Secre-
tary, 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. The unexpected loss of the services of any of
these individuals could have a detrimental effect on the Company. The Company
has obtained "key man" insurance in the amount of $1 million on the life of
each of Messrs. Berry and Christofferson, but does not have similar insurance
on Messrs. Barnes and Reese. See "Management."
SHARES ELIGIBLE FOR FUTURE SALE.
Upon completion of this Offering, the Company will have outstanding
8,808,406 shares of Common Stock. Of these shares all of the 3,600,000 shares
sold in the Offering (assuming no exercise of the Underwriter's over-allotment
option) will be freely transferable by persons other than affiliates (as de-
fined in regulations under the Securities Act), without restriction or further
registration under the Securities Act. Of the remaining 5,208,406 shares of
Common Stock outstanding, 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 ex-
ercise of outstanding options and warrants. 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 require the Company to register those shares under the Securi-
ties Act or have their shares included in any registration statement filed by
the Company, subject to certain limitations, to enable a public sale of those
shares. In the event the holders of a material amount of such shares should
seek to have their shares registered for sale under the Securities Act, these
obligations could result in considerable expense to the Company and the effect
of the offer and sale of such shares may be to depress the market price for
the Company's Common Stock. Compliance with these obligations may also inter-
fere with the Company's ability to raise additional capital when required.
IMMEDIATE AND SUBSTANTIAL DILUTION.
On the basis of a per-Unit offering price of $6.00 and attributing no value
to the Series B Warrants included in the Units, this Offering involves an im-
mediate dilution of approximately $.80 per share of Common Stock
15
<PAGE>
(approximately 40% of the offering price attributable to each share of Common
Stock included in the Units) between the offering price per share included in
the Units and the pro forma net tangible book value per share of the Common
Stock immediately after the completion of this Offering.
LIMITED TRADING MARKET FOR COMMON STOCK; NO PRIOR MARKET FOR UNITS OR 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 Units or
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 market, 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."
POSSIBLE TERMINATION OF SEPARATE QUOTATION OF UNITS.
The Company may terminate the quotation of the Units on Nasdaq at any time
commencing on the 30th day after the date of this Prospectus without notice to
the Company's security holders upon not less than 15 days' prior written no-
tice to Nasdaq. This will not affect the quotation on Nasdaq of the Common
Stock or the Series B Warrants. The termination of the quotation of the Units
on Nasdaq would result in a security holder having to sell the Common Stock
and Series B Warrants separately, thereby possibly resulting in increased bro-
kerage commissions as contrasted with selling the Units as an integral securi-
ty. See "Description of Securities."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF SERIES B WARRANTS.
The Series B Warrants initially are exercisable at $ . The Series B War-
rants are redeemable by the Company at a price of $.01 per Warrant at any time
after the Series B Warrants become exercisable, upon not less than 30 days'
prior written notice if the last sale price of the Common Stock has been at
least 200% of the then-exercise price of the Series B Warrants for the 20 con-
secutive trading days ending on the third day prior to the date the notice of
redemption is given. Notice of redemption of the Series B Warrants could force
the holders to (i) exercise the Series B Warrants and pay the exercise price
at a time when it may be disadvantageous for them to do so, (ii) sell the Se-
ries B Warrants at the current market price when they might otherwise wish to
hold the Series B Warrants, or (iii) accept the redemption price, which is
likely to be substantially less than the market value of the Series B Warrants
at the time of redemption. See "Description of Securities--Series B Warrants."
AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER
PROVISIONS.
The Company's Certificate of Incorporation (the "Certificate") authorizes
the issuance of preferred stock with such designations, rights and preferences
as may be determined from time to time by the Board of Directors. Accordingly,
the Board of Directors is empowered, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other 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, prevent stock-
holders from receiving the maximum value for their shares. Although the Com-
pany has no present intention to issue any
16
<PAGE>
shares of its preferred stock, there can be no assurance that the Company will
not do so in the future. 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."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units offered hereby,
assuming a per-Unit offering price of $6.00, are estimated to be $6,020,000
(or $6,959,600 if the Underwriter's over-allotment option is exercised in
full). The Company intends to use such net proceeds as follows: (i) approxi-
mately $4,214,000 (approximately 70%) will be used to fund the Company's ex-
ploration, developmental and acquisition projects in Southern Louisiana, along
the Gulf Coast of Alabama, Mississippi and Texas and in Garvin County, Oklaho-
ma; (ii) approximately $1,295,000 (approximately 22%) to service the debt re-
payment requirements for the 12 months subsequent to the date of this Prospec-
tus pursuant to the Credit Agreement; and (iii) approximately $511,000 (ap-
proximately 8%) for working capital and general corporate purposes (which may
include the payment of dividends on the Convertible Preferred Stock). If the
over-allotment option is exercised, the additional net proceeds will be added
to the Company's working capital and may be used for the Company's exploration
activities.
The Credit Agreement was entered into in January 1996 at an interest rate of
LIBOR (reserve adjusted) plus one and seven-eighths percent. The proceeds re-
ceived were used to (i) terminate a gas sales agreement by repaying $1,867,577
of deferred gas revenues remaining under the agreement plus a settlement pay-
ment of $313,912, (ii) repay bank indebtedness of $180,554, (iii) pay approxi-
mately $1,061,000 in infrastructure costs relating to the Company's Mobile Bay
properties, and (iv) pay approximately $150,000 in bank and legal fees relat-
ing to the Credit Agreement. The Credit Agreement calls for payment in varying
monthly installments over a five-year period. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capi-
tal Resources."
The following table summarizes the Company's intended uses of the net pro-
ceeds of this Offering:
<TABLE>
<CAPTION>
USE AMOUNT PERCENT
--- ------ -------
<S> <C> <C>
Development, drilling and acquisition..................... $4,214,000 70%
Repayment of loan indebtedness............................ 1,295,000 22%
Working capital and general corporate purposes............ 511,000 8%
---------- ----
Total................................................... $6,020,000 100%
========== ====
</TABLE>
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations, that the proceeds from this Offering, together
with projected cash flow from operations, the credit available under the
Credit Agreement and the Starboard Prospect Funding, will be sufficient to
satisfy its contemplated capital and operating cash requirements through fis-
cal 1997. If cash flows do not develop as anticipated, funds are not
17
<PAGE>
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 natu-
ral gas and oil reserves are not sufficient to secure the additional
borrowings. At present, 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."
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.
18
<PAGE>
For the periods indicated below, the following table sets forth the range of
high and low bid prices for the Company's Common Stock, Convertible Preferred
Stock and Series A Warrants as reported by Nasdaq. Nasdaq quotations represent
prices between dealers without adjustment for retail markups, markdowns or
commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
CONVERTIBLE SERIES A
COMMON PREFERRED WARRANTS
------------- --------------- -------------
CALENDAR QUARTER HIGH LOW HIGH LOW HIGH LOW
---------------- ---- --- ------ ----- ---- ---
<S> <C> <C> <C> <C> <C> <C>
1994
First quarter........... $4 $3 1/8 $10 1/4 $ 9 $ 1 $ 5/8
Second quarter.......... 4 3 1/2 10 1/4 9 1/2 3/4 3/8
Third quarter........... 5 3/8 3 5/8 13 9 1/4 1 1/4 3/8
Fourth quarter.......... 5 3/8 3 1/4 12 3/4 9 1 1/4 3/4
1995
First quarter........... 4 5/8 3 1/4 11 3/4 8 3/4 1 1/8 1 1/16
Second quarter.......... 3 1/2 1 7/8 9 5/8 7 3/4 1 1/16 1/4
Third quarter........... 2 1 13/16 9 1/4 9 1/4 1/8
Fourth quarter.......... 1 7/8 7/8 9 6 1/2 3/16 1/16
1996
First quarter........... 2 11/16 1 27/64 7 1/4 7 1/4 11/32 1/8
Second quarter (through
June 17, 1996)......... 2 11/16 1 7/8 7 3/8 7 1/4 1/2 7/32
</TABLE>
At June 14, 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 June 17, 1996 was $2 1/8. Prior to the date of this Prospectus,
there has been no public market for the Units or Series B Warrants, and there
can be no assurance that any market will develop. The securities comprising
the Units are immediately separable and transferable.
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996 and as adjusted to give effect to the sale of the 1,200,000 Units of-
fered hereby at an assumed per-Unit price of $6.00 and the application of the
estimated net proceeds as described under "Use of Proceeds." This table should
be read in conjunction with the Financial Statements of the Company appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Long-term debt, less current maturities, net of
unamortized discount of $288,803 (1).............. $3,513,411 $ 2,836,411
========== ===========
Shareholders' Equity:
Convertible Preferred Stock; $.01 par value,
5,000,000 shares authorized; 85,961 issued and
outstanding..................................... $ 860 $ 860
Common Stock; $.01 par value, 20,000,000 shares
authorized; 5,058,406 shares issued and
outstanding; 8,058,406 shares as adjusted (2)... 50,584 86,584
Common Stock to be issued (3).................... 234,375 234,375
Unamortized value of warrants issued (4)......... (75,372) (75,372)
Common Stock subscribed (5)...................... 45,000 45,000
Common Stock subscription receivable (5)......... (45,000) (45,000)
Additional paid-in capital....................... 7,982,379 13,966,379
Retained earnings (deficit) (6).................. (3,624,113) (3,624,113)
---------- -----------
Total shareholders' equity..................... 4,568,713 10,588,713
========== ===========
Total capitalization......................... $8,082,124 $13,425,124
========== ===========
</TABLE>
19
<PAGE>
- --------
(1) Assumes debt repayments will include $618,000 of long-term debt classified
as current at March 31, 1996, and $677,000 of long-term debt classified as
long-term at such date.
(2) Assumes (i) no exercise of the Series B Warrants offered hereby, the Un-
derwriter's over-allotment option or the Unit Purchase Option, (ii) no
conversion of the Company's outstanding Convertible Preferred Stock into
an aggregate of 171,922 shares of Common Stock and 171,922 Series A War-
rants, assuming a conversion rate of two shares of Common Stock for each
shares of Convertible Preferred Stock, (iii) no exercise of outstanding
options to purchase 108,000 shares of Common Stock under the Incentive
Plan, outstanding options to purchase 180,000 shares of Common Stock under
the Incentive Stock Option Plan or outstanding options to purchase 350,000
shares of Common Stock under the 1996 Option Plan, (iv) no exercise of
other outstanding warrants to purchase 890,000 shares of Common Stock (in-
cluding 300,000 shares of Common Stock issuable upon exercise of the Hi-
Chicago Warrant), and (v) no exercise of outstanding Series A Warrants to
purchase 1,578,078 shares of Common Stock or the Series A Warrants which
may be issued upon conversion of the Convertible Preferred Stock. As of
the date of this Prospectus, 505,000 options have an exercise price equal
to or less than the assumed per-share offering price of $2.00. See "Under-
writing" and "Description of Securities." See "Underwriting" and "Descrip-
tion of Securities."
(3) Includes the fair market value of 150,000 common shares committed for is-
suance in January 1996 and issued June 3, 1996.
(4) Value of warrants for Common Stock granted in January 1996 less amortiza-
tion since date of issue, in accordance with Financial Accounting Standard
Board No. 123.
(5) Common shares subscribed in 1993 but unpaid.
(6) Assumes that none of the proceeds of this Offering will used to pay divi-
dends on the Convertible Preferred Stock.
SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data with re-
spect to the Company for the periods and as of the dates indicated. The finan-
cial data for the years ended December 31, 1995 and December 31, 1994 were ex-
tracted from the audited financial statements of the Company. The financial
data for the three months ended March 31, 1996 and March 31, 1995 have been
extracted from the Company's unaudited financial statements, which have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, include all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the information set forth herein.
This information is not necessarily indicative of the Company's future perfor-
mance. The financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements of the Company and the notes thereto.
20
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------- -------------------------
1995 1994 1996 1995
--------- -------- ------------ ------------
($ 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.
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
21
<PAGE>
such results is subject to certain risks and uncertainties discussed 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 Finan-
cial 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 $708,036
Lease operating
expense............... 862,575 1,079,165 1,052,881 166,567 220,540
Depletion, depreciation
and amortization...... 1,182,988 1,104,061 960,788 431,988 284,874
General and
administrative
expense............... 2,291,701 2,425,647 1,197,929 560,515 571,742
Net production:
Oil (Bbl).............. 23,244 30,528 29,717 2,142 9,192
Gas (Mcf).............. 1,146,696 1,482,264 1,516,947 483,051 310,872
Gas equivalent (Mcfe).. 1,286,160 1,665,432 1,695,249 495,903 366,024
Average sales price
realized:
Oil ($ per Bbl)........ $ 17.36 $ 15.25 $ 17.23 $ 18.17 $ 17.10
Gas ($ per Mcf)........ $ 1.58 $ 1.72 $ 1.87 $ 2.05 $ 1.54
Average lease operating
expenses and taxes ($
per Mcfe)............... $ .84 $ .78 $ .76 $ .49 $ .74
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 Compared with the Three Months Ended March
31, 1995
Revenue. Revenue from gas and oil sales increased 54% for the three months
ended March 31, 1996 as compared to the three months ended March 31, 1995. The
increase was largely due to production from the Mobile Bay wells which con-
tributed approximately 237,000 Mcf of production during the quarter. These
wells began production in December 1995. The average price for all gas sold
during the three months ended March 31, 1996 was $2.05 per Mcf as compared to
$1.54 per Mcf for the three months ended March 31, 1995. The extent to which
future gas and oil prices will affect revenues cannot be determined. The in-
crease in revenues from gas and oil sales during the first quarter of 1996 as
compared to the same quarter of 1995 was partially offset by lower operating
fee revenue due to fewer operated wells in the first quarter of 1996 and by a
decline in the gain on sale of assets.
The gain on sale of assets for the quarter ended March 31, 1996 included the
sale of several small interests which provided less than $100,000 of cash pro-
ceeds. The remaining cash proceeds came from the conveyance, at cost, of work-
ing interests in the Starboard Prospect Joint Venture. See "--Liquidity and
Capital Resources" and "Business and Properties--Exploration and Development--
Gulf Coast--Southern Louisiana and Gulf Coast of Texas." The gain on sale of
assets for the quarter ended March 31, 1995 also included sales of interests
in numerous wells.
Costs and Expenses. Costs and expenses increased $435,555 for the three
months ended March 31, 1996 as compared to March 31, 1995 largely due to a
one-time charge of approximately $369,000 in expenses related to the settle-
ment on the termination of a gas sales agreement with Waldorf Corporation
("Waldorf"). Transportation and marketing costs, production taxes and deple-
tion, 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 transpor-
tation on the Mobile Bay wells.
22
<PAGE>
Exploration costs declined due to a reduction in seismic and drilling activ-
ity in the first quarter of 1996 as compared to the same period in 1995. Ex-
ploration costs in 1995 included approximately $180,000 in seismic costs and
$155,000 in dry hole costs. In 1996, exploration costs were largely due to the
impairment of leases. Interest costs increased due to the Company's new fi-
nancing arrangements as well as a reduction in capitalized interest as a re-
sult of the reduced drilling activity.
The Company's general and administrative expense remained relatively un-
changed for the comparable periods.
Net Loss. The Company's net loss increased from $388,241 for the three
months ended March 31, 1995 to $769,226 for the three months ended March 31,
1996 for the reasons previously discussed, including a one-time charge of
$368,960 relating to the settlement payment to terminate the Company's long-
term gas sales agreement with Waldorf.
The Company's loss per share decreased from $0.24 per share for the three
months ended March 31, 1995 to a loss of $0.16 per share in the comparable pe-
riod of 1996. The per share decrease was a result of the preferred stock con-
version completed in 1995 which increased the number of common shares out-
standing at March 31, 1996.
Year Ended December 31, 1995 Compared with the Year Ended December 31, 1994
Revenue. Total revenues decreased 15% for the year ended December 31, 1995
compared to the year ended December 31, 1994. The decline was largely due to a
28% decline in gas and oil revenues and a 23% decline in operating fees. The
decrease in gas and oil revenues was caused by a decline in revenues from the
sale of the Company's Lirette Field, located in Terrebonne Parish, Louisiana,
which generated approximately $354,000 in revenues in 1994 prior to its sale,
an 8% reduction in gas prices and a 12% decline in gas and oil production from
wells other than the Lirette Field wells due to the sale of producing proper-
ties and a decline in production on existing wells. The extent to which any
future increase or decrease in gas and oil prices, if any, will affect reve-
nues cannot be determined. Operating fees decreased largely due to a decline
in Company supervised drilling, recompletion and workover activities in the
comparable periods.
The gain on sale of assets during the year ended December 31, 1994 included
approximately $983,000 in gain on the sale of the Lirette Field. The gain on
sale of assets in 1995 represented the sale of interests in numerous wells.
Revenue from the sale of seismic data represented the proceeds from the sale
of seismic data which had been entirely expensed in 1994 as required under the
successful efforts method of accounting.
Costs and Expenses. Total costs and expenses of the Company declined
$457,423 for the comparable period. Lease operating expenses and production
taxes declined in 1995 as compared to 1994 due to the sale of operated proper-
ties including the Lirette Field and a decline in rework activity.
The 1995 exploration costs also reflect the impairment of gas and oil leases
and investments of $530,000, dry hole costs of $181,000 and the expensing of
seismic costs of $389,000. Approximately $68,000 and $129,000 of interest
costs incurred in 1994 and 1995, respectively, were capitalized to ongoing ex-
ploration activities.
General and administrative costs decreased $133,946 during the year ended
December 31, 1995, as compared to the year ended December 31, 1994. General
and administrative costs in 1994 included a $107,509 charge relating to the
accrued costs of the Incentive Plan resulting from an increase in the Common
Stock market price in excess of the exercise price. The Incentive Plan expense
for 1995 was $107,509 less due to the decline in the Common Stock market
price. The remaining decrease in general and administrative costs was largely
due 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.
23
<PAGE>
The net loss per common share increased from a net loss of $.69 per share in
1994 to a net loss of $1.05 per share in 1995. Of the 1995 loss, $0.55 was due
to the non-recurring charge for recognizing the value of the premium of two
additional shares of Common Stock per share of Convertible Preferred Stock
paid as an inducement to convert the Convertible Preferred Stock to Common
Stock during 1995.
Liquidity and Capital Resources. The Company, through two financing transac-
tions, increased its working capital by $2,290,000 during the first quarter of
1996. The financing proceeds primarily were used to refinance existing short-
term liabilities and terminate the gas sales agreement with Waldorf. The Com-
pany also used proceeds from the sale of assets to fund $457,000 of additional
capital costs largely associated with the Starboard Prospect. Approximately
$58,000 was used to fund capital costs associated with the Company's Mobile
Bay wells. Assets sold included working interests in the Starboard Prospect
Joint Venture, which provided over $495,000 in proceeds. See "Business and
Properties--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 drilling costs in the Starboard Prospect. After completion of
the initial development phase of the Starboard Prospect, the Company will be
permitted to borrow a further $8,500,000 for further exploration activities,
contingent upon the Company's reserve base meeting the bank's lending parame-
ters.
Under the terms of the Credit Agreement, the Company is subject to certain
covenants which escalate in 1996, as well as certain other operating restric-
tions. The Company is currently in compliance with all its obligations under
the Credit Agreement. The covenants include current ratio, cash on hand, tan-
gible net worth and other financial requirements. Management believes that the
net proceeds of this Offering may be necessary so that the Company will con-
tinue 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 capi-
tal 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 Agreement is based on the
maintenance of adequate natural gas and oil reserves to support the amount
borrowed. Should the estimated proved natural gas and oil reserves or the
price to be received for these reserves decline below the required reserve
value, the Company would be required to either accelerate payment, repay a
specified amount of the borrowing so as to have adequate reserve value to sup-
port the borrowing, or provide additional collateral for the loan. The Company
has not entered into any arrangements to obtain alternate financing, and there
can be no assurance of the availability of any financing on acceptable terms.
The level of current or additional activity to be achieved will be dependent
upon the Company's ability to generate capital from outside sources.
The Credit Agreement also requires (a) the Company to enter into an interest
rate swap agreement guaranteeing a fixed rate of 8.28% over the life of the
loan, (b) the issuance to the Bank of America Illinois of a warrant to pur-
chase 250,000 shares of Common Stock for a period of five years at an exercise
price of the highest average of the daily closing bid prices for thirty (30)
consecutive trading days between January 1, 1996 and June 30, 1996, (c) the
purchase of a natural gas hedge agreement on 62,500 MMBtu per month of natural
gas at $1.566 per MMBtu for the life of the loan period from April 1, 1996
through January 31, 1999 and a commodity collar transaction on 62,500 MMBtu
per month of natural gas for February and March 1996 with a cap of $2.195 per
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MMBtu and a floor of $1.25 per MMBtu, and (d) the assignment to Bank of Amer-
ica Illinois of a four percent (4%) overriding royalty interest in the mort-
gaged properties until such time as Bank of America Illinois has received an
internal rate of return of fifteen percent (15%) on the commitment amount at
which time the overriding royalty interest will be reduced to two percent
(2%).
The second financing transaction was the Starboard Prospect Funding which
occurred in March 1996, and encompasses certain agreements entered into by the
Company with South Coast Exploration Company and certain affiliates of South
Coast Exploration Company, including Soco Exploration, L.P. and 420 Energy In-
vestments, Inc. (collectively, the "Soco Group"). Pursuant to the agreements,
the Soco Group acquired a 48% interest in the Company's interest in the Star-
board Prospect Joint Venture, and through a non-recourse loan to the Company
is funding all of the Company's cost in obtaining the leasehold and seismic
data on the Starboard Prospect. The loan is anticipated to total approximately
$1,728,000 at its conclusion. The loan will be repaid solely from revenues at-
tributable to an overriding royalty interest granted to the Soco Group by the
Company. The overriding royalty interest, which is equal to 8% of the
Company's original interest in the Starboard Prospect Joint Venture (not tak-
ing into account the 48% working interest assignment to the Soco Group), con-
tinues until such time as the Soco Group has received an amount equal to the
loan borrowings plus closing costs and a 15% internal rate of return. After
the funds have been repaid, the overriding royalty interest will be reduced to
2% of the Company's remaining 48% interest in the Starboard Prospect Joint
Venture. The loan currently is secured by a first mortgage on the properties
comprising the Starboard Prospect. During March 1996, the Company received a
$240,000 prospect fee as part of the agreement, a reimbursement of costs from
the Soco Group of $255,000 and an advance on the non-recourse loan of
$278,000. Approximately $430,000 of the costs reimbursed and advanced were in-
curred as of December 31, 1995 and included in the Company's gas and oil prop-
erties. These funds were used by the Company for working capital requirements.
The Company anticipates that the remaining funds will be advanced throughout
1996 to fund additional leasehold acquisitions and seismic activity on the
Starboard Prospect. The Company anticipates it will obtain most of its financ-
ing needs for the Starboard Prospect activities in the second and third quar-
ters of 1996 from this arrangement.
Both financings were obtained with the assistance of Weisser, Johnson & Co.
Capital Corporation, an investment banking firm ("Weisser Johnson"). Pursuant
to an agreement with Weisser Johnson, the Company agreed to pay Weisser John-
son a combination of cash, stock and warrants for assisting the Company in ob-
taining the Bank of America Illinois financing and the Starboard Prospect
Funding. As part of the agreement, the Company paid $200,000 in cash in March
1996 and issued 150,000 shares of Common Stock in June 1996 to Weisser John-
son, accompanied by rights to demand registration at any time between July 1,
1996 and December 31, 1996. The Company agreed to guarantee a minimum of
$200,000 in proceeds, net of commission or selling costs, if these shares are
sold (or an attempt to sell such shares has been made and there is no market
for such sale over a reasonable period of time) prior to December 31, 1996.
The 150,000 shares of Common Stock issued to Weisser Johnson, as well as
20,000 shares of Common Stock already owned by it, are included in the Selling
Securityholders' Shares which are being registered pursuant to the Registra-
tion Statement of which this Prospectus forms a part. The Company will also
issue Weisser Johnson warrants to purchase 250,000 shares of the Company's
Common Stock at $2.00 per share. The warrants have a five-year term, both de-
mand and "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.
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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. 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 approximately $78,000. If both swaps
had been in effect during the quarter, an additional reduction in gas and oil
revenues of approximately $55,000 would have been recorded during the quarter.
Whether the swaps result in future 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 nego-
tiation to divest several non-mortgaged producing and non-producing gas and
oil properties. Other options available to the Company to raise the additional
drilling funds for exploration include, but are not limited to: (a) additional
outside partners, (b) additional private borrowing, and (c) the further sale
of 3-D seismic data. The Company is actively evaluating its options in this
regard.
The Company has made and intends to make substantial capital expenditures in
connection with the exploration and development of its gas and oil properties.
Historically, the Company has funded its capital expenditures through a combi-
nation of internally generated funds, equity and long-term debt financing, and
short-term financing arrangements.
Based on its current operations, the Company anticipates that the net pro-
ceeds from the Offering, together with its cash flow from operations, the
availability of credit under the Credit Agreement and the Starboard Prospect
Funding, will be sufficient to meet estimated capital expenditures through
1997. However, no assurance can be given that the cash flow and funds avail-
able to the Company will be sufficient for the Company to carry out its pro-
posed plans through such date. Future cash flows and the availability of
credit under the Credit Agreement are subject to a number of variables, such
as the level of production from existing wells, prices of gas and oil and the
Company's success in locating and producing new reserves. If cash flows do not
develop as anticipated or funds are not available under the Credit Agreement,
the Company will be required to find additional sources of capital.
BUSINESS AND PROPERTIES
GENERAL
The Company is an independent energy company primarily engaged in the explo-
ration for natural gas and oil reserves and in the acquisition, production,
development and marketing of natural gas and oil properties. The Company's
early growth was through acquisitions of natural gas reserves, principally in
the Mid-Continent area of Arkansas, Kansas, Oklahoma and Texas. In recent
years, however, the Company's business activities have focused more on explo-
ration and related developmental drilling projects situated in Southern Loui-
siana and along the Gulf Coast of Alabama, Mississippi and Texas. The
Company's current business strategy is to increase its reserves by drilling
natural gas and oil wells on prospects identified and developed through the
use of well correlations, CAEX technologies and 3-D seismic surveys, with em-
phasis on projects situated along the Gulf Coast and, particularly, the tran-
sition zone of Southern Louisiana. As a supplemental part of such strategy,
the Company may also acquire producing properties as market conditions and the
Company's resources allow.
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During 1995, as part of its refocusing activities, the Company sold to Amoco
a 50% interest in one of the Company's primary exploration projects in the
Mid-Continent area, a 33 square mile 3-D seismic shoot located in Garvin Coun-
ty, Oklahoma. Additional activities in 1995 included (i) the drilling of two
exploratory wells in Mobile Bay, Alabama which began production in December
1995, (ii) the execution of a joint venture agreement to explore for gas and
oil on prospects located in Southern Louisiana and along the Texas Gulf Coast,
and (iii) the acquisition of leasehold rights in various prospects, including
the Starboard Prospect located in Terrebonne Parish, Louisiana. The Starboard
Prospect is comprised of a group of four distinct high potential exploration
prospects, as well as proved undeveloped locations. The proved undeveloped
portion of the Starboard Prospect has been evaluated by independent petroleum
engineers as containing substantial proved undeveloped reserves. The Company
intends to conduct a 3-D seismic survey to further define the prospect. As of
December 31, 1995, the Company and its partners had acquired acreage in the
Starboard Prospect which included estimated proved undeveloped reserves of 11
Bcfe and estimated future net revenues of over $19 million. In March 1996, the
Company completed the Starboard Prospect Funding, pursuant to which affiliates
of a utility acquired a 48% interest in the Company's interest in the Star-
board Prospect Joint Venture, and through a non-recourse loan to the Company
is funding all of the Company's cost in obtaining the leasehold and seismic
data on the prospect. The Company intends to fund its share of developmental
drilling costs in the prospect from borrowings under the Credit Agreement. Ex-
ploratory drilling costs will be funded through proceeds of this Offering
and/or industry partners. As of the date of this Prospectus, the Company owns
a 48% working interest in the Starboard Prospect Joint Venture. The Company is
continuing to search for additional prospects in the area.
In addition to 3-D seismic, the Company makes extensive use of 2-D seismic
reprocessing and CAEX enhancement technologies to delineate "bright spot"
seismic anomalies. The Mobile Bay wells, which began production in December
1995, were located by identification of such "bright spot" seismic anomalies,
delineated by the Company through reprocessing and enhancement of existing 2-D
seismic data. The Company plans to commence drilling on its third Mobile Bay
area "bright spot"- delineated prospect by October 1996. The Company believes
that additional drilling prospects in the Gulf Coast area may be identified
through delineation of such "bright spot" seismic anomalies. In September
1995, the Company entered into an agreement to acquire, reprocess and inter-
pret up to 1,600 miles of 2-D seismic data in the shallow offshore Gulf Coast
area. The reprocessing and interpretation of such data is designed to identify
"bright spot" gas accumulations which potentially can identify the location of
commercial quantities of hydrocarbons. In connection with this agreement, the
Company also entered into an agreement with Marconi, Inc. to jointly explore
any prospects thus identified.
The Company plans to continue to expand its exploration activities in the
Gulf Coast area through a number of current activities, including the (1) gen-
eration of prospects with its existing partners; (2) identification of "bright
spot" seismic anomalies; (3) continuing acquisition of acreage on additional
high potential Southern Louisiana exploration projects identified by the Com-
pany; and (4) continuing evaluation of high-graded exploration prospect oppor-
tunities in Southern Louisiana and other Gulf Coast areas.
CAEX TECHNOLOGY AND 3-D SEISMIC
The Company uses CAEX technology to collect and analyze geological, geophys-
ical, engineering, production and other data obtained about a potential gas or
oil prospect. Using such technology, the Company correlates 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
process produces a three-dimensional image based upon seismic data obtained
from multiple horizontal and vertical points within a geological formation.
The tremendous number of calculations needed to process such data is made pos-
sible by computer programs and advanced computer hardware.
While 3-D seismic and CAEX technologies have been used by large oil compa-
nies for approximately 20 years, the method was not affordable to smaller, in-
dependent gas and oil companies until recently, when im-
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<PAGE>
proved data acquisition equipment and techniques and computer technology be-
came 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 ef-
forts of the Company. The Company believes that its use of CAEX and 3-D seis-
mic technology may provide it with certain advantages in the exploration proc-
ess over those companies that do not use this technology. Because computer
modeling generally provides clearer and more accurate projected images of geo-
logical formations, the Company believes it is better able to identify poten-
tial locations of hydrocarbon accumulations and the desirable locations for
wellbores. However, the technology has not been used extensively enough by the
Company to make any conclusion regarding its performance and the Company's
ability to interpret and use the information developed from the technology.
EXPLORATION AND DEVELOPMENT
Gulf Coast
General. The Company considers the Gulf Coast, and in particular Southern
Louisiana, to be the premier area in the United States to explore for signifi-
cant new reserves. This conclusion is based on several characteristics of
Southern Louisiana including (1) a large number of productive intervals
throughout a significant sedimentary section, (2) numerous wells with which to
calibrate 3-D seismic, and (3) complicated geology that the Company believes
3-D seismic is particularly well suited to interpret. In 1994, the Company be-
gan devoting more of its energy to the Gulf Coast region. The Company ini-
tially entered this area by evaluating the onshore shallow Frio/Miocene Trend.
The Company's emphasis is shifting to larger exploration targets in this area
due to the greater potential return on investment resulting from the size of
the geological features which remain to be explored and produced. This in-
cludes shallow offshore prospects such as the Company's Mobile Bay activities
and deeper and potentially much larger prospects centering in the transitional
lands and waters of Southern Louisiana. Additional 2-D and 3-D seismic surveys
may need to be conducted to evaluate these areas more fully, and when deter-
mined appropriate, the Company will acquire acreage and drill wells as indi-
cated by the evaluations.
Most of the prospects in Southern Louisiana being pursued by the Company are
either on the edge of a large existing producing field or between such fields.
The prospects generally involve drilling in fault blocks that have not been
tested adequately to date. Thus, the Company intends to drill prospects where
the formations being tested are known to be productive in the area and where
it believes 3-D seismic can be used to increase resolution and thereby lower
risk. The extent to which the Company will pursue its activities in the Gulf
Coast region will be determined by the availability of Company resources and
the availability of joint venture partners.
Southern Louisiana and Gulf Coast of Texas. A primary area of focus for the
Company to identify gas and oil on prospects is in Southern Louisiana and
along the Gulf Coast of Texas. The Company directly and in conjunction with
industry partners has identified a number of prospects to be explored in the
target areas, and the Company has acquired its initial position in certain
prospects, including one which the Company refers to as the Starboard Pros-
pect. The Starboard Prospect is comprised of a group of four distinct high po-
tential exploration prospects, as well as proved undeveloped locations. The
proved undeveloped portion of the Starboard Prospect has been evaluated by in-
dependent petroleum engineers as containing substantial proved undeveloped re-
serves. 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 Pros-
pect which included estimated proved undeveloped reserves of 11 Bcfe and esti-
mated future net revenues of over $19 million. As of the date of this Prospec-
tus, the Company has a 48% working interest in the Starboard Prospect Joint
Venture and a net working interest in the properties comprising the Starboard
Prospect of 18%-34%, depending on the zone, with associated reserves of 5.4
Bcfe and future net revenues of approximately $9 million. Based on subsurface
and 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 addi-
tional acreage in the areas of the proved undeveloped locations, increasing
its working
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<PAGE>
interest in the proved developed reserves of the Starboard Prospect. No sig-
nificant acquisition of proved developed acreage has occurred since December
31, 1995.
In March 1996, the Company completed the Starboard Prospect Funding, pursu-
ant to which the Soco Group (i) acquired a 48% interest in the Company's in-
terest in the Starboard Prospect Joint Venture, and (ii) through a non-re-
course loan to the Company is funding all of the Company's cost in obtaining
the leasehold and seismic data on the Starboard Prospect. The loan is antici-
pated to total approximately $1,728,000 at its conclusion. The loan will be
repaid solely from revenues attributable to an overriding royalty interest
granted to the Soco Group by the Company. The overriding royalty interest,
which is equal to 8% of the Company's original interest in the Starboard Pros-
pect Joint Venture (not taking into account the 48% working interest assign-
ment to the Soco Group), continues until such time as the Soco Group has re-
ceived an amount equal to the loan borrowings plus closing costs and a 15% in-
ternal rate of return. After the funds have been repaid, the overriding roy-
alty interest will be reduced to 2% of the Company's remaining 48% interest in
the Starboard Prospect Joint Venture. The agreement also calls for another af-
filiate of the Soco Group, Interactive Exploration Solutions, Inc. of Houston,
Texas, to manage the 3-D seismic data acquisition, processing and interpreta-
tion. In addition, up to $11,000,000 is available under the Credit Agreement
to fund the Company's actual developmental drilling and acquisition activities
in the Starboard Prospect.
Mobile Bay, Alabama. In February and April 1995, the Company successfully
completed two wells in the Mobile Bay area of Alabama offshore waters. The
wells are currently producing gas for sale at the combined rate of approxi-
mately 11,000 Mcf of gas per day. The Company owns approximately a 30% working
interest in each well. Sales from these wells commenced in December 1995. The
wells, drilled on "bright spot" seismic anomalies, were identified and devel-
oped by the Company utilizing CAEX technologies. The Company plans to commence
the drilling of a third Mobil Bay area well by October 1996. The Company has
expanded its exploration efforts in similar shallow waters in offshore Missis-
sippi and Louisiana, seeking to identify similar "bright spot" anomalies with
CAEX technology.
Gulf Coast "Bright Spot" Project. In September 1995, the Company entered
into an agreement with a seismic vendor to acquire, reprocess and interpret up
to 1,600 miles of 2-D seismic data in the shallow offshore Gulf Coast area to
identify "bright spot" gas accumulation indicators on the reprocessed data.
The Company entered into an agreement with Marconi, Inc. to jointly explore
any prospects thus identified. Under the joint venture agreement, Marconi,
Inc. bears 100% of the anticipated costs of the seismic reprocessing and in-
terpretation. The Company has rights to a 50% working interest in all pros-
pects located pursuant to this agreement.
Garvin County, Oklahoma
In January 1992, the Company began conducting extensive subsurface geologi-
cal work in an area comprising eight townships located within Garvin County in
Southern Oklahoma. This work has included subsurface mapping, CAEX mapping and
geological evaluation of potential prospects, as well as evaluation of 3-D
seismic data shot by the Company in an attempt to delineate oil structures
that are small in surface area but may produce significant amounts of oil from
depths of 5,000 to 8,000 feet. The area of concentration in Garvin County is
believed to be underlaid by a "blanket" of highly permeable, highly porous
reservoir sandstones referred to as the "Simpson Group Sands." Where trapping
occurs in conjunction with these sands, small geological features may yield
significant reserves of oil. The geological traps in this area containing hy-
drocarbons have been historically difficult to find with conventional explora-
tion techniques because of their complexity and size.
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 currently is
participating in the drilling of one exploratory well being drilled in Garvin
County, the results of which cannot yet be determined. The Company has re-
cently completed
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<PAGE>
two exploratory wells in Garvin County. Test results indicate initial produc-
tion in the first well of approximately 100 Bbl per day in the Oil Creek which
is part of the Simpson Group Sands. The second well was a dry hole. Additional
capital from third-party partners may be necessary to fully participate in the
exploration activities with Amoco.
ACQUISITIONS AND DIVESTMENTS
The Company periodically acquires producing natural gas and oil properties.
Historically, the Company concentrated its acquisition activity in the Mid-
Continent Region of Kansas, Oklahoma, Arkansas and Texas, believing that these
areas had potential for exploitation through additional development and en-
hanced recovery and improved operating techniques. The Company typically
sought properties that were underdeveloped, overly burdened with expenses or
owned by financially troubled companies. During 1994, natural gas and oil re-
serves generally available for acquisition were at unusually high costs. As a
result and in reaction to the market conditions, the Company divested selected
proved producing natural gas and oil properties to take advantage of the rela-
tively higher prices being paid for such properties, and refocused most of its
1994 and 1995 activities on its exploration program. However, the Company will
continue to evaluate properties for acquisition if they meet the Company's ac-
quisition criteria, and as resources permit.
The Company's acquisition program is overseen by its management which in-
cludes four officers with combined experience of more than 75 years in the gas
and oil industry. It is anticipated that acquisition opportunities will be
brought to the attention of the Company's management by certain of its offi-
cers, directors and their affiliates as well as by various unaffiliated sourc-
es. The Company currently does not engage professional firms or consultants
that specialize in acquisitions on a formal basis. The Company may engage such
firms in the future, in which case the Company may pay a finder's fee or other
cash or stock compensation.
In connection with each acquisition, the Company considers (i) current and
historic production levels and reserve estimates; (ii) exploitation potential;
(iii) capital requirements; (iv) proximity of product markets; (v) regulatory
compliance; (vi) acreage potential; and (vii) existing production transporta-
tion capabilities. The Company also considers the historic financial operating
results and cash flow potential of each acquisition opportunity. Each acquisi-
tion involves management's analysis of its ability to improve the operations
of other acquired properties. Evaluation of the merits of a particular acqui-
sition is based, to the extent relevant, on all of the above factors as well
as other factors deemed relevant by the Company's management.
MARKETING
The Company markets its natural gas through monthly spot sales or pursuant
to long-term fixed-price gas sales agreements. Sales pursuant to long-term
contracts may involve a prepayment of a portion or all of the purchase price.
Because sales not made under fixed-price contracts may result in fluctuating
revenues to the Company depending upon the market price of gas, the Company
may enter into various hedging agreements to minimize the fluctuations and the
effect of price declines or swings. During January 1996, the Company entered
into a swap agreement on 62,500 MMBtu of its mid-continent natural gas produc-
tion per month for $1.566 per MMBtu for the period beginning April 1, 1996 and
ending January 31, 1999, and a swap contract on 45,000 MMBtu of natural gas
per month from a portion of its Mobile Bay production for $2.03 per MMBtu for
the period from January 1996 through December 1996. The 62,500 MMBtu swap
agreement was required pursuant to the terms of the Credit Agreement.
Currently, all of the Company's oil production is sold under market-sensi-
tive or spot price contracts. The Company's revenues from oil sales fluctuate
depending upon the market price of oil.
No purchaser accounted for more than 10% of the Company's total revenue in
1995 except for the gas sales contract discussed below. The Company does not
believe the loss of any existing purchaser would have a materially adverse ef-
fect on the Company.
At year end 1995, the Company's only long-term, fixed-price contract was
with Waldorf, which was terminated on January 31, 1996. Sales under the Wal-
dorf agreement amounted to approximately 36% of the
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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 termi-
nation of the contract. The Company anticipates that it will be able to con-
tinue to sell all available natural gas production in the foreseeable future.
PRINCIPAL AREAS OF OPERATIONS
The Company owns and operates producing properties located in six states
with proved reserves located primarily in Alabama, Louisiana, Oklahoma and
Texas. The Company currently owns interests in 30 wells it operates and also
owns non-operated interests in approximately 27 producing wells in Alabama,
Arkansas, Kansas, Louisiana, Oklahoma and Texas. Daily production from both
operated and non-operated wells net to the Company's interest averaged 3,142
Mcf per day and 63.68 Bbls of oil per day for the year ended December 31,
1995. These properties provide the basis for the Company's revenues to date.
GAS AND OIL RESERVES
The Company engaged independent petroleum engineers, Hofmann & Assoc. Engi-
neering Co. and Atwater Consultants, Ltd., (the "Engineers"), to estimate the
Company's net proved reserves, projected future production, estimated future
net revenue from proved reserves and the present value of such estimated net
revenue as of the date, and in relation to the properties, specified in their
reports. The estimates set forth in such reports were based upon a review of
production histories and other geologic, economic, ownership and engineering
data provided by the Company. In determining the estimates of the reserve
quantities that are economically recoverable, the Engineers used selling
prices and estimated development and production costs in effect as of the
dates of its report and, where no prior sales existed, selling prices and pro-
duction costs of comparable wells in the general area were used. In accordance
with guidelines promulgated by the Commission, no price or cost escalation or
deescalation was considered.
Estimated Proved Reserves. The following table sets forth summary informa-
tion, as estimated by the Engineers, regarding gas and oil reserves at Decem-
ber 31, 1995.
<TABLE>
<CAPTION>
GAS
GAS OIL EQUIVALENT
(MCF) (BBL) (MCFE) (1)
---------- ------- ----------
<S> <C> <C> <C>
Proved developed reserves......................... 7,307,717 72,515 7,742,807
Proved undeveloped reserves (2)................... 11,256,424 206,986 12,498,340
Total proved reserves (2)......................... 18,564,141 279,501 20,241,147
</TABLE>
- --------
(1) Oil production is converted to Mcfe at the rate of six Mcf of natural gas
per Bbl of oil, based upon the approximate energy content of natural gas
and oil.
(2) Subsequent to December 31, 1995, the Company reduced its working interest
in the Starboard Prospect Joint Venture from 100% to 48%. As a result of
the transactions, the Company's proved undeveloped reserves were reduced
by 5,806,783 Mcfe. After giving effect to the transactions, the Company's
proved undeveloped reserves and total proved reserves at December 31, 1995
would have been 6,691,557 Mcfe and 14,434,364 Mcfe, respectively.
Estimate of Future Net Revenue From Proved Reserves. The following table
sets forth summary information, as estimated by Hofmann & Assoc. Engineering
Co. and Atwater Consultants, Ltd., independent petroleum engineers, as stated
in their reports dated February 13, 1996 and March 21, 1996, respectively, re-
garding estimated future net revenue and the present value of future net reve-
nue from net proved reserves as of December 31, 1995.
<TABLE>
<CAPTION>
12/31/95
-----------
<S> <C>
Estimated total future net revenue (1)(2)................... $31,265,445
Present value of future net revenue (2)(3).................. $20,049,726
</TABLE>
- --------
(1) Estimated future net revenue represents estimated future gross revenue to
be generated from the production of proved reserves, net of estimated pro-
duction and future development costs, using prices and costs in
31
<PAGE>
effect as of the date indicated. The amounts shown do not give effect to
non-property related expenses, such as general and administrative expenses,
debt service and future income tax expense or to depreciation, depletion
and amortization.
(2) Subsequent to December 31, 1995, the Company reduced its working interest
in the Starboard Prospect Joint Venture from 100% to 48%. As a result of
the transactions, the Company's estimated total future net revenue and the
present value of the future net revenue were reduced by $10,217,817 and
$5,971,265, respectively. After giving effect to the transactions, the
Company's estimated total future net revenue and the present value of the
future net revenue at December 31, 1995 would have been $21,047,628 and
$14,078,461, respectively.
(3) Present value is calculated by discounting estimated future net revenue by
10% annually.
DRILLING ACTIVITY
The Company drilled only one well in each of 1991, 1992 and 1993, each of
which was productive. In 1994, the Company drilled a total of six wells, in-
cluding five exploratory wells, of which four were productive, and one devel-
opmental well which was not productive. In 1995, the Company drilled seven ex-
ploratory wells, of which four were productive. The Company anticipates an in-
crease in its drilling activity as it continues to complete and increase its
CAEX analysis and 3-D seismic surveys of the Alabama, Mississippi, Southern
Louisiana and Texas Gulf Coast and Garvin County, Oklahoma prospects. The Com-
pany currently is participating in the drilling of one exploratory well being
drilled in Garvin County, the results of which cannot yet be determined. The
Company has recently drilled two 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 second well was a dry hole.
PRODUCTIVE WELL SUMMARY
The following table sets forth certain information regarding the Company's
ownership as of April 30, 1996 of productive gas and oil wells in the areas
indicated.
<TABLE>
<CAPTION>
GAS OIL
--------------------- ---------------------
STATE GROSS WELLS NET WELLS GROSS WELLS NET WELLS
- ----- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Oklahoma............................ 34 16.84 5 1.28
Texas............................... 1 0.07 11 2.93
Louisiana........................... 2 0.79 0 0
Alabama............................. 2 0.44 0 0
Arkansas............................ 1 0.10 0 0
Kansas.............................. 1 0.10 0 0
--- ----- --- ----
Total............................. 41 18.34 16 4.21
=== ===== === ====
</TABLE>
VOLUMES, PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the production
volumes, average prices received and average production costs associated with
the Company's sale of gas and oil for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
1995 1994 1993 MARCH 31, 1996
--------- --------- --------- --------------
<S> <C> <C> <C> <C>
Net production:
Oil (Bbl)...................... 23,244 30,528 29,717 2,142
Gas (Mcf)...................... 1,146,696 1,482,264 1,516,947 483,051
Gas equivalent (Mcfe).......... 1,286,160 1,665,432 1,695,249 495,903
Average sales price realized:
Oil ($ per Bbl)................ $ 17.36 $ 15.25 $ 17.23 $ 18.17
Gas ($ per Mcf)................ $ 1.58 $ 1.72 $ 1.87 $ 2.05
Average lease operating expenses
and taxes ($ per Mcfe).......... $ .84 $ .78 $ .76 $ .49
</TABLE>
32
<PAGE>
LEASEHOLD ACREAGE
The following table sets forth as of April 30, 1996, the gross and net acres
of proved developed and proved undeveloped gas and oil leases which the Com-
pany holds or has the right to acquire.
<TABLE>
<CAPTION>
PROVED DEVELOPED PROVED UNDEVELOPED
----------------- -------------------
STATE GROSS NET GROSS NET
- ----- ----------------- -------------------
<S> <C> <C> <C> <C>
Oklahoma.................................. 39,690 14,488 5,617 1,855
Texas..................................... 10,742 1,999 0 0
Alabama--Onshore.......................... 2,731 2,582 2,994 1,012
Alabama--Offshore......................... 2,425 2,295 2,348 704
Arkansas.................................. 1,672 357 6,360 2,544
Louisiana................................. 1,341 371 4,680 4,233
Kansas.................................... 1,600 126 0 0
-------- -------- --------- ---------
Total................................... 60,201 22,218 21,999 10,348
======== ======== ========= =========
</TABLE>
COMPETITION
The gas and oil industry is highly competitive in all of its phases. The
Company encounters competition from other gas and oil companies in all areas
of its operations, including the acquisition of producing properties, the per-
mitting and conducting of seismic surveys and the marketing of gas and oil.
Many of these competitors possess greater financial, technical and other re-
sources than the Company. Competition for acquisition of producing properties
is affected by the amount of funds available to the Company, information about
producing properties available to the Company and any standards established
from time to time by the Company for the minimum projected return on invest-
ment. Competition may also be presented by alternative fuel sources, including
heating oil and other fossil fuels. There has been increased competition for
lower risk development opportunities and for available sources of financing.
In addition, the marketing and sale of natural gas and processed gas are com-
petitive. Because the primary markets for natural gas liquids are refineries,
petrochemical plants and fuel distributors, prices are generally set by or in
competition with the prices for refined products in the petrochemical, fuel
and motor gasoline markets.
REGULATION
The gas and oil industry is extensively regulated by federal, state and lo-
cal authorities. In particular, gas and oil production operations and econom-
ics are affected by price controls, environmental protection statutes, tax
statutes and other laws and regulations relating to the petroleum industry, as
well as changes in such laws, changing administrative regulations and the in-
terpretations and application of such laws, rules and regulations. Gas and oil
industry legislation and agency regulation are under constant review for
amendment and expansion for a variety of political, economic and other rea-
sons. Numerous regulatory authorities, federal, state and local, issue rules
and regulations binding on the gas and oil industry, some of which carry sub-
stantial penalties for failure to comply. The regulatory burden on the gas and
oil industry increases the Company's cost of doing business and, consequently,
affects its profitability. The Company believes it is in compliance with all
federal, state and local laws, regulations and orders applicable to the Com-
pany and its properties and operations, the violation of which would have a
material adverse effect on the Company or its financial condition.
Seismic Permits. Current law in the State of Louisiana requires permits from
owners of at least an undivided 80% interest in each tract over which the Com-
pany intends to conduct seismic surveys. As a result of such requirement, the
Company may not be able to conduct seismic surveys covering its entire area of
interest. Moreover, 3-D seismic surveys are typically conducted from various
locations both inside and outside the area of interest in order to obtain the
most detailed data of the geological features within the area. To the extent
that the Company is unable to obtain permits to access locations to conduct
the seismic surveys, the data obtained may not be as detailed as might other-
wise be available.
Exploration and Production. The Company's operations are subject to various
types of regulation at the federal, state and local levels. Such regulation
includes (i) requiring permits for the drilling of wells; (ii)
33
<PAGE>
maintaining bonding requirements in order to drill or operate wells; and (iii)
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled, the
plugging and abandoning of wells and the disposal of fluids used in connection
with well operations. The Company's operations are also subject to various
conservation regulations. These include the regulation of the size of drilling
and spacing units, the density of wells which may be drilled, and the
unitization or pooling of gas and oil properties. In addition, state conserva-
tion laws establish maximum rates of production from gas and oil wells, gener-
ally prohibiting the venting or flaring of gas and impose certain requirements
regarding the ratability of production. The effect of these regulations is to
limit the amount of gas and oil the Company can produce from its wells and to
limit the number of wells or the locations at which the Company can drill. Re-
cently enacted legislation and/or regulatory action in Texas and Oklahoma is
intended to reduce the total production of natural gas in those states. Al-
though such restrictions have not had a material impact on the Company's oper-
ations to date, the extent of any future impact therefrom cannot be predicted.
The Company's drilling activities in the Mobile Bay area are subject not only
to the State of Alabama regulation, but also to regulations of the U.S. Army
Corp. of Engineers and various other federal and state environmental regula-
tions relating to offshore activities.
Marketing and Transportation. The sale of some natural gas production by the
Company may be subject to regulation under the Natural Gas Act and the Natural
Gas Policy Act of 1978 (the "NGPA"). Under the NGPA, ceiling prices apply to
first sales of certain natural gas production in both interstate and intra-
state commerce. Administration and enforcement of the NGPA ceiling prices are
delegated to the Federal Energy Regulatory Commission (the "FERC"). As a re-
sult of the Natural Gas Wellhead Decontrol Act of 1989 (the "Decontrol Act"),
all price and non-price controls are eliminated for gas not under contract on
July 26, 1989. With respect to gas under contract on July 26, 1989, the Decon-
trol Act provides that price and non-price controls are eliminated upon con-
tract termination or by written agreement of the parties. Since current market
prices for the Company's gas production which continues to be price controlled
are below NGPA maximum lawful prices, the Company is doubtful that the Decon-
trol Act will have a significant impact on the prices received by the Company
for gas production in the near future.
In April 1992, the FERC issued Order No. 636, which provides for the funda-
mental restructuring of interstate pipeline sales and transportation services.
Among other things, Order No. 636 requires interstate pipelines to "unbundle"
their merchant sales functions from their transportation and storage functions
and to assign capacity rights they have on upstream pipelines to the pipe-
lines' former sales customers, and provides for the recovery by interstate
pipelines of costs associated with the pipelines' transition from providing
bundled sales services to providing unbundled transportation and storage serv-
ices. Order No. 636 may also increase transportation costs and tariffs on in-
terstate pipelines and cause interstate pipelines to seek to renegotiate or
terminate certain of their existing purchase contracts, but ultimately may en-
hance gas marketing opportunities and available transportation. The rules con-
tained in Order No. 636, as amended by Order No. 636-A (issued in August 1992)
and Order No. 636-B (issued in November 1992) are far reaching and complex. In
addition, several provisions of Order No. 636 are currently subject to court
challenges. Although the ultimate outcome of these challenges under Order No.
636 cannot be predicted with certainty, the Company does not believe the Order
No. 636 will adversely affect its operations. Nevertheless, the Order has re-
sulted in a degree of uncertainty with respect to interstate natural gas sales
and transportation.
No Price Controls on Liquid Hydrocarbons. There are currently no price con-
trols on crude oil, condensate or natural gas liquids.
Environmental and Occupational Regulation. Various federal, state and local
laws and regulations covering the discharge of materials into the environment,
or otherwise relating to the protection of the public health and the environ-
ment, may affect the Company's operations, expenses and costs. The trend in
environmental regulation which affects the Company has been to place more re-
strictions and limitations on activities that impact the environment, such as
emissions of pollutants, generation and disposal of wastes, and the use and
handling of chemical substances. Increasingly, strict environmental restric-
tions and limitations have resulted in higher operating costs for the Company
and other similar businesses throughout the United States, and it is possible
that the costs of compliance with environmental laws and regulations will con-
tinue to increase.
34
<PAGE>
State initiatives to regulate further the disposal of gas and oil wastes are
also pending in certain states, including states in which the Company has op-
erations, and these initiatives could have a similar impact on the Company. In
addition, the Company is subject to laws and regulations concerning occupa-
tional health and safety. It is not anticipated that the Company will be re-
quired in the near future to expend amounts that are material in relation to
its total capital expenditures program by reason of environmental or occupa-
tional health and safety laws and regulations, but inasmuch as such laws and
regulations are frequently changed, the Company is unable to predict the ulti-
mate cost of compliance.
The Company does not believe that its environmental risks are materially
different from those of comparable gas and oil companies operating in similar
geographic areas. Nevertheless, no assurance can be given that environmental
laws will not, in the future, result in a curtailment of production or mate-
rial increases in the cost of production, development or exploration or other-
wise adversely affect the Company's operations and financial condition. Al-
though the Company maintains liability insurance coverage against certain lia-
bilities from pollution, such environmental risks generally are not fully in-
surable.
Louisiana Legislation. The Louisiana legislature passed Act 404 in 1993,
which permits a party transferring an oil field site to establish a site-spe-
cific trust account for such oil field. If the site-specific trust account is
established in accordance with the requirements of the statute, the party
transferring the oil field site shall not thereafter be held liable by the
state for any site restoration costs or actions associated with the trans-
ferred oil field site. The parties to a transfer may elect not to establish a
site-specific trust account; however, in the absence of such an account, the
transferring party will continue to have liability for the costs of restora-
tion of the site. In the event the parties to a transfer elect to establish a
site-specific trust account pursuant to the statute, the Louisiana Department
of Natural Resources ("DNR") requires an oil field site restoration assessment
to be made at the time of the transfer or within one year thereafter, to de-
termine the site restoration requirements existing at the time of transfer.
Based upon the site restoration assessment, the parties to the transfer must
propose to the DNR a funding schedule for the site-specific trust account,
providing for some contribution to the account at the time of transfer and at
least quarterly payment thereafter. If the establishment and funding of the
site-specific trust account is approved by the DNR, the selling party shall
not thereafter be held liable by the state for any site restoration costs. The
purchaser will thereafter be the responsible party to the state, except that
the failure of a transferring party to make a good faith disclosure of all oil
field site conditions existing at the time of the transfer will render that
party liable for the costs of restoration of such undisclosed conditions in
excess of the balance of the site-specific trust fund.
TITLE TO PROPERTIES
Title to properties is subject to royalty, overriding royalty, carried work-
ing, net profits, working and other similar interests and contractual arrange-
ments customary in the gas and oil industry, to liens for current taxes not
yet due and to other encumbrances. As is customary in the industry in the case
of undeveloped properties, little investigation of record title is made at the
time of acquisition (other than a preliminary review of local records). Inves-
tigations, including a title opinion of local counsel, are generally made be-
fore commencement of drilling operations. The Company has granted to an affil-
iate of the Soco Group a mortgage on its interest in the Starboard Prospect to
secure repayment of the funding provided by such affiliate and relating to
such prospect, and has granted to Bank of America Illinois a mortgage on vir-
tually all remaining producing gas and oil properties to secure repayment un-
der the Credit Agreement.
OPERATING HAZARDS AND INSURANCE
The gas and oil business involves a variety of operating risks, including
the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formations and environmental hazards such as oil spills, gas leaks, ruptures
or discharges of toxic gases, the occurrence of any of which could result in
substantial losses to the Company due to injury or loss of life, severe damage
to or destruction of property, natural resources and equipment, pollution or
other environmental damage, cleanup responsibilities, regulatory investigation
and penalties and suspension of operations.
35
<PAGE>
The Company maintains a gas and oil lease operator policy that insures the
Company against certain sudden and accidental risks associated with drilling,
completing and operating its wells. There can be no assurance that this insur-
ance will be adequate to cover any losses or exposure to liability. The Com-
pany also carries comprehensive general liability policies and an umbrella
policy. The Company and its subsidiaries carry workers' compensation insurance
in all states in which they operate. The Company maintains various bonds as
required by state and federal regulatory authorities. While the Company be-
lieves these policies are customary in the industry, they do not provide com-
plete coverage against all operating risks. An uninsured or partially insured
claim, if successful and of sufficient magnitude, could have a material ad-
verse effect on the Company and its financial condition. If the Company expe-
riences significant claims or losses, the Company's insurance premiums could
be increased which may adversely affect the Company and its financial condi-
tion or limit the ability of the Company to obtain coverage. Any difficulty in
obtaining coverage may impair the Company's ability to engage in its business
activities.
FACILITIES
The Company's headquarters are currently located in Oklahoma City, Oklahoma,
and occupy a total of approximately 8,568 square feet of leased space at an
annual rent of $106,656. The current lease expires August 31, 1996. The Com-
pany is planning to move its headquarters to Houston, Texas upon expiration of
the lease term because of a shift in the Company's emphasis to the Gulf Coast
area. In May 1996, the Company opened a small temporary office in Houston on a
month-to-month lease.
EMPLOYEES
The Company employs nine people in its Oklahoma City office, one person in
Houston, Texas, and one person in Covington, Louisiana. They are all full time
employees. Their functions include management, engineering, production, geolo-
gy, geophysics, land and legal, gas marketing, accounting, financial planning
and administration. Certain operations of the Company's field activities are
accomplished through independent contractors and are supervised by the Compa-
ny. The Company believes its relations with its employees and contractors are
good. No employees of the Company are represented by a union. As previously
discussed, the Company intends to move its headquarters to Houston, Texas when
the lease on its headquarters located in Oklahoma City, Oklahoma expires in
August 1996. Some of the current employees will not be willing or able to re-
locate, or will not be offered the opportunity to join the Company in such re-
location. The Company believes that, if the need arises, it will be able to
hire individuals with similar credentials and upon similar terms in the Hous-
ton market to replace any employees that do not relocate.
LEGAL PROCEEDINGS
The Company is party to a lawsuit filed on June 14, 1994 in the Circuit
Court of Mobile, Alabama. The lawsuit was brought by Frontier Exploration and
Production Corporation ("Frontier"), a subsidiary of the Company, as plaintiff
to quiet title to leases it owns in the Mobile Bay area in Mobile County, Ala-
bama. The original defendant, The Offshore Group, Inc. ("TOG"), filed various
counterclaims pursuant to which, inter alia, it (i) claimed an ownership in-
terest in the Mobile Bay area wells drilled by the Company and (ii) sought re-
covery of substantial damages it claimed to have sustained due to, among other
stated reasons, delays in drilling allegedly caused by the Company. The well
for which TOG alleged it sustained damages was a dry hole. The Company has
been awarded summary judgment as to all counterclaims of TOG with respect to
the Mobile Bay area wells, other than TOG's claim for damages related to the
drilling of its well, and the Company has sued TOG and certain of its princi-
pals for fraudulently asserting such claims. The grant of summary judgment may
be appealed. The Company does not believe TOG's remaining claim to 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
liability of $1,553,338 for that year plus penalty and interest. The Company
has filed a response to the proposed change and intends to defend its position
vigorously. The Company believes it has adequate net operating losses incurred
in 1992 and subsequent years to offset any potential tax liability.
36
<PAGE>
In addition to the above, the Company is a defendant from time to time in
lawsuits incidental to its business. The Company believes that none of such
current proceedings, individually or in the aggregate, will have a materially
adverse effect on the Company.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding the directors,
executive officers and key employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
David W. Berry............ 46 Chairman of the Board of Directors and President
David B. Christofferson... 48 Executive Vice President, Secretary, General
Counsel, Chief Financial Officer, and Director
S. Gordon Reese, Jr....... 46 Vice President--Gulf Coast Region and Director
Michael A. Barnes......... 54 Vice President of Exploration and Production
James R. Harris, Jr....... 50 Treasurer and Controller
Neal M. Elliott........... 56 Director
Jeffrey R. Orgill......... 51 Director
Allen H. Sweeney.......... 49 Director
</TABLE>
DAVID W. BERRY has served as President of the Company since the incorpora-
tion of its predecessor on August 1, 1988, and has served as Chairman of the
Board of Directors since 1991. Mr. Berry is a member of the Independent Petro-
leum Association of America.
DAVID B. CHRISTOFFERSON has served as General Counsel, Secretary and a di-
rector of the Company since 1989, Executive Vice President since January 1993
and as Chief Financial Officer since December 1994. He received his Bachelor
of Science degree in Finance in 1971 and a Juris Doctor in 1974 from the Uni-
versity of Oklahoma. He also received a Master of Divinity degree with Magna
Cum Laude honors from Phillips University in 1985. He has been active in the
gas and oil industry for more than 15 years. Mr. Christofferson is a member of
the Independent Petroleum Association of America.
S. GORDON REESE, JR. was elected a Director in June 1996 and has served as
Vice President of the Gulf Coast Region since January 1993. He received a
Bachelor of Science degree from Louisiana State University in 1971. From 1991,
until joining the Company in January 1993, he was the managing general partner
of Reese Production Company, a gas and oil company. From 1986 till 1991, he
was the President of Reese Energy Corporation. Mr. Reese is a director of the
Louisiana Independent Oil and Gas Association and a past vice president of the
Independent Petroleum Association of America.
MICHAEL A. BARNES joined the Company on May 15, 1996 as Vice President of
Exploration and Production. From March 1991 until his employment with the Com-
pany, Mr. Barnes served as Exploration Manager--Gulf Coast for Great Western
Resources, Inc. Mr. Barnes has 30 years experience in the gas and oil industry
with emphasis in the Gulf Coast region. Mr. Barnes holds a Bachelor of Science
degree in Geology from the University of Texas.
JAMES R. HARRIS, JR. has served as Treasurer and Controller since July 1991.
He has a Bachelor of Arts degree in Economics from DePaul University and a
Master of Business Administration degree from Oklahoma City University. Prior
to joining the Company, Mr. Harris was employed as an accountant with Matthews
Exploration Company, a gas and oil exploration company. Mr. Harris has indi-
cated that he will not continue with the Company after the relocation of its
principal offices to Houston, Texas and will cease his employment on or about
the date of the move.
37
<PAGE>
NEAL M. ELLIOTT has served as a director of the Company since September
1991. He has served as Chairman of the Board and President of Horizon
Healthcare Corp. since 1986. Horizon Healthcare Corp. is a publicly-traded
company listed on the New York Stock Exchange which operates extended nursing
care facilities in over 50 locations nationwide. Mr. Elliott received a Bache-
lor of Arts degree from Stanford University in 1963 and a Master of Business
Administration degree from Columbia University in 1965. His background in-
cludes public accounting with the firm of Price Waterhouse, as well as execu-
tive senior management duties for major health care providers. Mr. Elliott
also serves as a director of LTC Properties, a publicly traded real estate in-
vestment trust.
JEFFREY R. ORGILL has served as Vice Chairman of the Board of Directors
since 1991. From October 1988 to May 1996, he served as the Company's Vice
President of Exploration and Production. Mr. Orgill became a consultant to the
Company on May 1, 1996. Mr. Orgill received a Bachelor of Science degree in
Geology in 1970 and a Master of Science degree in Geology in 1971 from Brigham
Young University. Mr. Orgill has 25 years of experience in the gas and oil in-
dustry.
ALLEN H. SWEENEY has served as a director of the Company since September
1993. From 1991 to 1994, Mr. Sweeney also served as Chief Accountant and as a
consultant to the Company. Since 1990, Mr. Sweeney has served as President and
a director of AHS & Associates, Inc., a gas and oil consulting firm; as Presi-
dent and a director of Columbia Production Company, an independent gas and oil
company; and as Vice President and a director of Mid-America Waste Management,
Inc., a waste management company. Mr. Sweeney received a Bachelor of Science
degree in Accounting from Oklahoma State University in 1969 and a Master of
Business Administration degree from Oklahoma City University in 1972. He is
also a director of Panaco, Inc., a publicly held oil and gas exploration and
production company.
THE BOARD OF DIRECTORS
Pursuant to provisions of the Company's Certificate and Bylaws (the "Charter
Documents"), the Board of Directors has fixed the number of directors at sev-
en. The Charter Documents also provide that the directors shall be divided
into three classes, as nearly equal in number as possible, with each class
serving staggered three-year terms. Currently, the Board consists of six di-
rectors. The Board is continuing to search for a qualified and available nomi-
nee to fill the remaining vacant board seat which, when filled, will have a
term expiring in 1999.
Whenever dividends on the Convertible Preferred Stock have not been paid in
an aggregate amount equal to at least six quarterly dividends on such shares
(whether or not consecutive), the number of directors of the Company will be
increased by two, and the holders of the Convertible Preferred Stock, voting
separately as a class, will be entitled to elect such two additional directors
to the Board of Directors at any meeting of stockholders of the Company at
which directors are to be elected held during the period such dividends remain
in arrears. Such voting right will terminate when all such dividends accrued
and in default have been paid in full or set apart for payment. The term of
office of all directors so elected will terminate immediately upon such pay-
ment or setting apart for payment. No dividends on the Convertible Preferred
Stock have been paid since April 1995. As of May 31, 1996, the accumulated but
undeclared and unpaid dividends equaled $111,749, representing four quarterly
dividend periods. The Company anticipates that it will resume dividend pay-
ments prior to an aggregate of six quarterly dividend payments being in ar-
rears. The Company intends to seek a waiver of the Restricted Payment Tests in
order to resume dividend payments on the Convertible Preferred Stock prior to
an aggregate of six quarterly dividend payments being in arrears. There can be
no assurance, however, that the Company will be able to obtain such a waiver.
EXECUTIVE COMPENSATION
Set forth in the following table is information as to the compensation paid
or accrued to each officer and director receiving compensation of at least
$100,000 and the Chief Executive Officer ("CEO") for the three years ended De-
cember 31, 1995:
38
<PAGE>
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------- ---------------------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SAR'S COMPENSATION
- --------------------------- ---- -------- ------- ------------- ------------
(# OF SHARES)
<S> <C> <C> <C> <C> <C>
David W. Berry............. 1995 $120,000 $ 0 0 $18,367 (2)
Chairman of the Board 1994 120,000 0 0 18,367 (2)
and President 1993 71,250 29,250 24,000 (1) 9,184 (2)
Jeffrey R. Orgill ......... 1995 120,000 0 0 31,344 (2)
Vice Chairman of the Board 1994 120,000 0 0 31,344 (2)
and Vice President of 1993 71,250 29,250 24,000 (1) 15,672 (2)
Exploration and Production
(3)
David B. Christofferson ... 1995 95,000 5,000 0 20,090 (2)
Executive Vice President, 1994 90,000 10,000 0 20,090 (2)
Secretary, General 1993 70,000 30,000 204,000 (4) 10,045 (2)
Counsel,
Chief Financial Officer
and Director
S. Gordon Reese, Jr. ...... 1995 70,000 35,000 0 0
Vice President--Gulf Coast 1994 70,000 20,000 12,000 (1) 0
Region 1993 70,000 30,000 0 0
and Director
</TABLE>
- --------
(1) Indicates units ("Plan Units") awarded in the Company's Incentive Plan.
Each Plan Unit contains one option to purchase one share of Common Stock
(the "Plan Option") and one stock appreciation right ("SAR"), represent-
ing the right to receive a cash payment equal to twice the amount by
which the fair market value of the Common Stock on the date of exercise
of the Plan Option exceeds the exercise price thereof. Plan Options are
granted with an exercise price equal to the fair market value of the Com-
mon Stock on the date of the grant.
(2) Represents accrued liabilities of the Company pursuant to deferred com-
pensation benefits payable to the individual officers.
(3) Mr. Orgill resigned as Vice President of Exploration and Production ef-
fective May 1, 1996.
(4) Includes 24,000 Plan Units and 180,000 options issued under the Incentive
Stock Option Plan. Each option granted under the Incentive Stock Option
Plan entitles the holder to purchase one share of Common Stock at an ex-
ercise price equal to the fair market value of the Common Stock on the
date of the grant.
DIRECTORS' COMPENSATION
During the fiscal year ended December 31, 1995, directors who were not offi-
cers of the Company were paid $1,000 for each Board of Director's meeting at-
tended and, additionally, received an automatic grant of 2,000 Plan Units un-
der the Incentive Plan. Each Plan Unit contains one Plan Option to purchase
one share of Common Stock and one SAR, representing the right to receive a
cash payment equal to twice the amount by which the fair market value of the
Common Stock on the date of exercise of the Plan Option exceeds the exercise
price thereof. Plan Options are granted with an exercise price equal to the
fair market value of the Common Stock on the date of the grant. Each year di-
rectors who are not officers of the Company receive automatic grants of Plan
Units under the Incentive Plan, which vest one year from the grant date. Each
of Messrs. Elliott and Sweeney were granted 2,000 Plan Units in September 1993
which vested in January 1994, and an additional 2,000 Plan Units in June 1995
which vest in June 1996. The exercise prices of the 1993 and 1995 grants are
$3.10 and $2.09, respectively. In January 1996, the Board of Directors discon-
tinued the Incentive Plan, and amended the directors' compensation to grant
non-employee directors an automatic annual grant of 6,000 Common Stock pur-
chase options which vest in twelve months from the date of grant. On June 6,
1996, Messrs. Elliott and Sweeney each were granted non-qualified options to
purchase 6,000 shares of Common Stock at an exercise price of $2.00 per share,
the fair market value of the Common Stock on the date of grant.
STOCK OPTIONS GRANTED IN FISCAL 1995
No options to purchase Common Stock were granted in fiscal 1995 to the exec-
utive officers named in the Summary Compensation Table.
39
<PAGE>
No options were exercised by the Company's executive officers during the
fiscal year ended December 31, 1995. The following table sets forth informa-
tion about the unexercised options and SAR's held by Messrs. Berry, Orgill,
Christofferson and Reese at December 31, 1995.
FISCAL 1995 YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SAR'S AT 12/31/95 OPTIONS/SAR'S AT 12/31/95
-------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David W. Berry............ 16,000 (1) 8,000 (1) $ 0 $ 0
Jeffrey R. Orgill......... 16,000 (1) 8,000 (1) 0 0
David B. Christofferson... 148,000 (2) 56,000 (2) 181,500 77,000
S. Gordon Reese........... 8,000 (1) 4,000 (1) 0 0
</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)
</TABLE>
- --------
(1) Each of the options shown has an exercise price of $1.62, which is equal
to 110% plus $.01 of the fair market value of the Common Stock on the ef-
fective date of the grant, January 16, 1996.
(2) Each of the options shown has an exercise price of $1.47, which is equal
to the fair market value of the Common Stock on the effective date of the
grant, January 16, 1996.
(3) Each of the options shown has an exercise price of $2.125, which is equal
to the fair market value of the Common Stock on the effective date of the
grant, May 15, 1996.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with David W. Berry and David B.
Christofferson ("Employees"). Each of these agreements expires December 31,
1998. Each agreement automatically renews for additional one-year terms each
December 31st unless terminated by either the Company or Employee. Under these
agreements, Mr. Berry currently receives an annual salary of $120,000 and Mr.
Christofferson currently receives an annual salary of $100,000. In addition,
each Employee is entitled to receive deferred compensation, provided he re-
mains employed by the Company until expiration of the initial term of his
agreement and has not been terminated for cause thereunder. The deferred com-
pensation shall be an annual payment equal to the product of $9,000 multiplied
by the number of years the Employee is employed by the Company beginning with
July 1,
40
<PAGE>
1993 (up to a maximum of 10 years); payments commence the year the Employee
reaches 65 or retires from the Company, whichever is later. Deferred payments
shall be paid for a maximum of 15 years thereafter. In the event of Employee's
death or permanent disability during the term of his employment, deferred com-
pensation shall be paid to Employee or his estate beginning at the time of
said death or disability, in an aggregate amount computed as if Employee were
employed for ten years after July 1, 1993; provided, however, that any such
payments pursuant to the Employee's disability will be reduced by the amount
of any employer paid insurance which pays disability payments to Employee.
"Cause" for termination of an Employee includes: the conviction of a felony;
the perpetration of a fraud, misappropriation or embezzlement of property of
the Company; willful misconduct with respect to the duties or obligations of
Employee under his employment agreement; or intentional or continual neglect
of duties. For one year following the termination of Employee, Employee is
prohibited from engaging in or assisting in any business which is identical,
competitive with, or comparable to, the Company's business within 50 miles of
any area in which Employee rendered services to the Company.
The Company also has employment agreements with Michael A. Barnes and S.
Gordon Reese, Jr. Mr. Barnes' agreement, which commenced May 15, 1996 and ex-
pires on December 31, 1997, automatically renews for successive one-year terms
each December 31st unless terminated by either the Company or Mr. Barnes. Un-
der the agreement, Mr. Barnes receives an annual salary of $100,000, as well
as certain incentive compensation. Such incentive compensation consists of
25,000 options granted to Mr. Barnes on May 15, 1996 under the 1996 Option
Plan, in connection with the execution of his employment agreement, and an ad-
ditional 50,000 options to be granted on January 31, 1997 with an exercise
price equal to the then current market price of the Common Stock. Mr. Reese's
agreement commenced on January 1, 1995 and automatically renews for successive
on-year terms each December 31 unless terminated by either the Company or Mr.
Reese. Under the agreement, Mr. Reese receives an annual salary of $100,000.
Both agreements contain provisions prohibiting the disclosure to third parties
of proprietary information relating to the Company.
The Company and Mr. Orgill agreed to the termination of his employment
agreement effective May 1, 1996. However, Mr. Orgill continues to serve as a
director and as a consultant to the Company. The consulting agreement provides
for Mr. Orgill to furnish exploration and production oversight services on the
Company's existing properties and prospects in the Mid-Continent area and
prospect generation and evaluation services on the Company's existing 3-D
seismic date over acreage in the Mid-Continent area, for a period of 23 months
commencing May 1, 1996 at a monthly compensation of $10,000. To the extent
that Mr. Orgill's consulting services exceed 40 hours per month, the consult-
ing agreement provides that he will receive an additional $70 per hour, up to
a maximum of $400 per day. Mr. Orgill's agreement contains a provision prohib-
iting for one year subsequent to termination of employment the disclosure to
third parties of proprietary information relating to the Company.
OFFICER AND DIRECTOR LIABILITY
As permitted by the provisions of the OGCA, the Company's Certificate elimi-
nates, in certain circumstances, the monetary liability of directors of the
Company for a breach of their fiduciary duty as directors. These provisions do
not eliminate the liability of a director (i) for a breach of the director's
duty of loyalty to the Company or its stockholders; (ii) for acts or omissions
by a director not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for liability arising under Section 1053 of
the OGCA (relating to the declaration of dividends and purchase or redemption
of shares in violation of the OGCA); or (iv) for any transaction from which
the director derived an improper personal benefit. In addition, these provi-
sions do not eliminate the liability of a director for violations of federal
securities laws or limit the rights of the Company or its stockholders, in ap-
propriate circumstances, to seek equitable remedies such as injunctive or
other forms of non-monetary relief. Such remedies may not be effective in all
cases.
The Company's Certificate provides that the Company shall indemnify all di-
rectors and officers of the Company to the full extent permitted by the OGCA.
Under such provisions, any director or officer, who in his capacity as such,
is made or threatened to be made, a party to any suit or proceeding, may be
indemnified if the Board of Directors determines such director or officer
acted in good faith and in a manner he reasonably believed to be in or not op-
posed to the best interest of the Company. The Certificate and the OGCA fur-
ther provide that
41
<PAGE>
such indemnification is not exclusive of any other rights to which such indi-
viduals may be entitled under the Certificate, the Bylaws, any agreement, vote
of stockholders or disinterested directors or otherwise.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been ad-
vised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore, unenforce-
able.
CERTAIN TRANSACTIONS
From December 1992 through December 1995 the Company was a party to a Con-
sultant's Agreement with Federman Associates, Inc. ("Federman Associates"),
pursuant to which Federman Associates agreed to provide financial consulting
services to the Company and the Company agreed to pay Federman Associates
$3,000 per month. In addition, Mr. H. L. Federman of Federman Associates was
granted 6,000 Plan Units under the Company's Incentive Plan. Federman Associ-
ates was engaged to advise the Company relative to general financing matters.
These matters include structural and other issues involved in the Company's
private placement in February 1993 (the "Private Placement"), its initial pub-
lic offering in November 1993 and future financing needs. Mr. Federman is ei-
ther the father or spouse of all of the beneficiaries of the Hi-Chicago Trust,
which owned, as of May 31, 1996, 367,200 shares of Common Stock, 2,000 shares
of Convertible Preferred Stock and a warrant to purchase 300,000 shares of
Common Stock at an exercise price of $3.00 per share.
During 1995, Hi-Chicago Trust asserted a claim against the Company claiming
that the Company failed to use its best efforts to register in a timely manner
Hi-Chicago Trust's stock obtained under the convertible note agreement. The
Company had an obligation to register within one year of the effective date of
its initial public offering 200,000 shares of Common Stock issued or issuable
to the Hi-Chicago Trust upon conversion of its Convertible Notes, and an addi-
tional 107,200 shares subscribed for by the Hi-Chicago Trust pursuant to the
Private Placement. The registration statement relating to such shares was
filed in January 1995 and declared effective by the SEC in May 1995. The Com-
pany and Hi-Chicago Trust agreed to a settlement in December 1995, in which
the Company issued 75,000 shares of Common Stock (the "Settlement Shares") and
a warrant to purchase up to 300,000 shares of Common Stock at an exercise
price of $3.00 per share in settlement of this claim. The warrant is exercis-
able through the earlier of 60 months from the settlement date or for a period
of 30 days after the closing bid price of the Company's stock equals or ex-
ceeds $6.00 per share for 60 consecutive trading days. The Settlement Shares
are "restricted securities" within the meaning of Rule 144 under the Securi-
ties Act and the Company has granted certain demand and "piggyback" registra-
tion rights relating to such shares. The Settlement Shares are included in the
Selling Securityholders' Shares which are being registered pursuant to the
Registration Statement of which this Prospectus forms a part. The settlement
provides for issuance of additional shares of the Company's stock if the Com-
pany does not register the Settlement Shares promptly upon demand by the Hi-
Chicago Trust. The Company recorded a loss of $96,093 related to this settle-
ment in 1995.
The Company from time to time makes advances to officers and employees of
the Company. During 1994, 1995 and for the period from January 1, 1996 through
June 10, 1996, such advances aggregated $10,385, $14,234 and $36,748, respec-
tively, and repayments of $6,204, $30,282 and $9,000, respectively, were made
to the Company. At June 10, 1996, David W. Berry owed $64,740 in loans, which
bear interest at a rate of 8.28%, and advances of $12,485, which carry no in-
terest but which are normally repaid within 60 days or reclassified as a loan.
At June 10, no other officer or director had outstanding loans or advances in
excess of $60,000.
During 1994 and 1995, Mr. Neal Elliott, a director of the Company, partici-
pated as a working interest owner in the drilling of several wells and in sev-
eral seismic ventures conducted by the Company. In connection with such ven-
tures, Mr. Elliott paid the Company $160,754 and $35,995 in 1994 and 1995, re-
spectively. Mr. Elliott is also an additional general partner of the 1993 3-D
Seismic Exploration Limited Partnership (the "Partnership"), of which the Com-
pany serves as managing general partner. Mr. Elliott contributed $104,805 and
$12,201 in contributions to the Partnership in 1994 and 1995, respectively.
The Partnership and the Company are also joint venture partners in various
seismic and drilling activities, for which the Partnership paid the Company
$427,735 in 1994 for its share of the actual cost of such activities. At De-
cember 31, 1994 and 1995, the Partnership owed
42
<PAGE>
the Company $153,000 and $137,787, respectively. At March 31, 1996, the Part-
nership owed the Company $137,787.
All future and ongoing transactions between the Company and its directors,
officers, principal stockholders or affiliates will be on terms no less favor-
able to the Company than may be obtained from unaffiliated third parties, and
any such transactions will be approved by a majority of the disinterested di-
rectors of the Company.
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of June 14, 1996, and as ad-
justed to reflect the sale of the 1,200,000 Units offered hereby, concerning
the beneficial ownership of Common Stock by each of the Company's directors,
each executive officer named in the Summary Compensation Table and all direc-
tors and executive officers of the Company as a group, and by each person who
is known by the Company to own more than 5% of the outstanding shares of Com-
mon Stock. Unless otherwise indicated, the beneficial owner has sole voting
and investment power with respect to such stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS PERCENT OF CLASS PERCENT OF CLASS
OF BENEFICIAL HOLDER NUMBER OF SHARES BEFORE OFFERING AFTER OFFERING
-------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
David W. Berry* (2)(3)..... 684,930 13.1% 7.8%
Jeffrey R. Orgill* (2)(4).. 592,500 11.3% 6.7%
David B. Christofferson*
(2)(5).................... 212,000 4.0% 2.3%
Neal M. Elliott* (2)(6).... 74,750 1.4% .9%
S. Gordon Reese, Jr.*
(2)(7).................... 8,000 .1% .1%
Allen H. Sweeney* (2)(6)... 4,000 .1% .1%
Hi-Chicago Trust (8)(9).... 675,200 12.3% 7.5%(11)
All executive officers and
directors as a group
(7 persons)(10)........... 1,532,180 28.5% 17.5%
</TABLE>
- --------
* Director
(1) This tabular information conforms to Item 403 of Regulation S-B, and
gives effect to the exercise of warrants or options exercisable within
60 days of the date of this table owned in each case by the person or
group listed.
(2) Address is c/o Frontier Natural Gas Corporation, One Benham Place, 9400
North Broadway, Oklahoma City, Oklahoma 73114.
(3) Includes 24,000 shares issuable pursuant to options immediately exercis-
able under the Incentive Plan and excludes 120,000 shares issuable pur-
suant to options granted under the 1996 Option Plan which become exer-
cisable in the future.
(4) Includes 24,000 shares issuable pursuant to options immediately exercis-
able under the Incentive Plan.
(5) Includes 132,000 shares issuable pursuant to options immediately exer-
cisable under the Incentive Stock Option Plan and 24,000 shares issuable
pursuant to options immediately exercisable under the Incentive Plan;
and excludes 48,000 shares issuable pursuant to options granted under
the Incentive Plan and 100,000 shares issuable pursuant to options
granted under the 1996 Option Plan, which become exercisable in the fu-
ture.
(6) Includes 4,000 shares issuable pursuant to options immediately exercis-
able under the Incentive Plan and excludes 6,000 shares issuable pursu-
ant to options granted on June 6, 1996 which become exercisable in the
future.
(7) Includes 8,000 shares issuable pursuant to options immediately exercis-
able under the Incentive Plan; and excludes 4,000 shares issuable pursu-
ant to options granted under the Incentive Plan and 85,000 shares issua-
ble pursuant to options granted under the 1996 Option Plan, which become
exercisable in the future.
(8) Includes 300,000 shares issuable upon exercise of warrants which are
presently exercisable at $3.00 per share, 4,000 shares issuable upon con-
version of 2,000 shares of Convertible Preferred Stock which are pres-
ently convertible and 4,000 shares issuable upon exercise of 4,000 war-
rants which are issuable upon conversion of the Convertible Preferred
Stock and presently exercisable.
(9) Address is Two North LaSalle Street, Chicago, Illinois 60602.
43
<PAGE>
(10) Includes 88,000 shares issuable pursuant to options immediately exercis-
able under the Incentive Plan and 132,000 shares issuable pursuant to
options immediately exercisable under the Incentive Stock Option Plan;
and excludes 4,000 shares issuable pursuant to options granted under the
Incentive Plan, 48,000 shares issuable pursuant to options granted under
the Incentive Stock Option Plan and 330,000 shares issuable pursuant to
options granted under the 1996 Option Plan, which become exercisable in
the future.
(11) 5.4% taking into account the sale of 375,000 Selling Securityholders'
Shares which are being registered concurrently with this offering in a
registration statement of which this Prospectus forms a part.
The Company also has outstanding 85,961 shares of its Convertible Preferred
Stock. As of the date of this Prospectus, each share of Convertible Preferred
Stock is convertible into 2.26 shares of Common Stock and two Series A War-
rants. No director, or any of the above referenced officers owns any shares of
Convertible Preferred Stock.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, $.01 par value per share, and 5,000,000 shares of Convertible
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 Convertible Preferred Stock were issued and outstanding.
UNITS
Each Unit consists of three shares of Common Stock and three Series B War-
rants, each of which entitles the holder to purchase one share of Common
Stock. The Common Stock and Series B Warrants comprising the Units are immedi-
ately detachable and separately transferable.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters submitted to a vote of shareholders. There is no cumulative voting
with respect to the election of directors. Accordingly, holders of a majority
of the shares entitled to vote in any election of directors may elect all of
the directors standing for election. Subject to preferences that may be appli-
cable to any then outstanding class of preferred stock, the holders of Common
Stock are entitled to receive such dividends, if any, as may be declared by
the Board of Directors from time to time out of legally available funds. Upon
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets of the Company that are le-
gally available for distribution, after payment of all debts and other liabil-
ities and subject to the prior rights of holders of any class of preferred
stock then outstanding. The holders of Common Stock have no preemptive, sub-
scription, redemption or conversion rights. The rights, preferences and privi-
leges of holders of Common Stock are subject to the rights of the holders of
shares of any series of preferred stock that the Company may issue in the fu-
ture.
SERIES B WARRANTS
Each Series B Warrant entitles the registered holder to purchase one share
of Common Stock at a price of $ per share, subject to adjustment in cer-
tain circumstances, during the period commencing one year and ending five
years from the date of this Prospectus.
The Series B Warrants are redeemable by the Company, at the option of the
Company, with the prior consent of the Underwriter, at a price of $.01 per
warrant at any time after the Series B Warrants become exercisable, upon not
less than 30 days' written notice, provided that the last sales price of the
Common Stock equals or exceeds 200% of the then-exercise price of the Series B
Warrants (the "Redemption Threshold") for the 20 consecutive trading days end-
ing on the third day prior to the notice of redemption to warrant holders. The
warrant holders shall have the right to exercise the Series B Warrants until
the close of business on the date fixed for redemption.
The Series B Warrants will be issued in registered form under a Warrant
Agreement between the Company and Liberty National Bank and Trust Company of
Oklahoma City, N.A. as Warrant Agent. Reference is made to such Warrant Agree-
ment (which has been filed as an exhibit to the Registration Statement of
which this Pro-
44
<PAGE>
spectus is a part) for a complete description of the terms and conditions ap-
plicable to the Series B Warrants (the description herein contained being
qualified in its entirety by reference to such Warrant Agreement).
The exercise price, number of shares of Common Stock issuable on exercise of
the Series B Warrants and Redemption Threshold are subject to adjustment in
certain circumstances, including in the event of a stock dividend, recapitali-
zation, reorganization, merger or consolidation of the Company. However, the
Series B Warrants are not subject to adjustment for issuances of Common Stock
at a price below their exercise price.
The Series B Warrants may be exercised upon surrender of the Warrant Certif-
icate representing the Series B Warrants on or prior to the expiration date at
the offices of the Warrant Agent, with the exercise form on the reverse side
of the Warrant Certificate completed and executed as indicated, accompanied by
full payment of the exercise price (by certified check, payable to the Compa-
ny) for the number of Series B Warrants being exercised. The Company has re-
served from its authorized but unissued shares a sufficient number of shares
of Common Stock for issuance on exercise of the Series B Warrants. Exercise of
each Warrant may be effected by delivery of the Warrant, duly endorsed for ex-
ercise and accompanied by payment of the exercise price, to the Warrant Agent.
The shares of Common Stock issuable on exercise of the Series B Warrants will
be, when issued and paid for in the manner contemplated by the Series B War-
rants, fully paid and non-assessable. The warrant holders do not have the
rights or privileges of holders of Common Stock.
No Series B Warrants will be exercisable unless at the time of exercise
there is a current prospectus covering the shares of Common Stock issuable
upon exercise of such warrants under an effective registration statement filed
with the Commission and such shares have been qualified for sale or are exempt
from qualification under the securities laws of the state of residence of the
holder of such Series B Warrants. Although the Company has undertaken to have
all shares so qualified for sale in those states where the Units are being of-
fered and to maintain a current prospectus relating thereto until the expira-
tion of the Series B Warrants, subject to the terms of the Warrant Agreement,
there can be no assurance that it will be able to do so.
No fractional shares will be issued upon exercise of the Series B Warrants.
However, if a warrant holder exercises all Series B Warrants then owned of
record by it, the Company will pay to such warrant holder, in lieu of the is-
suance of any fractional share which is otherwise issuable to such warrant
holder, an amount in cash based on the market value of the Common Stock on the
last trading day prior to the exercise date.
For the life of the Series B Warrants, the holders thereof have the opportu-
nity to profit form a rise in the market for the Company's Common Stock, with
a resulting dilution in the interest of all other stockholders. So long as the
Series B Warrants are outstanding, the terms on which the Company could obtain
additional capital may be adversely affected. The holders of the Series B War-
rants might be expected to exercise them at a time when the Company would, in
all likelihood, be able to obtain any needed capital by a new offering of se-
curities on terms more favorable than those provided for by the Series B War-
rants.
SERIES A WARRANTS
Each Series A Warrant entitles the registered holder to purchase one share
of Common Stock at a price of $6.00 per share, subject to adjustment in cer-
tain circumstances, until November 12, 1998.
The Series A Warrants currently are redeemable by the Company, at the option
of the Company, at a price of $.25 per warrant at any time, upon not less than
30 days' written notice. The warrant holders have the right to exercise the
Series A Warrants until the close of business on the date fixed for redemp-
tion.
The Series A Warrants were issued in registered form under a Warrant Agency
Agreement between the Company and Liberty National Bank and Trust Company of
Oklahoma City, N.A. as Warrant Agent. Reference is made to such Warrant Agency
Agreement (which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part) for a complete description of the terms and
conditions applicable to the Series A Warrants (the description herein con-
tained being qualified in its entirety by reference to such Warrant Agency
Agreement).
45
<PAGE>
The exercise price, number of shares of Common Stock issuable on exercise of
the Series A Warrants are subject to adjustment in certain circumstances, in-
cluding in the event of a stock dividend, recapitalization, reorganization,
merger or consolidation of the Company. However, the Series A Warrants are not
subject to adjustment for issuances of Common Stock at a price below their ex-
ercise price.
The Series A Warrants may be exercised upon surrender of the Warrant Certif-
icate representing the Series A Warrants on or prior to the expiration date at
the offices of the Warrant Agent, with the exercise form on the reverse side
of the Warrant Certificate completed and executed as indicated, accompanied by
full payment of the exercise price (by certified check, payable to the Compa-
ny) for the number of Series A Warrants being exercised. The Company has re-
served from its authorized but unissued shares a sufficient number of shares
of Common Stock for issuance on exercise of the Series A Warrants. Exercise of
each Warrant may be effected by delivery of the Warrant, duly endorsed for ex-
ercise and accompanied by payment of the exercise price, to the Warrant Agent.
The shares of Common Stock issuable on exercise of the Series A Warrants will
be, when issued and paid for in the manner contemplated by the Series A War-
rants, fully paid and non-assessable. The warrant holders do not have the
rights or privileges of holders of Common Stock.
No Series A Warrants will be exercisable unless at the time of exercise
there is a current prospectus covering the shares of Common Stock issuable
upon exercise of such warrants under an effective registration statement filed
with the Commission and such shares have been qualified for sale or are exempt
from qualification under the securities laws of the state of residence of the
holder of such Series A Warrants.
No fractional shares will be issued upon exercise of the Series A Warrants.
However, if a warrant holder exercises all Series A Warrants then owned of
record by it, the Company will pay to such warrant holder, in lieu of the is-
suance of any fractional share which is otherwise issuable to such warrant
holder, an amount in cash based on the market value of the Common Stock on the
last trading day prior to the exercise date.
For the life of the Series A Warrants, the holders thereof have the opportu-
nity to profit from a rise in the market for the Company's Common Stock, with
a resulting dilution in the interest of all other stockholders. So long as the
Series A Warrants are outstanding, the terms on which the Company could obtain
additional capital may be adversely affected. The holders of the Series A War-
rants might be expected to exercise them at a time when the Company would, in
all likelihood, be able to obtain any needed capital by a new offering of se-
curities on terms more favorable than those provided for by the Series A War-
rants.
PREFERRED STOCK
Shares of preferred stock may be issued from time to time in one or more se-
ries with such designations, voting powers, if any, preferences and relative,
participating, optional or other special rights, and such qualifications, lim-
itations and restrictions thereof, as are determined by resolution of the
Board of Directors of the Company. The issuance of preferred stock, while pro-
viding flexibility in connection with possible financings, acquisitions and
other corporate purposes, could, among other things, adversely affect the vot-
ing power of holders of Common Stock and, under certain circumstances, be used
as a means of discouraging, delaying or preventing a change in control of the
Company. Currently, the Company has outstanding one series of preferred stock,
designated as Convertible Preferred Stock, par value $.01 per share, of which
85,961 shares are currently issued and outstanding.
Convertible Preferred Stock Series
Each share of Convertible Preferred Stock is convertible into shares of Com-
mon Stock, at the rate described below (the "Conversion Rate"), and two Series
A Warrants (i) at any time at the option of the holder, and (ii) automatical-
ly, if the last reported sales price of the Convertible Preferred Stock as re-
ported on Nasdaq (or as reported on any national securities exchange on which
the Convertible Preferred Stock is then listed), exceeds $13.00 for a period
of 10 consecutive trading days.
The Conversion Rate is determined by dividing the Conversion Price then in
effect by $5.00. The "Conversion Price" is equal to $10.00 plus all accrued
and unpaid dividends, including the full dividend accrued through the end of
the quarter in which the conversion occurs, unless such accrued and unpaid
dividends are paid after
46
<PAGE>
notice of conversion. The Conversion Price is subject to adjustment in certain
events, including: the issuance of stock as a dividend on the Common Stock;
subdivisions or combinations of the Common Stock; the issuance to all holders
of Common Stock of certain rights or warrants (expiring within 45 days after
the record date for determining stockholders entitled to receive them) to sub-
scribe for or purchase Common Stock at a price less than current market price;
or the distribution to all holders of Common Stock of evidences of indebted-
ness of the Company, cash (excluding ordinary cash dividends), other assets or
rights or warrants to subscribe for or purchase any securities (other than
those referred to above). No adjustment of the Conversion Price will be re-
quired to be made until cumulative adjustments aggregate 1% or more of the
Conversion Price as last adjusted; however, any adjustment not made will be
carried forward. As of May 31, 1996, the accumulated but undeclared and unpaid
dividends equaled $111,749, or $1.30 per share of Convertible Preferred Stock,
resulting in a Conversion Price at such date of $11.30 per share of Convert-
ible Preferred Stock and a Conversion Rate of 2.26.
Holders of shares of Convertible Preferred Stock are entitled to receive,
when, as and if declared by the Board of Directors out of funds at the time
legally available therefor, cash dividends at an annual rate of $1.20 per
share. Dividends accrue and cumulate from the date of first issuance of the
Convertible Preferred Stock and are payable to holders of record as they ap-
pear on the stock books of the Company on such record dates as are fixed by
the Board of Directors. The Convertible Preferred Stock has priority as to
dividends over the Common Stock, and no dividend (other than dividends payable
solely in Common Stock or any other series or class of the Company's stock
hereafter issued that ranks junior as to dividends to the Convertible Pre-
ferred Stock) may be declared, paid or set apart for payment on, and no pur-
chase, redemption or other acquisition may be made by the Company of, any Com-
mon Stock or Common Stock derivatives unless all accrued and unpaid dividends
on the Convertible Preferred Stock have been paid or declared and set apart
for payment. No Convertible Preferred Stock dividends have been paid since
April 30, 1995. The amount of dividends payable per share of Convertible Pre-
ferred Stock for each quarterly dividend period is computed by dividing the
annual dividend amount by four. No interest is payable in respect of any divi-
dend payment on the Convertible Preferred Stock which may be in arrears. Under
the terms of the Credit Agreement, the Company is prohibited from making any
dividend payments with respect to any class of its capital stock unless it
meets certain Restricted Payment Tests.
The holders of the Convertible Preferred Stock have no voting rights except
as required by law, or under the circumstances described below. In exercising
any such vote, each outstanding share of Convertible Preferred Stock is enti-
tled to such number of votes per share as they would have if the Convertible
Preferred Stock were converted and shares of Common Stock are received.
Whenever dividends on the Convertible Preferred Stock have not been paid in
an aggregate amount equal to at least six quarterly dividends on such shares
(whether or not consecutive), the number of directors of the Company will be
increased by two, and the holders of the Convertible Preferred Stock, voting
separately as a class, will be entitled to elect such two additional directors
to the Board of Directors at any meeting of stockholders of the Company at
which directors are to be elected held during the period such dividends remain
in arrears. Such voting right will terminate when all such dividends accrued
and in default have been paid in full or set apart for payment. The term of
office of all directors so elected will terminate immediately upon such pay-
ment or setting apart for payment.
So long as any Convertible Preferred Stock is outstanding, the Company shall
not, without the affirmative vote of the holders of at least 66 2/3% of all
outstanding shares of Convertible Preferred Stock, voting separately as a
class, (i) amend, alter or repeal any provision of the Certificate or the By-
laws of the Company so as to adversely affect the relative rights, prefer-
ences, qualifications, limitations or restrictions of the Convertible Pre-
ferred Stock, (ii) authorize or issue, or increase the authorized amount of,
any additional class or series of stock, or any security convertible into
stock of such class or series, ranking senior to the Convertible Preferred
Stock as to dividends or upon liquidation, dissolution or winding up of the
Company, or (iii) effect any reclassification of the Convertible Preferred
Stock.
So long as any Convertible Preferred is outstanding, the Company shall not,
without the affirmative vote of the holders of at least 50% of all outstanding
shares of Convertible Preferred Stock, voting separately as a class, (i) au-
thorize, issue, or increase the authorized amount of any additional class or
series of stock, or any security convertible into stock of such class or se-
ries, ranking on a parity with the Convertible Preferred Stock as to
47
<PAGE>
dividends or liquidation and having superior voting rights, or (ii) incur in-
debtedness or authorize or issue, or increase the authorized amount of, any
additional class or series of stock, or any security convertible into stock of
such class or series, ranking on parity with the Convertible Preferred Stock
as to dividend or liquidation rights if, immediately following such event, Ad-
justed Stockholders' Equity is less than the aggregate liquidation preferences
of all Convertible Preferred Stock and stock ranking senior to or on parity
with the Convertible Preferred Stock as to liquidation. Adjusted Stockholders'
Equity is the Company's stockholders' equity as shown on its most recent bal-
ance sheet, increased by (a) the amount of any liability or other reduction in
stockholders' equity attributable to the Convertible Preferred Stock and each
series of stock senior to or on parity with the Convertible Preferred Stock as
to liquidation, and (b) the net proceeds of any equity financing since the
date of the balance sheet, reduced by any reduction in stockholders' equity
resulting from certain dispositions of assets since the date of the balance
sheet.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Charter Documents may be deemed to have
anti-takeover effects and may delay, defer or prevent a tender offer or takeo-
ver attempt that a stockholder might consider to be in such stockholder's best
interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders.
Classified Board. The Company's Certificate provides that (i) the Board of
Directors is divided into three classes of as equal size as possible, (ii) the
number of directors is to be fixed from time to time by the Board of Direc-
tors, and (iii) the term of office of each class expires in consecutive years
so that each year only one class is elected. These provisions may render more
difficult a change in control of the Company or the removal of incumbent man-
agement.
No Stockholder Action by Written Consent; Special Meetings. The Company's
Certificate provides that no action shall be taken by stockholders except at
an annual or special meeting of stockholders, and prohibits action by written
consent in of lieu of a meeting. The Company's Bylaws provide that, unless
otherwise proscribed by law, special meetings of stockholders can only be held
pursuant to a resolution of the Board of Directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Bylaws establish an advance notice procedure for the nomina-
tion, other than by or at the direction of the Board of Directors or a commit-
tee thereof, of candidates for election as directors as well as for other
stockholder proposals to be considered at stockholders' meetings.
Notice of stockholder proposals and director nominations must be timely
given in writing to the Secretary of the Company prior to the meeting at which
the matters are to be acted upon or Directors are to be elected. In all cases,
to be timely, notice must be received at the principal executive offices of
the Company not less than 40 days before the meeting, or, if on the day notice
of the meeting is given to the stockholders less than 45 days remain until the
meeting, (i) five days after notice is given but not less than five days prior
to the meeting in the case of stockholder proposals, and (ii) 10 days after
notice is given in the case of director nominations.
Notice to the Company from a stockholder who proposes to nominate a person
at a meeting for election as a director must contain all information about
that person as would be required to be included in a proxy statement solicit-
ing proxies for the election of the proposed nominee (including such person's
written consent to serve as a Director if so elected) and certain information
about the stockholder proposing to nominate that person. Stockholder proposals
must also include certain specified information.
These limitations on shareholder proposals do not restrict a stockholder's
right to include proposals in the Company's annual proxy materials pursuant to
rules promulgated under the Exchange Act.
Section 1090.3 of the OGCA. Section 1090.3 of the OGCA prohibits a publicly
held Oklahoma corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (I)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation, (ii) upon
48
<PAGE>
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock, or (iii) on or after such date the business combina-
tion is approved by the Board of Directors and by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the inter-
ested stockholder. A "business combination" includes mergers, asset sales and
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and associ-
ates, owns (or within three years, did own) 15% or more of the corporation's
voting stock. The effect of such statute may be to discourage certain types of
transactions involving an actual or potential change in control of the Compa-
ny.
TRANSFER AGENTS, WARRANT AGENT AND REGISTRAR
The transfer agent for the Common Stock, Units, Series A Warrants, Series B
Warrants and Convertible Preferred Stock, and the warrant agent for the Series
A Warrants and Series B Warrants, is Liberty National Bank and Trust Company
of Oklahoma City, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
Possible Rule 144 Sales. Upon completion of the Offering described in this
Prospectus, the Company will have outstanding 8,808,406 shares of Common
Stock. Of these shares all of the 3,600,000 shares sold in the Offering (as-
suming no exercise of the Underwriter's over-allotment option) will be freely
transferable by persons other than affiliates (as defined in regulations under
the Securities Act), without restriction or further registration under the Se-
curities Act.
Of the remaining 5,208,406 shares of Common Stock outstanding, 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 consti-
tute "Restricted Securities") have agreed with the Underwriter not to sell
their shares until twelve months after the date of this Prospectus without ob-
taining the prior written approval of the Underwriter. The foregoing does not
give effect to any shares issuable on exercise of outstanding options and war-
rants. In addition, the Selling Securityholders have agreed with the Under-
writer to various limitations on the sale of shares of Common Stock owned by
such holders or issuable to them upon exercise of warrants. See "--Selling
Securityholders' Shares." The effect of the offer and sale of such shares may
be to depress the market price for the Company's Common Stock.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated for purposes of Rule 144) who beneficially owns
Restricted Securities with respect to which at least two years have elapsed
since the later of the date the shares were acquired from the Company or from
an affiliate of the Company, is entitled to sell, within any three month peri-
od, a number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock of the Company, or (ii) the average weekly
trading volume in Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner-of-sale provi-
sions and notice requirements, and to the availability of current public in-
formation about the Company. A person who is not an affiliate, has not been an
affiliate within 90 days prior to sale and who beneficially owns Restricted
Securities with respect to which at least three years have elapsed since the
later of the date the shares were acquired from the Company or from an affili-
ate of the Company, is entitled to sell such shares under Rule 144(k) without
regard to any of the volume limitations or other requirements described above.
Selling Securityholders' Shares. The Selling Securityholders, who benefi-
cially hold 537,200 shares of the outstanding Common Stock (1,087,200 shares
of Common Stock including outstanding warrants), have agreed with the Under-
writer to limit their ability to, directly or indirectly, sell or otherwise
dispose of certain of such shares, as follows:
49
<PAGE>
(i) Weisser Johnson has agreed not to sell 170,000 shares of Common Stock
until 60 days after the date of this Prospectus;
(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 97,400 shares of Common Stock
until 30 days after the date of this Prospectus, 97,400 shares of
Common Stock until 60 days after the date of this Prospectus and
97,400 shares of Common Stock until 90 days 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 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.
Registration Rights. Upon consummation of this Offering, other than the
shares of Common Stock issuable upon exercise of the Unit Purchase Option for
which the Underwriter has been granted registration rights, the holders of
500,000 shares of Common Stock issuable upon exercise of outstanding securi-
ties of the Company have the right to either require the Company to register
those shares under the Securities Act or have their shares included in any
registration statement filed by the Company, subject to certain limitations,
to enable a public sale of those shares. Either by reason of the terms of the
securities or agreements entered into by the holders thereof, the holders of
such registration rights cannot exercise those rights and seek to offer and
sell their shares of Common Stock until twelve months after the date of this
Prospectus. In the event the holders of a material amount of such shares
should seek to have their shares registered for sale under the Securities Act,
these obligations could result in considerable expense to the Company and the
effect of the offer and sale of such shares may be to depress the market price
for the Company's Common Stock. Compliance with these obligations may also in-
terfere with the Company's ability to raise additional capital when required.
If the Company were to waive the restriction on when these registration rights
are exercisable, it would not be required to give notice to the Company's
other stockholders and the earlier registration of such shares could have an
adverse impact on the market for the Company's shares.
UNDERWRITING
Gaines, Berland Inc. (the "Underwriter") has agreed, subject to the terms
and conditions of the Underwriting Agreement, to purchase from the Company
1,200,000 Units. The Underwriting Agreement provides that the obligations of
the Underwriter are subject to approval of certain legal matters by counsel to
the Underwriter and various other conditions precedent, and that the Under-
writer is obligated to purchase all of the Units offered by this Prospectus
(other than the Units covered by the over-allotment option described below) if
any are purchased.
The Underwriter has advised the Company that it proposes to offer the Units
to the public at the initial public offering price set forth on the cover page
of this Prospectus. The Underwriter may allow to certain dealers concessions,
not in excess of $0. per Unit, of which not in excess of $0. per Unit may
be reallowed to other dealers.
The Company has granted to the Underwriter an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 180,000 additional
Units at the public offering price set forth on the cover page of this Pro-
spectus, less the underwriting discounts and commissions and the
nonaccountable expense allowance, for the sole purpose of covering over-allot-
ments, if any.
The Company has agreed to indemnify the Underwriter against certain liabili-
ties, including liabilities under the Securities Act. The Company has agreed
to pay to the Underwriter a nonaccountable expense allowance of 3% of the
gross proceeds derived from the sale of the Units underwritten (including the
sale of any Units subject
50
<PAGE>
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 ex-
penses in connection with qualifying the Units offered hereby for sale under
the laws of such states as the Underwriter may designate and registering the
Offering with the NASD, including fees and expenses of counsel retained for
such purposes by the Underwriter and the costs of 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 120,000 Units (the "Unit Purchase Option"). The Unit
Purchase Option is exercisable at $9.00 per Unit (150% of the initial public
offering price) for a period of four years commencing one year from the date
of this Prospectus. The Units purchasable upon exercise of the Unit Purchase
Option are identical to those offered hereby. The Unit Purchase Option grants
to the holder thereof certain "piggyback" rights and one demand right for a
period of seven and five years, respectively, from the date of this Prospectus
with respect to the registration under the Securities Act of the securities
directly and indirectly issuable upon exercise of the Unit Purchase Option.
The Unit Purchase Option cannot be transferred, sold, assigned or hypothecated
during the one year period following the date of this Prospectus, except to
officers of the Underwriter and to selected dealers and their officers or
partners.
For a period of five years from the date of this Prospectus, and in the
event the Underwriter so designates, the Company will recommend and use its
best efforts to cause a designee of the Underwriter who is reasonably satis-
factory to the Company to be elected as a full voting member of its Board of
Directors. Until such time as the Underwriter exercises its option to desig-
nate a nominee for election to the Board of Directors, the Underwriter shall
have the right to have a representative present at all meetings of the
Company's Board of Directors. Such representative will be entitled to the same
notices and communications sent by the Company to its directors and to attend
directors' meetings, but will not be entitled to vote thereat. The Underwrit-
er's designee or representative, as the case may be, will be entitled to be
reimbursed for the out-of-pocket expenses incurred by him in attending such
meetings. As of the date of this Prospectus, the Underwriter has not named ei-
ther a nominee for election to full board membership or such non-voting repre-
sentative.
The Company has engaged the Underwriter, on a nonexclusive basis, as its
agent for the solicitation of the exercise of the Series B Warrants. To the
extent not inconsistent with the guidelines of the NASD and the rules and reg-
ulations of the Commission, the Company has agreed to pay the Underwriter for
bona fide services rendered a commission equal to 5% of the exercise price for
each Warrant exercised more than one year from the date of this Prospectus if
the exercise was solicited by the Underwriter. No compensation will be paid to
the Underwriter in connection with the exercise of the Series B Warrants if
the market price of the underlying shares of Common Stock is lower than the
exercise price, the Series B Warrants are held in a discretionary account, the
Series B Warrants are exercised in an unsolicited transaction or the arrange-
ment to pay the commission is not disclosed in the prospectus provided to war-
rant holders in connection with such exercise. In addition, unless granted an
exemption by the Commission from Rule 10b-6 under the Exchange Act, while it
is soliciting exercise of the Series B Warrants, the Underwriter will be pro-
hibited 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 beneficially
hold 537,200 shares of the outstanding Common Stock (1,087,200 shares of Com-
mon Stock including 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." In addition, for a period of five
years after the date of this Prospectus, certain Insiders have granted the Un-
derwriter a right of first refusal to purchase for its own account or to sell
for the account of such Insiders any securities sold by the Insiders in the
United States pursuant to Rule 144 under the Securities Act.
51
<PAGE>
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.
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:
Cumulative convertible 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 eco-
nomic 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 anal-
ysis 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 cri-
teria 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 valu-
ations.
Future net cash inflows are based on the future production of proved reserves
of natural gas, natural gas liquids, crude oil and condensate as estimated by
petroleum engineers by applying current prices of gas and oil (with considera-
tion of price changes only to the extent fixed and determinable and with con-
sideration 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 barrel--Oil, re-
spectively. Future net cash flows are then calculated by reducing such esti-
mated 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 reserves. The es-
timated future income taxes give effect to permanent differences and tax cred-
its 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:
Cumulative convertible 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................................................ 18
Capitalization........................................................... 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business and Properties.................................................. 26
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 JUNE 19, 1996
PROSPECTUS
545,000 SHARES OF COMMON STOCK
LOGO
[LOGO OF FRONTIER NATURAL GAS CORPORATION APPEARS HERE]
Pursuant to the Registration Statement of which this Prospectus forms a part,
Frontier Natural Gas Corporation (the "Company") is offering (the "Offering")
1,200,000 Units (the "Units"), each Unit consisting of three shares of Common
Stock (the "Common Stock") and three Series B Redeemable Common Stock Purchase
Warrants (the "Series B Warrants"). Each Series B Warrant entitles the holder
to purchase one share of Common Stock for $ [40% of the per-unit offering
price] commencing , 1997 and ending , 2001. Each Series B Warrant is
redeemable by the Company with the prior consent of Gaines, Berland Inc. (the
"Underwriter") at a price of $.01 per warrant, at any time after the Series B
Warrants become exercisable, upon not less than 30 days prior written notice,
if the last sale price of the Common Stock has been at least 200% of the then-
exercise price of the Series B Warrants (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 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. The Selling Securityholders may not sell their shares prior to the
expiration of various time periods without the prior consent of the Underwrit-
er. See "Selling Securityholders."
The Common Stock is traded on the Nasdaq under the symbol "FNGC." On June 17,
1996, the last reported sale price of the Common Stock, as reported on Nasdaq,
was $ per share. See "Price Range of Securities."
------------
THESE SECURITIES ARE SPECULATIVE IN NATURE, INVOLVE A HIGH DEGREE OF RISK AND
SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS."
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
SELLING SECURITYHOLDERS
Pursuant to the Registration Statement of which this Prospectus forms a
part, 545,000 shares of the Company's Common Stock are being registered for
the account of the Selling Securityholders. The following table sets forth
certain information regarding the record ownership of the Company's Common
Stock for each entity which is a Selling Securityholder as of June 17, 1996.
This tabular information conforms to Item 403 of Regulation S-B, and gives ef-
fect to the exercise of warrants exercisable within 60 days of the date of ta-
ble owned in each case by the listed securityholder. None of the Selling
Securityholders has held any position or office or has had a material rela-
tionship with the Company or any of its affiliates within the past three
years. The Company believes that none of the holders listed below owns any
other securities of the Company. The Company will not receive any of the pro-
ceeds from the sale of these shares by the Selling Securityholders, except
that it will receive cash proceeds attributable to the exercise of the Hi-Chi-
cago Warrant.
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
OWNED PRIOR TO OFFERING OWNED AFTER OFFERING
------------------------ ------------------------
NAME AND ADDRESS SHARES BEING
OF SELLING SECURITYHOLDER NUMBER OF SHARES PERCENT REGISTERED NUMBER OF SHARES PERCENT
- ------------------------- ---------------- ------- ------------ ---------------- -------
<S> <C> <C> <C> <C> <C>
Hi-Chicago Trust (1).... 675,200 (3) 12.3% 375,000 (4) 300,200 3.3%
Weisser Johnson (2)..... 245,000 (5) 4.6% 170,000 75,000 .1%
</TABLE>
- --------
(1) The business address for the Hi-Chicago Trust is Two North LaSalle
Street, Chicago, Illinois 60602.
(2) The business address for Weisser Johnson is 300 Park Avenue, 17th Floor,
New York, New York 10022.
(3) Includes 300,000 shares issuable upon exercise of the Hi-Chicago Warrant
which are presently exercisable at $3.00 per share, 4,000 shares issuable
upon conversion of 2,000 shares of Convertible Preferred Stock which are
presently convertible and 4,000 shares issuable upon exercise of 4,000
warrants which are issuable upon conversion of the Convertible Preferred
Stock and presently exercisable.
(4) Includes 300,000 shares issuable upon exercise of the Hi-Chicago Warrant
which are presently exercisable at $3.00 per share.
(5) Includes 75,000 shares issuable upon exercise of warrants which are pres-
ently exercisable at $2.00 per share.
PLAN OF DISTRIBUTION
The securities offered hereby may be sold from time to time directly by the
Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through underwriters, dealers and agents.
The distribution of securities by the Selling Securityholders may be effected
in one or more transactions that may take place on the over-the-counter mar-
ket, including ordinary broker's transactions, privately-negotiated transac-
tions or through sales to one or more broker-dealers for resale of such shares
as principals, at market prices prevailing at the time of sale, at prices re-
lated to such prevailing market prices or at negotiated prices. Usual and cus-
tomary 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 commis-
sions received may be deemed underwriting compensation. The Selling
Securityholders may also elect to sell such securities pursuant to one or more
exemptions from registration under the Securities Act, including but not lim-
ited 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 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 this Pro-
spectus.
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 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.
53
<PAGE>
----------------
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................................................ 18
Capitalization........................................................... 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business and Properties.................................................. 26
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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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............ $ 7,431.03
NASD fees...................................................... 2,655.01
Underwriter's non-accountable expense allowance................ 216,000.00
Legal fees and expenses........................................ 75,000.00
Accounting fees and expenses................................... 12,000.00
Printing and engraving expenses................................ 65,000.00
Blue sky fees and expenses (including registration on Boston
Stock Exchange)............................................... 60,000.00
Nasdaq application fees........................................ 10,000.00
Miscellaneous.................................................. 11,913.96
-----------
TOTAL EXPENSES............................................... $460,000.00
===========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
<TABLE>
<CAPTION>
DATE OF PERSONS TO WHOM TYPE OF AMOUNT OF DESCRIPTION OF
TRANSACTION SECURITIES WERE SOLD SECURITIES SECURITIES SOLD THE TRANSACTION
- ------------ --------------------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
1/94 Stock Management, Common Stock Warrant to purchase Issued pursuant to the
Inc. PurchaseWarrant 30,000 shares of exemption from registration
Common Stock, provided by Section 4(2) of
exercisable for three the Securities Act.
years from date of
issue; warrant rights
earned at 2,500
shares per quarter at
$1.47/share.
1/95 William B. Federman Common Stock 6,700 shares, at Subscribed in March 1993 in
$1.679 per share connection with a private
(aggregate $11,250) placement effected pursuant
to Section 4(2) of the
Securities Act; the shares
were subsequently registered
on Form S-3 in May 1995.
3/95 Hi-Chicago Trust Common Stock 107,200 shares, at Subscribed in March 1993 in
$1.679 per share connection with a private
(aggregate $180,000) placement effected pursuant
to Section 4(2) of the
Securities Act; the shares
were subsequently registered
on Form S-3 in May 1995.
3/95 Lawrence E. Steinberg Common Stock 6,700 shares, at Subscribed in March 1993 in
$1.679 per share connection with a private
(aggregate $11,250) placement effected pursuant
to Section 4(2) of the
Securities Act; the shares
were subsequently registered
on Form S-3 in May 1995.
9/95 Weisser, Johnson & Common Stock 20,000 shares Issued in exchange for
Co. Capital services rendered, pursuant
Corporation 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. Capital Purchase Warrant 250,000 shares of services rendered, pursuant
Corporation 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. Capital services rendered, pursuant
Corporation 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* Underwriting Agreement between the Company and Gaines, Berland Inc.
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated By-Laws
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 the Warrant Agency 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.
Capital Corporation
4.11* Registration Rights Agreement between the Company and Weisser, Johnson
& Co. Capital Corporation
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
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)
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
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
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF EXHIBIT
------- ---------------
<C> <S>
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>
- --------
* To be filed by amendment.
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.
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the Com-
pany pursuant to Section 13 or Section 15(d) of the Exchange Act that
are incorporated by reference in the registration statement.
(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.
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 registration
statement to be signed on its behalf by the undersigned, thereon duly autho-
rized in the City of Oklahoma City, State of Oklahoma, on June 6, 1996.
Frontier Natural Gas Corporation,
an Oklahoma corporation
/s/ David W. Berry
By: _________________________________
DAVID W. BERRY,
CHAIRMAN OF THE BOARD OF
DIRECTORS, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
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 W. Berry Chairman of the June 6, 1996
- ------------------------------------- Board of Directors;
DAVID W. BERRY President and Chief
Executive Officer
/s/ David B. Christofferson General Counsel; June 6, 1996
- ------------------------------------- Executive Vice
DAVID B. CHRISTOFFERSON President;
Secretary; Chief
Financial Officer;
Director
/s/ S. Gordon Reese, Jr. Vice President--Gulf June 6, 1996
- ------------------------------------- Coast Region and
S. GORDON REESE, JR. Director
/s/ Michael A. Barnes Vice President of June 6, 1996
- ------------------------------------- Exploration and
MICHAEL A. BARNES Production
/s/ James R. Harris, Jr. Treasurer and June 6, 1996
- ------------------------------------- Controller
JAMES R. HARRIS, JR.
/s/ Neal M. Elliott Director June 6, 1996
- -------------------------------------
NEAL M. ELLIOTT
II-7
<PAGE>
NAME TITLE DATE
/s/ Jeffrey R. Orgill Director June 6, 1996
- -------------------------------------
JEFFREY R. ORGILL
/s/ Allen H. Sweeney Director June 6, 1996
- -------------------------------------
ALLEN H. SWEENEY
II-8
<PAGE>
Exhibit 4.13
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS AGREEMENT is made as of December 8, 1995, by and between FRONTIER
NATURAL GAS CORPORATION, an Oklahoma corporation (the "Company"), and HI-CHICAGO
TRUST, a trust with its principal offices in Chicago, Illinois (the "Trust").
WHEREAS, in settlement of certain disputes, the parties have entered
into an Agreement and Mutual Release of even date herewith (the "Purchase
Agreement") whereby the Company has issued to the Trust 75,000 shares of its
common stock, $.01 par value per share (the "Shares") and a warrant ("Warrant")
to purchase 300,000 shares of its common stock (the "Warrant Shares") and has
agreed to issue additional shares of common stock ("Additional Shares") under
the circumstances set forth in the Purchase Agreement; and
WHEREAS, the Company has agreed to provide the registration rights to
the Trust as set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Piggyback Registrations.
-----------------------
(a) Right to Piggyback. The Company currently is contemplating a
------------------
public offering of its securities to be underwritten by Gaines, Berland Inc.
(the "Public Offering") which will include the Shares and the Warrant Shares on
the terms set forth in the Purchase Agreement. Whenever, at any time after (i)
the Shares and the Registrable Shares are registered as part of the Public
Offering but the registration statement ceases to be effective prior to the
disposition of the Shares and the Warrant Shares under the registration
statement or (ii) April 30, 1996, if the Public Offering has not been declared
effective by such date, whichever is applicable, (the "Registration Rights Start
Date"), the Company proposes to register any of its securities under the
Securities Act of 1933, as amended (the "Securities Act") other than pursuant to
a Demand Registration hereunder and the registration form to be used may be used
for the registration of any Registrable Securities (a "Piggyback Registration"),
the Company will give prompt written notice to the Trust of its intention to
effect such a registration and will include in such registration all Registrable
Securities (in accordance with the priorities set forth in Subsections 1 (c) and
1 (d) below) with respect to which the Company has received written requests for
inclusion therein within fifteen (15) days after the receipt of the Company's
notice. The Company will take whatever action is necessary to effect such
registration. Such inclusion will not detract from the registration rights
otherwise granted herein to the holders of Registrable Securities.
(b) Piggyback Expenses. The Registration Expenses of the holders of
------------------
Registrable Securities will be paid by the Company in any and all Piggyback
Registrations.
(c) Priority on Primary Registration. If a Piggyback Registration is
--------------------------------
an underwritten primary registration on behalf of the Company and the managing
underwriters advise the Company in writing that
<PAGE>
in their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering, the Company
will include in such registration (i) first, the securities that the Company
proposes to sell, (ii) second, the Registrable Securities requested to be
included in such registration and (iii) other securities requested to be
included in such registration.
(d) Priority on Secondary Registrations. If a Piggyback Registration
-----------------------------------
is an underwritten secondary registration on behalf of holders of the Company's
securities and the managing underwriters advise the Company in writing that in
their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering, the Company
will include in such registration (i) first, the securities requested to be
included therein by the holders requesting such registration and the Registrable
Securities requested to be included in such registration, pro rata among the
--- ----
holders of Registrable Securities and such other securities on the basis of the
number of securities so requested to be included therein, and (ii) second, any
other securities requested to be included in such registration.
(e) Selection of Underwriters. If any Piggyback Registration is an
-------------------------
underwritten offering, the selection of investment banker(s) and manager(s) for
the offering will be in the discretion of the Company.
2. Demand Registrations.
--------------------
(a) Requests for Registration. Subject to the terms of this
-------------------------
Agreement, the Trust may, at any time on or after the Registration Rights Start
Date, request (i) registration under the Securities Act of all or part of their
Registrable Securities. All registrations requested pursuant to this Subsection
2(a) are referred to herein as "Demand Registrations." In the event Additional
Shares are issuable pursuant to the Purchase Agreement, the holders of such
Additional Shares will be entitled to include them in the registration statement
the failure of which to timely go effective gave rise to such Additional Shares.
The Company will use best efforts to effect such registration. Such inclusion
will not detract from the registration rights otherwise granted herein to the
holders of Registrable Securities.
(b) Number of Demand Registrations. The holders of the Registrable
------------------------------
Securities will be entitled to request two (2) Demand Registrations pursuant to
which the Registrable Securities shall be registered and in which the Company
will pay all Registration Expenses. A registration will not count as one of the
permitted Demand Registrations (i) until it has become effective (unless such
Demand Registration has not become effective due solely to the fault of the
holders requesting such registration) and (ii) unless the holders of the
Registrable Securities are able to register at least 90% of the Registrable
Securities requested to be included in such registration (unless such holders
are not so able to register such amount of the Registrable Securities due solely
to the fault of such holders); provided, however, that in any event the Company
will pay all Registration Expenses in connection with any registration initiated
as a Demand Registration.
(c) Type of Demand Registration. A Demand Registration will be a
---------------------------
Short-Form Registration in which the Company will pay all Registration Expenses
whenever the Company is permitted to use any applicable short form. Otherwise,
the Demand Registration will be a Long-Form Registration. The selection of the
type of form shall be at the sole discretion of the Company.
(d) Priority on Demand Registrations. The Company will not include in
--------------------------------
any Demand Registration any securities which are not Registrable Securities
without the written consent of the Trust.
<PAGE>
If other securities are permitted to be included in a Demand Registration which
is an underwritten offering and the managing underwriters advise the Company in
writing that in their opinion the number of Registrable Securities and other
securities which can be sold in such offering, the Company will include in such
registration, prior to the inclusion of any securities which are not Registrable
Securities, the number of Registrable Securities requested to be included which
in the opinion of such underwriters can be sold.
(e) Selection of Underwriters. Both the Company and the Trust must
-------------------------
agree to the selection, if any, of the investment banker(s) and manager(s) to
administer the offering, and if there is no agreement, the Demand Registration
will not be underwritten.
(f) Other Registrations. If the Company has previously filed a
-------------------
registration statement with respect to Registrable Securities pursuant to this
Section 2 and if such previous registration has not been withdrawn or abandoned,
the Company will not file or cause to be effected any other registration of any
of its equity securities or securities convertible or exchangeable into or
exercisable for its equity securities under the Securities Act (except on Form
S-8 or any successor form), whether on its own behalf or at the request of any
holder or holders of such securities, until a period of at least one hundred and
twenty (120) days has elapsed from the effective date of such previous
registration except with respect to any Demand Registration without the prior
written consent of the holders of a majority of the Registrable Securities
included in such distribution. In the event such other registration is an
underwritten primary distribution in which the Company will receive the net
proceeds from the underwriting, the holders agree to not unreasonably withhold
their consent.
(g) Other Registration Rights. Except as provided in this Agreement,
-------------------------
the Company will not grant to any person or entity the right to request the
Company to register, during the period beginning on the receipt of a Demand
Registration and ending one hundred and twenty (120) days after the effective
date of a Demand Registration, any equity securities of the Company, or any
securities convertible or exchangeable into or exercisable for such securities
without the written consent of the holders of a majority of the Registrable
Securities.
(h) Timing of Demand Registration. The holders of the Registrable
-----------------------------
Securities agree to cooperate with the Company in timing the effectiveness of a
Demand Registration so as to (i) allow the Company to utilize the financial
statements that it otherwise is required to prepare due to the Company being
subject to the reporting requirements of the Securities Exchange Act and (ii)
minimize the necessity of having audited financial statements prepared sooner
after the end of its fiscal year than would be required under the Securities
Exchange Act or for periods other than its fiscal year unless the effectiveness
of the Demand Registration is delayed beyond the reasonable expectations of the
holders of the Registrable Securities and through no fault of such holders.
<PAGE>
3. Holdback Agreements. The Company agrees (i) not to effect any
-------------------
public sale or distribution of its equity securities, or any securities
convertible into or exchangeable or exercisable for such securities, during the
seven (7) days prior and the 90-day period beginning on the effective date of
any Demand Registration or any Piggyback Registration (except as part of such
registration or pursuant to registrations on Form S-8 or any successor form),
unless the holders of a majority of the Registrable Securities otherwise agree,
and (ii) to cause each holder of its equity securities, or any securities
convertible into or exchangeable or exercisable for such securities, hereinafter
purchased from the Company (other than in a registered public offering) to agree
not to effect any public sale or distribution of any such securities during such
period (except as part of such registration, if otherwise permitted), unless the
holders of a majority of the Registrable Securities otherwise agree. In the
event the public distribution is an underwritten primary distribution in which
the Company will receive the net proceeds from the underwriting, the holders
agree to not unreasonably withhold their consent. Notwithstanding the
foregoing, if the holders of the Registrable Securities are given notice of a
proposal by the Company to register any of its securities in an underwritten
primary public offering under the Securities Act, the holders cannot halt such
offering by subsequently filing notice of a Demand Registration unless such
underwritten registration has not gone effective with six (6) months after the
holders have received notice of the underwritten primary public registration.
The holders may nonetheless seek to include their Registrable Securities under
such registration as a Piggyback Registration pursuant to Section 1.
4. Registration Procedures. Whenever the Trust has requested that
-----------------------
any Registrable Securities will be registered pursuant to this Agreement, the
Company will use its best efforts to effect the registration and the sale of
such Registrable Securities in accordance with the intended method of
disposition thereof, and pursuant thereto, the Company will as expeditiously as
possible:
(a) prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities as soon as
possible but in no event later than 30 days after receipt of the registration
request and use its best efforts to cause such registration statement to become
effective (provided that, before filing a registration statement or prospectus
or any amendments or supplements thereto, the Company will furnish to the
counsel for the Trust copies of all such documents proposed to be filed);
(b) promptly respond to any comments from state and federal securities
regulators regarding the registration statement utilizing its best efforts;
(c) prepare and file with the Securities and Exchange Commission such
amendments and supplemental to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective for a period of not less than nine (9) months and comply
with the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof set
forth in such registration statement;
(d) furnish to the Trust such reasonable number of copies of such
registration statement, each amendment and supplement thereto, the prospectus
included in such registration statement (including each preliminary prospectus)
and such other documents as such seller may reasonably request in order to
facilitate the disposition of the Registrable Securities owned by such seller;
(e) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
any seller of Registrable Securities reasonably requests
<PAGE>
(but in no event with respect to more than five states) or to otherwise to take
such action to enable the sellers of the Registrable Securities to dispose of
their Registrable Securities through exemptions from registration which will
permit secondary trading of the Registrable Securities and do any and all other
acts and things which may be reasonably necessary or advisable to enable such
seller to consummate the disposition in such jurisdictions of Registrable
Securities owned by such seller (provided that the Company will not be required
to (i) qualify generally to do business in any jurisdiction, (ii) subject itself
to taxation in any such jurisdiction, or (iii) consent to general service of
process in any such jurisdiction where it would otherwise not be required to
qualify, subject itself to a taxation or subject itself to consent to service of
process, respectively, but for this subparagraph);
(f) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading, and, at the request of any such seller, the Company will prepare
a supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such Registrable Securities, such prospectus will not contain
an untrue statement of a material fact or omit to state any fact necessary to
make the statements therein not misleading;
(g) cause all such Registrable Securities to be listed on each
securities exchange and automated quotation system on which similar securities
issued by the Company are then listed, if any;
(h) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(i) enter into such customary agreements (including underwriting
agreements, if any, in customary form) and take all such other actions as the
holders of a majority of the Registrable Securities being sold or the
underwriters, if any, reasonably request in order to expedite or facilitate the
disposition of such Registrable Securities;
(j) make available for inspection during normal business hours by any
seller of Registrable Securities, any underwriter participating in any
disposition pursuant to such registration statement, and any attorney,
accountant or other agent retained by any such seller or underwriter, all
financial and other records, pertinent corporate documents and properties of the
Company, and cause the Company's officers, directors, employees and independent
accountants to supply all information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with such registration
statement; and
(k) if the registration statement has not been declared effective
within twelve (12) months after the notice of a Demand Registration has been
received by the Company, allow the holders of a majority of the Registrable
Securities to appoint an additional counsel in order to obtain such
effectiveness and to fully cooperate with such counsel in obtaining such
effectiveness.
5. Registration Expenses. All expenses incident to the Company's
---------------------
performance of or compliance with this Agreement, including, without limitation,
all registration and filing fees, fees and expenses of compliance with
securities or blue sky laws, printing expenses, messenger and delivery expenses,
and fees and disbursements of counsel for the Company including counsel
appointed pursuant to subsection (k) of Section 4 above and all independent
certified public accountants, underwriters (excluding discounts and commissions)
and other person or entity retained by the Company (all such
<PAGE>
expenses being herein called "Registration Expenses") will be borne by the
Company. The Company will also pay its internal expenses (including, without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties), the expense of any annual audit or quarterly
review, the expense of any liability insurance and the expenses and fees for
listing the securities to be registered on each securities exchange on which
similar securities issued by the Company are then listed. Each holder of
Registrable Securities will be responsible for its own legal fees and internal
expenses (including, without limitation, all salaries and expenses of its
trustees) and any discounts and commissions attributable to its Registrable
Securities.
6. Indemnification.
---------------
(a) The Company agrees to indemnify, to the extent permitted by law,
each holder of Registrable Securities, its trustees, settlors, beneficiaries,
officers and directors and each person or entity who controls such holder
(within the meaning of the Securities Act) against all losses, claims, damages,
liabilities and expenses caused by any untrue or alleged untrue statement of
material fact contained in any registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein, except
insofar as the same are caused by or contained in any information furnished in
writing to the Company by such holder expressly for use therein or which such
holder failed to provide after being so requested or by such holder's failure to
deliver a copy of the registration statement or prospectus or any amendments or
supplements thereto after the Company has furnished such holder with a
sufficient number of copies of the same or which is otherwise attributable of
the negligence or willful misconduct of such holder. In connection with an
underwritten offering, the Company will indemnify such underwriters, their
officers and directors and each person or entity who controls such underwriters
(within the meaning of the Securities Act) to the same extent as provided above
with respect to the indemnification of the holders of Registrable Securities.
(b) In connection with any registration statement in which a holder of
Registrable Securities is participating, each such holder will furnish to the
Company in writing such information and affidavits as the Company reasonably
requests for use in connection with any such registration statement or
prospectus and, to the extent permitted by law, will indemnify the Company, its
directors and officers, each person or entity who controls the Company (within
the meaning of the Securities Act), against any losses, claims, damages,
liabilities and expenses resulting from any untrue statement of material fact
contained or required to be contained in the registration statement, prospectus
or preliminary prospectus or any amendment thereto or supplement thereto or any
omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only to the extent
that such untrue statement or omission is contained or required to be contained
in any information or affidavit so furnished or required to be so furnished in
writing by such holder; provided that the obligation to indemnify will be
several, not joint and several, among such holders of Registrable Securities and
the liability of each such holder of Registrable Securities will be in
proportion to and limited to the net amount received by such holder from the
sale of Registrable Securities pursuant to such registration statement.
(c) Any person or entity entitled to indemnification hereunder will
(i) give prompt written notice to the indemnifying party of any claim with
respect to which it seeks indemnification and (ii) unless in such indemnified
party's reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim, with counsel reasonably
satisfactory to the indemnified party. If such defense
<PAGE>
is assumed, the indemnifying party will not be subject to any liability for any
settlement made by the indemnified party without its consent (but such consent
will not be unreasonably withheld). An indemnifying party who is not entitled
to, or elects not to, assume the defense of a claim will be obligated to pay the
reasonable fees and expenses of one counsel for all parties indemnified by such
indemnifying party respect to such claim unless in the reasonable judgment of
any indemnified party a conflict of interest may exist between such indemnified
party and any other of such indemnified parties with respect to such claim in
which case the indemnifying party will be obligated to pay the fees and expenses
of one counsel for each indemnified party where a conflict of interest may
exist.
(d) The indemnification provided for under this Agreement will remain
in full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling person or entity
of such indemnified party and will survive the transfer of securities; provided,
however, that such survival shall be limited to the rights of the Hi-Chicago
Trust and its subsequent assigns but not any purchasers of the securities
pursuant to Rule 144 or a registration pursuant to this Agreement. The Company
also agrees to make such provisions, as are reasonably requested by any
indemnified party, for contribution to such party in the event the Company's
indemnification is unavailable for any reason.
7. Current Public Information. The Company will timely file all
--------------------------
reports required to be filed by it under the Securities Act and the Securities
Exchange Act and the rules and regulations adopted by the Securities and
Exchange Commission thereunder, and will take such further action as any holder
or holders of Registrable Securities may reasonably request, all to the extent
required to enable such holders to sell Registrable Securities pursuant to (i)
Rule 144 adopted by the Securities and Exchange Commission under the Securities
Act (as such rule may be amended from time to time) or any similar rule or
regulation hereafter adopted by the Securities and Exchange Commission or (ii) a
registration statement contemplated by this Agreement. Upon request, the
Company will deliver to such holders of Registrable Securities a written
statement as to whether it has complied with such requirements.
8. Definitions.
-----------
(a) Registrable Securities.
----------------------
<PAGE>
(1) The term "Registrable Securities" means (i) any of the
Company's Common Stock or other securities issued or to be issued to the
Trust pursuant to the Purchase Agreement, whether as an initial issuance
of Shares or as an issuance of Additional Shares, (ii) any of the
Company's Common Stock or other securities issued or issuable upon
exercise of the Warrant, and (iii) any securities issued or issuable
with respect to the securities referred to in clauses (i) or (ii) by way
of stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization.
(2) As to any particular Registrable Securities, such securities
will cease to be Registrable Securities when they have (a) been
effectively registered under the Securities Act and disposed of in
accordance with the registration statement covering them, (b) been sold
to the public in accordance with Rule 144 (or any similar provision then
in force) under the Securities Act, or (c) been otherwise transferred
and new certificates for them not bearing a Securities Act restrictive
legend have been delivered by the Company. Whenever any particular
securities cease to be Registrable Securities, the holder thereof will
be entitled to receive from the Company, without expense, new securities
of like tenor not bearing a restrictive legend.
(b) The term "Long-Form Registration" means a registration under the
Securities Act on Form S-1 or any similar long form registration.
(c) The term "Short-Form Registration" means a registration under the
Securities Act on Form S-2, Form S-3 or any similar short form registration.
9. Miscellaneous.
-------------
(a) Adjustments Affecting Registrable Securities. The Company will
--------------------------------------------
not take any action or permit any change to occur with respect to its securities
which would materially and adversely affect the ability of the holders of
Registrable Securities to include such Registrable Securities in a registration
undertaken pursuant to this Agreement or which would materially and adversely
affect the marketability of such Registrable Securities in any such registration
(including, without limitation, effecting a stock split or a combination of
shares).
(b) Remedies. Any person or entity having rights under any provision
--------
of this Agreement will be entitled to enforce such rights specifically, to
recover damages caused by reason of any breach of any provision of this
Agreement, and to exercise all other rights granted by law.
(c) Amendment and Waivers. Except as otherwise provided herein, the
---------------------
provisions of this Agreement may be amended and the Company may take any action
herein prohibited, or omit to perform any act herein required to be performed by
it, only if the Company has obtained the written consent of the Trust pursuant
to an agreement signed by both the Company and the Trust.
(d) Successor and Assigns. All covenants and agreements in this
---------------------
Agreement by or on behalf of any of the parties hereto will bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not.
(e) No Inconsistent Agreements. The Company will not hereafter enter
--------------------------
into any agreement with respect to its securities which is inconsistent with the
rights granted to the holders of the Registrable Securities hereunder.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement.
HI-CHICAGO TRUST
TWO N. LASALLE STREET
22ND FLOOR
CHICAGO, IL 60602
By:/s/ Burton W. Kanter
------------------------
Burton W. Kanter, Trustee
FRONTIER NATURAL GAS CORPORATION
9400 NORTH BROADWAY
OKLAHOMA CITY, OK 73114
By: /s/ David W. Berry
-----------------------------
David W. Berry, President
<PAGE>
Exhibit 10.6
AGREEMENT AND MUTUAL RELEASE
----------------------------
This Agreement and Mutual Release (the "Agreement") is made and entered
into as of this 8th day of December, 1995, by and among Frontier Natural Gas
Corporation, an Oklahoma corporation ("Frontier") and the Hi-Chicago Trust, a
Trust with its principal offices in Chicago, Illinois ("Hi-Chicago").
RECITALS
--------
WHEREAS, Hi-Chicago subscribed to and purchased certain common stock and
securities of Frontier; and
WHEREAS, Burton W. Kanter is the trustee of Hi-Chicago, and warrants that
he has the authority to settle and compromise Hi-Chicago claims against third
parties;
WHEREAS, a dispute exists between Hi-Chicago and Frontier concerning
certain claims the parties hereto may have against one another and the merits of
the parties' claims; and
WHEREAS, Hi-Chicago and Frontier wish to amicably resolve said disputes and
avoid the expenses and uncertainties of litigation.
NOW, THEREFORE, in consideration of the mutual covenants set forth herein,
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, it is hereby stipulated and agreed by and between
Frontier and Hi-Chicago as follows:
1. Recitals Incorporated. Frontier and Hi-Chicago acknowledge that the
---------------------
foregoing Recitals are true and correct.
2. Conditions to this Agreement. The obligation of Hi-Chicago to enter
----------------------------
into this Agreement is subject to the satisfaction of each of the following
conditions, unless waived in writing by Hi-Chicago:
(a) The receipt by Hi-Chicago of the following:
(i) This Agreement, a stock certificate representing the Shares,
the Warrant
<PAGE>
and the Registration Rights Agreement, each as defined
herein, all appropriately completed and duly executed by
Frontier;
(ii) A Certificate of Good Standing from the Secretary of State of
Oklahoma dated within seven (7) days of the date of this
Agreement;
(iii) A copy of Frontier's current Certificate of Incorporation and
By-Laws, certified as of a recent date by the Secretary of
Frontier;
(iv) Board of Director resolutions of Frontier authorizing the
transactions contemplated by this Agreement certified as of a
recent date by the Secretary of Frontier; and
(v) Consent of Gaines, Berland Inc. to the transactions
contemplated by the Agreement in form satisfactory to the
Trust.
(b) The representations and warranties set forth in Section 3 are true and
correct in all material respects on the date hereof.
3. Representations and Warranties.
-------------------------------
(a) Frontier represents and warrants to Hi-Chicago as follows:
(i) Organization. The Frontier is a corporation validly organized and
------------
existing and in good standing under the laws of the State of
Oklahoma, has full power and authority to own its property and
conduct its business as presently conducted by it and is duly
qualified to do business and is in good standing as a foreign
corporation in each jurisdiction where the nature of its business
or ownership of property makes such qualification necessary.
(ii) Due Authorization. The execution, delivery and performance by
-----------------
Frontier of this Agreement have been duly authorized by all
necessary corporate action, do not require any approval or consent
of, or any registration, qualification or filing with, any
governmental agency or authority or any approval or consent of any
other person (including, without limitation, any stockholder), do
not and will not conflict with, result in any violation of or
constitute any default under, any provision of Frontier's
Certificate of Incorporation or By-Laws, any agreement binding on
or applicable to Gaines, Berland Inc., Frontier or any of its
property, or any law or governmental regulations or court decree
or order, binding upon or applicable to Frontier or any of its
property, and will not result in the creation or imposition of any
lien on any of its property pursuant to the provisions of any
agreement binding on or applicable to Frontier or any of its
property except
<PAGE>
pursuant to this Agreement. The parties acknowledge that certain
of the transactions contemplated by this Agreement are
inconsistent with that certain Letter of Intent dated the 15th day
of September, 1995 between Frontier and Gaines, Berland Inc., a
copy of which has previously been provided to Hi-Chicago, and that
the consent to be provided by Gaines, Berland Inc. pursuant to
Section 2(a)(v) is to obtain a waiver from Gaines, Berland Inc. of
any objections which it may have to these transactions.
(iii) Validity of Agreement. Frontier has full power and authority to
---------------------
enter into and perform its obligations under this Agreement, and
to otherwise carry out the transactions contemplated by this
Agreement. This Agreement, the Registration Rights Agreement, the
Warrant and the Shares are legal, valid and binding obligations of
Frontier, enforceable in accordance with their terms, subject only
to bankruptcy, insolvency, reorganization, moratorium or similar
laws, rulings or decisions at the time in effect affecting the
enforceability of rights of creditors generally and to general
equitable principles which may limit the right to obtain equitable
remedies. Frontier has sufficient authorized but unissued shares
of its common stock to issue the Shares and the Warrant Shares and
will reserve sufficient shares to allow issuance when the Warrant
is exercised or when Additional Shares are to be issued pursuant
to Section 7 below.
(iv) Accuracy of Information. All factual information heretofore or
-----------------------
herewith furnished by or on behalf of Frontier to Hi-Chicago for
purposes of, or in connection with, this Agreement or any
transaction contemplated hereby is, and all other such factual
information hereafter furnished by or on behalf of Frontier to Hi-
Chicago will be, true and accurate in every material respect on
the date as of which such information is dated or certified, and
no such information contains any material misstatement of fact or
omits to state a material fact or any fact necessary to make the
statements contained therein not misleading.
(v) Survival of Representations. All representations and warranties
---------------------------
contained in this subsection (a) shall survive the delivery of the
Shares, the Warrant and the Registration Rights Agreement and any
investigation at any time made by or on behalf of Hi-Chicago shall
not diminish its rights to rely thereon.
(b) Hi-Chicago represents and warrants to Frontier as follows:
<PAGE>
(i) Organization. Hi-Chicago is a trust validly organized and
------------
existing and in good standing and has full power and authority
to conduct its business as presently conducted by it.
(ii) Due Authorization. The execution, delivery and performance by
-----------------
Hi-Chicago of this Agreement have been duly authorized by all
necessary action, do not require any approval or consent of, or
any registration, qualification or filing with, any governmental
agency or authority or any approval or consent of any other
person (including, without limitation, any beneficiary), do not
and will not conflict with, result in any violation of or
constitute any default under, any provision of its trust
agreement, any agreement binding on or applicable to Hi-Chicago
or any of its property, or any law or governmental regulations
or court decree or order, binding upon or applicable to Hi-
Chicago or any of its property.
(iii) Validity of this Agreement. Hi-Chicago has full power and
--------------------------
authority to enter into and perform its obligations under this
Agreement and to otherwise carry out the transactions
contemplated by this Agreement. This Agreement and the
Registration Rights Agreement are legal, valid and binding
obligations of Hi-Chicago, enforceable in accordance with their
terms, subject only to bankruptcy, insolvency, reorganization,
moratorium or similar laws, rulings or decisions at the time in
effect affecting the enforceability of rights of creditors
generally and to general equitable principles which may limit
the right to obtain equitable remedies.
(iv) Investment Intent. Hi-Chicago is purchasing the Shares and the
-----------------
Warrant for investment purposes only and not with a view to any
resale or public distribution thereof.
4. Issuance and Delivery of Shares. Frontier shall issue to Hi-Chicago
-------------------------------
Seventy Five Thousand (75,000) shares of Frontier common stock (the "Shares"),
which are currently unregistered and subject to Rule 144. The certificate
evidencing the Shares shall be delivered to Hi-Chicago upon execution of and as
condition to this Agreement.
5. Issuance and Delivery of Warrants. Frontier shall issue to Hi-Chicago
---------------------------------
a Warrant in the form as attached hereto as Exhibit "A" (the "Warrant") for the
purchase of 300,000 shares of Frontier common stock (the "Warrant Shares") at an
exercise price of Three Dollars ($3.00) per share exercisable through the
earlier of (a) sixty (60) months from the date hereof or (b) thirty (30) days
after the date in which the closing bid price of Frontier common stock has
equalled or exceeded Six Dollars ($6.00) per share for sixty (60) consecutive
trading days. The executed Warrant shall be delivered to Hi-Chicago upon
execution of and as a condition to this Agreement. Warrant Shares issued upon
exercise of the
<PAGE>
Warrants will be unregistered and subject to Rule 144 unless previously
registered pursuant to the terms of the Registration Rights Agreement, as
defined in Section 6 below.
6. Execution and Delivery of Registration Rights Agreement and Inclusion
---------------------------------------------------------------------
of Securities in Public Offering. Each party shall execute a registration
- --------------------------------
rights agreement in the form attached hereto as Exhibit "B" (the "Registration
Rights Agreement") and each party will deliver an executed copy of the
Registration Rights Agreement to the other upon execution of and as a condition
to this Agreement. The Registration Rights Agreement shall be as set forth
herein. The Company currently is contemplating a public offering of its
securities (the "Public Offering") to be underwritten by Gaines, Berland Inc.
The Company will include the Shares and the Warrant Shares as part of the Public
Offering subject to the agreement of the Trust, which is hereby given provided
that the registration statement is effective on or before April 30, 1996 and
remains effective thereafter with respect to the Shares and the Warrant Shares,
to not sell the Shares or the Warrant Shares without the prior consent of
Gaines, Berland Inc. for a period of six months after the effective date of the
Public Offering (the "Effective Date") and, thereafter, to sell the Shares
without limitation as to number. The Warrant Shares will be subject to an
additional restriction period as to sales by the Trust without the prior consent
of Gaines, Berland Inc. which will be released as to (a) 75,000 of the Warrant
Shares on the six month anniversary of the Effective Date and (b) 75,000 of the
Warrant Shares on the nine month anniversary of the Effective Date with no
restrictions after the twelve month anniversary of the Effective Date. The
number of Shares and Warrant Shares included in the registration statement and
subject to the foregoing limitations on sales shall be adjusted in the same
manner as provided in Section 8(a)(1)(iii) of the Registration Rights Agreement
regarding the definition of Registrable Securities. The expenses of including
the Shares and Warrant Shares in the Public Offering will be borne by the
Company to the same extent the Company would bear the Registration Expenses of a
Piggyback Registration, as both terms are defined in the Registration Rights
Agreement. The Company hereby agrees to maintain the effectiveness of the
registration statement and to otherwise comply with subsections (b) through (j),
inclusive, of Section 4 of the Registration Rights
<PAGE>
Agreement with respect to the Shares and the Warrant Shares until they have been
disposed of under the registration statement, and the Company and the Trust
hereby agree to abide by the provisions of Section 6 of the Registration Rights
Agreement regarding indemnification. Subject to the foregoing limitations,
sales of Shares and Warrant Shares by the Trust may be made in such fashion as
the Trust shall determine. At any time after (i) the Shares and Warrant Shares
are registered as part of the Public Offering but the registration statement
ceases to be effective prior to the disposition of the Shares and Warrant Shares
under the registration statement, or (ii) April 30, 1996 if the Public Offering
has not been declared effective by such date, whichever is applicable, the
rights under the Registration Rights Agreement shall be effective.
7. Additional Issuance of Shares. In the event a notice for a Demand
-----------------------------
Registration, as defined in the Registration Rights Agreement, is received by
Frontier pursuant to the Registration Rights Agreement and the registration
statement regarding the Registrable Securities (as defined in the Registration
Rights Agreement) has not gone effective within seventy-five (75) days of the
date of such notice or such later date as is due to comments from the Securities
and Exchange Commission which are received after sixty-five (65) days from the
date of such notice but in no event shall such later date extend beyond one
hundred (100) days from the date of such notice (the "Registration Period"),
Frontier shall issue additional shares of its common stock to Hi-Chicago (the
"Additional Shares") in the amount of five percent (5%) of the Registrable
Securities requested for inclusion in a Demand Registration for each week past
such Registration Period that such registration does not go effective. The
Additional Shares issuable hereunder will constitute Registrable Securities and
will be issued to Hi-Chicago on a prompt basis and in no event later than two
(2) business days after the obligation to issue the Additional Shares accrues.
Notwithstanding the foregoing, no Additional Shares shall be issuable to Hi-
Chicago which are attributable to any periods which are subsequent to eighteen
(18) months after the notice for a Demand Registration is received by Frontier.
Nothing herein is intended to preclude Hi-Chicago from enforcing any other
remedy of law.
<PAGE>
8. Releases.
--------
(a) Frontier hereby releases, acquits and forever discharges Hi-Chicago
and its trustee, settlor, beneficiaries, attorneys, successors and assigns from
any and all liability actions, causes of action, suits, claims, demands,
charges, damages of whatsoever kind, known and unknown, from the beginning of
time to the date of execution of this Agreement, by reason of any matter or
thing arising out of or in connection with any dealings, contacts or obligations
between Hi-Chicago and Frontier, or any alleged breach of contract, fraud,
warranty or any other thing, whether legal or equitable, and the consequences
thereof, including any claims, losses, costs or damages, whether known or
unknown, liquidated or unliquidated, fixed or contingent, direct or indirect,
which Frontier ever had, has or ever can have, shall or may have or claim to
have against Hi-Chicago.
(b) Hi-Chicago and its trustee hereby release, acquit and forever
discharge Frontier, its heirs, representatives, parents, directors, officers,
agents, employees, attorneys, successors, assigns and all other persons, firms
and corporations from any and all liability, actions, causes of action, suits,
claims, demands, charges, damages of whatsoever kind, known and unknown, from
the beginning of time to the date of execution of this Agreement, by reason of
any matter or thing arising out of or in connection with any dealings, contacts
or obligations between the Hi-Chicago and Frontier, or any alleged breach of
contract, fraud, warranty or any other thing, whether legal or equitable, and
the consequences thereof, including any claims, losses, costs or damages,
whether known or unknown, liquidated or unliquidated, fixed or contingent,
direct or indirect, which Hi-Chicago had, have or ever can have, shall or may
have or claim to have against Frontier.
9. Successors and Assigns. It is hereby agreed that this Agreement shall
----------------------
be binding upon the parties, their predecessors and successors, and their past
and present agents, employees, trustees, settlors, beneficiaries, officers,
directors, heirs, administrators, executors, and assigns.
10. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which, when executed, shall be deemed to be an original
and all of which together shall be deemed to be
<PAGE>
one and the same instrument.
11. Governing Laws. This Agreement shall be governed by the laws of the
--------------
State of Oklahoma.
IN WITNESS WHEREOF, the parties have executed this Agreement and Mutual
Release.
HI-CHICAGO TRUST
TWO N. LASALLE STREET
22ND FLOOR
CHICAGO, IL 60602
By: /s/ Burton W. Kanter
--------------------
Burton W. Kanter, Trustee
FRONTIER NATURAL GAS CORPORATION
9400 NORTH BROADWAY
OKLAHOMA CITY, OK 73114
By: /s/ David W. Berry
----------------------------
David W. Berry, President
<PAGE>
STATE OF_______________________ )
) SS
COUNTY OF _____________________ )
This instrument was acknowledged before me on the ______ day of
____________________, 1995 by Burton W. Kanter as Trustee of the Hi-Chicago
Trust.
________________________________________
Notary Public
My Commission Expires:
____________________________
[SEAL]
STATE OF OKLAHOMA )
) SS
COUNTY OF OKLAHOMA )
This instrument was acknowledged before me on the ______ day of
____________________, 1995 by David W. Berry, as President of Frontier Natural
Gas Corporation.
________________________________________
Notary Public
My Commission Expires:
____________________________
[SEAL]
<PAGE>
Exhibit 10.12
CONSULTING AGREEMENT
WHEREAS, Frontier Natural Gas Corporation ("Frontier") and Jeffrey R.
Orgill, an individual ("Consultant"), previously executed that certain
employment agreement dated effective the 1st day of January, 1993, a copy of
which is attached hereto as Exhibit "A" (the "Employment Agreement") and,
WHEREAS, Frontier and Consultant both have agreed that Consultant
would limit and modify Consultant's relationship with Frontier and,
WHEREAS, the parties have agreed that the Consultant shall be become a
consultant to Frontier as set forth herein;
THEREFORE, the parties agree as follows:
1. Consultant. Consultant shall, effective the 1st day of May,
----------
1996, cease to be an employee of Frontier and shall thereafter serve as
geological, geophysical and exploration consultant to Frontier, pursuant to the
terms of this Consulting Agreement.
2. Duties. Frontier shall employ Consultant, and Consultant agrees
------
to serve as Frontier's geological, geophysical and exploration and production
consultant to the extent consistent with Consultant's background as required and
requested by Frontier up to a maximum of 40 hours per month, as requested by
Frontier, provided, however, that Consultant shall not be required to work more
than 24 hours (i.e. three eight-hour days) in any one week period. Services
requested in excess thereof shall be billed at the rate of $70.00 per hour, up
to a maximum of $400.00 per calendar day. Consultant shall provide exploration
and production oversight services on Frontier's currently existing properties
and prospects in the Mid-Continent Area and prospect generation and evaluation
services on Frontier's existing 3-D seismic data over acreage in the Mid-
Continent Area, and such other services as agreed to between Consultant and
Frontier. Frontier shall be required to provide Consultant access to all tools
necessary to perform the requested work.
3. Independent Contractor. Consultant shall serve as an independent
----------------------
contractor and shall have the right to perform for Frontier and/or for third
parties from his offices in Oklahoma City; provided Consultant shall travel as
reasonably necessary.
4. Compensation. Employee's monthly consulting fee shall be
------------
$10,000.00 per month, payable in equal semi-monthly installments on the 15th day
of each month and at the end of each month. Compensation paid pursuant hereto
shall not be subject to reduction by the amount of all applicable withholding,
social security and other similar state, federal and local taxes and deductions,
all of which Consultant agrees to pay as an independent contractor. Consultant
agrees to indemnify and hold harmless Frontier for any costs incurred in regard
thereto due to Consultant's failure to timely pay any such taxes.
5. Term. The term of this Consulting Agreement and all provisions
----
hereof shall
<PAGE>
Orgill/Consulting Agreement
Page 2 of 5
commence effective May 1, 1996 and shall extend to March 31, 1998, at which
time the Consulting Agreement will expire, unless agreed to in writing between
the parties.
6. Director. Consultant may continue to serve on Frontier's Board
--------
of Directors as he is elected to so serve by the shareholders of Frontier, and
if Consultant so serves, shall do so for no additional compensation other than
as set forth herein during the term of this Consulting Agreement.
7. Incentive Compensation. All units in Frontier's Stock Incentive
----------------------
Plan, currently vested in Consultant, pursuant to paragraph 4 of the Employment
Agreement, shall remain vested and shall be exercisable throughout the duration
of Consultant's service as a Director of Frontier and such period thereafter as
set forth in said Stock Incentive Plan. There shall be no additional vesting of
additional incentive compensation for any rights not vested as of the date
hereof.
8. Deferred Compensation. All amounts vested as of the date hereof
---------------------
in Consultant, pursuant to paragraph 5 of the Employment Agreement, shall remain
valid and payable obligations of Frontier pursuant to the provisions of
paragraph 5 of the Employment Agreement. There shall be no further vesting
after the date hereof, and Consultant shall accrue no additional deferred
compensation not currently vested as of the date hereof.
9. Travel Expenses. Consultant shall be reimbursed for reasonable
---------------
approved travel and business expenses incurred in connection with Consultant's
duties to Frontier.
10. Confidentiality and Proprietary Ownership Agreement. Consultant
---------------------------------------------------
will maintain all information which is Frontier's proprietary information
confidential as set forth in paragraph 7(a) of the Employment Agreement
throughout the term of this Consulting Agreement and for one year thereafter.
Consultant can, however, perform services for third parties unrelated to
confidential information regarding Frontier's business activities beginning May
1, 1996, which permitted services shall include work on any oil and gas prospect
leads not currently on acreage owned by Frontier or on acreage which does not
underlie any of Frontier's existing seismic data bases.
11. Other. Frontier agrees to sell to Consultant for a total
------
purchase price of $1.00 the following:
a. Furniture currently located in Consultant's office at
Frontier;
b. One (1) light table;
c. One (1) hard copy data base of Oklahoma data comprised of
scout tickets and well logs; provided, however, that Frontier
shall have access to said data base at any reasonable time
and the right to use any such data as it deems necessary; and
provided further, that should Consultant ever seek to dispose
of said data base, he shall offer same to Frontier at a price
of $1.00 prior to any such disposition;
d. One (1) Desk Jet 500 Plotter;
e. One (1) Mita copying machine which does not function;
f. One (1) lot of drafting tools comprised of triangles, etc.;
<PAGE>
Orgill/Consulting Agreement
Page 3 of 5
g. One DOS-based personal computer as currently used by
Consultant;
h. Use of any mapping software as may be agreed to by the
parties at a future date.
Any taxes or other liabilities accruing due to compensation to
Consultant as a result hereof shall be Consultant's sole responsibility, and
Consultant agrees to pay same and to indemnify Frontier for any costs in regard
thereto. Frontier also agrees that all rights to that certain Oak Tree Country
Club membership currently in Consultant's name vest solely in Consultant and
Consultant agrees that Frontier has no obligation in regards to any dues or
additional costs due on said membership.
12. Employment Agreement. All terms, obligations and provisions of
--------------------
each party thereto to the other shall, other than those specifically extended in
-----------------------------------------
this Consulting Agreement, be deemed of no further effect, and Frontier shall be
- -------------------------
under no further obligation to Consultant, and Consultant under no further
obligation to Frontier, pursuant to the terms of said Employment Agreement as of
May 1, 1996, the effective date hereof.
13. Notices. Any notices, requests, demands or other communications
-------
provided for by this Consulting Agreement shall be sufficient if, in writing,
and sent by Registered or Certified Mail, overnight courier or if delivered in
person to Frontier or Consultant at the following addresses:
"FRONTIER" FRONTIER NATURAL GAS
CORPORATION
One Benham Place, Suite 120
9400 North Broadway
Oklahoma City, Oklahoma 73114
"CONSULTANT" JEFFREY R. ORGILL
[to be provided]
14. Governing Law. This Consulting Agreement shall be governed by
-------------
and construed in accordance with the laws of the State of Oklahoma.
15. Assignment. The Consultant acknowledges that the services to be
----------
rendered hereunder are unique and personal. Accordingly, the Consultant may not
assign any of his rights or delegate any of his duties or obligations under this
Consulting Agreement. The rights and obligations of Frontier under this
Consulting Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of Frontier.
16. Attorneys' Fees. In the event that any legal action is taken to
---------------
enforce any of the terms of this Consulting Agreement, the prevailing party
shall be entitled to, in addition to all remedies
<PAGE>
Orgill/Consulting Agreement
Page 4 of 5
provided to such party, reasonable attorneys' fees, costs and expenses.
17. Severability. If any provisions of this Consulting Agreement
------------
shall be or become illegal or unenforceable, in whole or in part, for any reason
whatsoever, the remaining provisions shall nevertheless be deemed valid and
binding.
18. Partial Performance. Frontier agrees that in the event Frontier
-------------------
does not request any consulting services from Consultant that it shall
nonetheless make all payments as set forth herein.
19. Entirety of Agreement. This writing represents the entire
---------------------
agreement between the parties and can only be modified or awarded by a writing
signed by all of the parties hereto.
IN WITNESS WHEREOF, the parties have executed and delivered this
Consulting Agreement effective as of May 1, 1996.
"FRONTIER"
ATTEST: FRONTIER NATURAL GAS CORPORATION
/s/ David B. Christofferson By: /s/ David W. Berry
- ---------------------------
(SEAL) Its: President
"CONSULTANT"
/s/ Jeffrey R. Orgill
----------------------------
JEFFREY R. ORGILL
<PAGE>
Orgill/Consulting Agreement
Page 5 of 5
STATE OF OKLAHOMA )
) ss
COUNTY OF OKLAHOMA )
Before me, the undersigned, a notary public, in and for the said county and
state, on the ____ day of May, 1996, personally appeared
_______________________________, as ________________________ of Frontier Natural
Gas Corporation, who acknowledged to me he executed same as the free and
voluntary act and deed of said corporation, for the uses and purposes therein
set forth.
In witness whereof, I have hereunto set my official signature and affixed
my official seal the day and year last above written.
____________________________
Notary Public
My Commission Expires:
______________________
[SEAL]
STATE OF OKLAHOMA )
) ss
COUNTY OF OKLAHOMA )
Before me, the undersigned, a notary public, in and for the said county and
state, on the ____ day of May, 1996, personally appeared Jeffrey R. Orgill, an
individual, who acknowledged to me he executed same as his free and voluntary
act and deed, for the uses and purposes therein set forth.
In witness whereof, I have hereunto set my official signature and affixed
my official seal the day and year last above written.
____________________________
Notary Public
My Commission Expires:
______________________
[SEAL]
<PAGE>
Exhibit 10.19
MORTGAGE, ASSIGNMENT OF PRODUCTION,
SECURITY AGREEMENT AND FINANCING STATEMENT
FROM
FRONTIER NATURAL GAS CORPORATION
(Taxpayer I.D. No. 73-1421000)
TO
420 ENERGY INVESTMENTS, INC.
(Taxpayer I.D. No. 25-1763291)
Dated as of March 1, 1996
A CARBON, PHOTOGRAPHIC, FACSIMILE OR OTHER REPRODUCTION OF THIS INSTRUMENT IS
SUFFICIENT AS A FINANCING STATEMENT.
THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS, SECURES PAYMENT OF
FUTURE ADVANCES AND COVERS PROCEEDS OF COLLATERAL.
THIS INSTRUMENT COVERS MINERALS AND OTHER SUBSTANCES OF VALUE WHICH MAY BE
EXTRACTED FROM THE EARTH (INCLUDING WITHOUT LIMITATIONS OIL AND GAS) AND WHICH
WILL BE FINANCED AT THE WELLHEADS OF THE WELL OR WELLS LOCATED ON THE PROPERTIES
DESCRIBED IN EXHIBIT A HERETO. THIS FINANCING STATEMENT IS TO BE FILED FOR
---------
RECORD, AMONG OTHER PLACES, IN THE REAL/IMMOVABLE PROPERTY RECORDS OF THE PARISH
RECORDERS OF THE PARISHES LISTED IN EXHIBIT A HERETO. THE GRANTOR HAS AN
---------
INTEREST OF RECORD IN THE REAL OR IMMOVABLE PROPERTY CONCERNED, WHICH INTEREST
IS DESCRIBED IN EXHIBIT A ATTACHED HERETO.
---------
THE MAXIMUM AMOUNT SECURED BY THIS MORTGAGE IS $4,000,000. (SEE SECTION 1.033.
WHEN RECORDED OR FILED RETURN TO:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
711 Louisiana, Suite 1900 South Tower
Houston, Texas 77002
Attn: Mark T. Woolfolk
<PAGE>
MORTGAGE, ASSIGNMENT OF PRODUCTION
SECURITY AGREEMENT AND FINANCING STATEMENT
------------------------------------------
This MORTGAGE, ASSIGNMENT OF PRODUCTION, SECURITY AGREEMENT AND FINANCING
STATEMENT (this "Mortgage") is entered into as of March 1, 1996 (the "Effective
-------- ---------
Date") by Frontier Natural Gas Corporation, an Oklahoma corporation whose
- ----
address for notice hereunder is One Benham Place, Suite 120, 9400 N. Broadway
Extension, Oklahoma City, Oklahoma, 73114-7431 (Taxpayer I.D. No. 73-
1421000)("Mortgagor") and 420 Energy Investments, Inc., a Delaware corporation
---------
whose address for notice hereunder is 420 Boulevard of the Allies, Pittsburgh,
Pennsylvania, 15219 (Taxpayer I.D. No. 25-1763291)("Mortgagee").
---------
R E C I T A L S:
- - - - - - - -
ARTICLE I.
Grant of Lien and Indebtedness Secured
--------------------------------------
Section 1.1 Grant of Liens. To secure payment of the Indebtedness (as
--------------
hereinafter defined) and the performance of the covenants and obligations herein
contained and in consideration of Ten Dollars ($10.00) in hand pain by Mortgagee
to Mortgagor and i consideration of the agreement of the Mortgagee to extend
credit to Mortgagor as evidenced by that certain Loan Agreement (hereinafter
called the "Loan Agreement") of even date herewith by and between Mortgagor and
--------------
mortgagee and by that certain promissory note hereinafter described, receipt and
sufficiency of all of which is hereby acknowledged, Mortgagor does by and in
favor of Mortgagee, the movable and immovable property, rights, titles, interest
and estates described in the following paragraphs (a) through (h) (collectively
called the "Mortgaged Property"):
------------------
(a) All rights, titles interests and estates now owned or hereafter
acquired by Mortgagor in and to the lands and premises described on Exhibit A
---------
hereto (collectively called the "Hydrocarbon Property"), including, without
--------------------
limitation, the oil and gas leases and/or oil, has and other mineral leases and
other interests and estates described on Exhibit A or which Hydrocarbon Property
---------
is otherwise referred to herein.
(b) All right, titles, interests and estates now owned or hereafter
acquired by Mortgagor in and to (i) the properties now or hereafter pooled or
unitized with the Hydrocarbon Property; (ii) all presently existing or future
unitization, communitization, pooling agreements and declarations of pooled
units and the units created thereby (including, without limitation, all units
created under orders, regulations, rules or other official acts of any Federal,
state or other governmental body or agency having jurisdiction and any units
created solely among working interest owners pursuant to operating agreements or
otherwise) which may affect all or nay portion of the Hydrocarbon Property
including, without limitation, those units which may be described or referred to
on attached Exhibit A; (iii) all operating agreements, production sales or other
---------
contracts, farmout agreements, farm-in agreements, area of mutual interest
agreements, equipment leases and other agreements describe or
2
<PAGE>
referred to in this mortgage or which relate to any of the Hydrocarbon Property
or interests in the Hydrocarbon Property described or referred to herein or to
the production, sale, purchase, exchange, processing, handling, storage.
transporting or marketing of the Hydrocarbons (hereinafter defined) from or
attributable to such Hydrocarbon Property or interests; (iv) all geological,
geophysical, engineering, accounting, title, legal, and other technical or
business data concerning the Mortgaged Property, the Hydrocarbons, or any other
item of Property which are in the possession of Mortgagor or in which Mortgagor
can otherwise grant a security interest, and all books, files, records, magnetic
media, computer records, and other forms of recording or obtaining access to
such data; and (v) the Hydrocarbon Property described on attached Exhibit A and
--------
covered by this Mortgage even though Mortgagor's interests therein be
incorrectly described or a description of a part of all of such Hydrocarbon
Property or Mortgagor's interests therein be omitted; it being intended by
Mortgagor and Mortgagee herein to cover and affect hereby all interest which
Mortgagor may now own or may hereafter acquire in and to the Hydrocarbon
Property notwithstanding that the interests as specified on Exhibit A may be
--------
limited to particular lands, specified depths or particular types of property
interests.
(c) All rights, titles, interests and estates now owned or hereafter
acquired by Mortgagor in and to all oil, gas, casinghead gas, condensate,
distillate, liquid hydrocarbons,. gaseous hydrocarbons and all products refined
therefrom and all other minerals (collectively called the "Hydrocarbons") in and
------------
under and which may be produced and saved from or attributable to the
Hydrocarbon Property, the lands pooled or unitized therewith and Mortgagor's
interests therein, including all oil in tanks and all rents, issues, profits,
proceeds; products, revenues and other income from or attributable to the
Hydrocarbon Property, the lands pooled or unitized therewith and Mortgagor's
interest therein which are subjected or required to be subjected to the liens
and security interests of this Mortgage and including specifically but without
limitation all liens and security interests in such Hydrocarbons securing
payment of proceeds resulting from the sale of Hydrocarbons.
(d) All tenements, hereditaments, appurtenances and properties in anywise
appertaining, belonging, affixed or incidental to the Hydrocarbon Property,
rights, titles, interests and estates described or referred to in paragraphs (a)
and (b) above, which are now owned or which may hereafter be acquired by
Mortgagor, including, without limitation, any and all property, movable or
immovable, now owned or hereafter acquired and situated upon, used, held for
use, or useful in connection with the operating, working or development of any
of such Hydrocarbon Property or the lands pooled or unitized therewith and
including any and all oil wells, gas wells, injection wells or other wells,
buildings, structures, field separators, liquid extraction plants, plant
compressors, pumps, pumping units, pipelines, sales and flow lines, gathering
systems, field gathering systems, salt water disposal facilities, tanks and tank
batteries, fixtures, valves, fittings, machinery and parts, engines, boilers,
meters, apparatus, equipment, appliances, tools, implements, cables, wires,
towers, casing, tubing and rods, surface leases, rights-of-way, easements,
servitudes, licenses and other surface and subsurface rights together with all
additions, substitutions, replacements, accessions and attachments to any and
all of the foregoing properties.
3
<PAGE>
(e) Any property that may from time to time hereafter, by delivery or by
writing of any kind, be subjected to the lien and security interest hereof by
Mortgagor or by anyone on Mortgagor's behalf; and Mortgagee is hereby authorized
to receive the same at any time as additional security hereunder.
(f) All of the rights, titles and interests of every nature whatsoever now
owned or hereafter acquired by Mortgagor in and to the Hydrocarbon Property
rights, titles, interests and estates and every part and parcel thereof,
including, without limitation, the Hydrocarbon Property rights, titles,
interests and estates as the same may be enlarged by the discharge of any
payments out of production or by the removal of any charges or Permitted
Encumbrances (as hereinafter defined in Section 3.1) to which any of the
-----------
Hydrocarbon Property rights, titles, interests, or estates are subject, or
otherwise; all rights of Mortgagor to liens and security interest securing
payment of proceeds from the sale of production from the Mortgaged property;
together with any and all renewals and extensions of any of the Hydrocarbon
Property rights, titles, interests or estates; all contracts and agreements
supplemental to or amendatory of or in substitution for the contracts and
agreements described or mentioned above; and any and all additional interests of
any kind hereafter acquired by Mortgagor in and to the Hydrocarbon Property
rights, titles, interests or estates.
(g) All accounts, contract rights, inventory, general intangibles,
insurance contracts and insurance proceeds, and any and all personal/movable
property of any kind or character as defined in and subject to the Uniform
Commercial Code of each jurisdiction applicable to all or any part of the
Mortgaged Property (the "UCC) constituting a part of, relating to or arising out
of those portions of the Mortgaged Property which are described in paragraphs
(a) through (f) above and all proceeds and products of all such portions of the
Mortgaged Property and payments in lieu of production (such as "take or pay"
payments), whether such proceeds or payments are goods, money, documents,
instruments, chattel paper, securities, accounts, general intangibles, fixtures,
real property, or other assets.
(h) All of Mortgagor's rights, now owned or hereafter acquired, in and to
all lease records, well records and production records which relate to any of
the foregoing property; provided, however the foregoing is made subject to the
--------
overriding royalties, unit declarations, operating agreements, contracts,
encumbrances, agreements, exceptions, limitations and other matters, if any,
described or referred to in Exhibit B.
----------
Any fractions or percentages specified on attached Exhibit A in referring
---------
to Mortgagor's interests are solely for purposes of the warranties made by
Mortgagor pursuant to Section 3.1 hereof and shall in no manner limit the
-----------
quantum of interest affected by this Section 1.1 with respect to any Hydrocarbon
-----------
Property or with respect to any unit or well identified on said Exhibit A.
TO HAVE AND TO HOLD the Mortgaged Property unto Mortgagee and its
successors and assigns forever to secure the payment of the Indebtedness
(hereinafter defined) and to secure the performance of the covenants,
agreements, and obligations of Mortgagor herein contained.
4
<PAGE>
Section 1.2 Grant of Security Interest. To further secure the Indebtedness,
--------------------------
Mortgagor hereby grants to Mortgagee a general and continuing security interest
in and Lien (hereinafter defined) upon the Mortgaged Property (whether now or
hereafter acquired by operation of law or otherwise) insofar as the Mortgaged
Property consists of equipment, accounts, contract rights, general intangibles,
insurance contracts, insurance proceeds, inventory, Hydrocarbons, fixtures and
any and all other personal/movable property of any kind or character, whether
subject to the provisions of the UCC or not, including the proceeds and products
from any and all of such personal property. Upon the happening of any of the
Events of Default, Mortgagee is and shall be entitled to all of the rights,
powers and remedies afforded a secured party by the UCC with reference to the
personal/movable property and fixtures in which Mortgagee has been granted a
security interest herein, or Mortgagee may proceed as to both the real/immovable
and personal/movable property covered hereby in accordance with the rights and
remedies granted under this Mortgage in respect of the real property covered
hereby. Such rights, powers and remedies shall be cumulative and in addition to
those granted to Mortgagee under any other provision of this Mortgage or under
any other security instrument. Written notice mailed to Mortgagor as provided
herein at least five (5) days prior to the date of public sale of any part of
the Mortgaged Property which is personal/movable property subject to the
provision of the UCC, or prior to the date after which private sale of any such
part of the Mortgaged Property will be made, shall constitute reasonable notice.
Section 1.3 Indebtedness Secured. This Mortgage is executed and delivered
--------------------
by Mortgagor to secure and enforce the following:
(a) All amounts owing or to become owing on one certain promissory noteof
even date herewith in the principal amount of ONE MILLION SEVEN HUNDRED TWENTY
EIGHT THOUSAND AND NO/100 DOLLARS ($1,728,000), made by Mortgagor and payable to
the order of Mortgagee, bearing interest at the rate therein provided and
containing a provision for the payment of a reasonable additional amount as
collection and attorneys' fees, and all other notes given in substitution
therefor or in renewal, extension or modification thereof, in whole or in part,
all such notes being hereinafter collectively called the "Note". Reference is
hereby made to said Note for all of its terms and provisions;
(b) All indebtedness incurred or arising pursuant to or permitted by the
provisions of this Mortgage, and any other security instrument or the Loan
Agreement or other loan agreements which Mortgagor has, either alone or with
others, executed, or in the future may execute, to secure the Note;
(c) All other loans and future advances made by Mortgagee to Mortgagor and
all other debts, obligations and liabilities of every kind and character now or
hereafter owing by Mortgagor to Mortgagee related to the Starboard Project Area
or Subject Interests as defined in the Loan Agreement, and whether direct or
indirect, primary or secondary, fixed or contingent, and whether originally
payable to Mortgagee or to a third party and subsequently acquired by Mortgagee
and including, without limitation, any fees, expense or costs (including
attorneys' fees) advanced by any Mortgagee to enforce its rights hereunder or
pursuant to the Loan Agreement. Nothing herein shall
5
<PAGE>
be construed to impose any obligation upon Mortgagee to make any such loans or
advances; and
(d) Payment of and performance of any and all other indebtedness,
obligations and liabilities of any kind of Mortgagor to the Mortgagee, now or
hereafter existing, arising directly between Mortgagor and the Mortgagee or
acquired outright, as a participation, conditionally or as collateral security
from another by the Mortgagee, absolute or contingent, joint and/or several,
secured or unsecured, due or not due, arising by operation of law or otherwise,
or direct or indirect, including indebtedness, obligations and liabilities to
the Mortgagee of Mortgagor as a member of any partnership, syndicate,
association or other group, and whether incurred by Mortgagor as principal,
surety, endorser, guarantor, accommodation party or otherwise.
The term "Indebtedness" as used herein shall mean and include all
------------
obligations incurred by Mortgagor under the Loan Agreement and all other
indebtedness described, referred to or mentioned in paragraphs (a) through (d),
inclusive, of this Section 1.3.
-----------
It is contemplated and acknowledged that the Indebtedness may include
revolving credit loans and advances from time to time, and that this Mortgage
shall have effect as of the date hereof to secure all indebtedness, regardless
of whether any amounts are advanced on the date hereof or on a later date or,
whether having been advanced, are later repaid in part or in whole and further
advances made at a later date. This Mortgage secures all future advances and
obligations constituting Indebtedness. The total amount of obligations and
advances secured hereby may decrease or increase from time to time, but at no
time shall the total amount of obligations and advances secured hereby exceed
the sum of $4,000,000.
Section 1.4 Fixture Filing. Etc. This Mortgage shall be effective as a
-------------------
financing statement filed as a fixture filing with respect to all fixtures
included within the Mortgaged Property and is to be filed for record in the
immovable property records of each parish where any part of the Mortgaged
Property (including such fixtures) is located. This Mortgage shall also be
effective as a financing statement covering minerals or the like including oil
and gas) and accounts subject to the UCC, as amended, which minerals or the like
and accounts will be financed at the wellhead or minehead of the wells or mines
located on the Mortgaged Property. This Mortgage may be filed for record in the
office of the Louisiana State Mineral Board (or any successor agency) and in
each Louisiana parish where any part of the Mortgaged Property is located.
Section 1.5 Certain Defined Terms. As used herein, the following terms
---------------------
shall have the following meanings:
"Excepted Liens -- collectively, (a) Liens for taxes, assessments or other
--------------
governmental charges or levies not yet due or which constitute a Matter
Contested in Good Faith; (b) Liens in connection with worker's compensation,
unemployment insurance or other social security, old age pension or public
liability obligations not yet due or which constitute a Matter Contested in Good
Faith; (c) operator's, vendor's, carrier's, warehousemen's, repairmen's,
mechanics', workers', materialmen's, construction or other like Liens arising by
operation of law in the ordinary course of
6
<PAGE>
business or incident to the exploration, development, operation and maintenance
of Mortgaged Proper or statutory landlord's liens, each of which is in respect
of obligations that have not been outstanding more than 90 days or which
constitute a Matter Contested in Good Faith; (d) encumbrances, easements,
restrictions, servitudes, exceptions or reservations in any rights-of-way or
other Property for the purpose of roads, pipelines, transmission lines,
transportation lines or distribution lines for the removal of Hydrocarbons; (e)
defects, irregularities. zoning restrictions and deficiencies in title of any
rights-of-way or other Property which (individually or in the aggregate) do not
materially impair the use or value of such rights-of-way or other Property; and
(f) Operations Liens, provided that the terms and conditions of the Loan
Agreement are satisfied.
"Governmental Authority" -- the country, state, county, city and political
----------------------
subdivisions in which any Person or such Person's Property is located or which
exercises valid jurisdiction over any such Person or such Person's Property; and
any court, agency, department, commission, board, bureau or instrumentality of
any of them (including any central bank or monetary or other authority that
exercises jurisdiction over any such Person or such Person's Property).
"Highest Lawful Rate" -- with respect to Mortgagee, the maximum nonusurious
-------------------
interest rate, if any, that at any time or from time to time may be contracted
for, taken, reserved, charged or received on the Notes or on other Indebtedness
under laws applicable to Mortgagee which are presently in effect or, to the
extent allowed by law, under such applicable laws which may hereafter be in
effect and which allow a higher maximum nonusurious interest rate than
applicable laws now allow.
"Lien" -- (a) any mortgage, pledge, security interest or any other charge,
----
claim or conveyance of Property securing an obligation owed to (or a claim by) a
Person other than the owner of the encumbered Property (whether created by
common law, statute or contract, and whether the secured obligation is fixed or
contingent); (b) any conditional sale, trust receipt, lease, consignment or
bailment for security purposes; (c) conveyances of Property creating debt; (d)
reservations, exceptions, encroachments, easements, rights-of-way, covenants,
conditions, restrictions and other title exceptions, defects and encumbrances
affecting Property; and (e) any other arrangement pursuant to which Property
that is beneficially used or owned by one Person is conveyed or vested in
another Person with the intention to create a financing (such as a financing
lease or a conditional sale arrangement).
"Matters Contested in Good Faith"--matters then being contested in good
-------------------------------
faith by appropriate proceedings diligently and continuously pursued.
"Person" -- any individual, corporation, company, voluntary association,
------
partnership, joint venture, trust, unincorporated organization, Governmental
Authority or any other form of entity.
"Property" -- any interest in any kind of property or asset, whether
--------
immovable or movable, tangible or intangible.
7
<PAGE>
Section 1.6 Other Definitions. Other capitalized terms used herein and not
-----------------
defined herein shall have the meaning ascribed to them in the Loan Agreement.
ARTICLE II.
Assignment of Production Accounts
Contract Rights and Proceeds
2.1 Assignment. To facilitate the discharge of all such indebtedness and as
----------
cumulative of any and all rights and remedies herein provided for, Mortgagor
hereby TRANSFERS, ASSIGNS, CONVEYS, SETS OVER and DELIVERS to Mortgagee all of
the following:
(a) All oil, gas, casinghead gas, distillate and other minerals, and the
proceeds therefrom, produced and to be produced from the interests of
Mortgagor in the oil, gas and mineral leases, properties, processing plants
and interests now or hereafter constituting a part of the Mortgaged
Property from and after the Effective Date and Mortgagor hereby authorizes
and empowers said Mortgagee to demand, collect and receive said oil, gas,
casinghead gas, distillate and other minerals, and the proceeds therefrom,
produced and to be produced from the interests of Mortgagor in said
Mortgaged Property, and to execute any release, receipt, division order,
transfer order and relinquishment or other instrument that may be required
or necessary to collect and receive such production or the proceeds
therefrom and Mortgagor hereby authorizes and directs all pipeline
companies, gathering companies and others purchasing oil, gas or other
mineral production from said properties or having in their possession any
production from said properties or the proceeds therefrom, to pay and
deliver to Mortgagee all such production or proceeds therefrom accruing.
Mortgagor agrees that all division orders, transfer orders, receipts and
other instruments which Mortgagee may from time to time execute and deliver
for the purpose of collecting or receipting for such production or the
proceeds therefrom may be relied upon in all respects, and that the same
shall be binding upon Mortgagor, and Mortgagor's successors and assigns.
Mortgagor agrees to execute and deliver all necessary and appropriate
instruments, including transfer and division orders, which may be required
by Mortgagee in connection with the receipt by Mortgagee of such production
or the proceeds therefrom and to indemnify and keep and hold said Mortgagee
free and harmless from all parties whomsoever having or claiming and
adverse interest in said leases, properties and interests and the
production and proceeds therefrom, and in this respect agrees to pay all
expenses, costs, charges and reasonable attorneys' fees that may be
incurred by Mortgagee as to any of said matters.
(b) All amounts or proceeds hereafter payable to or to become payable to
Mortgagor or to which Mortgagor is entitled under all gas sales contracts,
all oil, distillate or condensate sales contracts, all gas transportation
contracts, and all gas processing contracts relating to or now or hereafter
to become a part of the Mortgaged Property.
(c) All amounts, sums, revenues and income which become payable to
Mortgagor from any of the Mortgaged Property (including after-acquired
properties) or under any contract,
8
<PAGE>
present or future, relating to any gas pipeline system and processing plant
or unit now or hereafter constituting a part of the Mortgaged Property.
Mortgagor hereby authorizes and directs that all such pipeline companies,
purchasers, transporters and other parties owing moneys to Mortgagor under
contracts herein assigned, pay such amounts direct to Mortgagee as follows:
420 Energy Investments, Inc.
420 Boulevard of the Allies
Pittsburgh, Pennsylvania 15219
and such authorization shall continue until this Mortgage is released provided,
however, that until and if there has not been an Event of Default under the Loan
Agreement, Mortgagee agrees that Mortgagor shall be entitled to collect and
receive such sums in accordance with the terms of the Loan Agreement. Mortgagee
is authorized to collect, receive and receipt for all such amounts and no party
making payment shall have any responsibility to see to the application of any
funds paid to Mortgagee, but shall be fully protected in making such payment to
Mortgagee under the assignments herein contained. Should Mortgagee bring suit
against any third party for collection of any amounts or sums included within
this assignment (and Mortgagee shall have the right to bring any such suit)
Mortgagee may sue either in its own name or in the name of Mortgagor.
The office where the records of Mortgagor with respect to the accounts and
contracts rights concerning the Mortgaged Property are kept is located at the
address shown opposite the signature of Mortgagor to this Mortgage, and
Mortgagor agrees that the place at which such records are kept will not be
changed without the prior written consent of Mortgagee.
2.2 Independent of the foregoing provisions and authorities herein granted,
Mortgagor agrees to execute and deliver any and all transfer orders, payment
orders, division orders and other instruments that may be requested by Mortgagee
or that may be required by any purchaser of the production from any of the
Mortgaged Property for the purpose of effectuating payment of the proceeds of
runs to Mortgagee. If under any existing sales agreements, other than division
orders or transfer orders, any proceeds of runs are required to be paid by the
purchaser to Mortgagor so that under such existing agreement payment cannot be
made of such proceeds of runs to Mortgagee, Mortgagor's interest in all proceeds
of runs under such sales agreements and in all other proceeds of runs which for
any reason may be paid to Mortgagor shall, when received by Mortgagor,
constitute trust funds in Mortgagor's hands and shall be immediately paid over
to Mortgagee.
2.3 Mortgagor authorizes and empowers Mortgagee to receive, hold and
collect all sums of money paid to Mortgagee in accordance with this assignment
and to apply the same as is hereinafter provided, all without any liability or
responsibility on the part of Mortgagee, save as to good faith in so receiving
and applying said sums. All payments provided for in this assignment shall be
paid promptly to Mortgagee, and applied pursuant to the terms contained in the
Note or any other note or notes or loan agreements evidencing said indebtedness
or any part thereof. After such application
9
<PAGE>
has been so made by Mortgagee, the balance of any such payment or payments
remaining shall be paid to Mortgagor. It is understood and agreed that should
said payments provided for by this assignment be less than the sum or sums then
due on said indebtedness, such sum or sums then due shall nevertheless be paid
by Mortgagor in accordance with the provisions of the note or notes or other
instrument or instruments evidencing said indebtedness and neither this
assignment nor any provision herein contained shall in any manner be construed
to affect the terms and provisions of said note or notes or other instrument or
instruments. Likewise, neither this assignment nor any provision herein
contained shall in any manner be construed to affect the lien, rights and
remedies herein granted securing said indebtedness, nor Mortgagor's liability
therefor. The rights under this assignment are cumulative of the other rights,
remedies and powers granted under this Mortgage and are cumulative of any other
security which Mortgagee now holds or may hereafter hold to secure the payment
of said indebtedness.
2.4 If a default has occurred and is continuing, should any person now or
hereafter purchasing or taking oil, gas, other hydrocarbons or other minerals
attributed to the Mortgaged Property fail to make payment promptly to Mortgagee
of the hereby assigned proceeds of runs, Mortgagee shall have the right to make,
or to require Mortgagor to make, a change of connection and the right to
designate or approve the purchaser with whose facilities a new connection shall
be made, without liability or responsibility in connection therewith, so long as
ordinary care is used in making such designation, and Mortgagor agrees to pay to
Mortgagee the amount of any proceeds of runs not promptly paid to Mortgagee by
any person having responsibility for payment thereof.
2.5 Mortgagee and its successors and assigns are hereby absolved from all
liability for failure to enforce collection of the proceeds of runs and from all
other responsibility in connection therewith, except the responsibility to
account to Mortgagor for funds actually received. Mortgagor agrees to indemnify
and hold harmless Mortgagee against any and all liabilities, actions, claims,
judgments, costs, charges and attorneys' frees by reason of the assertion that
it received either before or after payment in full of the Indebtedness funds
from the production of oil, gas, other hydrocarbons or other minerals claimed by
third persons, and Mortgagee shall have the right to defend against any such
claims or actions, employing attorneys of its own selection, and if not
furnished with indemnity satisfactory to Mortgagee, shall have the right to
compromise and adjust any such claims, actions and judgments, and in addition to
the rights to be indemnified as herein provided, all amounts paid by Mortgagee
in compromise, satisfaction or discharge of any such claim, action or judgment.
All court costs, attorneys' fees and other expenses of every character incurred
by Mortgagee pursuant to the provisions of this section shall be a demand
obligation owing by Mortgagor, shall bear interest from date of expenditure
until paid at the same rate as is provided in the Note for interest on past due
principal, and shall be a part of the Indebtedness. Notwithstanding the
foregoing, nothing contained herein shall be deemed to require Mortgagor to
indemnify Mortgagee for its wilful misconduct or gross negligence.
2.6 Nothing herein contained shall detract from or limit the absolute
obligation of Mortgagor to make prompt payment of the note, of all amounts owing
thereon, and of all amounts owing hereunder at the time and in the manner
provided in the Note or provided herein, regardless of
10
<PAGE>
whether the proceeds herein assigned are sufficient to pay the same, and the
rights under this assignment shall be cumulative of all other security of any
and every character now or hereafter existing to secure the payment of the Note
and all other Indebtedness. Moneys received under the assignments herein
contained shall not be deemed applied to payment of the Indebtedness unless and
until such funds are actually applied to the indebtedness. Mortgagee may, in its
sole discretion, permit funds received by it to be returned to Mortgagor (rather
than applied to Mortgagor's indebtedness) by deposit to its account for use in
Mortgagor's operations.
ARTICLE III.
Representations. Warranties and Covenants
-----------------------------------------
Mortgagor hereby represents, warrants and covenants as follows:
Section 3.1 Title. That Mortgagor holds legal and equitable title to the
-----
undivided interests specified on attached Exhibit A and Mortgagor has not
---------
previously conveyed, assigned, transferred, mortgaged or otherwise encumbered
the Mortgaged Property. The Mortgaged Property is free of any and all Liens
except for Excepted Liens and Liens described on Exhibit B hereto (collectively,
---------
the "Permitted Encumbrances").
----------------------
Section 3.2 Defend Title. That this Mortgage is, and always will be kept, a
------------
direct first lien and security interest or privilege upon the Mortgaged Property
subject only to the Permitted Encumbrances and Mortgagor will not create or
suffer to be created or permit to exist any lien, security interest, privilege
or charge prior or junior to or on a parity with the lien and security. interest
or privilege of this Mortgage upon the Mortgaged Property or any part thereof or
upon the rents, issues, revenues, profits and other income therefrom. Mortgagor
will warrant and defend the title to the Mortgaged Property against the claims
and demands of all other Persons, and will maintain and preserve the lien and
privilege created hereby so long as any of the Indebtedness secured hereby
remains unpaid. Should an adverse claim be made against or a cloud develop upon
the title to any part of the Mortgaged Property, Mortgagor agrees it will
immediately defend against such adverse claim or take appropriate action to
remove such cloud at Mortgagor's cost and expense, and Mortgagor further agrees
that Mortgagee may take such other action as they deem advisable to protect and
preserve their interests in the Mortgaged Property, and in such event Mortgagor
will indemnify Mortgagee against any and all cost, attorney's fees and other
expenses which they may incur in defending against any such adverse claim or
taking action to remove any such cloud.
Section 3.3 Not a Foreign Person. That Mortgagor is not a foreign person
--------------------
within the meaning of the Internal Revenue Code of 1986, as amended (hereinafter
called the "Code"), Sections 1445 and 7701 (i.e. Mortgagor is not a non-resident
alien, foreign corporation, foreign partnership, foreign trust or foreign estate
as those terms are defined in the Code and any regulations promulgated
thereunder).
11
<PAGE>
Section 3.4 Power to Create Lien and Security. That Mortgagor has full
---------------------------------
power and lawful authority to grant, bargain, sell, assign, transfer, mortgage,
pledge, hypothecate and convey and grant a security interest in and lien on all
of the Mortgaged Property in the manner and form herein provided and without
obtaining the authorization, approval, consent or waiver of any lessor,
sublessor, Governmental Authority or other party or parties whomsoever.
Section 3.5. Payment of Note. That Mortgagor will make prompt payment of
---------------
the Note and of all installments of principal and interest thereon as the same
become due, and also of all other Indebtedness.
Section 3.6 Existence. That Mortgagor will continuously maintain
---------
Mortgagor's corporate existence as an Oklahoma corporation and full power to own
and operate the Mortgaged Property and, if required by law, Mortgagor's right to
do business in each State where any part of the Mortgaged Property is situated,
and that Mortgagor will promptly pay all income, franchise and other taxes owing
by Mortgagor and any stamp, documentary or recording taxes which may be required
to be paid with respect to this Mortgage or any other instrument evidencing or
securing any of the Indebtedness.
Section 3.7 Operation of Properties. That Mortgagor will cause the oil and
-----------------------
gas (or oil, gas and mineral) leases included in or relating to the Mortgaged
Property (herein called Subject Leases") to be maintained, developed and
--------------
operated for the production of oil or gas in a good and workmanlike manner and
in accordance with sound field practices and all applicable federal, state and
local laws, rules and regulations and will not allow any of the Subject Leases
to be surrendered, abandoned, terminated or impaired in any manner.
Section 3.8 Payment of Debts. That Mortgagor will cause all debts and
----------------
liabilities of any character incurred in the operation, maintenance or
development of the Mortgaged Property (including. without limitation, all costs
of the administration and development of each Subject Lease, and all leasehold
costs attributable thereto, including, but not by way of limitation, all costs
of completing, processing, storing, transporting and marketing oil or gas which
are allocated as leasehold expenses by customary industry account) to be paid
punctually when due.
Section 3.9 Maintenance and Repairs. That Mortgagor will cause the
-----------------------
Mortgaged Property and all ;elated machinery, pipelines, equipment, improvements
and personal property of any kind now or hereafter used or obtained in
connection with the operation thereof to be kept in good and effective operating
condition and all necessary repairs, replacements, additions and improvements to
be made.
Section 3.10 Lease Terms. That Mortgagor will observe and comply with all
-----------
of the terms and provisions, express or implied, of the oil, gas and/or mineral
leases and assignments constituting a part of the Mortgaged Property in order to
keep the same in full force and effect. Mortgagor will also protect all oil and
gas properties included in the Mortgaged Property against drainage of oil, gas
and hydrocarbons thereunder by reason of production on other properties.
12
<PAGE>
Section 3.11 Contracts. That Mortgagor will observe and comply with all of
---------
the terms and provisions of all easements, licenses, franchises, permits and
contracts (both existing and future) which are part of the Mortgaged Property or
which are incident to the operation of any of the Mortgaged Property. Without
limiting the foregoing, Mortgagor agrees to fully comply with all covenants and
make timely payments of all amounts payable under gas purchase and gas
processing contracts held by Mortgagor and also to fully perform all obligations
and covenants of the seller under all gas sales contracts and all condensate,
distillate and other products sales contracts and processing contracts held by
Mortgagor.
Section 3.12 Notice and Cure of Defects. That if the validity or priority
--------------------------
of this Mortgage or of any right, titles, liens or interests created or
evidenced hereby with respect to the Mortgaged Property or any part thereof
shall be endangered or questioned or shall be attacked directly or indirectly or
if any legal proceedings are instituted against Mortgagor with respect thereto,
Mortgagor will give written notice thereof to Mortgagee promptly and, at
Mortgagor's own cost and expense, Mortgagor will diligently endeavor to cure any
defect that may be developed or claimed, and will take all necessary and proper
steps for the defense of such legal proceedings, including, but not limited to,
the employment of counsel agreeable to Mortgagee, the prosecution or defense of
litigation and the release or discharge of all adverse claims. Mortgagee is
hereby authorized and empowered to take such additional steps as in its judgment
and discretion may be necessary or proper for the defense of any such legal
proceedings, including, but not limited to, the employment of independent
counsel, the prosecution or defense of litigation, and the compromise or
discharge of any adverse claims made with respect to the Mortgaged Property, and
all expense so incurred of every kind and character shall be a demand obligation
owing by Mortgagor and shall bear interest at the same rate as is provided in
the Note for interest on past due principal from the date of expenditure until
paid and shall be secured by the lien evidenced by this Mortgage and the party
incurring such expenses shall be subrogated to all rights of the person
receiving such payment.
Section 3.13 Liens. That Mortgagor will not, without the prior written
-----
consent of Mortgagee, suffer or permit any lien to be hereafter claimed or
created on any of the Mortgagee Property, and should a lien become attached
hereafter in any manner to any part of the Mortgaged Property without the prior
written consent of Mortgagee, Mortgagor will cause such lien to be promptly
discharged.
Section 3.14 Taxes. That Mortgagor will pay all taxes and assessments of
-----
every kind and character charged, levied or assessed against the Mortgaged
Property, or any part thereof, and all franchise taxes, production, severance or
other similar taxes or charges, before any such taxes and assessments shall
become delinquent; but Mortgagor shall have the right to contest any such tax in
good faith, and while any such contest is pending shall not be in default
hereunder; and, in the event Mortgagor should fail or refuse to pay or discharge
the same, the holder of said indebtedness hereunder shall have the right, but
shall not be obligated, to pay off said charges against said property and shall
be subrogated to the rights, liens and equities thereof, and the amount so paid,
together with interest at the same rate as is provided in the Note for interest
on past due principal from the date of payment, shall be added to said
indebtedness and shall be part of the Indebtedness.
13
<PAGE>
Section 3.15 Improvements. That none of the buildings, improvements and
------------
personal property constituting portions of the Mortgaged Property will be
removed or destroyed if to do so would have a Material Adverse Effect (as that
term is defined in the Loan Agreement).
Section 3.16 Records. That Mortgagor will keep accurate books and records
-------
in accordance with sound accounting principles in which full, true and correct
entries shall be promptly made as to all operations on the Mortgaged Property,
and all such books and records shall at all times during reasonable business
hours be subject to inspection by Mortgagee and its duly accredited
representatives, and if, and as often as, requested by Mortgagee, Mortgagor
shall make reports of such income in such form as Mortgagee reasonably
prescribes setting out full data as to production and revenues from the
Mortgaged Property.
Section 3.17 Further Assurances. That Mortgagor will, on request of
------------------
Mortgagee, promptly correct any defect, error or omission which may be
discovered in the contents of this Mortgage the Note, or other documents
executed in connection herewith or in the execution or acknowledgement of any
thereof, and will execute and deliver any and all additional instruments as may
be requested by Mortgagee to correct such defect, error or omission or to
identify any additional properties which are or become subject to this Mortgage
and will execute, acknowledge and deliver such further assurances and
instruments as shall be, in the opinion of Mortgagee, necessary or proper to
convey and assign to the Mortgagee all of the Mortgaged Property herein conveyed
or assigned, or intended so to be.
Section 3.18 Indemnity. That Mortgagor will indemnify and hold harmless
---------
Mortgagee from and against all claims, demands, liabilities and causes of action
on account of any act performed or omitted to be performed hereunder or on
account of any transaction arising out of or in any way connected with the
Mortgaged Property or with this Mortgage or any of the Indebtedness, save and
except for their willful misconduct.
Section 3.19 Title Defects. That Mortgagor will proceed with reasonable
-------------
diligence to correct any defect in title to the Mortgaged Property should any
such defect be found to exist after the execution and delivery of this
instrument, and in this connection, should it be found after the execution and
delivery of this instrument that there exists upon the Mortgaged Property any
lien or encumbrance, equal or superior in rank to the lien created by this
instrument, or should any such hereafter arise, Mortgagor will promptly
discharge and remove any such lien or encumbrance from said property.
Section 3.20 Insurance. That Mortgagor will keep such part of the Mortgaged
---------
Property as is of an insurable nature and of a character usually insured by
persons operating similar properties insured with companies of recognized
responsibility satisfactory to Mortgagee against loss or damage by fre and
against other hazards customarily insured against, and all policies evidencing
such insurance shall contain clauses providing that the proceeds therefrom shall
be payable to-Mortgagee as its interest may appear; and in the event of any loss
under any of said policies, Mortgagee shall have the right to collect the same,
and all amounts so received shall be applied toward costs, charges
14
<PAGE>
and expenses, if any, incurred in the collection thereof, then to the payment of
the Note and the Indebtedness and any balance remaining shall be subject to the
order of Mortgagor; provided, however, that Mortgagor may be permitted by
Mortgagee to receive all of said proceeds so collected for the sole purpose of
reimbursing Mortgagor for proper expenditures made in repairing or restoring the
damaged property, and the payment of said proceeds from said policies to
Mortgagor for the purpose provided for herein shall not impair any right, title,
interest or lien hereunder; and Mortgagee is hereby authorized but not obligated
to enforce in its name or in the name of Mortgagor payment of any and all of
said policies or settle or compromise any claim in respect thereof, and to
collect and make receipts for the proceeds thereof. From time to time, Mortgagee
may waive certain of the insurance requirements herein contained, but any such
waiver must be in writing and any waiver will be revocable upon written notice
to Mortgagor.
3.21 Operating Expenses. That Mortgagor will promptly pay its share of all
------------------
costs and expenses incurred under any joint operating agreement affecting the
Mortgaged Property or any portion thereof and will furnish Mortgagee as and when
requested full information as to the status of any joint account maintained with
others under any such operating agreement.
Section 3.22 Inspection. That Mortgagor will permit Mortgagee and its
----------
accredited agents. representatives and employees at all times to go upon,
examine, inspect and remain on the Mortgaged Property, and to go upon the
derrick floor of any well at any time drilled or being drilled thereon, and will
furnish to Mortgagee on request all pertinent information in regard to the
development and operation of the Mortgaged Property or any part thereof.
Section 3.23 Release of Lien. That Mortgagee at all times shall have the
---------------
right to release any part of the property now or hereafter subject to the lien
hereof or any part of the proceeds of production or other income herein or
hereafter assigned or pledged or any other security it now has or may hereafter
have securing said indebtedness, without releasing any other part of said
property, proceeds or income, and without affecting the lien hereof as to the
part or parts thereof not so released, or the right to receive future proceeds
and income.
Section 3.24 Title Examination. That, promptly upon receipt of any
-----------------
reasonable written request from Mortgagee considering the size of the Mortgaged
Property, Mortgagor will furnish and deliver, pursuant to such request, complete
abstracts of title prepared by competent abstractors and covering title to the
real property hereby mortgaged from the sovereignty of the soil to the latest
practicable date. Should Mortgagor fail to furnish such abstracts upon such
request, Mortgagee may proceed to obtain such abstracts, and any and all costs
so incurred shall be added to and included in the indebtedness secured hereby
and shall be payable by Mortgagor upon demand, the obligation for such payment
being secured by all liens and remedies granted in this Mortgage. Any abstracts
furnished by Mortgagor or so acquired by Mortgagee shall be and constitute a
part of the Mortgaged Property, as above defined.
Section 3.25 Reports. That Mortgagor will, if requested by Mortgagee,
-------
furnish Mortgagee any information or data possessed by Mortgagor with respect to
the Mortgaged Property, and in the
15
<PAGE>
case of oil and gas leases full information, including independent engineering
reports, shall be furnished with regard to the wells drilled or reworked or
drilling or reworking operations being conducted thereon, including, without
limitation, electrical logs, core analyses and well pressure reports.
Section 3.26 Access to Files. That Mortgagor shall make available to
---------------
Mortgagee, or its engineers, attorneys or representatives, at any time
requested, its complete files and contracts on the properties included in this
instrument and the wells, pipelines and other property located thereon, or
regarding the operations of (or the production from) the Mortgaged Property, and
in the event Mortgagee should take possession of the Mortgaged Property under
this Mortgage, Mortgagee shall be entitled to possession of all such files and
contracts. Should this Mortgage be foreclosed (howsoever such foreclosure may be
effected), the purchaser at the foreclosure sale shall be entitled to all such
files.
Section 3.27 Amendments to Operating Agreements. That Mortgagor will not
----------------------------------
enter into any new operating agreement or any material amendment of any existing
operating agreement affecting the Mortgaged Property without the prior written
consent of Mortgagee.
Section 3.28 Costs and Expenses. That Mortgagor will promptly upon demand
------------------
by Mortgagee pay all reasonable costs and expenses heretofore or hereafter
incurred by Mortgagee for legal, engineering or geological services rendered to
it in connection with the making of the initial or any future loan to Mortgagor
secured in whole or in part by the lien hereof and/or in the enforcement of any
of its rights hereunder.
Section 3.29 Pipelines. That Mortgagor will continuously maintain in good
---------
condition and operate, or cause to be maintained and operated, in a good and
workmanlike manner any pipelines and pipeline systems included in the Mortgaged
Property in accordance with the valid rules and regulations of duly constituted
authorities.
Section 3.30 Operation By Third Parties. That all or portions of the
--------------------------
Mortgaged Property may be comprised of interests in the Hydrocarbon Property
which are other than working interests or which may be operated by a party or
parties other than Mortgagor and with respect to all or any such interests and
properties as may be comprised of interests other than working interests or
which may be operated by parties other than Mortgagor, Mortgagor's covenants as
expressed in this Article III are modified to require that Mortgagor use its
-----------
best efforts to obtain compliance with such covenants by the working- interest
owners or the operator or operators of such leases or properties.
Section 3.31 Failure to Perform. That Mortgagor agrees that if the
------------------
Mortgagor fails to perform any act or to take any action which the Mortgagor is
required to perform or take hereunder or pay any money which the Mortgagor is
required to pay hereunder, Mortgagee in the Mortgagor's name or its own name
may, but shall not be obligated to, perform or cause to perform such act or take
such action or pay such money, and any expenses so incurred by Mortgagee and any
money so paid by Mortgagee shall be a demand obligation owing by the Mortgagor
to Mortgagee; Mortgagee upon
16
<PAGE>
making such payment, shall be subrogated to all of the rights of the Person
receiving such payment or, at the election of Mortgagee, shall be treated as
provided under the Loan Agreement. Each amount due and owing by-Mortgagor to
Mortgagee pursuant to this Mortgage shall bear interest from the date of such
expenditure or payment or other occurrence which gives rise to such amount being
owed to such Person until paid at the Highest Lawful Rate, and all such amounts
together with such interest thereon shall be a part of the Indebtedness
described in Section 1.3 hereof.
-----------
ARTICLE IV.
Rights and Remedies
Section 4.1 Events of Default. If one or more of the following events
shall occur, it shall constitute an "Event of Default" hereunder:
(a) The Mortgagor shall fail to pay (i) any principal of any Indebtedness
at maturity (regardless of how its maturity may be brought about), or (ii) any
interest accrued on or with respect to any Indebtedness (whether before or after
maturity) or any fees or another amounts payable by the Mortgagor in connection
with the Indebtedness when such interest, fees or other amount becomes due and
payable;
(b) An "Event of Default" under the Loan Agreement shall occur and be
----------------
continuing;
(c) The Mortgagor shall fail to pay over to Mortgagee any proceeds of the
sale of the oil, gas, other hydrocarbons and other minerals produced, saved, or
sold from or allocated to the Mortgaged Property which are paid to Mortgagor
rather than Mortgagee as provided in Section 2.1 hereof;
-----------
(d) The Mortgagor shall fail to timely and properly observe, keep or
perform any nonmonetary covenant, agreement, warranty or condition herein
required to be observed, kept or performed within thirty (30) days after written
notice from Mortgagor; or
(e) Any representation or warranty made by or on behalf of mortgagor herein
or in any writing furnished in connection herewith shall be false or misleading
in any material respect when made.
Upon the occurrence of any such Event of Default, Mortgagee may, by written
notice to Mortgagor pursuant to Section 5.7, declare the Indebtedness to be due
-----------
and payable without notice of any kind.
Section 4.2 Foreclosure; Receivership. If an Event of Default shall occur
-------------------------
and be continuing, the Mortgage may be foreclosed as to the Mortgaged Property
or any portion thereof in any manner permitted by applicable law, and Mortgagee
shall have the right and power to proceed by a suit or suits in equity or at
law, whether for the specific performance of any covenant or agreement herein
contained or in aid of the execution of any power herein granted, or for any
foreclosure hereunder
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or the sale of the Mortgaged Property under judgment or decree of any court or
courts of competent jurisdiction, or for the appointment of a receiver pending
any foreclosure hereunder or the sale of the Mortgaged Property under the order
of a court or courts of competent jurisdiction or under executory or other legal
process, or for the enforcement of any other appropriate legal or equitable
remedy. All expenses of retaking, holding, maintaining, preparing for sale,
selling and the like, including Mortgagee's reasonable attorney's fees and legal
expenses, shall constitute additional Indebtedness or Mortgagor and shall be
immediately due and payable, and payment of the same shall be secured by and
entitled to the he benefits of this Mortgage. If the proceeds of any sale or
other lawful disposition of the Mortgaged Property by Mortgagee are insufficient
to fully pay the Indebtedness, then Mortgagor shall pay or cause to be paid any
deficiency. Any money advanced by Mortgagee in connection with any such
receivership shall be a demand obligation (which obligation Mortgagor hereby
expressly promises to pay) owing by Mortgagor to Mortgagee and shall bear
interest from the date of making such advance by Mortgagee until paid at the
Highest Lawful Rate.
Section 4.3 Separate Sales. The Mortgaged Property may be sold in one or
--------------
more parcels and in such manner and order as Mortgagee, in its sole discretion,
may elect, it being expressly understood and agreed that the right of sale
arising out of any Event of Default shall not be exhausted by any one or more
sales.
Section 4.4 Possession of Mortgaged Property. Mortgagor agrees to the full
--------------------------------
extent that it lawfully may, that, in case one or more of the Events of Default
shall have occurred and shall not have been remedied, then, and in every such
case, Mortgagee shall have the right and power to enter into and open and take
possession of all or any part of the Mortgaged Property in the possession of
Mortgagor, its successors or assigns, or its or their agents or servants, and
may exclude Mortgagor, its successors and assigns, and all persons claiming
under Mortgagor, and its or their agents or servant wholly or partly therefrom;
and, holding them same, the Mortgagee may use, administer, manage, operate and
control the Mortgaged Property and conduct the business thereof to the same
extent as Mortgagor, its successors or assigns, might at the time do and may
exercise all right and powers of Mortgagor, in the name, place and stead of
Mortgagor, or otherwise as the Mortgagee shall deem best. All costs, expenses
and liabilities of every character incurred by Mortgagee in administering,
managing, operating, and controlling the Mortgage Property shall constitute a
demand obligation (which obligation Mortgagor hereby expressly promises o pay)
owing by Mortgagor to Mortgagee and shall bear interest from date of expenditure
until paid at the Highest Lawful Rate, all of which shall constitute a portion
of the Indebtedness and shall be secured by this Mortgage and all other Security
Instruments. In connection with each and all of the foregoing and acting
pursuant to the authority granted under Louisiana Revised Statutes 9:5131, et
seq., Mortgagor hereby expressly designates Mortgagee, or its agents, servants
or employees as Keeper of each and all of the Mortgaged Property.
Section 4.5 Occupancy After Foreclosure. In the event there is a
---------------------------
foreclosure sale hereunder and at the time of such sale Mortgagor or Mortgagor's
heirs, devisees, representatives, successors or assigns or any other person
claiming any interest in the Mortgaged Property by, through or under Mortgagor,
are occupying or using the Mortgaged Property or any part thereof, each and all
shall
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immediately become the tenant of the purchaser at such sale, which tenency shall
be a tenancy from day to day, terminable a the will of either the landlord or
tenant, or at a reasonable rental per day based upon the value of the property
occupied, such rental to be due daily to the purchaser; to the extent permitted
by applicable law, the purchaser at such sale shall, notwithstanding any
language herein apparently to the contrary, have the sole option to demand
immediate possession following the sale or to permit the occupants to remain as
tenants at will. In the event the tenant fails to surrender possession of said
property upon demand, the purchaser shall be entitled to institute and maintain
a summary action for possession of the Mortgaged Property (such as an action for
forcible entry and detainer) in any court having jurisdiction.
Section 4.6 Remedies Cumulative, Concurrent and Nonexclusive. Every
------------------------------------------------
right, power and remedy herein given to Mortgagee shall be cumulative and in
addition to every other right, power and remedy herein specifically given or now
or hereafter existing in any other Loan Document, in equity, at law or by
statute (including specifically those granted by the Louisiana UCC in effect and
applicable to the Mortgage Property or any portion thereof), and under no
circumstances shall any right, power or remedy herein given or otherwise
existing be construed as in any way limiting or restricting any other right,
power or remedy. Each and every right, power and remedy whether specifically
herein given or otherwise existing may be exercised from time to time and so
often and in such order as may be deemed expedient by Mortgagee, and the
exercise, or the beginning of the exercise, at the same time or thereafter any
other right, power or remedy. No delay or omission by Mortgagee in the exercise
of any right, power or remedy shall impair any such right, power or remedy or
operate as a waiver thereof or of any other right, power or remedy then or
thereafter existing.
Section 4.7 No Release of Obligations. Neither Mortgagor, any guarantor nor
-------------------------
any other person hereafter obligated for payment of all or any part of the
Indebtedness shall be relieved of such obligation by reason of (a) the failure
of Mortgagee to comply with any request of Mortgagor, or any guarantor or any
other person so obligated to foreclose the lien of this Mortgage or to enforce
any provision hereunder or under the Loan Agreement; (b) the release, regardless
of consideration, of the Mortgaged Property or any portion thereof or interest
therein or the addition of any other property to the Mortgaged Property; (c) any
agreement or stipulation between any subsequent owner of the Mortgaged Property
and Mortgagee extending, renewing! rearranging or in any other way modifying the
terms of this Mortgage without first having obtained the consent of, given
notice to or paid any consideration to Mortgagor, any guarantor or such other
person, and in such event Mortgagor, guarantor and all such other persons shall
continue to be liable to make payment according to the terms of any such
extension or modification agreement unless expressly released and discharged in
writing by Mortgagee, or (d) by any other act or occurrence save and except the
complete payment of the Indebtedness and the complete fulfillment of all
obligations hereunder or under the Loan Agreement.
Section 4.8 Release of and Resort to Collateral. Mortgagee may release,
-----------------------------------
regardless of consideration, any part of the Mortgaged Property without, as to
the remainder, in any way impairing, affecting, subordinating or releasing the
lien or security interest created in or evidenced
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by this Mortgage or its stature as a first and prior lien and security interest
in and to the Mortgaged Property, and without in any way releasing or
diminishing the liability of any person or entity liable for the repayment of
the Indebtedness. For payment of the Indebtedness, Mortgagee may resort to any
other security therefor held by Mortgagee in such order and manner as Mortgagee
may elect. Mortgagee or any future holder or holders of the Indebtedness may at
any time and from time to time release to Mortgagor or its order all or any
portion of the funds received from the proceeds of oil, gas or other minerals as
herein provided without in anywise impairing, releasing or discharging the lien,
privilege and security of this Mortgage or affecting the validity thereof.
Section 4.9 Waiver of Redemption. Notice and Marshalling, of Assets. Etc.
------------------------------------------------------------
To the fullest extent permitted by law, Mortgagor hereby irrevocably and
unconditionally waives and releases (a) all benefits that might accrue to
Mortgagor by virtue of any present or future moratorium law or other law
exempting the Mortgaged Property from attachment, levy or sale on execution or
providing for any appraisement, valuation, stay of execution, exemption from
civil process, redemption or extension of time for payment; (b) all notices of
any Event of Default or of Mortgagee's intention to accelerate maturity of the
Indebtedness or of Mortgagee's election to exercise or Mortgagee's actual
exercise of any right, remedy or recourse provided for hereunder or under the
Loan Agreement; (c) any right to a marshalling of assets or a sale in inverse
order of alienation; (d) the benefit of appraisement as provided for in Articles
2332, 2336, 2723 and 2724 of the Louisiana Code of Civil Procedure and all other
laws conferring the same; (e) the demand and 3 days delay accorded by Articles
2639 and 2721 of the Louisiana Code of Civil Procedure; (f) the notice of
seizure required by Articles 2293 and 2721 of the Louisiana Code of Civil
Procedure; (g) the benefit of any other provisions of Articles 2331, 2722 and
2723 of the Louisiana Code of Civil Procedure; and Mortgagor agrees to the
immediate seizure of the property subject hereto in the event of suit hereon. If
any law referred to in this Mortgage and now in force, of which Mortgagor or its
successor or successors might take advantage despite the provisions hereof,
shall hereafter be repealed or cease to be in force, such law shall thereafter
be deemed not to constitute any part of the contract herein contained or to
preclude the operation or application of the provisions hereof.
Section 4.10 Discontinuance of Proceedings. In case Mortgagee shall have
-----------------------------
proceeded to invoke any right, remedy or recourse permitted hereunder or under
the Loan Agreement and shall thereafter elect to discontinue or abandon same for
any reason, Mortgagee shall have the unqualified right so to do and, in such an
event, Mortgagor and Mortgagee shall be restored to their former positions with
respect to the Indebtedness, this Mortgage, the Loan Agreement, the Mortgaged
Property and otherwise, and the rights, remedies, recourses and powers of
Mortgagee shall continue as if same had never been invoked.
Section 4.11 Resignation of Operator. In addition to all rights and
-----------------------
remedies under this Mortgage, at law and in equity, if any Event of Default
shall occur and Mortgagee shall exercise any remedies under this Mortgage with
respect to any portion of the Mortgaged Property (or Mortgagor shall transfer
any Mortgaged Property "in lieu of" foreclosure), the Mortgagee shall have the
right to request that any operator of any Mortgaged Property which is either
Mortgagor or any affiliate of Mortgagor, if applicable, resign as operator under
the joint operating agreement applicable thereto,
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and no later than 60 days after receipt by Mortgagor of any such request,
Mortgagor shall resign (or cause such other party to resign) as operator of such
Mortgaged Property.
Section 4.12 Indemnity. In connection with any action taken by Mortgagee
---------
pursuant to this Mortgage, Mortgagee and Mortgagee's officers, directors,
employees, representatives, agents, attorneys, accountants and experts
("Indemnified Parties") shall not be liable for any loss sustained by Mortgagor
- ---------------------
resulting from an assertion that Mortgagee has received funds from the
production of Hydrocarbons claimed by third persons or any act or omission of
any Indemnified Party in administering, managing, operating or controlling the
Mortgaged Property including such loss which may result from the ordinary
negligence of an Indemnified Party unless such loss is caused by the willful
misconduct and bad faith of an Indemnified Party, nor shall Mortgagee be
obligated to perform or discharge any obligation, duty or liability of
Mortgagor. Mortgagor shall and does hereby agree to indemnify each Indemnified
Party for, and to hold each Indemnified Party harmless from, any and all
liability, loss or damage which may or might be incurred by any Indemnified
Party by reason of this Mortgage or the exercise of rights or remedies
hereunder. Should Mortgagee make any expenditure on account of any such
liability, loss or damage, the amount thereof, including costs, expenses and
reasonable attorneys' fees, shall be a demand obligation (which obligation
Mortgagor hereby expressly promises to pay) owing by Mortgagor to Mortgagee and
shall bear interest from the date expended until paid at the Highest Lawful
shall be a part of the Indebtedness and shall be secured by this Mortgage and
any other Security Instrument. Mortgagor hereby assents to, ratifies and
confirms any and all actions of Mortgagee with respect to the Mortgaged Property
taken under this Mortgage. The liabilities of the Mortgagor as set forth in this
Section 4.12 shall survive the termination of this Mortgage.
- ------------
Section 4.13 Executory Process. Mortgagor for itself, its successors and
-----------------
assigns does by these presents agree and stipulate that it shall be lawful for
and Mortgagor does hereby authorize Mortgagee without making a demand or putting
in default, putting in default being expressly waived, to cause all and singular
the Mortgaged Property to be seized and sold by executory or other legal process
without appraisement (appraisement being hereby expressly waived) either in its
entirety or in lots, or parcels as Mortgagee may determine to the highest bidder
for cash or on such terms as Mortgagee may direct, Mortgagor for itself, its
successors and assigns hereby confessing judgment for the full amount of the
Notes in principal and interest and all other Indebtedness secured and to be
secured hereby.
ARTICLE V.
Miscellaneous
-------------
Section 5.1 Instrument Construed as Mortgage. Etc. This Mortgage may be
-------------------------------------
construed as a mortgage of both real/immovable and personal/movable property, a
conveyance, assignment, security agreement, financing statement, hypothecation
or contract, or any one or more of them, in order fully to effectuate the
security interest and lien hereof and the purposes and agreements herein set
forth.
Section 5.2 Severability. If any provision hereof is invalid or
------------
unenforceable in any
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jurisdiction, the other provisions hereof shall remain in full force and effect
in such jurisdiction and the remaining provisions hereof shall be liberally
construed in favor of Mortgagee in order to effectuate the provisions hereof,
and the invalidity or unenforceability of any provision hereof in any
jurisdiction shall not affect the validity or enforceability of any such
provision in any other jurisdiction.
Section 5.3 Successors and Assigns of Parties. The "Mortgagee" as used
---------------------------------
herein shell mean and include any legal owner, holder, assignee or pledgee of
any of the Indebtedness secured hereby. The terms used to designate Mortgagee
and Mortgagor shall be deemed to include the respective heirs, legal
representatives, successors and assigns of such parties.
Section 5.4 Satisfaction of Prior Encumbrance. To the extent that proceeds
---------------------------------
of the Indebtedness are used to pay indebtedness secured by any outstanding
Lien, security interest, charge or prior encumbrance against the Mortgaged
Property, such proceeds have been advanced by Mortgagee at Mortgagor's request,
and Mortgagee shall be subrogated to any and all rights, security interests and
liens owned by any owner or holder of such outstanding liens, security interests
and liens owned by any owner or holder of such outstanding liens, security
interests, charges or encumbrances, irrespective of whether said liens, security
interests, charges or encumbrances are released, and it is expressly understood
that, in consideration of the payment of such other indebtedness by Mortgagee,
Mortgagor hereby waives and releases all demands and causes of action for
offsets and payments to, upon and in connection with the said indebtedness.
Section 5.5 Subrogation of Mortgagee. This Mortgage is made with full
------------------------
substitution and subrogation of Mortgagee and its successors and assigns in and
to all covenants, representations and warranties by others heretofore given or
made in respect of the Mortgaged Property or any part thereof.
Section 5.6 Nature of Covenants. The covenants and agreements herein
-------------------
contained shall constitute covenants running with the land and interests covered
or affected hereby and shall be binding upon the heirs, legal representatives,
successors and assigns of the parties hereto.
Section 5.7 Notices. All notices, requests, consents, demands and other
-------
communications required or permitted hereunder shall be in writing and shall be
deemed sufficiently given or furnished if delivered by registered or certified
United States mail, postage prepaid, or by personal service (including express
or courier service) at the addresses specified at the end of this Mortgage
(unless changed by similar notice in writing given by the particular party whose
address is to be changed). Any such notice or communication shall be deemed to
have been given either at the time of personal delivery or, in the case of
delivery at the address and in the manner provided herein, upon receipt.
Section 5.8 Counterparts. This Mortgage is being executed in several
------------
counterparts, all of which are identical, except that to facilitate recordation,
if the Mortgaged property is situated in more than one parish, only those
portions of the description of the Mortgaged Property attached hereto as
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<PAGE>
Exhibit A located in the parish in which a particular counterpart is recorded
shall be attached hereto. A complete Exhibit A will be attached to that certain
counterpart to be attached to a Financing Statement and filed with the Clerk of
Terrebonne Parish in the Uniform Commercial Code Records. Each of such
counterparts shall for all purposes be deemed to be an original and all such
counterparts shall together constitute but ore and the sane instrument.
Section 5.9 Exculpation Provisions. EACH OF THE PARTIES HERETO SPECIFICALLY
----------------------
AGREES THAT IT HAS A DUTY TO READ THIS MORTGAGE; AND AGREES THAT IT IS CHARGED
WITH NOTICE AND KNOWLEDGE OF THE TERMS OF THIS MORTGAGE; THAT IT HAS IN FACT
READ THIS MORTGAGE AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF
10; TERMS, CONDITIONS AND EFFECTS OF THIS MORTGAGE; THAT IT HAS BEEN REPRESENTED
BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING
ITS EXECUTION OF THIS MORTGAGE; AND HAS RECEIVED THE ADVICE OF ITS ATTORNEY IN
ENTERING INTO THIS MORTGAGE; AND THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF
THIS MORTGAGE RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT IN SOME
ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS RESPONSIBILITY
FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT
CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS
MORTGAGE ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH
PROVISION OR THAT THE PROVISION IS NOT "CONSPICUOUS."
Section 5.10 Governing Law. THIS MORTGAGE SHALL BE CONSTRUED AND ENFORCED
-------------
IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF LOUISIANA AS TO ALL
REAL PROPERTY AND OIL AND GAS INTERESTS PROVIDED HEREIN AND SUCH CORRESPONDING
RIGHTS AND REMEDIES OF MORTGAGEE, AND AS TO ALL OTHER MATTERS THE LAWS OF THE
COMMONWEALTH OF PENNSYLVANIA SHALL APPLY.
Section 5.11 Usury Savings Clause. Interest on the indebtedness secured by
--------------------
this Mortgage is expressly limited so that in no contingency or event
whatsoever, whether by acceleration of the maturity of the indebtedness secured
by this Mortgage or otherwise, shall the interest contracted for, charged or
received by the Mortgagee exceed the maximum amount permissible under applicable
law. If from any circumstances whatsoever fulfillment of any provisions of this
Mortgage, the Loan Agreement or any of the other Loan Documents or of any other
document evidencing, securing, guaranteeing or otherwise pertaining to the
indebtedness secured hereby, at the time performance of such provision shall be
due, shall involve transcending the limit of validity prescribed by law, then,
ipso facto, the obligation to be fulfilled shall be reduced to the limit of such
validity, and if from any such circumstances the Mortgagee shall ever receive
anything of value as interest or deemed interest by applicable law under this
Mortgage, the Loan Agreement or any other document evidencing, securing,
guaranteeing or otherwise pertaining to the indebtedness secured hereby or
otherwise an amount that would exceed the Highest Lawful Rate, such amount that
would be
23
<PAGE>
excessive interest shall be applied to the reduction of the principal amount
owing on the indebtedness secured by this Mortgage or on account of any other
indebtedness of the Mortgagor to the Mortgagee, and not to the payment of
interest, or if such excessive interest exceeds the unpaid balance of principal
of the indebtedness secured by this Mortgage and such other indebtedness, such
excess shall be refunded to the Mortgagor. In determining whether or not the
interest paid or payable with respect to any indebtedness of the Mortgagor to
the Mortgagee, under any specific contingency, exceeds the Highest Lawful Rate,
the Mortgagor and the Mortgagee shall, to the maximum extent permitted by
applicable law, (a) characterize any non-principal payment as an expense, fee or
premium rather than as interest, (b) exclude voluntary prepayments and the
effects thereof, (c) amortize, prorate, allocate and spread the total amount of
interest throughout the term of such indebtedness so that the actual rate of
interest on account of such indebtedness does not exceed the maximum amount
permitted by applicable law, and/or (d) allocate interest between portions of
such indebtedness, to the end that no such portion shall bear interest at a rate
greater than that permitted by law. The terms and provisions of this Section
shall control and supersede every other conflicting provision of this Mortgage.
Section 5.12 Conflicts. Any conflict between the terms of this Mortgage and
---------
the terms of the Loan Agreement shall be resolved by referring to the terms of
the Loan Agreement, except, however, (i) if the Loan Agreement is silent as to
any issue, this Mortgage shall prevail, and (ii) with respect to the description
of the collateral, security interests and assignments, as described herein.
Section 5.13 Entire Agreement. This instrument may be amended only by an
----------------
instrument in writing executed jointly by authorized officers of Mortgagor and
Mortgagee, and supplemented only by documents delivered or to be delivered in
accordance with the express terms hereof.
24
<PAGE>
MORTGAGOR:
WITNESSES TO
SIGNATURES: FRONTIER NATURAL GAS CORPORATION
/s/ Alton Tandy By: /s/ David W. Berry
- -------------------- ------------------------------
Witness Name: David W. Berry
-----------------------------
Title: President
------------------------
/s/ Becky Bowzer
- --------------------
Witness
STATE OF TEXAS (S)
(S)
COUNTY OF HARRIS (S)
BE IT KNOWN, that on this 5th day of March , 1996, before me, the
----- -------
undersigned authority, personally came and appeared David W. Berry, to me
--------------
personally known, who being by me duly sworn did say that he/she is the
President of Frontier Natural Gas Corporation, an Oklahoma corporation, and that
- ---------
the instrument was signed in behalf of the Corporation by authority of its Board
of Directors and that said officer acknowledged the instrument to be the free
act and deed of the Corporation.
Sworn to and subscribed before me, this 5th day of March, 1996.
----- ------
/s/ Jackie H. Turk
-----------------------------------
NOTARY PUBLIC, STATE OF
MY COMMISSION EXPIRES NOV. 20, 1997
25
<PAGE>
EXHIBIT A
All that certain property and lands included in and covered by Township 20
South, Range 18 East, Terrebonne Parish, Louisiana, and within two (2) miles of
the East and West boundaries of said township.
26
<PAGE>
EXHIBIT B
That certain Assignment of 2% Overriding Royalty Interest dated May 5, 1996 by
Frontier Natural Gas Corporation to 420 Energy Investments, Inc.
27
<PAGE>
Exhibit 10.21
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into effective this 1st day
of January, 1995 by and between FRONTIER NATURAL GAS CORPORATION, ("Frontier")
and S. GORDON REESE, JR., an individual ("Employee").
W I T N E S S E T H
1. Duties. Frontier hereby employs Employee and Employee hereby accepts
------
employment upon the terms and conditions contained herein. Employee shall serve
as Vice President Gulf Coast Region of Frontier. Employee's job functions shall
include, among others, the following:
(To Be Added)
Frontier may from time to time at Frontier's discretion extend or curtail
the Employee's job functions provided, however, such job functions shall at all
times be consistent with those assigned generally to persons in Employee's
position and with Employee's background, education and training. Employee shall
devote his full time, attention, energy, skill and best efforts to the promotion
of the business and affairs of Frontier and shall perform faithfully and to the
fullest of Employee's ability all duties which relate to Employee's position of
employment by Frontier.
2. Term. The term of employment of Employee under this Employment
----
Agreement shall commence January 1, 1995 and shall continue for a period of one
(1) year thereafter until December 31, 1995, unless terminated sooner pursuant
to paragraph 7 of this Employment Agreement. Each December 31, this Agreement
shall be extended for an additional one (1) year period unless either party
notifies the other party in writing within thirty (30) days prior to December 31
of any such party's desire to terminate this Agreement. For example, if there
has been no such written notification, then on December 31, 1995, this Agreement
shall be extended for an additional one (1) year period resulting in a new term
ending December 31, 1996. If, however, by December 1 of 1995, either party has
provided the other with written notice of such party's desire to terminate this
Agreement, the term of employment shall end December 31, 1995.
3. Compensation. For all services rendered by the Employee, Frontier
------------
shall pay the Employee a monthly salary of Five Thousand Eight Hundred Thirty
Three Dollars and Thirty Three Cents ($5,833.33), payable in equal semi-monthly
installments on the 15th day of each month and at the end of each month with
merit and cost of living raises being added thereto at the option of Frontier
pursuant to Frontier policy and practice in addition to the incentive
compensation described in paragraph 4 hereof, and other benefits referred to in
paragraph 5 hereof. All compensation paid pursuant to this Employment Agreement
shall be subject to reduction by the amount of all applicable withholding,
social security and other similar state, federal and local taxes and deductions.
4. Incentive Compensation. Frontier grants to Employee 12,000 Units in
-----------------------
Frontier Natural
1
<PAGE>
Gas Corporation's Stock Incentive Plan which was adopted by Frontier Natural Gas
Corporation shareholders and Board of Directors on September 7, 1993 (the
"Plan") a copy of which is attached hereto and incorporated herein by reference.
The Exercise Price of options pursuant to said Plan shall be $3.10 per share and
the effective date of the grant shall be January 1, 1994. Frontier represents
and warrants to Employee that such grant of Units has been approved pursuant to
the terms of the Plan. Further, additional Units in the Plan may be granted to
Employee in Frontier's discretion pursuant to the terms of the Plan.
Frontier and Employee further agree that Frontier shall, from time to time
and in consultation with Employee provide to Employee additional incentive
compensation opportunities based upon achievement of certain performance goals.
Said performance goals and the nature and timing of incentive compensation shall
be as agreed to from time to time between Frontier and Employee in writing which
set forth the performance goals and the nature and timing of such incentive
compensation.
5. Benefits and Travel Expenses. Employee, during the term of this
----------------------------
Employment Agreement, shall be entitled to such benefits as are provided for by
Frontier to all of its employees on the terms and conditions provided for by
Frontier as such may change from time to time in Frontier's sole discretion. In
addition, Employee shall be entitled to reimbursement and/or advancements of
certain travel expenses incurred by Employee in connection with Employee's
duties on behalf of Frontier hereunder. No expense for reimbursements shall be
made without prior documentation including, but not limited to, original
receipts reflecting expenses. Furthermore, all expenditures must be reasonable
and must be directly connected to Employee's duties performed on behalf of
Frontier, both of which determinations shall be made in Frontier's sold
discretion.
6. Confidentiality and Proprietary Ownership Agreement.
---------------------------------------------------
(a) Employee shall not, either during the term of this Agreement or
at any time for a period of one (1) year subsequent to the date upon which
Employee's employment relationship with the Corporation shall terminate for any
reason whatsoever, disclose to any person or entity, other than in the discharge
of Employee's contractual duties to the Corporation, any information concerning
(a) the business operations of the Corporation; (b) the investors of the
Corporation; (c) Employee's work performed for the Corporation on specific
projects; or (d) any data, file or information relating to properties owned or
projects developed or being developed by the Corporation or contemplated by the
Corporation to be developed. Further, upon termination of Employee's employment
relationship with the Corporation for any reason whatsoever, Employee shall not
take, without the prior written consent of the Corporation, any proprietary
maps, well or prospect information, or any other written, graphic or recorded
data or information, or documentation pertaining to the business of the
Corporation or any copies of the foregoing; and Employee shall return to the
Corporation any such items in Employee's possession. These provisions shall not
limit Employee retaining copies of software programs or data which were paid for
by Employee and are Employee's personally and which are exempted from this
agreement by a writing referencing this agreement and signed by Employee and the
Corporation.
(b) Employee agrees that any and all inventions and/or computer
programs which Employee may make, or develop, pursuant to employment with the
Corporation either solely or jointly with any other person or persons during the
term of employment by the Corporation (either before or after the date of this
agreement) which are used or are intended to be used in connection with the
business of the Corporation shall be and hereby are the sole and exclusive
property of the Corporation. Employee
2
<PAGE>
agrees to do all such acts and execute, acknowledge and deliver all such
instruments as may be necessary to vest in the Corporation the absolute title
thereto. It is understood and agreed that Employee shall not be entitled to any
additional compensation in regard to any such inventions and/or computer
programs.
(c) Employee agrees that the restrictions contained in subparagraphs
6(a) and 6(b) above are reasonable and necessary in order to protect the
legitimate interests of Frontier and its affiliates and that any violation
thereof would result in irreparable injury to Frontier or its affiliates.
Employee, therefore, acknowledges and agrees, that in the event of any violation
thereof, Frontier shall be authorized and entitled to obtain, from any court of
competent jurisdiction, preliminary and permanent injunctive relief as well as
an equitable accounting of all profits and benefits arising our of such
violation, which rights and remedies shall be cumulative and in addition to any
other rights or remedies to which Frontier and/or its affiliates may be
entitled.
(d) In the event of any breach or violation of the restrictions
contained in subparagraphs 6(a) or 6(b) above, the one year time period called
for in subparagraph 6(a) above shall abate during the time of any violation
thereof, and that portion shall not begin to run until such violation has been
fully and finally cured.
7. Termination. Notwithstanding any provision of this Employment
-----------
Agreement to the contrary, Employee's employment hereunder may be terminated
prior to the expiration of the term of this Agreement under the following
circumstances:
a. In the event of death of Employee during the term of this
Agreement, this Employment Agreement and all compensation and benefits payable
hereunder shall terminate on the date of death of Employee, except that Frontier
shall pay to Employee's estate (i) the compensation that would be payable to the
Employee up to the end of the month in which Employee's death occurs, (ii) any
and all amounts owing on obligations pursuant to the Plan with Employee's
benefits pursuant to the Plan vesting at death; and (iii) any and all amounts
owing on obligations pursuant to the Pool with Employee's rights in the Pool
vesting at death.
b. If Employee, because of illness, injury of other incapacitating
condition, is disabled from performing the services required to be performed by
him under this Employment Agreement for a period or periods aggregating more
than thirty (30) days in any twelve (12) consecutive months, then Frontier, in
its sole discretion, may terminate Employee's employment by giving notice
thereof to Employee, and all rights and benefits hereunder, shall terminate upon
the date of such notice, except that Frontier shall pay to Employee (i) the
compensation that would be payable to the Employee up to the end of the month in
which Employee is terminated, (ii) any and all amounts owing on obligations
pursuant to the Plan with Employee's benefits pursuant to the Plan vesting upon
such notice; and (iii) any and all amounts owing on obligations pursuant to the
Pool with Employees' rights in the Pool vesting upon such notice.
c. Frontier may terminate Employee's employment at any time for
"Cause." For the purposes of this Employment Agreement, "Cause" is defined as
any of the following:
1. The conviction of a felony of any kind;
2. The perpetration of a fraud, misappropriation or
embezzlement of Frontier's property (whether or not, in each case, a felony or
misdemeanor);
3
<PAGE>
3. Willful misconduct with respect to the duties or
obligations or employee under this Employment Agreement; or
4. Intentional or continual neglect of duties.
If Frontier terminates Employee's employment pursuant to this subparagraph
7(c), all rights and benefits hereunder not fully vested shall terminate upon
the effective date of termination, and all further rights and obligations of the
parties under the Employment Agreement, except those set forth in Section 6
shall terminate.
8. Notices. Any notices, requests, demands or other communications
-------
provided for by this Employment Agreement shall be sufficient if, in writing,
and sent by Registered or Certified Mail, overnight courier or if delivered in
person to Frontier or Employee at the following addresses:
"FRONTIER" FRONTIER NATURAL GAS
CORPORATION
One Benham Place, Suite 120
9400 North Broadway
Oklahoma City, Oklahoma 73114
"EMPLOYEE" S. GORDON REESE
72 Riverdale Drive
Covington, LA 70433
9. Governing Law. This Employment Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Oklahoma.
10. Assignment. The Employee acknowledges that the services to be
----------
rendered hereunder are unique and personal. Accordingly, the Employee may not
assign any of Employee's rights or delegate any of Employee's duties or
obligations under this Employment Agreement. The rights and obligations of
Frontier under this Employment Agreement shall inure to the benefit of and shall
be binding upon the successors and assigns of Frontier.
11. Severability. If any provisions of this Employment Agreement shall be
------------
or become illegal or unenforceable, in whole or in part, for any reason
whatsoever, the remaining provisions shall nevertheless be deemed valid and
binding.
12. Attorneys' Fees. In the event that any legal action is taken to
---------------
enforce any of the terms of this Employment Agreement, the prevailing party
shall be entitled to, in addition to all remedies provided to such party,
reasonable attorneys' fees, costs and expenses.
13. Entire Employment Agreement. This writing represents the entire
---------------------------
agreement and understanding of the parties hereto with respect to the subject
matter hereof and supersedes all prior agreements and understandings of the
parties in connection therewith.
4
<PAGE>
14. Drafting. The agreements contained herein shall not be construed in
--------
favor of or against either party but shall be construed as if all parties
prepared this Employment Agreement.
15. Headings. Headings in this Employment Agreement are for convenience
--------
only and shall not be used to interpret or construe its provisions.
16. Counterparts. This Employment Agreement may be executed in two or
------------
more counterparts each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed and delivered this Employment
Agreement as of the 1st day of January, 1995.
"FRONTIER"
FRONTIER NATURAL GAS CORPORATION
By: /s/ David W. Berry
------------------
Its: President
"EMPLOYEE"
/s/ S. Gordon Reese, Jr.
----------------------------
S. GORDON REESE, JR.
5
<PAGE>
STATE OF OKLAHOMA )
) ss
COUNTY OF OKLAHOMA )
Before me, the undersigned, a notary public, in and for the said county and
state, on the ____ day of ______________, 19___, personally appeared
________________________, as __________________________ of Frontier Natural Gas
Corporation, who acknowledged to me he executed same as the free and voluntary
act and deed of said corporation, for the uses and purposes therein set forth.
In witness whereof, I have hereunto set my official signature and affixed
my official seal the day and year last above written.
____________________________
Notary Public
My Commission Expires:
______________________
[SEAL]
STATE OF OKLAHOMA )
) ss
COUNTY OF OKLAHOMA )
Before me, the undersigned, a notary public, in and for the said county and
state, on the ____ day of ______________, 19___, personally appeared
________________________, an individual, who acknowledged to me he executed same
as his free and voluntary act and deed, for the uses and purposes therein set
forth.
In witness whereof, I have hereunto set my official signature and affixed
my official seal the day and year last above written.
____________________________
Notary Public
My Commission Expires:
______________________
[SEAL]
6
<PAGE>
Exhibit 10.22
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made effective the 15th day of May, 1996 by
and between FRONTIER NATURAL GAS CORPORATION, ("Frontier") and MICHAEL A.
BARNES, an individual ("Employee").
W I T N E S S E T H
1. Duties. Frontier hereby employs Employee and Employee hereby accepts
------
employment upon the terms and conditions contained herein. Employee shall serve
as Vice President of Exploration and Production of Frontier. Employee's job
functions shall include, among others, the following:
General management and direction of Frontier's exploration and
operational activities, including prospect generation, prospect
review, geological and geophysical evaluation, land functions,
planning and implementation of drilling, development, and production
activities; certain of which functions Employee shall perform directly
and certain of which will be performed by staff of Frontier and/or
outside independent contractors under Employee's supervision.
Frontier may from time to time at Frontier's discretion extend or curtail
the Employee's job functions provided, however, such job functions shall at all
times be consistent with those assigned generally to persons with Employee's
background, education and training. Employee shall devote his full time,
attention, energy, skill and best efforts to the promotion of the business and
affairs of Frontier and shall perform faithfully and to the fullest of
Employee's ability all duties which relate to Employee's position of employment
by Frontier.
2. Term. The term of employment of Employee under this Employment
----
Agreement shall commence May 15, 1996 and shall continue for a period through
December 31, 1997, unless terminated sooner pursuant to paragraph 7 of this
Employment Agreement. Each December 31, this Agreement shall be extended for an
additional one (1) year period unless either party notifies the other party in
writing within thirty (30) days prior to December 31 of any such party's desire
to terminate this Agreement. For example, if there has been no such written
notification, then on December 31, 1997, this Agreement shall be extended for an
additional one (1) year period resulting in a new term ending December 31, 1998.
If, however, by December 1 of 1997, either party has provided the other with
written notice of such party's desire to terminate this Agreement, the term of
employment shall end December 31, 1997.
3. Compensation. For all services rendered by the Employee, Frontier
------------
shall pay the Employee a monthly salary of Eight Thousand Three Hundred Thirty
Three Dollars and Thirty Three Cents ($8,333.33), payable in equal semi-monthly
installments on the 15th day of each month and at the end of each month with
merit and cost of living raises being added thereto, at the option of Frontier,
pursuant to Frontier policy and practice in addition to the incentive
compensation described in paragraph 4 hereof, and other benefits referred to in
paragraph 5 hereof. All compensation paid pursuant to this Employment Agreement
shall be subject to reduction by the amount of all applicable withholding,
social security and other similar state, federal and local taxes and deductions.
4. Incentive Compensation. Frontier grants to Employee options to
----------------------
purchase 25,000 shares of Frontier's common stock, which options shall be
pursuant to Frontier's Stock Incentive Option Plan -1996 which was adopted by
Frontier Natural Gas Corporation's Board of Directors in January of 1996
<PAGE>
Barnes/Frontier Employment Agreement
Page 2 of 6
(the "Plan") a copy of which is attached hereto and incorporated herein by
reference. The Exercise Price of options pursuant to said Plan shall be a price
per share equal to the last reported sale price of Frontier common stock as
reported by NASDAQ prior to May 15, 1996, and the effective date of the grant
shall be May 15, 1996. The options shall vest in Employee pursuant to a three
year schedule as set forth in the Plan. Frontier represents and warrants to
Employee that such grant of Units has been approved pursuant to the terms of the
Plan. Further, additional stock options will be granted to Employee not later
than January 31, 1997 to purchase an additional 50,000 shares of Frontier common
stock at the then current market price, and subject to a comparable vesting
schedule, and in a form of plan as determined by Frontier in its sole
discretion.
5. Benefits and Travel Expenses. Employee, during the term of this
----------------------------
Employment Agreement, shall be entitled to such benefits as are provided for by
Frontier to all of its employees on the terms and conditions provided for by
Frontier as such may change from time to time in Frontier's sole discretion. In
addition, Employee shall be entitled to reimbursement and/or advancements of
certain travel expenses incurred by Employee in connection with Employee's
duties on behalf of Frontier hereunder. No expense for reimbursements shall be
made without prior documentation including, but not limited to, original
receipts reflecting expenses. Furthermore, all expenditures must be reasonable
and must be directly connected to Employee's duties performed on behalf of
Frontier, both of which determinations shall be made in Frontier's sole
discretion. Included in such reimbursable expenses shall be dues to Employee's
membership in The Houston Petroleum Club or equivalent as may be agreed to
between Employee and Frontier.
6. Confidentiality and Proprietary Ownership Agreement.
---------------------------------------------------
(a) Employee shall not, either during the term of this Agreement or
at any time for a period of one (1) year subsequent to the date upon which
Employee's employment relationship with the Corporation shall terminate for any
reason whatsoever, disclose to any person or entity, other than in the discharge
of Employee's contractual duties to the Corporation, any information concerning
(a) the business operations of the Corporation; (b) the investors of the
Corporation; (c) Employee's work performed for the Corporation on specific
projects; or (d) any data, file or information relating to properties owned or
projects developed or being developed by the Corporation or contemplated by the
Corporation to be developed. Further, upon termination of Employee's employment
relationship with the Corporation for any reason whatsoever, Employee shall not
take, without the prior written consent of the Corporation, any proprietary
maps, well or prospect information, or any other written, graphic or recorded
data or information, or documentation pertaining to the business of the
Corporation or any copies of the foregoing; and Employee shall return to the
Corporation any such items in Employee's possession.
(b) Employee agrees that any and all inventions and/or computer
programs which Employee may make, or develop, pursuant to employment with the
Corporation either solely or jointly with any other person or persons during the
term of employment by the Corporation (either before or after the date of this
agreement) which are used or are intended to be used in connection with the
business of the Corporation shall be and hereby are the sole and exclusive
property of the Corporation. Employee agrees to do all such acts and execute,
acknowledge and deliver all such instruments as may be necessary to vest in the
Corporation the absolute title thereto. It is understood and agreed that
Employee shall not be entitled to any additional compensation in regard to any
such inventions and/or computer programs.
<PAGE>
Barnes/Frontier Employment Agreement
Page 3 of 6
(c) Employee agrees that the restrictions contained in subparagraphs
6(a) and 6(b) above are reasonable and necessary in order to protect the
legitimate interests of Frontier and its affiliates and that any violation
thereof would result in irreparable injury to Frontier or its affiliates.
Employee, therefore, acknowledges and agrees, that in the event of any violation
thereof, Frontier shall be authorized and entitled to obtain, from any court of
competent jurisdiction, preliminary and permanent injunctive relief as well as
an equitable accounting of all profits and benefits arising our of such
violation, which rights and remedies shall be cumulative and in addition to any
other rights or remedies to which Frontier and/or its affiliates may be
entitled.
(d) In the event of any breach or violation of the restrictions
contained in subparagraphs 6(a) or 6(b) above, the one year time period called
for in subparagraph 6(a) above shall abate during the time of any violation
thereof, and that portion shall not begin to run until such violation has been
fully and finally cured.
7. Termination. Notwithstanding any provision of this Employment
-----------
Agreement to the contrary, Employee's employment hereunder may be terminated
prior to the expiration of the term of this Agreement under the following
circumstances:
a. In the event of death of Employee during the term of this
Agreement, this Employment Agreement and all compensation and benefits payable
hereunder shall terminate on the date of death of Employee, except that Frontier
shall pay to Employee's estate (i) the compensation that would be payable to the
Employee up to the end of the month in which Employee's death occurs and (ii)
any and all amounts owing on obligations pursuant to the Plan with Employee's
benefits pursuant to the Plan vesting at death.
b. If Employee, because of illness, injury of other incapacitating
condition, is disabled from performing the services required to be performed by
him under this Employment Agreement for a period or periods aggregating more
than thirty (30) days in any twelve (12) consecutive months, then Frontier, in
its sole discretion, may terminate Employee's employment by giving notice
thereof to Employee, and all rights and benefits hereunder, shall terminate upon
the date of such notice, except that Frontier shall pay to Employee (i) the
compensation that would be payable to the Employee up to the end of the month in
which Employee is terminated and (ii) any and all amounts owing on obligations
pursuant to the Plan with Employee's benefits pursuant to the Plan vesting upon
such notice.
c. Frontier may terminate Employee's employment at any time for
"Cause." For the purposes of this Employment Agreement, "Cause" is defined as
any of the following:
1. The conviction of a felony of any kind;
2. The perpetration of a fraud, misappropriation or
embezzlement of Frontier's property (whether or not, in each case, a felony or
misdemeanor);
3. Willful misconduct with respect to the duties or obligations
or employee under this Employment Agreement; or
4. Intentional or continual neglect of duties.
<PAGE>
Barnes/Frontier Employment Agreement
Page 4 of 6
If Frontier terminates Employee's employment pursuant to this subparagraph
7(c), all rights and benefits hereunder not fully vested shall terminate upon
the effective date of termination, and all further rights and obligations of the
parties under the Employment Agreement, except those set forth in Section 6
shall terminate.
8. Notices. Any notices, requests, demands or other communications
-------
provided for by this Employment Agreement shall be sufficient if, in writing,
and sent by Registered or Certified Mail, overnight courier or if delivered in
person to Frontier or Employee at the following addresses:
"FRONTIER" FRONTIER NATURAL GAS CORPORATION
One Benham Place, Suite 120
9400 North Broadway
Oklahoma City, Oklahoma 73114
"EMPLOYEE" MICHAEL A. BARNES
2806 South Blue Meadow Circle
Sugarland, TX 77479
9. Governing Law. This Employment Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Texas.
10. Assignment. The Employee acknowledges that the services to be
----------
rendered hereunder are unique and personal. Accordingly, the Employee may not
assign any of Employee's rights or delegate any of Employee's duties or
obligations under this Employment Agreement. The rights and obligations of
Frontier under this Employment Agreement shall inure to the benefit of and shall
be binding upon the successors and assigns of Frontier.
11. Severability. If any provisions of this Employment Agreement shall be
------------
or become illegal or unenforceable, in whole or in part, for any reason
whatsoever, the remaining provisions shall nevertheless be deemed valid and
binding.
12. Attorneys' Fees. In the event that any legal action is taken to
---------------
enforce any of the terms of this Employment Agreement, the prevailing party
shall be entitled to, in addition to all remedies provided to such party,
reasonable attorneys' fees, costs and expenses.
13. Entire Employment Agreement. This writing represents the entire
---------------------------
agreement and understanding of the parties hereto with respect to the subject
matter hereof and supersedes all prior agreements and understandings of the
parties in connection therewith.
14. Drafting. The agreements contained herein shall not be construed in
--------
favor of or against either party but shall be construed as if all parties
prepared this Employment Agreement.
15. Headings. Headings in this Employment Agreement are for convenience
--------
only and shall not be used to interpret or construe its provisions.
<PAGE>
Barnes/Frontier Employment Agreement
Page 5 of 6
16. Counterparts. This Employment Agreement may be executed in two or
------------
more counterparts each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed and delivered this Employment
Agreement as of the ____ day of May, 1996.
"FRONTIER"
FRONTIER NATURAL GAS CORPORATION
By: /s/ David W. Berry
------------------
Its: President
"EMPLOYEE"
/s/ Michael A. Barnes
---------------------------
MICHAEL A. BARNES
<PAGE>
Barnes/Frontier Employment Agreement
Page 6 of 6
STATE OF OKLAHOMA )
) ss
COUNTY OF OKLAHOMA )
Before me, the undersigned, a notary public, in and for the said county and
state, on the ____ day of May, 1996, personally appeared David W. Berry, as
President of Frontier Natural Gas Corporation, who acknowledged to me he
executed same as the free and voluntary act and deed of said corporation, for
the uses and purposes therein set forth.
In witness whereof, I have hereunto set my official signature and affixed
my official seal the day and year last above written.
____________________________
Notary Public
My Commission Expires:
______________________
[SEAL]
STATE OF ______________ )
) ss
COUNTY OF ___________ )
Before me, the undersigned, a notary public, in and for the said county and
state, on the ____ day of May, 1996, personally appeared Michael A. Barnes, an
individual, who acknowledged to me he executed same as his free and voluntary
act and deed, for the uses and purposes therein set forth.
In witness whereof, I have hereunto set my official signature and affixed
my official seal the day and year last above written.
____________________________
Notary Public
My Commission Expires:
______________________
[SEAL]
<PAGE>
Exhibit 23.1
[Atwater Letterhead]
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
------------------------------------------
We hereby consent to the use in the Prospectus, constituting part of this
Registration Statement of Form SB-2, of our report, dated March 21, 1996,
relating to the reserves of Frontier Natural Gas Corporation and its
subsidiaries.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
ATWATER CONSULTANTS, LTD.
By: /s/ T.A. Johnston
Name: T.A. Johnson
Title: Senior Vice President
Dated: June 5, 1996
<PAGE>
Exhibit 23.2
[Hofmann Letterhead]
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
------------------------------------------
We hereby consent to the use in the Prospectus, constituting part of this
Registration Statement of Form SB-2, of our report, dated February 13, 1996,
relating to the reserves of Frontier Natural Gas Corporation and its
subsidiaries.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
HOFMANN & ASSOC. ENGINEERING CO.
By: /s/ Robert P. Hoffmann
Name: Robert Hoffmann
Title: President
Dated: June 10, 1996
<PAGE>
Exhibit 23.3
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement 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.
DELOITTE & TOUCHE LLP
Oklahoma City, Oklahoma
June 18, 1996
<PAGE>
EXHIBIT 24.1
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David W. Berry and David B. Christofferson, and
each of them, each with full power to act without the other, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign any or all amendments
to this Registration Statement, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute, may lawfully do or cause to be
done by virtue hereof.
NAME AND TITLE DATE
-------------- ----
/s/ David W. Berry
- --------------------------------------------------- June 6, 1996
David W. Berry
President and Chief Executive Officer;
Chairman of the Board of Directors
/s/ David B. Christofferson
- --------------------------------------------------- June 6, 1996
David B. Christofferson
General Counsel; Executive Vice President;
Secretary; Chief Financial Officer; Director
/s/ Neal M. Elliott
- --------------------------------------------------- June 6, 1996
Neal M. Elliott
Director
/s/ Jeffrey R. Orgill
- --------------------------------------------------- June 6, 1996
Jeffrey R. Orgill
Vice Chairman of the Board of Directors
/s/ Allen H. Sweeney
- --------------------------------------------------- June 6, 1996
Allen H. Sweeney
Director
<PAGE>
/s/ James R. Harris
- --------------------------------------------------- June 6, 1996
James R. Harris
Treasurer and Controller
/s/ Michael A. Barnes
- --------------------------------------------------- June 6, 1996
Michael A. Barnes
Vice President of Exploration and Production
/s/ S. Gordon Reese
- --------------------------------------------------- June 6, 1996
S. Gordon Reese
Vice President - Gulf Coast Region
